Giesecke & Devrient (India) (P) Ltd. v. Addl.
CIT [ITA No. 7075/Del/2017, dt. 13-10-2020] : 2020 TaxPub(DT) 4243 (Del.-Trib.)
Dividend distribution tax rate in section 115-O does it
override DTAA rates (Indo-German)
Facts:
Assessee had to pay dividend to its German parent on which
dividend distribution tax was applied under section 115-O. They raised a plea
before ITAT that the said section 115-O runs contrary to the Article 10 of
Indo-German DTAA on dividends where dividends cannot be taxed at a rate more
than 10%.
Held in favour of the assessee that thought section 115-O
envisages tax in the hands of the company in principle it was introduced to
obviate the shareholder being taxed thus a shifting of taxation had happened
from shareholder to company. The Indo-German DTAA was effective from 29-11-1996
while section 115-O was introduced vide Finance Act, 1997. So effectively the
amendment vide introduction of section 115-O was subsequent to the DTAA
becoming effective. Since DTAA override domestic provisions the DTAA override
will need to apply. For the purpose of verification of the clauses in DTAA the
case was remanded to the AO by the ITAT.
The principles of VCLT -- The Vienna Convention of Law of
Treaties and its upholding would mean a unilateral amendment directly or
indirectly to obviate or override the DTAA provisions would not be permitted.
These will go against the principles of VCLT.
43. The Vienna Convention on the Law of Treaties, 1969
("VCLT") is universally accepted as authoritatively laying down the
principles governing the law of treaties. Article 39 therein states the general
rule regarding the amendment of treaties and provides that a treaty may be
amended by agreement between the parties. The rules laid down in Part II of the
VCLT apply to such an agreement except insofar as the treaty may otherwise
provide. This provision therefore clearly states that an amendment to a treaty
must be brought about by agreement between the parties. Unilateral amendments
to treaties are therefore categorically prohibited.
"Article 26 (binding nature of treaties and the
obligation to perform them in good faith); Article 27 (Internal law and
observance of treaties, i.e., provisions of internal or municipal law of a
nation cannot be used to justify omission to perform a treaty); General rule of
interpretation under Article 31(1) (i.e., that it shall be interpreted in good
faith, in accordance with ordinary meaning to be given to the terms of a
treaty) and Article 31(4) (A special meaning shall be given to a term if it is
established that the parties so intended)".
Applied: New Skies
Satellites (2016) 382 ITR 114 (Del) : 2016 TaxPub(DT) 1115 (Del-HC)
Editorial Note: What
is worthwhile to note is the below underlined clause of the Indo-German DTAA
whereby a reading may also be done that the tax on the dividend factually is
imposed on the company more than the shareholders under section 115-O. The
Legistlature is well equipped to pick and choose topics and modus operandi to
tax as widely as possible. A tax on company is different to the tax on
shareholders. There is a great latitude available to the legislature on this
subject. Given this the imposition of the tax on dividends on the company how
does it impact the tax rate on the shareholders given the fact is the plea could
also be raised that under the act the shareholder is exempt thus 0% while under
DTAA is 10% rate. So beneficial provision of act is more better for a
non-resident. This plea or argument was not made before the ITAT as it appears.
This will certainly be a bone to pick.
Article 10. Dividends.--(1)
Dividends paid by a company which is a resident of a Contracting State to a
resident of the other Contracting State may be taxed in that other State.
(2) However, such dividends may also be taxed in the
Contracting State of which the company paying the dividends is a resident and
according to the laws of that State, but if the recipient is the beneficial
owner of the dividends, the tax so charged shall not exceed 10 per cent of the
gross amount of the dividends.
This paragraph shall not affect the taxation of the
company in respect of the profits out of which the dividends are paid.