Supreme Court To Decide Fate Of Dividend Income Under Netherlands, France, Swiss Treaty

Nestle SA, Concentrix Services Netherlands and several other multinationals are before the Supreme Court in a case that will impact the treatment of their dividend income under India's tax treaties with the Netherlands, Switzerland and France.

At the heart of it lies the issue of taxing dividend payouts at the rate of 10% versus 5%. The multinationals have argued that the Netherlands, Switzerland and France are members of the Organisation for Economic Co-operation and Development. And that 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.

The clause ensures that if there's a beneficial tax rate in any other treaty that India has signed, that will apply to treaties with the Netherlands, Switzerland and France as well, since they are all OECD members.

The cases have reached the apex court after the tax department lost before the Delhi High Court. Briefly, the high court had concluded that tax treaties must be liberated from the technical rules, the 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.

Arguing for the tax department, Additional Solicitor General N Venkatraman highlighted the significance of a notification if treaty provisions are to be incorporated into the domestic law. In any tax matter, whether it's creation of charge or grant of an exemption or a reduction of tax, it must have the status of law through a statute and, therefore, it should be notified.

To give effect to a Double Taxation Avoidance Agreement under the Indian tax law, a notification must be issued by the legislature or else, the treaty's legality will come into question. For the taxpayer to draw a concessional benefit under the income tax law, the concession must come through a notification, he argued.

Citing the case of Jolly George Verghese, Venkatraman said it had been clearly held that an international law could only be enforced if it is in consonance with the municipal law of our country. 

As his second argument, Venkatraman reiterated what the tax department had submitted before the Delhi High Court.

That the language of the treaties with the Netherlands, Switzerland and France must be interpreted to mean that the MFN clause gets triggered only if India had signed a beneficial treaty with any other country, which was an OECD member at the time. Since Slovenia, Lithuania and Columbia became OECD members much later, the benefit of the lower rate in their treaties cannot apply to the Dutch, Swiss and French treaties.

When countries are not a member of the OECD, the negotiation with them is held on different parameters. If the order of the high court is allowed in the present matter, it will amount to stripping the powers of the diplomats to negotiate with the non-OECD countries, he argued.

Arguing for Nestle SA, senior advocate Porus Kaka said the main question before the court is whether a withholding tax rate of 5% shall be applicable or 10%. 

There are different types of MFN clauses. India and Switzerland had renegotiated the protocol in 2010 to include an automatic provision. India itself had made the provision automatic while negotiating the protocol.

The stand of the government in this case points to an ultimate bad faith in the execution of the treaty, he said.

Nestle's counsel will continue with his arguments on Feb. 21.