ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) Vs. NESTLE SA

JUDGEMENT

(1.) The present batch of appeals arise from decisions of the Delhi High Court involving interpretation of the Most Favoured Nation (MFN) clause contained in various Indian treaties with countries that are members of the Organisation for Economic Cooperation and Development (hereafter OECD). This clause provides for lowering of rate of taxation at source on dividends, interest, royalties or fees for technical services (hereafter FTS) as the case may be, or restriction of scope of royalty/FTS in the treaty, similar to concession given to another OECD country subsequently. The bilateral treaties in question are between India and Netherlands, France, and Switzerland, respectively. Broadly, the issues arising are whether there is any right to invoke the MFN clause when the third country with which India has entered into a Double Tax Avoidance Agreement (hereafter DTAA) was not an OECD member yet (at the time of entering into such DTAA); and secondly whether the MFN clause is to be given effect to automatically or if it is to only come into effect after a notification is issued.

(2.) One of the first judgments[1] challenged, in this batch of appeals by special leave, relates to Steria India. Before the Authority for Advance Ruling ("AAR"), Steria contended that having regard to Clause 7 of the Protocol to the India-France DTAA the more restrictive definition of the expression 'fees for technical services' appearing in the India-UK DTAA, must be read as forming part of the India-France DTAA as well. The AAR, by the impugned order, disagreed with Steria. It ruled that the Protocol could not be treated as forming part of the DTAA itself. It further held that restrictions imposed by the Protocol were only to limit the taxation at source for the specific items mentioned therein; the restriction was only on the rates. Further, the 'make available' clause found in the India-UK DTAA could not be read into the expression 'fee for technical services' occurring in the India-France DTAA unless there was a notification under Sec. 90 of the Income Tax Act, 1961 issued by the Union Government to incorporate the more restrictive provisions of the India-UK DTAA into the India-France DTAA. In other words, Sterias plea that Clause 7 of the Protocol did not require any separate notification and could straightway be operationalised, was not accepted by the AAR. Upon challenge in a writ petition before the High Court, this was reversed; the court accepted Sterias contention, and held that a Protocol is considered as part of the treaty itself and does not have to be separately notified for the purposes of application of the MFN clause. Therefore, in Steria, the question for the interpretation of the MFN clause in the Protocol to the India-France DTAA, was whether a separate notification by the Union was required for application of the MFN clause. The AAR had concluded that even though the conditions set out in the MFN clause were satisfied, the benefit could not be availed unless there was a specific notification by the Government of India effectuating the benefit under the MFN clause, which the High Court reversed.

(3.) The next set of facts, relate to the India-Netherlands DTAA which was entered into on 21/1/1989, and notified on 27/3/1989. This DTAA was amended by a subsequent notification dtd. 30/8/1999. The respondent assessees (writ petitioners before the High Court) were Concentrix Services Netherlands BV, and Optum Global Solutions International BV, and their Indian counterparts (in which the former held 99.99% share respectively) which remitted dividends. In 2020, Concentrix India and Optum India each applied under Sec. 197 of the Act in the prescribed form, seeking a certificate that authorized them to deduct withholding tax at a lower rate of 5% in consonance with the subject DTAA read with the Protocol. In both cases, certificates were issued on 16/9/2020 and 4/1/2021 respectively by which the stipulated withholding tax rate was shown as 10%. In both cases, the certificates were valid till 30/3/2021. The validity period of the certificates came to an end on 31/3/2021 in both cases. By communication dtd. 17/9/2020, Concentrix, through its accountants, sought permission of respondents to inspect the files as well as copies of order sheet(s) which concerned processing of its application preferred under Sec. 197 of the Act. It also sought reasons why the certificate did not grant the withholding rate at 5%. The respondent sought to justify its certificate on 1/10/2020, and applied seeking reasons from the appellant (hereafter "the revenue"). A similar request was made by Optum Netherlands; the revenue furnished reasons to justify the withholding tax rate which was pegged at 10% by its communication dtd. 22/1/2021. Feeling aggrieved, both Concentrix Ne and Optum Ne approached the Delhi High Court, in proceedings under Article 226 of the Constitution.