Article 10 of India-Germany DTAA – Section 115-O of the Act – Dividend Distribution Tax (DDT) payable by Indian company on dividend distributed to non-resident shareholder to be restricted to tax rate specified in DTAA

3. TS-522-ITAT-2020-Delhi Giesecke &
Devrient [India] Pvt. Ltd. vs. ACIT ITA No:
7075/Del/2017 A.Y: 2013-14 Date of order: 13^th
October, 2020

Article 10 of
India-Germany DTAA – Section 115-O of the Act – Dividend Distribution Tax (DDT)
payable by Indian company on dividend distributed to non-resident shareholder
to be restricted to tax rate specified in DTAA

FACTS

The assessee was a
wholly-owned subsidiary of a German company (GCo). It paid dividend to GCo and
also paid DDT u/s 115-O.

During the appeal
proceedings before the Tribunal¹, the assessee raised additional
grounds and contended that dividend was paid to a non-resident shareholder who
was qualified for benefit under the provisions of the India-Germany DTAA.
Accordingly, the DDT rate under the Act was to be restricted to the rate
specified under the India-Germany DTAA and the excess DDT refunded.

HELD

Interplay of DDT
with DTAA

(i)    For administrative convenience, while DDT is
collected from the company paying dividends, effectively, DDT is a tax on
dividend.

(ii)   In Godrej and Boyce Manufacturing
Company Ltd.², the Bombay High Court held that DDT is a tax
on the company paying dividends and not on the shareholder.

(iii) The liability to pay DDT is on the Indian
company; DDT is a tax on income and income includes dividend.

(iv) The Tribunal perused the Memoranda to Finance
Bill, 1997 and the Finance Bill, 2003³ and observed that
administrative convenience was the reason for the introduction of DDT. For all
intents and purposes, DDT was a charge on dividends. The burden of DDT falls on
shareholders rather than the company as the amount of dividend available for
distribution to shareholders stands reduced.

(v)   The income of a non-resident is to be
determined having regard to the provisions of the DTAA. The fact that liability
to pay DDT is on the Indian company was irrelevant for considering the rate for
tax on dividend under DTAA.

(vi) The India-Germany DTAA was notified in 1996,
i.e., prior to the introduction of DDT in 1997. In New Skies Satellite⁴
the Delhi High Court held that Parliament cannot amend DTAA by unilaterally
amending domestic law. Accordingly, the DDT rate cannot exceed the rate
prescribed on dividend under the India-Germany DTAA (namely, 10%).

(vii)       The Tribunal remitted the issue back to
the A.O. for limited verification of beneficial ownership and existence of PE
of GCO.

Note:

The Tribunal
admitted additional ground relying upon the jurisdictional Delhi High Court
decision in Maruti Suzuki India Ltd. WP(C) 1324/2019.