The above judgement is passed by Delhi Tribunal in case of Giesecke & Devrient [India] Pvt Ltd. v. Additional Commissioner of Income Tax, Special Range-4, New Delhi.
The assessee, a wholly-owned subsidiary of a Germany Company (G&D GmbH), primarily deals in trading of Currency Verification and Processing Systems.
It paid Dividend to G&D GmbH and paid DDT on the same as per Sec 115-O.
During the appeal for the A.Y 2013-14, the company raised additional ground against the tribunal challenging the applicability of higher rate of DDT instead of beneficial rate of tax available under India-Germany DTAA.
The assessee claimed refund of the excess DDT paid, as the non-resident recipient was eligible to opt for DTAA benefit, and as per the provision of sec 237 of the Act read with Article 265 of the Constitution of the India, only legitimate tax could have been retained.
Issues Raised:
Whether DDT is a tax on the Company or the Shareholder?
Whether DDT u/s 115-O, should be subject to the rate of tax on dividend as provided in the applicable DTAA governing non-resident shareholders?
Judgement:
DDT is a tax on the Company or the Shareholder:
Firstly, tribunal went through the judgement of Hon’ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited, 328 ITR 81 wherein it was unequivocally held that DDT is tax ‘on the company’ and not ‘on the shareholder’.
DDT is chargeable to income of the recipient of dividend
To interpret this issue, the Delhi ITAT perused the interplay of the charging section of the Act and the definition of the terms ‘tax’ and ‘income’ as follows:
Section 115-O – As per section 115O-(1) of the Act, DDT is an additional income tax required to be paid by a domestic company on amount declared, distributed or paid by way of dividends;
Section 4 – Income Tax is chargeable on total income of a person including provisions for levy of additional income tax.
Section 2(24) – Income also includes
Section 2(43) – Tax includes additional tax (section 115-O i.e. DDT) by virtue of section 4.
Also, the provisions of sections 4 and 5 of the Act are made ‘subject of the provisions of the Act’ which means it includes section 90(2) of the act that allows to opt for a beneficial tax rate of treaty over the Act.
Reference was made to the Hon’ble Supreme Court in the case of Union of India and Another v. Azadi Bachao Andolan where it was founded that 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 implementation of the terms of the DTAs which would automatically override the provisions of the Income- tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income.
On combined reading of the memorandum to Finance Bill 1997, 2003, 2020 it clearly states that the levy of additional tax on the company was merely for administrative consideration rather than legal necessity. Also, in the memorandum to Finance Bill 2020, it has been specifically mentioned for removal of DDT and moving to a classical system of taxing dividend in the hands of shareholders where It has been mentioned in this bill 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.
The Delhi Tribunal is of the opinion that although the liability to DDT under the Act falls on the company, however the same shall be subject to tax rates of dividend set out in the tax treaties on combined reading of section 4 and section 90. The generally accepted principles relating to interpretation of treaties in the light of the object of eliminating double taxation, in our view does not bar the application of tax treaties to DDT.
Further the tribunal referred the judgement of Hon’ble Delhi High Court in case of New Skies Satellites where Hon’ble Delhi High Court and article 39 of VCLT, which clearly states that amendment in the Act will not impact the Treaties entered between the two countries as it is a unilateral amendment.
In light of the aforesaid discussion, Delhi tribunal held that the tax rates specified in DTAA in respect of dividend must prevail over DDT.
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Our comments:
1. Although DDT is now not applicable and now TDS is to be deducted on Dividend paid which would be subject to DTAA rate and dividend is taxed in the hands of recipient but this could lead to many non-resident asking for refund of DDT paid on their dividend income.
2. Although Tribunal has allowed to use DTAA rate instead of DDT rate if same is beneficial in case of non resident however, to claim refund of such difference, each person/ recipient of dividend who is a non-resident taking the benefit of such DTAA will have to file application before relevant authority for such refund as he/ it shall be the person eligible for refund as per section 237 of the Income tax act.
