Core function of treaties is to aid commercial relations and equitable distribution of tax revenues: Delhi High Court

The purpose of international treaties is to streamline commerce between two nations and authorities should avoid double taxation as far as possible as according to the provisions mentioned under the treaty dictating rules for equitable taxation. In the present matter of Optum Global Solutions International BV Vs Deputy Commissioner of Income Tax & Anr. [W.P.(C)-882/2021], concerned with an international treaty between India and Netherlands, the Delhi High Court bench of Rajiv Shakdher J. and Talwant Singh J. proposed that taxation should be conducted in an equitable proportion.

The petitioners are the deductees, i.e., the ultimate tax-payers. The grievance of the petitioners is that their request to respondent, for issuance of a certificate at a lower withholding 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 [DTAA]. 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 justifying its stance.

It was contended by the petitioners that Although the subject DTAA provides for a withholding tax rate of 10% on dividends received by an entity residing in the Netherlands from an entity residing in India, the petitioners sought a lower rate withholding tax certificate of 5% by placing reliance on the Most Favoured Nation [in short “MFN”] Clause obtaining in the protocol appended to the subject DTAA. In this context, reliance was placed on Article 10 (2) read with Clause IV. Articles 10, 11 and 12 contained in the protocol appended to the subject DTAA. In particular, reliance was placed on Clause IV (2) of the protocol.

The bench focused on Clause (1) and (2) of Article 10 of the subject DTAA which revealed 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.

The court relied on the judgment of Union of India and Anr. vs. Azadi Bachao Andolan and Anr, (2004) 10 SCC 1 wherein it was held that 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 and the words ‘are to be given their general meaning, general to lawyer and layman.

The court held that “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. 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%.

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