The Delhi High Court ruled that the rules of Interpretation applicable to Domestic Law need not be applicable while interpreting the Double Taxation Avoidance Agreement (DTAA).
The petitioners, Concentrix Services Netherlands and Optum Global Solutions are the deductees, i.e., the ultimate tax-payers. The grievance of the petitioners is that their request to respondent authority, 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, when read, along with the appended protocol, making a provision qua the same.
The petitioner contended 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 Clause obtaining in the protocol appended to the subject DTAA. In this context, reliance was placed on Article 10 (2) read with Clause IV.Ad 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.
It was contended that since India had entered into DTAAs with other countries which were members of the Organization for Economic Co-operation and Development [in short “OECD”], the lower rate or the restricted scope in the DTAA executed between India and such a country would automatically apply to the subject DTAA. This argument was based on the provision made in the preface of the protocol which inter alia stated that the protocol “shall form part an integral part of the Convention” i.e., the subject DTAA.
On the other hand, the reponsent authority contended that the DTAA between India and Slovenia which provided for a withholding tax rate of 5% on dividends was executed on 17.02.2005. Slovenia, we were told, became a member of OECD in August 2010. Likewise, we were informed that the DTAA between India and Lithuania was executed on 10.07.2012 whereas Lithuania became a member of OECD only in July 2018. Insofar as Columbia was concerned, we were informed that the DTAA between India and Columbia was executed on 07.07.2014 whereas it became a member of OECD in April 2020. The argument was, since none of the aforementioned countries, i.e., Slovenia, Lithuania, and Columbia were members of the OECD, on the date when they executed DTAAs with India, Clause IV (2) of the protocol appended to the subject DTAA would have no applicability.
The coram of Justice Rajiv Shakdher and Talwant Singh held that while interpreting international treaties including Tax treaties the rules of interpretation that apply to domestic or municipal law need not be applied, for the reason, that international treaties, conventions and tax treaties are negotiated by diplomats and not necessarily by men instructed in the law.
Therefore, the court while directing the Respondent to 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% held, “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.”
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