Supreme Court Rejects Tax Benefits On Dividend Income Under Dutch, French, Swiss Treaty

A government notification is a mandatory condition for a judicial authority to give effect to a Double Taxation Avoidance Agreement or any protocol changing its terms and conditions, which has the effect of altering the existing provisions of law, the Supreme Court has held.

A treaty is enforceable in Indian courts as long as a notification is issued to give it effect. If there is no notification, the treaty is not enforceable, the court said.

At the heart of this dispute lay the issue of taxing dividend payouts at a rate of 10% versus 5%.

Nestle SA, Concentrix Services Netherlands and several other multinationals have argued that Netherlands, Switzerland and France are members of the Organisation for Economic Co-operation and Development. And as India's treaties with these countries have the most-favoured-nation clause, the beneficial 5% withholding rate in treaties with Slovenia, Lithuania and Columbia should apply to them as well.

Since the Netherlands, Switzerland, and France are all members of the Organisation for Economic Co-operation and Development, the MFN clause says that if India has signed another treaty with an OECD member that has a lower tax rate, the same will also apply to these three countries.

However, the court explained that for a party to claim benefits of equal treatment based on a DTAA between India and another OECD member state, the date on which the treaty was signed is what matters.

The benefit cannot be claimed if the other country becomes an OECD member after signing the DTAA with India, the court said.

Since Slovenia, Lithuania, and Columbia became OECD members much later than when the treaties were signed with them, the benefit of the lower rate in their treaties cannot apply to the Dutch, Swiss, and French treaties.

As a corollary, multinationals from Netherlands, Switzerland and France will now have to pay tax at the rate 10% for their dividend payouts.

The cases reached the apex court after the tax department lost before the Delhi High Court.

The high court had concluded that tax treaties must be liberated from the technical rules. It was further held that department's denial of beneficial treatment of 5% withholding is "misconceived", and that no separate notification is required to apply the treaty to the domestic law.