The Income Tax Appellate Tribunal (ITAT), Delhi Bench held that tax rates specified in Double Taxation Avoidance Agreement (DTAA) in respect of dividend must prevail over Dividend Distribution Tax (DDT).
The appellant, Giesecke & Devrient (India) Pvt Ltd was incorporated in 2001 as a 100% subsidiary of G&D GmbH, with its corporate office located in Gurgaon. The appellant primarily deals in trading of Currency Verification and Processing Systems. G&D India imports these machines from its AEs for resale in India and as part of the related services, G&D also buys and resells annual maintenance contracts to its customers in India.
The appellant is also engaged in distribution and personalization of smart cards in India, which are imported from its AEs.
These smart cards are for the Payment Card industry and in the nature of chip cards, magnetic cards etc. The primary customer of the smart card is the banking sector. The appellant also renders software development services to G&D GmbH, wherein it develops application software for G&D GmbH for smart cards module through Development Centre India.
Memorandum to the Finance Bill 2003 reiterates that it is easier to collect Income Tax from a single point, that is, from the company distributing the dividends] rather than compel the companies to compute income tax deductible from the dividend income in the hands of the shareholders.
Memorandum to Finance Bill 1997 and 2003 clearly establish that levy of tax on the company was driven by administrative considerations rather than legal necessity and further emphasis on the fact that levy is for all intents and purposes, a charge on dividends. Even if we go by economical considerations, the burden of DDT falls on the shareholders rather than on the company, as the amount of distributed profits available for shareholders stands reduced to the extent of DDT levied.
The provisions of section 4 and 5 of the Act are expressly made “subject to the provisions of this Act” which would include section 90 of the Act. Section 90(2) of the Act provides “Where the central government has entered into an agreement with the government of any country outside India or specified territory outside India” as the case maybe, under sub-section (1) for granting relief of tax or as the case maybe, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, provisions of this Act shall apply to the extent they are more beneficial to the assessee.
The two member bench of Suchitra Kamble and N.K. Billaiya observed that the present system of taxation of dividend in the hands of the company was re-introduced by the Finance Act 2003 since it was easier to collect tax at a single point and the new system was leading to an increase in compliance burden.
The tribunal held that the liability to DDT under the Act which falls on the company may not be relevant when considering applicability of rates of dividend tax set out in the tax treaties. The generally accepted principles relating to interpretation of treaties in the light of object of eliminating double taxation, in our view does not bar the application of tax treaties to DDT.
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