India-France DTAA sparks tax row with Saint Gobain, HC orders higher outgo

Court says firm can pay "under protest", subject to final order; dispute could trigger similar rows in tax matters with MNCs, experts warn

The Delhi high court has issued notice to the income tax department on a tax dispute with Saint Gobain India Ltd which relates to interpretation of India's agreement with OECD countries.

In the meantime, the court allowed Saint Gobain to pay dividend to its French shareholder--Societe De Participations Financiers ET Industrielles (SPAFI)--for 2022-23 after paying higher withholding tax "under protest". The higher tax amount will be subject to the order by the court, it ruled.

The dispute, which relates to double taxation avoidance agreements (DTAAs) that India entered with OECD countries, has a potential to trigger similar rows in tax matters with multinational companies (MNCs), experts warned.

While the tax department felt that Saint Gobain, which is engaged in glass, ceramics and concrete manufacturing, should withhold ten per cent tax on dividend payment to its French shareholder, the company was of the view that it should withhold only five per cent.

The dispute arises due to a Most-Favoured-Nation (MFN) clause in DTAA that India has entered with OECD countries which include France. The clause says that if India enters into DTAA with any other OECD country which reduces its taxes in areas such as dividend,  that reduced rate will apply to those countries which have MFN clauses.

India later entered into DTAA with Slovenia where withholding tax on dividend is five per cent and not ten per cent. However, Slovenia became a member of OECD after signing DTAA with India. Now France says that the lower tax rate should apply to its companies too due to the MFN clause.

However, CBDT in a clarificatory circular said that the MFN clause comes into force if Slovenia was a member of OECD at the time of DTAA with that country as well at a time when MFN clause was entered into some OECD countries including France.

Saint Gobain has challenged that circular as well as the income tax department's notice directing the company to pay ten per cent withholding tax.

Sandeep Sehgal, partner tax at AKM Global, said the granting of benefit of the MFN clause is a vexed topic and the issue of this circular is expected to add to the complexities due to the different interpretations taken by the countries.

"The MNCs would certainly like to go with the interpretation of their home jurisdiction especially when it is faourable to them. Hence, this would give rise to several such writ petitions against the circular and would add to the litigations," he said.