2025 (2) TMI 1389 - AT - Income Tax

MFN clause in DTAA dividend parity: present-tense 'is a member' requires OECD membership on treaty entry, denying claimed benefit.

Interpretation of an MFN clause: the tribunal applies present-tense construction to 'is a member,' holding that a third state must be an OECD member at ... Benefit of MFN clause - DTAAs, their relative Protocols - contention of the assessee is that as per the MFN clause of India Netherlands DTAA as reproduced above, the protocol reference to Article 10 of India Slovania DTAA should be read into India Netherlands DTAA - interpretation is whether the 'is a member' means the present tense, which is that the third party state should be a member of OECD when it enters into DTAA with India. HELD THAT:- Assessee seeks to invoke Protocol with reference to Article 10 of India Slovenia DTAA, since taxability of dividend is more restrictive whereby the dividend paid by the Indian company shall be taxable in the hands of the shareholders at the rate of 5% of gross dividend. This issue is no longer res integra by virtue of decision of Nestle SA [2024 (8) TMI 887 - SC ORDER] held that it is clear that the expression 'is' has a present signification and it derives meaning from the context. Given this interpretation, the conclusion is that when a third-party country enters into DTAA with India, it should be a member of OECD, for the earlier treaty beneficiary to claim parity. DTAA which India entered into with the Kingdom of Netherlands, was signed on 13-7-1988. DTAA with Slovenia was on 13/01/2003, DTAA Entry into Force was in 17/02/2005, Date of Notification was on 31/05/2005 and Slovenia became an OECD member on 21/07/2010. Thus as the necessary requirements to claim benefit of MFN clause does not get satisfied, we do not find any merit in the case of the assessee. The addition made by the Ld.AO thus stands confirmed. Decided against assessee. Issues: Whether the MFN clause in the Protocol to the IndiaNetherlands DTAA permits importing the 5% dividend withholding rate from the IndiaSlovenia DTAA in the absence of an Indian Government notification under Section 90(1) of the Income-tax Act, 1961 and where the OECD-membership and other conditions specified in Circular No.3/2022 are not satisfied.Analysis: The MFN clause in the Protocol permits application of a lower rate or more restricted scope found in a later treaty with a third State only upon satisfaction of the conditions required by the Protocol and domestic law. Relevant conditions include that the subsequent treaty be entered into after the relevant date required by the MFN clause, that the third State be an OECD member as required by the Protocol at the relevant time, that India has limited its taxing rights in the subsequent treaty, and that a separate notification under Section 90(1) be issued to give domestic effect to the change. Circular No.3/2022 clarifies these cumulative requirements. The Supreme Court's decision in Nestle SA confirms that treaty or protocol provisions effecting alterations in domestic taxing rights are not automatically enforceable until a notification under Section 90(1) has been issued and that the OECD-membership condition must be satisfied as per the Protocol's language. Applying these principles to the present facts, the condition of issuance of a notification under Section 90(1) was not fulfilled and the OECD-membership/timing requirements are not met for importing the 5% rate from the IndiaSlovenia DTAA into the IndiaNetherlands DTAA.Conclusion: The claim to tax dividends at 5% by invoking the MFN clause is rejected; the MFN benefit cannot be imported in the absence of the statutory notification and required conditions, and therefore the dividend income is taxable at 10% under Article 10 of the IndiaNetherlands DTAA (decision against the assessee; in favour of the Revenue).