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.