Parity for All? Delhi High Court upholds trigger of MFN clause, bats for ‘common interpretation’ of Tax Treaties

Parity for All Delhi High Court upholds trigger of MFN clause, bats for ‘common interpretation’ of Tax Treaties

By Aditi Sharma (Partner, Khaitan & Co, India) & Krutika Chitre (Principal Associate, Khaitan & Co, India)

The Delhi High Court in its recently pronounced decision in the case of Concentrix Services Netherlands BV WP (C) 9051/2020 and Optum Global Solutions International BV WP (C) 882/2021 invoked the ‘Most Favoured Nation’ (MFN) clause under the India-Netherlands double taxation avoidance agreement (Tax Treaty) and applied a reduced 5% withholding rate on dividend income paid by Indian companies to Dutch shareholders.

Under the Income-tax Act, 1961 (IT Act), dividend received by a non-resident shareholder from an Indian company is taxable at the rate of 20% (plus applicable surcharge and cess) and accordingly subject to a withholding tax in India by the (payer) Indian company. The aforementioned rate is however subject to the application of a beneficial rate under a tax treaty entered into by India with the country of the residence of the recipient shareholder.

The Tax Treaty in the instant case provides for a lower rate of 10% on dividend where the recipient is the beneficial owner of the dividend income. Additionally, the Tax Treaty incorporates an MFN clause under the protocol to the Tax Treaty. The MFN clause provides that if India enters into a tax treaty with any country which is a member of the Organisation for Economic Co-operation and Development (OECD) and the tax rates (on dividends, interest, royalties and fees for technical services) in such a treaty are lower than those agreed to in Tax Treaty, the lower rates shall apply even for the purposes of the Tax Treaty.

After signing the Tax Treaty in 1988 (in force since 21 January 1989), India signed tax treaties with Slovenia in 2003 (in force since 17 February 2005), Lithuania in 2011 (in force since 10 July 2012) and Colombia in 2011 (in force since 7 July 2014). These tax treaties provide for a tax rate of 5% on dividend income if the recipient company holds at least 10% of the share capital in the dividend paying company.

Pertinently, Slovenia, Lithuania and Colombia were not OECD member countries on the date of signing of the Tax Treaty or the date of signing their respective tax treaties with India.  Slovenia, Lithuania and Colombia became members only much later. The interpretation of the MFN clause in light of this timeline became the bone of contention in the present case.

Facts and Arguments

Concentrix Services Netherlands BV and Optum Global Solutions International BV (Taxpayers) are two Dutch entities with subsidiaries (where the Taxpayers hold 99.99% shares) in India. The Taxpayers approached the Indian tax authorities for a certificate that would authorize their Indian subsidiaries to deduct withholding tax at the rate of 5% under the Tax Treaty (read with the protocol appended thereto encapsulating the MFN clause and India’s tax treaties with Slovenia, Lithuania and Colombia). Having received certificates showing the withholding tax rate as 10% instead of 5%, the aggrieved Taxpayers filed a writ petition before the HC.

In the opinion of the tax authorities, for the Taxpayers to place reliance on another tax treaty to avail the lower tax rate, such tax treaty should have been with a country which was a member of the OECD on the date when the Tax treaty was executed as well as when the Taxpayers were claiming such benefit.

To illustrate, in the instant case Slovenia, Lithuania and Colombia became members of the OECD in 2010, 2018 and 2020 respectively, much after signing / entry into force of their respective tax treaties with India and also after the signing / entry into force of the Tax Treaty.

The tax authorities argued that since none of the three countries in question were members of the OECD on the date when the Tax Treaty was executed nor when their respective tax treaties with India were executed, the MFN clause would not trigger.

The tax authorities contended that a lower withholding tax rate could be extended to a Dutch entity only by amending the Tax Treaty followed by the issuance of notification; and since no such amendment has been made (despite several other amendments having been made to the Tax Treaty), the withholding tax cannot be lower than 10%.

Decision of the HC

The HC ruled in favour of the Taxpayers and directed the tax authorities to issue certificates permitting the Indian subsidiaries to withhold tax at 5% on the dividend income.

In what appears to be India’s first ruling on the subject matter, the HC laid down out that protocol to the Tax Treaty forms an integral part of the Tax Treaty and thus no separate notification is required for the protocol to apply.

Highlighting the intention behind the MFN clause, the HC held that the clause brings parity between the Tax Treaty and tax treaties executed thereafter, qua the items such as rate of tax or the scope of the treaty. This however is subject to conditions prescribed under the MFN clause and once such conditions are fulfilled, the lower rate or scope (as the case maybe) would necessarily apply to the Tax Treaty from the date of the tax treaty between India and the relevant third country in question.

The HC further noted that in the instant case, the two prescribed conditions were (i) the country with which India enters into a tax treaty should be a member of the OECD; and (b) the said tax treaty should have limited the rate of tax or restricted the scope, as compared to that in the Tax Treaty.

The HC rejected the interpretation of the tax authorities concerning such country’s OECD membership as on the date of execution of the Tax Treaty. Referring to the emphasis placed by the tax authorities on the word “is” in the protocol which reads “If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividend…” (emphasis supplied), the HC held that the word “is” describes a state of affairs that should exist not necessarily at the time when the Tax Treaty was executed but when a request is made by the taxpayer or deductee for issuance of a lower rate withholding tax certificate.

The HC also noted contents of the decree issued by the Kingdom of Netherlands interpreting the clause in similar fashion and alluded that a different interpretation is not plausible as one of the avowed purposes of entering into tax treaties is the equitable allocation of taxes concerning transactions that are taxable in both countries. The HC stressed that its approach aligns with the accepted principle applied in the interpretation of tax treaties, i.e. of ‘Common Interpretation’.

Referring to the landmark decision of the Supreme Court in Azadi Bachao Andolan, the HC stated that the interpretation of tax treaties should be liberated from the technical rules which govern the interpretation of domestic law and should be interpreted to aid commercial relations and equitable distribution of tax revenues in respect of income falling within the domain of taxation of both countries.


With effect 1 April 2020 in a major tax policy overhaul, the Indian dividend taxation regime saw the abolition of dividend distribution tax and dividend income is now taxable in the hands of the shareholder. The ruling is thus timely and provides existing and potential investors with much needed clarity on their dividend tax exposure in India. 

Being one of the first rulings on the issue, the ruling assumes significance not just vis a vis dividend income but other relevant sources of income that may be within the ambit of an MFN clause, such as interest income, fees for technical services etc and would be helpful to interpret MFN clauses present in several treaties entered into by India.

The HC has emphasized on the ‘common’ or liberal interpretation of tax treaties bearing in mind their purpose and that are negotiated by diplomats and not necessarily by men instructed in the law. This interpretation should however be extended with caution and on a case-to-case basis after a careful review of MFN clauses in various tax treaties. Special attention must be paid to the language and pre-requisites for trigger of the clause such as beneficial ownership, sources of income etc. With the exact text of MFN clauses differing across tax treaties, the extent to which the HC’s approach of common and liberal interpretation can be applied is sure to be put to test.

An important takeaway from the decision was the HC’s reliance on the interpretation of the clause by the other contracting country, Netherlands. The HC’s observations on maintaining consistency in interpretation is an interesting observation and accentuates the importance of international decisions as an aid to interpretation.

The views of the author(s) in this article are personal and do not constitute legal / professional advice of Khaitan & Co.

Delhi High Court upholds trigger of MFN clause, bats for ‘common interpretation’ of Tax Treaties

Aditi Sharma is Partner at Khaitan & Co, Mumbai, India.