The controversy in the case of India vs Concentrix Services Netherlands B.V. & Optum Global Solutions International Netherlands B.V., was the rate of withholding tax to be applied on dividends paid by the Indian subsidiaries (Concentrix Services India Private Limited & Optum Global Solutions India Private Limited) to its participating (more than 10% ownership) shareholders in the Netherlands.
The shareholders in the Netherlands held that withholding tax on dividends should be applied by a rate of only 5%, whereas the Indian tax authorities applied a rate of 10%.
The difference in opinions relates to interpretation of a protocol to the tax treaty between India and the Netherlands containing an most favoured nation clause (MFN clause).
MFN clauses provides that the parties to the treaty (here India and the Netherlands) are obliged to provide each other with a treatment no less favourable than the treatment they provide under other treaties in the areas covered by the MFN clause. The MFN Clause in the relevant protocol to the tax treaty between India and the Netherlands had the following wording
“2. If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention.”
More favourable tax treaties in regards of withholding tax had later been signed between India and #Slovenia, #Lithuania, and #Columbia. However, none of these countries were OECD members at the time where the Tax Treaties with India were entered.
Concentrix Services Netherlands B.V. & Optum Global Solutions International Netherlands B.V. contended that since India had entered into Tax Treaties with other countries which were now members of OECD, the lower rate of 5% withholding tax in these treaties should automatically apply to the Tax Treaty between India and the Netherlands.
According to the Tax Authorities since none of the aforementioned countries were members of the OECD, at the date where the tax treaties with India were signed, the MFN clause of the protocol appended to the tax treaty between India and the Netherlands would not apply in regards to these tax treaties. Slovenia, Lithuania, and Columbia only later became members of the OECD.
Judgement of the Delhi High Court
The High Court decided in favour of Concentrix Services Netherlands B.V. & Optum Global Solutions International Netherlands B.V.
Hence, withholding tax on dividends paid by the Indian subsidiaries to its (participating) shareholders in the Netherlands was limited to 5%.
Excerpts from the conclusion of the High Court
“In our view, the word “is” describes a state of affairs that should exist not necessarily at the time when the subject DTAA was executed but when a request is made by the taxpayer or deductee for issuance of a lower rate withholding tax certificate under Section 197 of the Act. .”
“Clearly, the Netherlands has interpreted Clause IV (2) of the protocol appended to the subject DTAA in a manner, indicated hereinabove by us, which is, that the lower rate of tax set forth in the India-Slovenia Convention/DTAA will be applicable on the date when Slovenia became a member of the OECD, i.e., from 21.08.2010, although, the Convention/DTAA between India and Slovenia came into force on 17.02.2005.”
“However, the case before us is one where the other contracting State, i.e., the Netherlands has interpreted Clause IV (2) in a particular way and therefore in our opinion, in the fitness of things, the principle of common interpretation should apply on all fours to ensure consistency and equal allocation of tax claims between the contracting States.”
India vs Concentrix Services & Optum Global Solutions Netherlands HC decision 22-03-21