The Delhi High Court held that 5% tax to be applicable on the dividend income of Netherlands-based shareholders.
The grievance of the petitioners, Concentrix Services Netherlands and Optum Global Solutions International 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 petitioners had applied to the concerned statutory authority under Section 197 of the Income Tax Act, 1961 in the prescribed form, i.e., Form 13 seeking issuance of a certificate that would authorize Concentrix India to deduct withholding tax at a lower rate of 5% in consonance with the subject DTAA read with the protocol appended thereto.
In the case of Concentrix Netherlands and Optum Netherlands, respondent authority, after obtaining approval issued the impugned certificate wherein the stipulated withholding tax rate was shown as 10%.
The coram of Justices Rajiv Shakdher and Talwant Singh said that since Slovenia, Lithuania, and Columbia became members of the OECD, not only after the subject DTAA came into force but also after their own DTAA came into force, and therefore, lower rate of withholding tax, i.e., 5% on dividends would not apply to recipients in the Netherlands, who are otherwise covered under the subject DTAA – as that is not how the other contracting State, i.e., the Netherlands has interpreted Clause IV (2) of the protocol appended to the subject DTAA.
The court held that 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.
The court quashed the impugned certificates imposing 10% of the tax and directed the issue of 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%.