2021 (6) TMI 855 - AT - Income Tax

Tribunal Considers DTAA Applicability to DDT under Section 115-O, Recommends Special Bench

The Tribunal rejected preliminary objections on timeliness and admissibility in the cross-objection case. However, it raised doubts on the application of ... Admissibility of cross-objections under section 253(4) - scope of issues permissible in a cross-objection - time bar under section 253(4) and extension of limitation - treaty protection under section 90 and applicability of DTAA to domestic taxes - characterisation of dividend distribution tax (DDT) as tax on the company v. tax on dividend recipient - reference to a Special Bench for authoritative determination of a recurring legal questionAdmissibility of cross-objections under section 253(4) - scope of issues permissible in a cross-objection - time bar under section 253(4) and extension of limitation - Cross-objection filed by the assessee is admissible and not time barred; a cross-objection may raise new issues to the same extent as an appeal. - HELD THAT: - The Special Bench held that section 253(4) mandates that a memorandum of cross-objections, when filed within the prescribed period after service of the opposite party's appeal, is to be disposed of by the Tribunal as if it were an appeal presented within time. Consequently, there is legal parity between an appeal and a cross-objection and the scope of issues that can be raised in an appeal applies equally to a cross-objection. The Bench examined the material on record regarding service and filing dates, accepted the assessee's explanation (including reliance on extension of limitation orders), found the cross-objection to have been filed within time, and rejected the Departmental Representative's preliminary objections grounded on earlier narrower precedents which pre dated the Supreme Court's observations in National Thermal Power Corporation Ltd. v. CIT regarding the Tribunal's discretion to entertain new questions of law. [Paras 4]Preliminary objections overruled; cross-objection admitted for consideration on merits.Treaty protection under section 90 and applicability of DTAA to domestic taxes - characterisation of dividend distribution tax (DDT) as tax on the company v. tax on dividend recipient - reference to a Special Bench for authoritative determination of a recurring legal question - Whether the rate limitations in the Indo-France DTAA in respect of taxation of dividends can be extended, in the absence of an express treaty provision, to limit the incidence of dividend distribution tax under section 115O when the tax is borne by a domestic company was referred to a Special Bench for comprehensive consideration. - HELD THAT: - The Bench examined competing contentions: coordinate ITAT decisions treating DDT as effectively a tax on dividend income and thus subject to treaty rates, and Departmental and Supreme Court authorities (notably Godrej & Boyce) treating section 115O as a tax on the company and not a tax paid on behalf of shareholders. The Bench expressed serious reservations about extending treaty protection to DDT in the absence of express treaty language, noting (i) the Godrej & Boyce finding that DDT does not discharge shareholders' tax liability, (ii) the limited effect of constitutional/competence decisions such as Tata Tea for resolving this interpretive question, (iii) treaty principles which confine protection to residents of the treaty partner unless expressly extended (with examples such as the Indo-Hungary protocol where such extension exists), and (iv) comparative jurisprudence indicating that similar fiscal levies elsewhere have been characterised as taxes on the distributing company rather than on dividends. In view of the importance, recurring nature and revenue implications of the question, and the existence of consonant coordinate decisions and persuasive contrary authority, the Bench concluded that the matter ought to be examined by a Special Bench (three or more Members) so that all aspects can be considered holistically. [Paras 10, 11]Issue referred to a Special Bench for authoritative determination; matter to be placed before the President for constitution of the Special Bench.Final Conclusion: The Tribunal admitted the assessee's cross-objection as timely and permissible to raise new issues; on the substantive question whether India-France treaty limits the rate of dividend distribution tax under section 115O, the Tribunal expressed reservations about coordinate decisions and referred the legal question to a Special Bench for comprehensive adjudication. Issues Involved:1. Timeliness of the cross-objection.2. Admissibility of new issues in cross-objections.3. Application of the India-France Double Taxation Avoidance Agreement (DTAA) to Dividend Distribution Tax (DDT) under section 115-O of the Income Tax Act, 1961.Detailed Analysis:1. Timeliness of the Cross-Objection:The Departmental Representative argued that the cross-objection was time-barred as it was filed much later than the appeal. However, the assessee contended that the cross-objection was filed within the permissible time limit, considering the extension of the limitation period by the Supreme Court's suo motu writ petition. The Tribunal agreed with the assessee, noting that the cross-objection was filed on the next working day after the last date, which was a public holiday. Thus, it was deemed to be filed within the time limit.2. Admissibility of New Issues in Cross-Objections:The Departmental Representative objected to the introduction of new issues in the cross-objection, citing that these were not raised before the lower authorities. The Tribunal, however, held that cross-objections are to be treated on par with appeals, meaning any issue that can be raised in an appeal can also be raised in a cross-objection. The Tribunal relied on the Supreme Court's judgment in the case of National Thermal Power Corporation Ltd vs CIT, which allows the Tribunal to consider questions of law arising in assessment proceedings even if not raised earlier. Consequently, the Tribunal rejected the preliminary objections and decided to address the issue on its merits.3. Application of the India-France DTAA to DDT under Section 115-O:The core issue was whether the DDT paid by the assessee, which has non-resident shareholders domiciled in France, should be limited to the rate prescribed in the India-France DTAA. The assessee argued that the DDT is essentially a tax on dividend income of the shareholders and should not exceed the rate specified in the DTAA. The assessee relied on the decision of the coordinate bench in Giesecke & Devrient India Pvt Ltd vs ACIT, which held that the tax rates specified in the DTAA for dividends should prevail over DDT.The Departmental Representative opposed this view, stating that DDT is a tax on the company distributing the dividends, not on the shareholders. He cited the Supreme Court's decision in Godrej & Boyce Manufacturing Co. Ltd, which categorically held that DDT is a tax on the company and not on the income of the shareholders. The Departmental Representative also highlighted that the DTAA benefits cannot be claimed by the company but only by the shareholders, and since the shareholders are not taxed in India, they cannot claim credit for DDT.The Tribunal noted that the coordinate bench decisions in favor of the assessee did not consider the Supreme Court's judgment in Godrej & Boyce Manufacturing Co. Ltd. Furthermore, the Tribunal observed that the DTAA benefits are meant for residents of the treaty partner jurisdictions and not for domestic companies. The Tribunal also referenced international perspectives, such as the South African High Court's decision on a similar tax, which supports the view that DDT is a tax on the company, not the shareholders.Given the complexities and substantial revenue implications, the Tribunal suggested that the issue be referred to a special bench for a comprehensive evaluation. The proposed question for the special bench was whether the DTAA's protection for dividend taxation in the source jurisdiction extends to DDT under section 115-O in the hands of a domestic company.Conclusion:The Tribunal rejected the preliminary objections regarding the timeliness and admissibility of new issues in the cross-objection. However, it expressed doubts about the correctness of the coordinate bench decisions favoring the assessee's interpretation of the DTAA's application to DDT. Consequently, the Tribunal recommended referring the matter to a special bench for a detailed examination.