Alerts:

Tax Alert: Delhi Tribunal admits taxpayer’s additional ground on applying treaty rate to dividend distribution tax

07 November 2019

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.

BDO 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)