Denial Of Tax Benefits Under French, Swiss, Dutch Treaties: A Showcase Of Bad Faith?
If a separate notification is required to give effect to a DTAA, it would defeat the purpose of such an agreement, experts say.
Nestle SA, Concentrix Services Netherlands and several other multinationals from Switzerland, the Netherlands and France are staring at a higher tax burden as the Supreme Court has denied them a favourable tax rate.
The top court was dealing with the interpretation of the 'Most Favoured Nation' clause, contained in various Indian treaties with countries that are members of the Organisation for Economic Cooperation and Development.
The multinationals had argued before the court that since French, Swiss, and Dutch treaties have the MFN clause, the beneficial 5% withholding rate in treaties with Slovenia, Lithuania and Colombia should apply to them as well.
And since the Netherlands, Switzerland and France are all members of the OECD, 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, the multinationals said.
This stance, which was accepted by the Delhi High Court in 2021, has now been overturned by the apex court.
From the Delhi High Court's decision, it would have followed that the 5% withholding tax rate would be available to Dutch, French and Swiss resident companies from July 21, 2010, if they owned at least 10% of the shares of an Indian company paying dividends, said Dhruv Janssen-Sanghavi, leader at Nishith Desai Associates.
That is the date on which Slovenia became an OECD member.
Janssen-Sanghavi explained that the 10% shareholding threshold would have disappeared once Colombia became an OECD member on April 28, 2020, and all dividends paid by an Indian company to Dutch, French and Swiss residents would have been eligible for the 5% withholding tax rate.
However, the apex court said that there is no "automatic" application of a lower tax rate under the MFN clause and that the beneficial rate will not apply unless a notification is issued to give it effect.
This might project India as a difficult nation for international trade and transactions. Taxpayers from MFN jurisdictions carrying out operations in India may reassess and revamp their operating structure, according to Rahul Charkha, partner at Economic Laws Practice.
The whole discussion, with respect to the notification of the effect of the MFN clause, is entirely superfluous. Everything has already been notified.Dhruv Janssen-Sanghavi, Leader, Nishith Desai Associates
A protocol is a part of the Double Taxation Avoidance Agreement, and every clause therein is effectively applicable from the date it is agreed between the member states. If, even after such an agreement, a separate notification is required, it would defeat the purpose of such an agreement, Charkha said.
The Law Of Treaties
It is a trite law that international treaties must be interpreted liberally and not literally. Adopting a strict and literal interpretation defeats the very purpose of international treaties.
The top court has said that for a party to claim benefits of equal treatment based on a Double Taxation Avoidance Agreement between India and another OECD member state, the date on which the treaty was signed with the other member state is what’s relevant.
The benefit cannot be claimed if the other country becomes an OECD member after signing the DTAA with India, the court said.
Slovenia, Lithuania, and Colombia became members of the OECD in 2010, 2018, and 2020, respectively, which was much later than when the treaties were signed with them.
One has to acknowledge that such treaties are negotiated between diplomats, who are not conscious of the complexities of the legal expressions used in statutes, and not legislatives, who are well-versed in the legal language, Charkha said.
In such cases, it is the intention of the states and the benefit that they intend to provide to their residents under the DTAA that is to be looked into.Rahul Charkha, Partner, ELP
The Vienna Convention on the Law of Treaties says that every treaty in force is binding upon the parties and must be performed by them in "good faith". It also states that a party may not invoke its internal laws as a justification for its failure to perform a treaty.
Highlighting India's treaty practice, the apex court said that whenever a signatory to an existing DTAA points to the event of a third state entering into OECD membership, the beneficial effect given to the later third-party state has to be notified in the earlier DTAA.
The idea that India has developed a "subsequent practice" to notify the effect of an MFN clause in its tax treaties is grossly erroneous, as such "subsequent practice" needs to be bilateral. There is absolutely nothing that suggests any such agreement between India and the jurisdictions in dispute, said Janssen-Sanghavi.
This interpretation is not in good faith, according to him.
