Hon’ble Delhi Tribunal in the matter of Giesecke & Devrient [India] Pvt Ltd vs. ACIT [ITA No.7075/Del/2017, AY 2013-14, dated October 13, 2020] ruling in the favor of the taxpayer and also many non-resident shareholders, observed that beneficial tax rates given in the tax treaties in the case of a dividend would also be applicable on dividend distribution tax [herein after “DDT”] deducted and paid by the companies under section 115-O of the Income Tax Act [herein after “Act”] thus limiting the DDT to tax treaty rates.
In this article team JGarg has analysed facts, legislative development, observation of the Tribunal and what may happen in the matter way forward.
Giesecke & Devrient [India] Pvt Ltd [herein after referred as “taxpayer”] is a wholly owned subsidiary of Giesecke & Devrient GmBH, a German company. During the year under review, the taxpayer paid dividend to its German parent company and via additional ground in the Delhi Tribunal claimed that DDT under section 115-O of the Act should be restricted to the withholding tax rate mentioned in the tax treaty between India and Germany.
Brief History of Legislative Developments
Till 1997, every domestic company was required to deduct tax on the payment of dividend over Rs. 2500 at the specified rate and deposit the same with the Central Government. In addition to deduction, as a procedure companies were also required to issue the tax deduction certificates to all the shareholders. Subsequently, shareholders were liable to pay tax on such dividends received at the specified rate.
To overcome this cumbersome process (please keep in mind technology & tools that were available pre-1997 when we used to have desk computers and not pocket computers) and to broaden the tax base, Finance Act, 1997 inserted section 115-O in the Act shifting the tax liability on dividends from shareholders to companies as ‘additional tax’ on the distributed dividend. Along with section 115-O, section 10(34) was also inserted to exempt such dividends in the hands of shareholders.
These amendments gave rise to a new question of law “Whether the tax on dividend distributed under section 115-O should be restricted to the rate specified in tax treaties”
The above question came in front of the Mumbai Tribunal in the case of SGS India (P) Ltd vs ACIT [IT Appeal No. 6974 & 7311 of 2014, dated 12th April 2017], without giving conclusion but with some positive note Mumbai Tribunal remanded this matter back to Commissioner (Appeal) for detailed examination, relevant para of the judgment is quoted below;
“14……Therefore, keeping in perspective the provisions contained under section 115O vis-a-vis Article-10 of DTAA it needs to be examined whether the benefit of tax treaty can be extended to the DDT paid / payable by the assessee. We have noted, the various proposition advanced by the assessee claiming benefit under Article- 10 of India Switzerland DTAA as contained in the written notes are nothing but repetition of submissions made before the learned Commissioner (Appeals) on 20th February 2014, a copy of which is at Page-112 of the paper book. Though, reading of Article-10 of India Switzerland DTAA prima-facie gives an impression that it will only apply to non-resident shareholder receiving the dividend, however, still it leaves a scope for examining the claim of the assessee that DDT being a tax on dividend, Article-10 of the DTAA would be applicable even if such dividend is payable by the domestic company. In our view, it will be too simplistic to reject the contention of the assessee on the plea that it will only apply where the non-resident recipient of dividend incurs the liability in respect of dividend. In our considered opinion, the learned Commissioner (Appeals), though, was required to deal with all propositions advanced by the assessee, he has not done so. Therefore, we are inclined to restore the matter back to the file of the learned Commissioner (Appeals) for fresh consideration after reasonable opportunity of being heard to the assessee.”
The above question of law gained significant strength when Apex Court in the matter of Union of India vs. Tata Tea Co. Ltd. [Civil Appeal No. 9178-80 of 2012, dated September 20, 2017] while ruling on the constitutional validity of section 115-O , observed the nature of an additional tax on dividend or say DDT and ruled
“24. As noted above Entry 82 of List I embraces entire field of “tax on income”. What is excluded is only tax on agricultural income which is contained in Entry 46 of List II. Income as defined in Section 2(24) of the 1961, Act is the inclusive definition including specifically “dividend”. Dividend is statutorily regulated and under the article of association of companies are required to be paid as per the Rules of the companies to the shareholders. Section 115-O pertains to declaration, distribution or payment of dividend by domestic company and imposition of additional tax on dividend is thus clearly covered by subject as embraced by Entry 82. The provisions of Section 115-O cannot be said to be directly included in the field of tax on agricultural income. Even if for the sake of argument it is considered that the provision trenches the field covered by Entry 46 of List II, the effect is only incidental and the legislation cannot be annulled on the ground of such incidental trenching in the field of the State legislature. Looking to the nature of the provision of Section 115-O and its consequences, the pith and substance of the legislation is clearly covered by Entry 82 of List I.” Thus concluded that Dividend Distribution Tax is indeed a tax on income and income, in this case, is dividend.
Based on the above judgment, in 2019 Delhi Tribunal in the matter of Maruti Suzuki India Limited vs. DCIT [ITA No.961 of 2015] also admitted additional ground concerning levy of DDT at a lower rate as mentioned in the tax treaty.
Delhi Tribunal in taxpayer’s case
Finally, in the matter of the taxpayer Delhi Tribunal passed a relief order and observed;
a) The term “Tax” would cover additional income tax levied under section 115-O of the Act.
b) Hon’ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited [328 ITR 81] has unequivocally held that DDT is tax ‘on the company’ and not ‘on the shareholder’.
c) There is no dispute that the liability is on the payer company to pay DDT, but, at the same time, fact is additional income tax is part of tax as defined in Section 2(43) of the Act and levy of additional income tax under section 115-O has its genesis in charging provision of section 4 of the Act.
d) DDT levied under section 115-O is a tax on income and the definition of “income” includes dividend.
e) 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 of the Act.
f) It has been mentioned in the Finance Bill 2020 that the 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.
g) A conjoint reading of the Memorandum to Finance Bill 1997, 2003 and 2020 would show that levy of DDT was merely for administrative conveniences and withdrawal of DDT is keeping in mind that revenue was across-the-board, irrespective of marginal rate, at which recipient is otherwise taxed.
h) The DDT is levy on the dividend distributed by the payer company, being an additional tax is covered by the definition of ‘Tax’ as defined u/s 2(43) of the Act which is covered by the charging section 4 of the Act and charging section itself is subject to the provisions of the Act which would include section 90 of the Act.
i) the liability to DDT under the Act which falls on the company may not be relevant when considering the applicability of rates of dividend tax set out in the tax treaties.
i) Tax rates specified in DTAA in respect of dividend must prevail over DDT.
Delhi Tribunal is quite descriptive and clear in its order. The judgment would certainly going to encourage foreign shareholders to apply for a refund of extra tax deducted in light of the above judgment. However, one additional point which left untouched in the judgment is the language used in the tax treaty. If one sees protocol to Indian tax treaties with Hungary and Cyprus, one will find a specific mention about the DDT;
India – Hungary
“When the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend.”
India – Cyprus
“It is clarified that at present, dividends distributed by an Indian Company is exempt from tax by virtue of section 10 (34) of the Income-tax Act, 1961. Accordingly, even though the treaty provides for withholding tax rate of 10%, so long as the present system of taxation of dividends in India continues, there will be no withholding tax from dividends paid by an Indian company to its shareholders.”
In our view, when tax authority would be appealing against the above judgment in the higher court, in addition to the argument taken in front of the Delhi tribunal, they might be taking the above argument too i.e. if the tax treaty would have intended to include DDT within its scope, the same must have provided some specific clarification in the main article or the protocol.