Indian Supreme Court in its landmark judgment has caused a furore among European MNCs in India. The Court ruled that the provision of Double Taxation Avoidance Agreement (DTAA) needs to be given effect through some legislative mechanism under Income Tax Law. Treaty does not get automatic enforceability India. The issue in question was interpretation of Section 90 (1) of Indian Income Tax law vis a vis DTAA provisions between Indian and OECD members.
Existing interpretation of Law: As per the decisions of Delhi High Court in April, 2021 in the case of Concentric Services Netherlands B. V. and Optimum Global Solutions Intl B.V., automatic benefits of the MFN (Most Favoured Nation) was granted to Netherlands as was given subsequently to Slovenia, Lithuania and Columbia by DTAA signed by those countries. Here, the withholding tax rate of 5% instead of 10% was asked by Netherlands.
- Reliance placed on Clause IV (Most Favored Nation (MFN) clause) of the Protocol appended to the India-Netherlands tax treaty
- when India enters tax treaties with other countries that are members of the OECD and if such tax treaties provide a lower rate or restricted scope in the tax treaty executed between India and any such country, it would automatically apply to the subject tax treaty
- This argument was based on the preface of the protocol, which, inter alia stated that “protocol shall be integral part of the convention i.e., subject tax treaty”
- No fresh notification was required to apply the provision of the protocol appended to the subject tax treaty. Reliance was placed on High Court decisions in Steria India case and Apollo Tyres case.
- Protocol contained in India-Netherlands tax treaty was configured, to self-trigger, upon execution of another tax treaty if it provided for a lower rate of tax or restricted scope so long as the deductee held more than 10% of the share capital of the deductor
- when India enters tax treaties with other countries that are members of the OECD and if such tax treaties provide a lower rate or restricted scope in the tax treaty executed between India and any such country, it would automatically apply to the subject tax treaty
Supreme Court Reasoning and Judgement in the aforesaid case delivered on 19th October, 2023 in the case of Assessing Officer Circle (International Taxation) Vs Nestle SA :
1) India follows “dualistic practice” while giving effect to international treaties and conventions. Even after ratification, they need to be given effect with enabling notification/legislation.
2) In Azadi Bachao Andolan & others, it was held that Section 90 specifically enable and empower the central government to issue notification for implementation of DTAA, even if the treaty provisions are inconsistent with provisions of Income Tax Act
3) The term “is” is given a contextual meaning when a third-party country enters into DTAA with India, it should be a member of OECD, for the earlier treaty beneficiary to claim parity. Relevant date is the entering into treaty with India.
4) There is unwritten premise that assimilation of treaty provision into domestic legal system is not in the hands of the executive. The constitutional and legal requirements have to be satisfied to integrate the treaty provisions in national legal system.
5) Upon India entering a treaty or protocol, it does not result into automatic enforceability in courts or tribunals till appropriate notifications are issued under Section 90(1) of Indian Income Tax Law.
Decision: Treaty benefits cannot be granted unless the treaty provisions are notified by government of India.
Impact:
a) Nestle will be liable for higher withholding tax rate on dividend and cannot claim parity with Slovenia, Lithuania, and Columbia for lower withholding tax rate as available to them.
b) Many OCED MNCs will have to pay higher withholding tax rates as per the certificates granted under Section 197 of Income Tax Act. The present decision has implications for tax, interest and penalties on dividend, royalties or fees for technical services.
c) Netherlands, Switzerland and France and other OECD Members may revisit their MFN provisions and deny benefits to Indian companies.
In case you have any concern or need any clarity regarding the transfer pricing/DTAA, you may like to contact us.
Abhinarayan Mishra, FCA, FCS; Managing Partner KPAM & Associates, Chartered Accountants; +9910744992; ca.abhimishra@gmail.com
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