Delhi Tribunal had an occasion to discuss the long-lasting debate over the applicability of the Double Tax Avoidance Agreement (DTAA) rates to the additional income tax levy under the Income Tax Act (the Act) by virtue of Dividend Distribution Tax (DDT). This could be a landmark judgment as the Tax Tribunal has given immense importance to the intent of the introduction of DDT vs the literal interpretation of the law.
- The Giesecke & Devrient [India] Pvt Ltd (hereinafter referred to as 'Taxpayer' or 'G&D India') is a 100% subsidiary of G&D GmbH, a company incorporated under the laws of Germany. G&D India imports Currency Verification and Processing Systems from its Associated Enterprise (AE) and resells the same to Indian Customers.
- In the course of an appeal for AY 2013-14 on transfer pricing and corporate tax matters, the appellant raised an additional ground challenging the applicability of the higher rate of DDT instead of the beneficial Dividend tax rate provided under India-Germany DTAA.
- Whether the DDT levied in terms of Section 115-0 of the Act should be restricted to the rate of tax on dividends as provided in the applicable DTAA governing non-resident shareholders?
Key observations of the Tribunal
- The Tribunal appreciated the fact that the issue raised is purely a legal one and thus, the additional ground was admitted in light of the ratio laid down by the Hon'ble Supreme Court in the case of NTPC1.
- The Delhi Tribunal noted that a similar additional ground was also allowed by the coordinate bench in the recent judgment of Maruti Suzuki Ltd.2 This action of the Tribunal was subsequently upheld by the Hon'ble Delhi High Court.
- The Tribunal has given high weightage to the intent of the lawmaker while introducing the concept of DDT. Tribunal has relied on the memorandum to Finance Bill 1997, 2003 to establish that levy of additional tax on the company was driven by administrative considerations rather than legal necessity.
- The Tribunal emphasized the fact that economically, the burden of DDT falls on the shareholders rather than on the company, as the amount of distributed profits available for shareholders stands reduced to the extent of DDT levied. Further, based on the reading of memorandum for 1997 and 2003, it was clear that the levy is for all intent and purposes, a charge on dividends.
- The Tribunal has taken cognizance of the Bombay High Court's judgment in the case of Godrej and Boyce Manufacturing Company Limited3, whereby it was held that DDT is tax 'on the company' and not 'on the shareholder'.
- However, the Tribunal also emphasized that additional Income tax is part of the tax as defined in Section 2(43) of the Act, and levy of additional Income tax u/s 115-0 has its genesis in charging provision of Section 4 of the Act. The provisions of Sections 4 and 5 of the Act are expressly made 'subject to the provisions of this Act' which would include Section 90(2) of the Act that opens the gate for applying the beneficial treaty rate over the Act.
- The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under Section 90 towards the implementation of the terms of the DTAAs which would automatically override the provisions of the Income-tax Act. Reference was made to the decision of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan4 and the Hon'ble Andhra Pradesh High Court in the case of Visakhapatnam Port Trust5.
- Finally, in the memorandum to the finance bill 2020, the government has specifically mentioned that the reason for removal of DDT and moving to the classical system of taxing dividend is that incidence of tax is on the payer company and not on the recipient where it should normally be as the dividend is income in the hands of the shareholders and not in the hands of the company. The incidence of tax should, therefore, be on the recipient.
- In the Delhi Tribunal's opinion, it is absurd to hold that the liability of the DDT falls on the company and thus rates of dividend tax set out in the tax treaties shall not be applicable. In fact, in light of the generally accepted principles relating to the interpretation of treaties with the object of eliminating double taxation, the mere responsibility of collecting tax on the company does not bar the application of tax treaties to DDT.
- Lastly, to support its aforementioned contention, the Tribunal highlighted the fact that the India-Germany DTAA was notified in the year 1996 whereas Section 115-O was introduced by finance bill 1997. The Tribunal was of the view that DDT is nothing but a unilateral mode of implementing a tax on dividend. However, referring to the judgment of Hon'ble Delhi High Court in the case of New Skies Satellites6, Tribunal held that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty.
- Such an act of unilateral amendment is a disregard to the general rule under Article 39 of The Vienna Convention on the Law of Treaties, 1969 (VCLT) regarding the amendment of treaties, which provides that a treaty may be amended by agreement between the parties.
- In light of the above, the Tax Tribunal has allowed the claim of the taxpayer. However, to verify the beneficial ownership condition, supporting documents, etc. has been remanded to the tax officer.
There was always a murmur in the industry revolving around how far the government is justified to impose an additional tax on dividends under the disguise of tax on distributed income of the company. The decision of the Delhi Tribunal could be path-breaking and would pave the way for many other additional claims from taxpayers across the industry.
The judgment clearly highlights that it would be unfair to read the unilateral amendment into the treaties signed before the introduction of the DDT regime to restrict the advantage of beneficial provisions. This also poses a question on the availability of benefits in respect of the Treaty signed post the introduction of DDT.
While this decision would be welcomed with open arms by the taxpayers, it is expected that Tax Authorities would appeal this matter to the highest level.
Taxpayers adopting this position while relying on the above decision may also have to consider the following aspects:
- Foreign Shareholders have been given a specific exemption under the Indian Tax Laws when DDT is paid by the Indian company. Also, there are few treaties (like India-USA, India-Mauritius, etc.) that provide underlying tax credit in the home country in respect of the income-tax paid to India by or on behalf of the distributing company with respect to the profits out of which the dividends are paid. In a case where foreign companies have claimed a tax credit in the home country, then restricting the rate may result in a double benefit.
- In the majority of the tax treaties (including the India-Germany Tax Treaty), the Dividend article specifically provides that "This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid". Where DDT is considered as a tax on distributed profits, the beneficial rate provided for taxation of dividends in the tax treaty may not apply based on the language of Tax Treaty itself.
- Treaties with few countries (like India-Cyprus) also clarify that dividend is exempt in India and hence, a lower rate of tax is not relevant. This also indicates that shareholders are not impacted by the DDT tax. It may be difficult to claim an exemption in case of such Treaties.
We seem to be at a precipice of an interesting battle. It would be important for taxpayers to analyze its facts thoroughly before lodging a claim.
1 229 ITR 383â€9
3 328 ITR 81
4 263 ITR 706
5 144 ITR 146
6 382 ITR 114
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