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The Tax Publishers ITO v. Besco Engineering & Services (P) Ltd. [ITA No. 727/Kol/2012, dt. 4-5-2016] : 2016 TaxPub(DT) 2228 (Kol-Trib) Dividend from offshore entity whether taxable and whether relief under DTAA is available *Facts:* Assessee private limited company was in receipt of dividend from a joint venture in Brazil and claimed exemption on the same in India vide DTAA provisions. Assessing Officer held it as dividend from overseas thus is not exempt under section 10(34). Article 10 of the Indo-Brazil DTAA taxes dividend @ 15%. However it was found on facts that there is no taxation of dividend in Brazil and corporate tax was levied at 34% on the joint venture in Brazil after which the dividend was distributed. It was also mandatory to distribute 25% of yearly profits as dividend as per Brazilian laws. Commissioner (Appeals) in the appeal referred to clause 23 of the DTAA and since no tax was paid in Brazil did not grant any tax credit. On appeal the ITAT perused article 23 as under (highlighted clause 3): "ARTICLE 23: Methods for the elimination of double taxation: 1. Subject to the provisions of paragraphs 3 and 4, where a resident of a Contracting State derives income which, in accordance with the provisions of this Convention may be taxed in the other Contracting State, the first-mentioned State shall allow as a deduction from the tax on the income of that resident an amount equal to the tax paid in that other State. Such deduction shall not, however, exceed that part of the tax, as computed before the deduction is given, which is attributable to the income which may taxed in that other State. 2. For the deduction mentioned in paragraph 1, the tax paid in that other State shall always be deemed to have been paid at the rate of 25 per cent of the gross amount of interest referred to in paragraph 2 of Article 11 and of royalties referred to in paragraph 2(b) of Article 12, provided however, that the tax so deemed to have been paid shall not exceed the tax leviable on that income in the first-mentioned State. 3. Where a company which is a resident of a Contracting State derives dividends which, in accordance with the provisions of paragraph 2 of Article] 10 may be taxed in the other Contracting State, the first- mentioned State shall exempt such dividends from tax 4. Where a resident of India derives profits which, in accordance with the provisions of paragraph 5 of Article 10 may be taxed in Brazil, India shall exempt such profits from tax." Held in favour of the assessee basing the explicit clause of article 23(3) of the Indo-Brazilian DTAA where it has mentioned that if the company pays tax in the state (Brazil here) then the other state (India) shall exempt the same. Note: The issue of dividend tax credit in a pass through transparency has been a vexed issue in cross border taxation. This decision indicates favouring the assessee.

The Tax Publishers

ITO v. Besco Engineering & Services (P) Ltd. [ITA No. 727/Kol/2012, dt. 4-5-2016] : 2016 TaxPub(DT) 2228 (Kol-Trib)

Dividend from offshore entity whether taxable and whether relief under DTAA is available

Facts:

Assessee private limited company was in receipt of dividend from a joint venture in Brazil and claimed exemption on the same in India vide DTAA provisions. Assessing Officer held it as dividend from overseas thus is not exempt under section 10(34). Article 10 of the Indo-Brazil DTAA taxes dividend @ 15%. However it was found on facts that there is no taxation of dividend in Brazil and corporate tax was levied at 34% on the joint venture in Brazil after which the dividend was distributed. It was also mandatory to distribute 25% of yearly profits as dividend as per Brazilian laws. Commissioner (Appeals) in the appeal referred to clause 23 of the DTAA and since no tax was paid in Brazil did not grant any tax credit. On appeal the ITAT perused article 23 as under (highlighted clause 3):

"ARTICLE 23: Methods for the elimination of double taxation:

1. Subject to the provisions of paragraphs 3 and 4, where a resident of a Contracting State derives income which, in accordance with the provisions of this Convention may be taxed in the other Contracting State, the first-mentioned State shall allow as a deduction from the tax on the income of that resident an amount equal to the tax paid in that other State. Such deduction shall not, however, exceed that part of the tax, as computed before the deduction is given, which is attributable to the income which may taxed in that other State.

2. For the deduction mentioned in paragraph 1, the tax paid in that other State shall always be deemed to have been paid at the rate of 25 per cent of the gross amount of interest referred to in paragraph 2 of Article 11 and of royalties referred to in paragraph 2(b) of Article 12, provided however, that the tax so deemed to have been paid shall not exceed the tax leviable on that income in the first-mentioned State.

3. Where a company which is a resident of a Contracting State derives dividends which, in accordance with the provisions of paragraph 2 of Article] 10 may be taxed in the other Contracting State, the first- mentioned State shall exempt such dividends from tax

4. Where a resident of India derives profits which, in accordance with the provisions of paragraph 5 of Article 10 may be taxed in Brazil, India shall exempt such profits from tax."

Held in favour of the assessee basing the explicit clause of article 23(3) of the Indo-Brazilian DTAA where it has mentioned that if the company pays tax in the state (Brazil here) then the other state (India) shall exempt the same.

Note: The issue of dividend tax credit in a pass through transparency has been a vexed issue in cross border taxation. This decision indicates favouring the assessee.