TaxTMI 
TaxTMI 
2020 (10) TMI 750
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....o 38 of the appeal memo. 3. Representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules and have also perused the judicial decisions relied upon by both the sides. 4. G & D, the appellant, 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 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 ca....
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....the operating revenue is taken at Rs. 13,43,67,865/- and operating cost as Rs. 15,98,34,215/-, which matches with the total of trading and service segments. 8. Objections were raised before the DRP but the DRP did not give any relief with respect to the selection of comparables. However, the DRP gave partial relief with the direction that benchmarking should be undertaken in terms of earlier years. 9. In the meanwhile, the margin of comparables was rectified from 8.75% to 6.79% and thereafter, from 6.79% to 2.52% and, accordingly, adjustment was reduced from Rs. 3,72,23,538/- to Rs. 2,88,52,420/-. While giving effect to the directions of the DRP, though the TPO made reference to the orders of A.Y 2009-10 and 2010-11, and noted that adjustment is to be restricted to the value of international transaction with AES. However, an adhoc adjustment of Rs. 88,86,545/- was sustained. It appears that the TPO once again erred in taking gross numbers of trading and service segments. 10. The same can be understood from the following chart: Sl. No Particulars Amount Reference 1. Operating Revenue [A] 13,43,67,865 Total of sales and service income in trading and s....
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....ng taking NCP margin as the PLI and under DCI division, NCP margin of the assessee was at 12.62% whereas under CCI division, NCP margin was 12.02%. 15. The TPO retained 6 comparables out of 10 comparables selected by the assessee and introduced 8 new comparables and came to a final set of 14 comparables. The working capital adjusted OP/OC margin of the comparables was 20.71%. Accordingly, under DCI Division, adjustment of Rs. 3,28,86,862/- was proposed and under CCI Division, adjustment of Rs. 1,88,81,141/- was proposed. 16. Objections were raised before the DRP demonstrating the reasons for exclusion of Infosys Ltd and Larsen and Toubro Infotech Ltd as comparables. However, the DRP upheld the order of the TPO vide directions dated 18.09.2017. 17. Before us, the same reasons were given for exclusion of Infosys Limited and Larsen and Toubro Infotech Ltd which were given before the lower authorities. INFOSYS LTD 18. The risk profile of the appellant shows that it operates at minimal risk as 100% services are provided to AES whereas Infosys Ltd operates as full-fledged risk-taking entrepreneur. Further, the appellant provides software development testing support and tec....
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....e Assessing Officer has disallowed these expenses u/s 40(a)(i)of the Act on account of non-deduction of tax at source on reimbursement. The total disallowance was made at Rs. 17,76,704/-. 23. When objections were raised before the DRP, the DRP directed for deletion of Rs. 4,22,386/- pertaining to training expenses and Rs. 3,21,873/- pertaining to recovery of expenses. However, balance disallowance of Rs. 10,32,445/- was sustained. 24. Before us, the learned counsel for the assessee pointed out that the same pertains to pension of the Managing Director, purchase of office merchandise like calendar etc., recovery of damages to apartments etc. It is the say of the learned counsel that these are nothing but pure reimbursements and the facts of the decision of the Hon'ble Delhi High Court in the case of Centrica India Offshore Pvt Ltd 364 ITR 336 are clearly distinguishable. The learned counsel pointed out that on identical set of facts, the coordinate bench in A.Y 2011-12 has allowed the expenditure. 25. Per contra, the ld. DR strongly supported the findings of the lower authorities. 26. We find that some additional evidences were furnished before the DRP. Though the DRP ha....
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.... that the assessee has furnished additional evidences before the DRP. We are of the considered view that such additional evidences should have been examined thoroughly. We, accordingly, restore this issue to the file of the Assessing Officer. The assessee is directed to furnish all the additional evidences in support of the claim of write off and the Assessing Officer is directed to examine the same and decide the issue afresh after giving reasonable opportunity of being heard to the assessee. Ground Nos 39 to 42 are, accordingly, treated as allowed for statistical purposes. ADDITIONAL GROUNDS 34. Vide application dated 11.09.2019, the assessee has raised the following additional grounds of appeal: "Ground 3.1: That the Assessing Officer ("AO") erred in not extending the benefit of applicable Double Taxation Avoidance Agreement between India and Germany ("DTAA ") qua the rate of tax on payment of dividend to the shareholder (Giesecke & Devrient GmbH) Ground 3.2: That the AO failed to appreciate that the dividend income was that of the non-resident recipient who was governed by the provisions of relevant DTAA. Ground 3.3: That the AO also failed to a....
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....d on its merits." 39. In light of the above, the additional ground is admitted for adjudication. 40. Representatives were heard at length. The relevant articles of Double Taxation Avoidance Act [DTAA], accordingly, perused. 41. The aforementioned additional grounds of appeal raise a purely legal issue and the issue needs to be adjudicated as to whether the Dividend Distribution Tax [DDT] levied in terms of section 115-0 of the Act should be restricted to the rate of tax on dividends as provided in the applicable DTAA governing non-resident shareholders. 42. In other words, what needs to be examined is the interplay between Section 115-0 of the Act on one hand, and Article 10 of DTAA governing taxation of dividend on the other. 43. Section 115-0 contained in chapter XVII-D of the Act reads as under: "115-O. (1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or afte....
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....ded, is as to whether the DDT is tax on the company or the shareholder since the admissible surplus stands reduced to the extent of DDT. We are aware of the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited 328 ITR 81 though the same was rendered in the context of section 14A r.w.s 115-0 of the Act. The relevant findings of the Hon'ble Bombay High Court read as under: "35. Section 115-O has been enacted with a view to exempt dividend income. Prior to the insertion of Section 115-O, domestic companies were liable to pay tax on the total income (including profits distributed as dividends) and shareholders were liable to pay tax on dividend income received. Domestic companies distributing profits as dividends were liable to deduct tax at source and shareholders receiving the dividend were entitled to take credit of such tax deducted at source. As this method was found to be cumbersome, Parliament chose to exempt dividend income in the hands of the shareholder and chose to levy additional income-tax on the amount of profits declared, distributed or paid as dividend by the domestic companies. Thus, by inserting Section 115-O....
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....ce. Many a time, the tax deducted or a part thereof is required to be refunded to the assessee. Thus, the procedure for tax collection is cumbersome and involves a lot of paper work." 54. 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. 55. 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. 56. As mentioned elsewhere, section 4 provides for charge of Income tax and Section 5 provides that total income of resident includes all income which is : (a) received or is deemed to be received in India ....
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.... Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections "subject to the provisions" of the Act". The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income- tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC. 63. We have already discussed the Memorandum to the Finance Bill 1997 and 2003. It would be very p....
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....ion No. G. S. R. 836(E), dated 29th November, 1996 Whereas the annexed Agreement between the Government of the Republic of India and the Government of the Federal Republic of Germany for the avoidance of double taxation with respect to taxes on income and capital has been concluded; And, whereas, the aforesaid agreement was brought into force on the 26th day of October, 1996, after the completion by both the Contracting States to each other of the procedure required under their laws in accordance with Article 28 of the said Agreement; Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act 1961 (43 of 1961), and section 44A of the Wealth-tax Act, 1957 (27 of 1957), the Central Government hereby directs/that all the provisions of the said Agreement shall be given effect to in the Union of India." 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....
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....clearly mentions that the dividends may also be taxed in the contracting state on which the company paying the dividend is a resident. However, a rider is also put that if the resident is beneficial owner of the dividend, the tax so charged shall not exceed 10% of the gross amount of the dividend. 70. The Hon'ble Jurisdictional High Court at Delhi in the case of New Skies Satellites 382 ITR 114 had an occasion to consider the amendment to the Act vis a vis the international treaty and the Hon'ble High Court held as under: "41. This Court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the....
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....es." 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. 44. We do not however rest our decision on the principles of the VCLT, but root it in the inability of the Parliament to effect amendments to international instruments and directly and logically, the illegality of any Executive action which seeks to apply domestic law amendments to the terms of the treaty, thereby indirectly, but effectively amending the treaty unilaterally. As held in Azadi Bachao Andolan39these treaties are creations of a different process subject to negotiations by sovereign nations. The Madras High Court, in ....
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....ss self-executory, becomes operative within the State once Parliament passes a law to such effect, which governs the relationship between the treaty terms and the other laws of the State. It then becomes part of the general conspectus of domestic law. Now, if an amendment were to be effected to the terms of such treaty, unless the existing operationalizing domestic law states that such amendments are to become automatically applicable, Parliament will have to by either a separate law, or through an amendment to the original law, make the amendment effective. Similarly, amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. 53. Finally, States are expected to fulfill their obligations under a treaty in good faith. This includes the obligation to not defeat the purpose and object of the treaty. These obligations are rooted in customary international law, codified by the VCLT, especially 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 ....