ITAT Rules that Beneficial DTAA Rates to Prevail over DDT Rate under IT Act

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In a recent decision of the Income Tax Appellate Tribunal (‘ITAT’) dated October 13, 2020 involving an Indian subsidiary of a German company, ITAT held that the dividend distribution tax (‘DDT’) rate as provided for in the Indian German Double Taxation Avoidance Agreement (‘DTAA’) would prevail over the rates as provided under the Income Tax Act, 1961 (‘IT Act’). ITAT further held that any amendment to the domestic tax provisions would not override the DTAA. The case involved payment of dividend by an Indian subsidiary to its German parent company and the Indian subsidiary was paying DDT as mandated under Section 115O of the IT Act. Subsequently, for the Financial Year 2012-13, the plea for the beneficial rate available under the DTAA was taken up for the first time before the ITAT by way of an additional ground.

ITAT whilst relying on the decision of the Hon’ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited v. Deputy Commissioner of Income Tax[1] held that DDT was a tax levied on the company paying the dividend and not on the shareholder. ITAT by relying on various provisions of domestic tax law also observed that the tax was on income of the shareholder which included dividend. Having observed so, ITAT then analysed the legislative history of DDT and observed that the intent of shifting the burden of tax back on the company rather than on the shareholders was merely for convenience/administrative purposes and hence, even though the terminology used in Section 115-O was “additional income tax”, in substance the tax was that of the shareholder and it was only for administrative purposes that the burden of payment of tax was shifted on the company.

 

[1] 328 ITR 81.

Published In:Inter Alia - Quarterly Edition - December 2020 [ English Chinese japanese ]
Date: December 31, 2020