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TMI Blog2021 (4) TMI 1051X X X X Extracts X X X X X X X X Extracts X X X X ..... olding tax rate of 5%, was rejected, despite The Government of the Republic of India and the Government of the Kingdom of Netherlands Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion [in short "subject DTAA"], [when read, along with] the appended protocol, making a provision qua the same. 2.1. What is not in dispute is that the impugned certificates issued by respondent no. 1, with the approval of respondent no. 2, have stipulated a withholding tax rate of 10% on dividends receivable by the petitioners. 3. Therefore, insofar as W.P. (C) 9051/2020 [hereafter referred to as the "first writ petition"] is concerned, a challenge is laid to the certificate dated 16.09.2020 issued by respondent no. 1. The relief sought is that the same be quashed. The consequential relief sought is that the petitioner's Indian counterpart, i.e., the deductor be permitted to remit dividend, after deducting withholding tax at the rate of 5%. Likewise, in W.P. (C) 882/2021 [hereafter referred to as the "second writ petition"], the relief sought is for quashing the certificate dated 04.01.2021 issued by respondent no. 1 with the approval of respondent no. 2 whereby the withholding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtificates came to an end on 31.03.2021. Via the communication dated 17.09.2020, Concentrix Netherlands, through its accountants, Earnst & Young LLP [in short "Earnst & Young], sought, not only the permission of respondent no. 1 to inspect the files but also copies of order sheet(s) which concerned processing of its application preferred under Section 197 of the Act. 4.7. In the first writ petition, there is an assertion made by Concentrix Netherlands that it had also filed an application seeking reasons as to why a higher rate of TDS had been stipulated and that a response qua the same was received from respondent no. 1 justifying its stance. While the response of the respondent no. 1 dated 01.10.2020 is on record [See: page number 53 of the paper book in the first writ petition], the application seeking reasons is not part of the record. Although notice in this writ petition was issued on 17.11.2020, no counter-affidavit was filed on behalf of the respondents despite an opportunity being granted in that behalf. 4.8. Insofar as Optum Netherlands is concerned, it has placed on record letter dated 27.08.2020 and 11.11.2020 addressed to respondent no. 1. These letters were written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 12 contained in the protocol appended to the subject DTAA. In particular, reliance was placed on Clause IV (2) of the protocol. ii. Based on the said provisions of the subject DTAA and the protocol, it was contended that since India had entered into DTAAs with other countries which were members of Organization for Economic Cooperation and Development [in short "OECD"], the lower rate or the restricted scope in the DTAA executed between India and such a country would automatically apply to the subject DTAA. This argument was based on the provision made in the preface of the protocol which inter alia stated that the protocol "shall form part an integral part of the Convention" i.e., the subject DTAA. iii. For applicability of the provisions of the DTAA which followed the subject DTAA, contrary to the stand of the respondents, no fresh notification was required. In support of this plea, reliance was placed on the judgement of Division Bench of this Court in Steria (India) Ltd. vs. Commissioner of Income-tax-VI, [2016] 386 ITR 390 (Delhi) and the judgement of the Karnataka High Court in Apollo Tyres Ltd. vs. Commissioner of Income Tax, International Taxation, [2018] 92 taxmann. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided for a withholding tax rate of 5% on dividends was executed on 17.02.2005. Slovenia, we were told, became a member of OECD in August 2010. Likewise, we were informed that the DTAA between India and Lithuania was executed on 10.07.2012 whereas Lithuania became a member of OECD only in July 2018. Insofar as Columbia was concerned, we were informed that the DTAA between India and Columbia was executed on 07.07.2014 whereas it became a member of OECD in April 2020. The argument was, since none of the aforementioned countries, i.e., Slovenia, Lithuania, and Columbia were members of the OECD, on the date when they executed DTAAs with India, Clause IV (2) of the protocol appended to the subject DTAA would have no applicability. iii. It was contended, based on the aforesaid dates and events, that the benefit of the lower rate of withholding tax or a scope more restricted was extended to Slovenia, Lithuania and Columbia in their own right and not because they were members of the OECD. iv. Furthermore, the submission made was that several amendments have been made to the subject DTAA which have been ratified by both India and the Netherlands and therefore, if the benefit of a low ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed 10 per cent of the gross amount of the dividends.]" 11. A perusal of Clause (1) and (2) of Article 10 of the subject DTAA would show that when dividends are paid by a company which is a resident of one of the contracting State, to a resident of other State, it may be taxed in that other State. However, such dividends can also be taxed in the contracting State of which the company paying dividends is a resident according to laws of that State, and if the recipient is the beneficial owner of the dividend, the tax so charged shall not exceed 10% of the gross amount of the dividend. 11.1. In the given facts and circumstances, although, the remitter of dividends are Indian entities, the recipients are companies residents of the Netherlands. Therefore, in consonance with Article 10 (2) of the subject DTAA, the remittance, i.e., the dividends can be taxed in India provided the recipients are beneficial owners of the dividends and the tax rate does not exceed 10% of the gross amount of dividends. The respondents have not contested the assertion that the recipients, i.e., Concentrix Netherl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the protocol is concerned. In this regard, it would be useful to extract the apposite observations, made by a Division Bench of this Court, in Steria (India) Ltd. vs. Commissioner of Income-tax-VI, [2016] 386 ITR 390 (Delhi). "16. The AAR appears to have failed to notice that the wording of Clause 7 of the Protocol makes it self-operational. It is not in dispute that the India-France DTAA was itself notified by the Central Government by issuing a notification under Section 90 of the Act. It is also not in dispute the separate Protocol signed between India and France simultaneously forms an integral part of the Convention itself. The preamble in the Protocol, which states "the undersigned have agreed on the following provisions which shall form an integral part of the Convention", makes this position clear. Once the DTAA has itself been notified, and contains the Protocol including para 7 thereof, there is no need for the Protocol itself to be separately notified or for the beneficial provisions in some other Convention between India and another OECD country to be separately notified to form part of the Indo-France DTAA. 17. Reliance is rightly placed by the Petitioner on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under the subject DTAA even though the concerned third State was a member of the OECD is, to our minds, completely misconceived and contrary to the plain terms of Clause IV (2) of the protocol appended to the subject DTAA. 17.2. Although it must be said in favour of the revenue, the construct of Clause IV (2) is such that in certain cases there could be a hiatus between the dates on which the Convention/DTAA is executed between India and the third State and the date when such third State becomes a member of OECD. The limit on the lower rate of tax or the scope more restricted contained in the Convention/DTAA executed between India and the third State can only apply when the third State fulfils the attribute of being a member of the OECD. 17.3. We must point out that a lot of emphases is laid on behalf of the revenue on the word "is" mentioned in the following part of Clause IV (2) in the context of the aforementioned third States with which India has entered into Conventions/DTAAs after the execution of the subject DTAA "... which is a member of the OECD ...". 17.4. In our view, the word "is" describes a state of affairs that should exist not necessarily at the time when the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f double taxation and the prevention of fiscal evasion with regard to taxes on income and capital of July 30, 1988 (Treaty Series 1988, 122) 2. Profit from business The Convention includes a most favored nation clause relating to a restriction on the deduction of head office expenses by a permanent establishment under the national law of the State in which the permanent establishment is located (Article 7 (3) (a)). The most-favored-nation clause in Article 7 provides that if one of the Contracting Governments agrees a tax treaty with another state that relaxes (or removes) the limitation on the deduction of head office expenses, its application will not extend to the India - Netherlands relationship until after the relaxation of the deduction limitation as such is included in the Convention. The MFN clause in Article 7 of the Treaty therefore does not have automatic effect. 3. Dividends The Protocol to the Convention contains a most-favored-nation clause in relation to Articles 10, 11 and 12 (Article IV, paragraph 2). This provision shall apply if, after the signing of the Convention in a treaty with another State which is a member of the OECD, India lowers the rate in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipation dividend paid by companies resident in the Netherlands to a body resident in India will bear a lower withholding tax rate of 5 per cent. 17.7. Thus, can the converse be any different? We think not. The reason being that one of the avowed purposes of entering into DTAAs is the equitable allocation of taxes concerning transactions that are taxable in both States. The approach adopted by us aligns with the accepted principle applied in the interpretation of Conventions/DTAAs. This is the principle of "Common Interpretation". [See: Klaus Vogel, Double Tax Treaties and Their Interpretation, (1986)] 17.8. This principle of Common Interpretation is also recognized in private international law with regard to conflict rules. The purpose, it appears, as indicated above, is to allocate tax claims equally between the contracting States. The Courts of the contracting States are, thus, required to ensure that Conventions/DTAAs are applied efficiently and fairly so that there is consistency in the interpretation of the provisions by the tax authority and courts of the concerned contracting State. 17.9. Having said so, the common interpretation if adopted [whether it concerns a tax aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egislation taking the wellknown form of an Act of Parliament, it has the form of a treaty. In other words, the form and language found suitable for embodying an international agreement become, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganised composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for a very good reason. To get agreement, politic uncertainty is called for. ... The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being 'unconstrained by technical rules of English law, or by English legal precedent, but conducted on broad principles of general acceptation. This echoes the optimistic dictum of Lord Widgery, C.J. that the words 'are to be given their general meaning, general to lawyer and layman alike ... the meaning of the diplomat rather than the lawyer'." [ Francis Bennion: Statutory Interpretation, p. 461 [Butterworths, 1992 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, their interpretation is liberated from the technical rules which govern the interpretation of domestic/municipal law. The core function of a DTAA should be seen to aid commercial relations and equitable distribution of tax revenues in respect of income which falls for taxation in both the deductor and the deductee States, i.e., the contracting States. Conclusion: 20. Thus, having regard to the foregoing discussion, we are of the view that the impugned certificates dated 16.09.2020 and 04.01.2021 deserve to be quashed. 21. It is ordered accordingly. Respondent no. 1 will issue a fresh certificate under Section 197 of the Act, which would indicate, that the rate of withholding tax, in the facts and circumstances of these cases, would be 5%. 22. The case papers shall stand consigned to record. ----------------- Notes: 1. See: Oxford Reference, Oxford University Press, https://www.oxfordreference.com/view/10.1093/oi/authority.20110803095436320, last accessed on 17.04.2021, at 13:00 IST. 2. See: Oxford Reference, Oxford University Press,https://www.oxfordreference.com/view/10.1093/oi/authority.20110803095934970, last accessed on 17.04.2021, at 13:00 IST. 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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