Decided! DTAA prevails over DDT, rules Delhi ITAT
The critical issue for adjudication was whether (Dividend Distribution Tax) DDT was tax on the company or a tax on the shareholder.
In a path-breaking order Income Tax Appellate Tribunal (ITAT) Delhi has ruled that “DDT levied by the appellant [assessee] should not exceed the rate specified in Article 10 in India Germany DTAA”. ITAT said in case of inconsistency between the DTAA and the Income Tax Act, the DTAA shall prevail over the Act. ITAT passed this order in the matter of Giesecke & Devrient [India] Pvt Ltd Vs Addl CIT. DTAA is Double Tax Avoidance Agreement.
The critical issue for adjudication was whether (Dividend Distribution Tax) DDT was tax on the company or a tax on the shareholder. 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 has gone ahead 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 by the appellant should not exceed the rate specified in Article 10 in India Germany DTAA, which is 10%.
Interestingly, this ruling has taken 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. According to experts, this ruling would have hugely benefited the foreign companies that had invested in India, if the levy of DDT was not withdrawn.
Rakesh Nangia, Managing Partner, Nangia Anderson says ” 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”
Giesecke & Devrient [India] Pvt Ltd had challenged the order of the Addl CIT Delhi for transfer pricing adjustment and disallowance of expenditure of Rs 17.76 lakhs.
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Amit Maheshwari, Tax Partner, AKM Global, states, “Several companies may apply for refunds for the DDT already paid and based on this very important and landmark judgment. However, given the repercussions involved the tax department is expected to file an appeal.” He added, “Most of the treaty rates are around 10% so this will have revenue implications.” Noting that the concessional DTAA rate is subject to meeting of 'beneficial ownership' condition, PE examination etc., ITAT has remitted the matter back to AO for limited purpose to verify supporting documents in light of Article 10 of India-Germany DTAA.
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