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ITAT held Double Taxation Avoidance Agreement rate supremacy over Dividend Distribution Tax rate.

Published: October 16, 2020

Delhi bench of Income Tax Appellate Tribunal has held that Dividend Distribution Tax (DDT) levied by the assessee should not exceed the rate specified in the Double Taxation Avoidance Agreement (DTAA).

Gurugram-based Giesecke & Devrient [India] Private Limited had moved the tribunal to appeal against the order of the Income Tax Department for FY 2013-14. The question was whether the DDT levied in terms of section 115-0 of the Income Tax Act should be restricted to the rate of tax on dividends as provided in the applicable DTAA governing non-resident shareholders.

Here, DTAA is referred as India-Germany DTAA.

The Tribunal following the judgment of High Court of Bombay in Godrej and Boyce Manufacturing Company Limited held that DDT was tax on the company and not on the shareholder. Also, the Tribunal went on to say that in case of inconsistency between the DTAA and the Act, the DTAA shall prevail over the Act. Thereby holding that the DDT levied should not exceed the rate specified in Article 10 in India Germany DTAA, which is 10 per cent.

The Tribunal noted the date of notification for DTAA, while inclusion of relevant provision in the Act through Finance Bill 1997. “This means that the DTAA between India and Germany is pre-dated to the amendment,” Tribunal said. One of the clauses of the DTAA clearly mentions that the dividends may also be taxed in the contracting state on which the company paying the dividend is a resident. However, a rider is also put that if the resident is beneficial owner of the dividend, the tax so charged shall not exceed 10 per cent of the gross amount of the dividend.

The ruling took into consideration the recent abolishment of DDT vide Finance Act 2020, and observed 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. This ruling would have hugely benefited the foreign companies that had invested in India, if the levy of DDT was not withdrawn.

Concessional DTAA rate

However, noting that the concessional DTAA rate is subject to meeting of ‘beneficial ownership’ condition, PE (Permanent Establishment) examination etc., ITAT remits matter back to AO (Assessing Officer) for limited purpose to verify supporting documents in light of Article 10 of DTAA.

Commenting on the ruling, Rakesh Nangia, Chairman , Nangia Andersen India, said this ruling has effectively dealt with the economic impact of DDT along with equity and regressive taxation to resolve the conflict between DDT and the beneficial treaty provision while admitting that the levy of DDT was on the company. “Analogy may be drawn to extend the interpretation of law in this ruling on buyback tax,” he said.

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