Most Favoured Nation treaty parity extended the lower dividend withholding rate under the India-Netherlands protocol.

The India-Netherlands tax treaty was interpreted to allow the Most Favoured Nation clause in the protocol to extend a later lower dividend withholding rate to Netherlands residents. The protocol was treated as an integral part of the treaty and as operating without a separate notification, while Article 10 capped dividend tax at 10% for a beneficial owner. Applying the protocol's parity mechanism and a common interpretation aligned with the contracting states' understanding, the Court held that the later 5% rate under subsequent OECD-country treaties was available. The certificates fixing withholding tax at 10% were therefore set aside and fresh certificates at 5% were directed.

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Issues: Whether the petitioners were entitled to a lower withholding tax rate of 5% on dividends under the India-Netherlands tax treaty by invoking the Most Favoured Nation clause in the protocol, and whether the certificates fixing tax deduction at 10% were liable to be quashed.

Analysis: Article 10 of the treaty capped tax on dividends at 10% where the recipient was the beneficial owner. The protocol formed an integral part of the treaty and operated without requiring a separate notification. Clause IV(2) of the protocol embodied a parity principle: if India later agreed with a third OECD member state to a lower source-tax rate or a more restricted scope for the same income items, the same benefit would apply to the Netherlands treaty from the date the later convention entered into force. The Court held that this language was not confined to OECD membership existing on the date of the India-Netherlands treaty, and that the relevant interpretive approach was one of common interpretation, consistent with the Netherlands' own understanding of the clause. On that basis, the lower 5% rate under the later treaties relied on by the petitioners was held applicable.

Conclusion: The certificates fixing withholding tax at 10% were liable to be set aside, and the petitioners were entitled to fresh certificates reflecting withholding tax at 5%.

Final Conclusion: The writ petitions succeeded because the protocol's MFN mechanism was held to extend the lower dividend withholding rate to the petitioners' case.

Ratio Decidendi: Where a tax treaty protocol forms an integral part of the convention and provides for MFN parity with later OECD-country treaties, the later concessional source-tax rate applies according to the protocol's terms without requiring a fresh notification, and the treaty must be interpreted consistently with the common understanding of the contracting states.

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