Delhi Tribunal – Giesecke & Devrient (India) Pvt Ltd. Vs. Addl. CIT (ITA No. 7075/Del/2017)

Recently, the Hon'ble Delhi ITAT has ruled in favor of the assessee by allowing the ground that tax treaty rate to be applied over dividend distribution tax rate. The ruling has been held on the basis of considering the concept of "substance over the form".

Following are the synopsis of the said ruling of the Hon'ble Delhi ITAT in case of Giesecke & Devrient (India) Pvt Ltd. Vs. Addl. CIT (ITA No. 7075/Del/2017).

Matter of the case: 

Applicability of Tax treaty benefits on DDT in case of dividend distributed to foreign shareholders.

Additional ground raised before ITAT:

Seeking refund for DDT paid in excess of applicable tax rate prescribed as per tax treaty between India and Germany

Extract of the Ruling in the above context: 

“…the liability to DDT under the Act which falls on the company may not be relevant when considering applicability of rates of dividend tax set out in the tax treaties. The generally accepted principles relating to interpretation of treaties in the light of object of eliminating double taxation, in our view does not bar the application of tax treaties to DDT..”

Summary of the Ruling: The Delhi ITAT has observed and held the following in the favour of assessee 

• Fundamental principle of DDT being in the nature of “tax on income”, which is chargeable u/s. 115-O (additional income tax).

• As per the Article 10 of tax treaty, dividend is taxed @ 15%/ 10%/ 5% on gross basis and taxpayer can avail benefit of this clause, subject to the condition of no PE in India.

• Since, DDT is nothing but part of income tax, provisions of tax treaty are applicable and it is to be noted that the provision of tax treaty does not apply based on whether tax is levied in the hands of shareholder or in the hands of company, it deals only with allocation of taxing rights.

• Tax treaties introduced before introduction of DDT (i.e., 1997), in that case the position cannot be changed unilaterally by amending domestic laws and without amending the treaty and therefore, the applicability of Article 10 remains.

• The ITAT has also upheld supremacy of tax treaty over provisions of section 115-O, i.e., section 115-O cannot override the article of tax treaty. The provisions of tax treaty cannot be overridden by the domestic laws.

• Further, it is concluded that the burden of DDT was shifted to distributing company only for administrative purpose but still the economic burden remains with the shareholders as the dividend amount received by them stands reduced to the extent of DDT levied. The excess tax can’t be levied by shifting tax incidents from the hands of shareholders to company by merely amending the law and therefore refund of DDT paid in excess of applicable rate as per treaty shall be granted to the assesse.

Points to ponder on:

• DTAA provides for the distributive rights but the ruling does not mention for, in whose hand should the income be taxed

• Whether, ruling is also applicable for the treaties signed post the introduction of DTAA

• Applicability of grossing up of DDT concept to treaty rates

• DDT is legally tax on company but the ruling has been held on the theory of economic burden on the shareholders, so it would be subject matter of the litigations

• Applicability of the Most Favored Nation (MFN) clause, while determining the applicable tax rate for charging dividend, which could be subject to restriction (e.g., MFN clause of DTAA between India and Switzerland, where restriction has been put in respect of scope of FTS)

Our Comments/ Observations:

• In the said ruling, it can be observed that the ruling has been held on the basis that the ultimate burden of paying tax on dividend falls on the shareholder and not on the company. Though, DDT is levied on the company, but it is being recovered from the profits distributed to the shareholders and hence it can be argued that it should be taxed in consideration to economic burden.

• Further, it is worth noting that the Hon'ble Supreme Court in the case of Tata Tea Co Ltd (398 ITR 260) while upholding the constitutional validity of section 115-O held that DDT was tax on Income and on this basis the said ruling of Delhi ITAT can be accepted, if challenged before the higher appellate authorities.

• On the issue of grossing up DDT, one can argue that the wordings of the treaty are clear enough to tax dividend on a gross basis at the given rate in the treaty itself. If the ground of taxing dividend as per tax treaty is allowed in favor of assessee, the question of grossing up would be of no importance.

• It can be seen in this ruling that the Hon'ble ITAT has admitted the additional ground raised during the proceedings though the matter was not  previously dealt by the jurisdictional A.O. and hence on this basis one can raise additional ground during the course of the assessment proceedings, if not concluded yet. There are also other various judgments held, which supports this fact of raising additional ground.

You can access the copy of the above mentioned ruling of the Hon'ble Delhi ITAT in the below given link:

Delhi Tribunal – Giesecke & Devrient (India) Pvt Ltd. Vs. Addl. CIT (ITA No. 7075/Del/2017)

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Advisory: Information relates to the law prevailing in the year of publication as indicated. The above article is only to enable public to have a quick and an easy understanding. Viewers are advised to ascertain the correct position/prevailing law before relying upon any document.