Multinational companies with Indian affiliates operating in India may have to pay higher tax following the Supreme Court verdict on October 19 that the “Most Favoured Nation” clause under tax treaties does not get automatically triggered until it is notified under the Income Tax Act.
Experts said the ruling could lead to additional tax being paid by these companies and re-opening of past cases as well.
“The decision of the apex court will have wide repercussions for the industry and could result in millions of dollars of additional tax revenue for the government. The decision would also entail revival of pending matters in the form of fresh action by tax authorities by initiating proceedings, raising demands, or denying lower withholding in respect of these remittances made in the past. This may not go well with our tax treaty partners,” noted Amit Maheshwari, Tax Partner, AKM Global.
Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen noted that the key takeaways of the verdict is that the Supreme Court has clarified the date of applicability of Double Taxation Avoidance Agreements (DTAA) and its relevance to the Most Favoured Nation (MFN) clause in the Protocol.
It has also held that a notification under Section 90(1) is a mandatory condition for any court, authority, or tribunal to give effect to a DTAA or any protocol that changes the terms and conditions, modifying the existing provision. The ruling came by a Division Bench of the Supreme Court that disposed 11 petitions clubbed with that of Nestle SA including those of Concentrix and Optum Global and Steria and set aside an April 2021 ruling of the Delhi High Court.
The appeals arose from decisions of the Delhi High Court involving interpretation of the MFN clause contained in various Indian treaties with countries that are members of the Organisation for Economic Cooperation and Development. The bilateral treaties are between India and Netherlands, France, and Switzerland, respectively.
“Broadly, the issues arising are whether there is any right to invoke the MFN clause when the third country with which India has entered into a Double Tax Avoidance Agreement was not an OECD member yet (at the time of entering into such DTAA); and secondly whether the MFN clause is to be given effect to automatically or if it is to only come into effect after a notification is issued,” the Supreme Court observed. Under the India- Netherlands DTAA, the withholding tax rate is 10% for dividend income in India.
“Indian companies that may have made remittances outside India, applying the MFN clause (which was not specifically notified) without deducting taxes or after deducting taxes at a lower tax rate, will face the brunt of this ruling which is certain to open up a fresh set of litigation,” said Shruti KP, Partner, INDUSLAW, adding that the ruling could potentially make the MFN clause in tax treaties itself redundant and inoperative as the benefit would only be granted where the government specifically issues such a notification.
Divakar Vijayasarathy, Founder and CEO, DVS Advisors said the ruling opens challenges on various fronts and initiating reassessment of income escaping assessment is one of them. “In general, non-deduction of tax or lower deduction of tax would qualify as a case for initiating reassessment. However there have been varied judgments on whether an issue having been scrutinised during assessment can be basis for initiating reassement,” he said, adding that the approach of the Revenue in this regard is to be closely observed.
MFN clause is not restricted only to providing favourable tax rates alone but also extends to restriction on scope of the incomes such as royalty, FTS, and other incomes and hence this judgement could result in the Revenue reassessing the tax-base itself in such cases.
Niranjan Govindekar, Partner, Tax & Regulatory Services, BDO India said it has dealt a big blow to the multinational enterprises with Indian affiliate companies that have discharged DDT liabilities on past dividend distributions and were seeking refunds of excess DDT paid over the applicable tax treaty dividend withholding rates.
Source :- Business Today