Background
Indian Companies are required to pay Dividend
Distribution Tax (DDT), currently at an effective
rate of 21.71%,
under section 115-O
of the Income-tax Act, 1961 (the
IT Act) in respect of dividend declared, distributed or paid by them. Under most of the Tax Treaties, taxation
of dividends [Article
10(2) of OECD model treaty]
is restricted to 5%/10%/15% of the gross amount of dividend. In light of
this, the Indian Companies are exploring arguments to cap the rate of DDT, in respect of dividends paid to their overseas investor(s), at the Tax Treaty rate (i.e. 5%/10%/15% as the case may be). In this regard, recently, Delhi Tribunal had an occasion
to consider whether an additional ground
raised for applying
treaty rate to dividend distribution tax rate should
be admitted or not. We, at BDO, have summarized
this ruling and provided our comments on the impact of this decision.
Fact of the case
Taxpayer, an Indian automobile company,
had distributed dividend
to its investors (including non-resident investors) and paid DDT at the rate prescribed under section 115-O of the IT Act. Certain adjustments were made by the Tax Officer to the reported income
of the taxpayer during the tax audit which were contested
in appeal by the taxpayer. The matter reached to Delhi Tribunal. While the
hearings and arguments of the taxpayer as well as Revenue Authorities were
completed, the case was marked
as partly heard. Subsequently, the appeal was released from ‘part-heard’ stage and it was slated for fresh hearing. Before
the fresh date of the hearing,
the taxpayer filed an application before the Delhi
Tribunal to admit
an additional ground
of appeal. By this additional ground of appeal, the taxpayer pleaded that the
lower rate prescribed in the Article 10 of the Tax Treaty for
taxation of dividend should be applied to dividend distribution by the Indian
company instead of rate of DDT prescribed under Section 115-O of the Act . For
the purpose of raising the additional ground of appeal, the taxpayer contended that the additional ground of appeal
is a legal issue. The Revenue raised
following objections with respect to taxpayer’s request
for raising additional ground of appeal:
On admissibility of additional ground,
the Revenue Authorities contended that the hearings and arguments were complete and therefore additional ground of appeal cannot be raised
before the Delhi Tribunal.
With respect
to substituting the Tax Treaty rate for DDT, the Revenue
Authorities contended that the additional ground does not relate to assessing the tax
liability of the taxpayer nor facts relating
to the issue were part of the record of the tax audit proceedings.
Tribunal ruling
The Delhi Tribunal
stated that a legal plea can be raised at any point of time. It also observed that since the matter was subsequently released
from ‘part heard’, it meant
that the appeal was never adjudicated by the Tribunal. It further observed that
mere procedural lapse, or omission on the part of the taxpayer cannot
lead to denial
of substantive benefit
/ eligible claim in the hands of the taxpayer.
Relying on Apex Court’s Ruling
in the case of Tata Tea Co. Ltd[1], the Delhi tribunal
observed that the additional tax levied under section 115-O
of the IT Act
could be treated
as is tax on income and is a part of tax as defined under section 2(43) of the
IT Act.
It also observed
that the details
regarding admission of DDT have to be provided in the income
tax return form and also disclosed in the Tax Audit Report
in Form 3CD. The income tax assessment order read with the computation form quantifies the DDT liability and the IT Act does not provide
for separate adjudication / passing of separate order with regard
to adjudication of liability of DDT.
The Delhi tribunal
placing reliance on the ratio
laid down by the Apex Court Ruling
in the case of NTPC[2] stated that since
liability of tax under section
115-
O of the IT Act
is part of tax liability of taxpayer, the additional ground raised by taxpayer
should be admitted for adjudication.
Further, while admitting
the admission of additional ground of appeal,
it made a noting that all the apprehensions of the Revenue
Authorities on the additional ground will be heard on merits.
TBM Comments
This is a welcome ruling as it makes an important observation that
the additional ground of appeal can be raised at any point of time during the
pendency of appeal as long as the issue raised involves a question of law
arising from the facts available on record. Furthermore, while admitting the
additional ground of appeal, the Delhi Tribunal has made preliminary
observation that the additional tax levied under section 115-O of the IT Act is
a tax on income as held by the Hon'ble Supreme Court in the case of Union of India vs. Tata Tea Co Ltd. 85. This will give a boost to the taxpayer’s contention that the Tax Treaty rate should be considered for the purpose of DDT rate.
This Ruling will also be helpful for taxpayers whose matter is pending before
the higher authorities and they had not taken
an argument to cap the DDT rate at the lower rate prescribed under the tax treaty, before
the lower forum.
[1] 85 taxmann.com 346 (SC)
[2] 229
ITR 383 (SC
No comments:
Post a Comment