OECD Countries Can't Avail Lower Withholding Tax On Just MFN Clause, Says Supreme Court

The Supreme Court bench led by Justice Ravindra Bhatt Thursday held that the lower 5 per cent withholding tax on dividend income of companies was not available to all Organisation for Economic Co-operation and Development (OECD) countries just on the most favoured nation (MFN) basis.

The bench held that international treaty practices are not enforceable in India unless the government notifies them, a ruling that experts said will have wide ramifications for the industry, reported ET.

The apex court set aside a 2021 Delhi High Court ruling that allowed Nestle SA, Concentrix Services, Steria and others a concessional withholding tax rate of 5 per cent on dividend income from their Indian arms.

The court further made it clear that preferential treatment given to a country under a double taxation avoidance agreement did not automatically get extended to other member countries unless the earlier treaty with them was amended.

Experts said other countries could also revisit the position on benefits under these treaties.

India in 1998 had signed a tax treaty with the Netherlands, where a withholding tax of 10 per cent was allowed. It later entered into treaties with Slovenia, Lithuania, and Colombia where it agreed to a similar beneficial rate of 5 per cent on dividend income if the recipient company held 10 per cent or more of the share capital in the Indian company.

Slovenia, Lithuania, and Colombia later became members of the OECD.

Tax authorities sought to apply a 10 per cent rate on the dividend income of companies from the Netherlands, Switzerland, and France. These companies argued that the lower rate of 5 per cent available to companies under the tax treaties with the countries of Slovenia, Lithuania and Colombia must also be applicable to them as all were members of the OECD.

They said OECD provides for MFN treatment, making it imperative that if India has signed a treaty with an OECD member that has a lower tax rate, the same will also apply to other members of the grouping.