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Tax Publishers 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.

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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.