TaxTMI 
TaxTMI 
2023 (12) TMI 922
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.... Limited ("Novateur") 2. Further, in treating the capital gains as dividend, the AO/ DRP erred in recomputing the accumulated profit as against the actual accumulated loss of Novateur as on the date of capital reduction 3. Without prejudice to the above, even if the aforesaid amount is considered as dividend, the AO/ DRP has erred in taxing the alleged dividend in the hands of the Appellant by holding that Section 115-O of the Act does not apply in case of deemed dividend as per section 2(22)(d) of the Act and hence, dividend as per section 2(22)(d) of the Act is not exempt under section 10(34) of the Act. 4. Without prejudice to the above, even if the aforesaid amount is assumed to be dividend and dividend is not considered to be exempt under section 10(34) of the Act, the AO/DRP has erred in considering tax rate of 10% as per India-Netherlands tax treaty (hereinafter referred as "the Tax Treaty") instead of the tax rate of 5% on dividend as per the Most Favoured Nation or MFN Clause of Tax Treaty (read with protocol to the Tax Treaty). 5. On the facts and in circumstances of the case and in law, the AO/ DRP has erred in not treating capital gains arising pursuant to c....
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.... the view that the assessee did not have any accumulated loss as on date of capital reduction, but it had accumulated profits as on that date. In this regard, the Assessing Officer observed that Indian Accounting Standard became applicable to the assessee with effect from the FY 2015-16 and accordingly, the opening balance for computing accumulated profit should be considered as per Indian Accounting Standard instead of considering opening balance as per Indian Generally Accepted Accounting Principles (GAAP). In view of the above and relying on the judgement of the Hon'ble Supreme Court in case of G Narsimhan [1999] 236 ITR 327 (SC), the Assessing Officer divided the entire consideration of Rs.. 375,20,00,000 into two parts, i.e, dividend to the extent of accumulated profits (Rs.. 138,47,19,180) and balance amount of Rs.. 236,72,80,820 as consideration for the transfer of the shares Capital Gains of Rs.. 136,72,80,820 were determined after reducing the cost of Rs.. 100,00,00,000 in the final assessment order. The working of the accumulated loss computed by the assessee is extracted in Para No.3.4.1 on Page No. 13 of the final assessment order whereas the working of accumulated ....
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....Rs.. 441.84 crores to Rs.. 7.55 crores having regard to Indian Accounting Standard provisions, in the financial statements for FY 2016-17 only for the comparative purpose whereby the assessee was required to present the opening figures as on 01.04.2016 in sync with the manner in which the figures are reflected for 31.03.2017. In this regard, a requisite disclosure has been made in the audited financial statements for FY 2016-17 at 'point - II.a.i.' of Note 1- Statement of significant accounting policies, which is reproduced below: - "(i) Compliance with Ind AS These financial statements have been prepared in accordance with the Indian Accounting Standards (hereinafter referred to as 'Ind AS) as notified by Ministry of Corporate Affairs pursuant to Section 133 of the Companies Act. 2013 (Act') read with the Companies (Indian Accounting Standard) Rules, 2013 that are notified (as amended) and effective as at 31 March 2015 and other relevant provisions of the Act. These financial statements for the year ended 31 March, 2017 are the first financial statement prepared to the company under Ind AS For all previous periods up to and including the year ended 31 March....
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....sment of the assessee. 10. In light of the above, Ld. AR of the assessee submitted that the balance as on 31.03.2016/ 01.04.2016, for computation of accumulated loss as on date of capital reduction should be considered as per the audited financial statements prepared as per Indian GAAP and not as per Indian Accounting Standard, which became applicable from the F.Y.2016-17 and the reinstatement of figures as of April 2016 was done only for comparative disclosure purpose. Ld. AR submitted that there is no question of any part of the consideration received by it on the reduction of the share capital being characterized as dividend under section 2(22)(d) of the Act as there was an accumulated loss of Rs.. 295.82 crores as on the date of capital reduction. Hence, section 2(22)(d) of the Act was not applicable in its case and the entire consideration is to be considered as a consideration for the transfer of the shares on reduction. This position was adopted in accordance with the judgement of the Hon'ble Supreme Court in the case of G Narsimhan [1999] 236 ITR 327 (SC). Therefore, Ld. AR of the assessee prayed that the action of the Assessing Officer in considering amount of Rs.. 13....
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....the new Ind-AS, general accepted policies and method in line with the global acceptance are being adopted to present the financials of the company. In order to achieve the transition, Ind-AS 101 was introduced to facilitate the companies to prepare the first balance sheet. This requires the companies to prepare the current (FY 2016-17) and previous year (FY 2015-16) balance sheet by adopting the new and accepted policies and method proposed in the Ind-AS. The argument that the figures reinstated is only comparative purpose is not proper considering the fact that the reinstated figures are based on the new accounting method and new policies as per the Ind-AS, which the company proposes to follow consistently in the future. The reinstated figures are not for past performance but for the future adoption of the policies. The reinstated figures are the actual status and financial position of the company based on the accepted new method of accounting proposed in the Ind-AS. The balance sheet adopted by the share holders as on 31.03.2016 are based on the previous set of accounting method as per Indian GAAP and when the company adopts the new accounting standards as per Ind AS, the assets ....
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.... it is upon the assessing authorities to bring the receipt to tax under an explicit deeming provision, there is no question of applicability of section 115-O. However, the assessee submitted that the Explanation below section 115-Q puts it beyond any pale of doubt and excludes sub clause (d) of Section 2(22) from the expression "dividend" for the purposes of Chapter XII-D (containing section 115(O) to 115(Q)). Therefore, the assessee has to be given benefits of claiming deduction under section 10(34) of the Act. 16. Before us, at the time of hearing, Ld. AR of the assessee submitted that, he wishes to bring to our attention to the Explanation below section 115Q of the Act, which was omitted by the Finance Act 2018, w.e.f 01.04.2018. Prior to its omission, the Explanation read as under: "Explanation. For the purposes of this chapter, the expression "dividends" shall have the same meaning as is given to "dividend" in clause (22) of section 2 but shall not include sub-clause (e) thereof." 17. Chapter XII-D contains provisions from section 115-O to section 115Q of the Act. Therefore, in view of the above Explanation, it should be noted that only sub-clause (e) of section 2(22) of ....
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....r in terms of Section 10(34) of the Act. The contention of the counsel for the Revenue that the company having not paid such dividend distribution tax, exemption under Section 10(34) should be deprived to the assessee needs to be noted only for rejection. If a certain income is exempt at the hands of recipient by virtue of statutory provision, unless a provision is made in the statute itself, such exemption cannot be withdrawn only because the payer has not paid tax. The statute has made specific provision for recovery or unpaid tax from the company. In the result, the tax appeal is dismissed" 21. On the other hand, Ld.DR on the issue of section 10(34) relied on the order of the Authorities below and in particular page 24 of DRP order. Further, he submitted that it is not relevant what happened in the case of Indian entity assessments i.e., Novateur India. 22. Considered the rival submissions and material placed on record, we observe from the record that the claim of the assessee that the deemed dividend u/s 2(22)(d) is also eligible to claim exemption u/s.10(34) of the Act- since the provisions of the section 115-O does cover the definition of dividend except specifically as....
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....me management to take the advantage of benefit u/s 10(34) of the Act for the failure of the same management. It is fact on record that Novateur India has not paid any DDT on the dividend, hence the benefit u/s. 10(34) cannot be claimed even though the definition of dividend u/s.2(22)(d) is covered u/s 115O of the Act. 23. In another perspective, the assessee has received the gross dividend including DDT. In the normal case, the company will deduct DDT at the applicable rate and remit the net dividend. Therefore, as per the provisions of section 10(34) r.w.s. 115O the dividend received by the shareholders are exempt. In this case, the assessee has received gross dividend. The option available to the assessee is two-fold, considering the fact that same management is responsible to deduct DDT. Either they should remit the DDT to the Novateur India and Novateur India will remit the DDT and thus assessee can claim exemption or other option is to pay the applicable tax under DTAA on the Gross dividend received by them which has lower rate of taxation. Therefore, we are inclined to reject the factual submissions of the assessee and accordingly, the plea raised by the assessee in the Grou....
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....me rate as provided in the tax treaty with such OCED member shall apply and to that extent India's rights as a source country will get limited. Subsequent to tax treaty protocol, India has entered into DTAA with Slovenia which is an OECD member and in terms thereof the tax rate on dividend is not to exceed 5% of gross amount of dividend. Accordingly, in view of MFN clause in the tax treaty and tax rate on dividend under India-Slovenia DTAA, the dividend tax rate under the tax treaty shall also not exceed 5%. Similarly, India has entered into DTAA with Lithuania and Columbia (OECD members) which also provide that tax rate on dividend should not exceed 5% on gross amount of dividend. 27. In support of the above contention, Ld. AR of the assessee relied on the order of Hon'ble Delhi High Court in the case of Concentrix Services Netherlands B.V. v. ITO (2021) 434 ITR 516 (Delhi) and Nestle SA v. Assessing Officer Circle (W.P.(C) 3243/2021)., where a similar contention urged by the assessees therein stands accepted. 28. Further, Ld. AR of the assessee submitted that, in addition to the above and in response to the AO/Ld.DRP's conclusions, Ld.AR submitted that once a double....
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....es for lower rate of tax @5% and also later on with Lithuania which became OECD member in 2018. It is relevant to note here that CBDT vide Circular No. 3 of 2022 dated 03rd Feb, 2022, had brought the clarification that such unilateral decree / bulletin do not represent the stand of India as a treaty partners on applicability of the MFN clause, without taking into bilateral consultation with India and therefore, does not have a binding force. India has expressed its strong reservation stating that such unilateral action cannot be imported into the DTAA unless the third State was the member of the OECD at the time of signing that treaty. The CBDT has clearly expressed that there is a requirement that the third State is to be member of the OECD both at the time of conclusion of the Treaty with India as well as at the time of applicability of MFN clause. In other words, these countries could not have made it effective from the date of entry into force of India DTAA with the third State as the third State was not the member of the OECD on such date of entry into force. Therefore, the stand of the Revenue is that no benefit can be given to the countries with which India has MFN clause to....
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.... or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention." 35. From the above it is clear that where tax has been levied at source at excess under the provisions of Article 10 to 12, applications for refund of the same have to be lodged with the competent authority of the state which levied the tax within a period of three years after the expiration of the calendar year in which the tax has been levied. In this case, the tax under DTAA rates were levied by the Assessing Officer. Now the assessee takes the plea that in case the dividend income is chargeable to tax then the applicable rate would be based on the MFN clause, which is lesser than the applicable treaty rate. As discussed above, in this case, Assessing Officer has levied the applicable tax, the period of claiming the excess tax has already elapsed. Therefore, in this case, the assessee cannot claim any benefit under treaty or under MFN clause. Therefore, we are not inclined to entertain the claim of the assessee at this stage based on the above discussion. Accordingly, the ground raised by the assessee is dismissed even though they relied on the decisio....
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....nly in the State of which the alienator is a resident if such gains are realised in the course of a corporate organisation, reorganization, amalgamation, division or similar transaction, and the buyer or the seller owns at least 10 per cent of the capital of the other." 39. The above mentioned Para 5 of Article 13 is divided into three limbs as under - * First limb-Gains from the alienation of any property other than that referred to in paragraphs 1,2,3 and 4 shall be taxable only in the State of which the alienator (i.e., the assessee) is a resident (ie., Netherlands). * Second limb-This carves out an exception to the first limb and provide that the gains from the alienation of shares issued by a company resident in the other State (ie., India) which shares form part of at least a 10 per cent interest in the capital stock of that company, may be taxed in that other State (ie, India) if the alienation takes place to a resident of that other State (ie., India) * Third limb-The third limb in turn is an exception of the second limb. It provides that such gains shall remain taxable only in the State of which the alienator is a resident (i.e... Netherlands) if such gains are r....
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....llation of shares pursuant to capital reduction) and it does not fall under the second limb (ie, it is not an alienation to a resident), therefore it would not be required to test the third limb (i.e. alienation of shares in the course of organisation, reorganisation......). 44. Ld. AR of the assessee, further, submitted that, without prejudice to the assessee's claim that its case falls under the first limb and its gains are taxable only in Netherlands, if Your Honors hold that the second limb applies to the assessee's case, then, the assessee submits that its case will fall under the carved out in the third limb of Para 5 of Article 13 of the tax treaty ie, capital gains arising to assessee pursuant to capital reduction would qualify as gains realised in the course of corporate organisation, reorganisation, amalgamation, division or similar transaction. This is so because a scheme of capital reduction leads to change in the capital structure of the company which tantamount to reorganisation. Consequently, the capital gains arising pursuant to capital reduction will be taxable in Netherlands only. 45. In this connection, Ld. AR of the assessee draw our attention to the m....
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....hares of Rs.. 100 Crores. Accordingly, taxes were withheld @10.815% u/s. 112(1)(c)(iii). The Netherland entity filed its tax return and offered the same as capital gains. However, during the course of assessment proceedings, assessee made a claim before the Assessing Officer that the capital gains arising on cancellation of shares pursuant to capital reduction is not taxable in India in view of Article 13(5) of India Netherland DTAA. 50. The Article 13 reads as under: - ARTICLE 13 CAPITAL GAINS 1. Gains derived by a resident of one of the States from the alienation of immovable property referred to in Article 6 and situated in the other State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of one of the States has in the other State or of movable property pertaining to a fixed base available to a resident of one of the States in the other State for the purpose of performing independent personal services, including such gains from the alienation of such permanent establishment (alone or with the whole enterprise) or of such fixed base, may be taxed in tha....
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....of any property which in this case the shares which are not covered from Para Nos. 1 to 4 shall be taxable in the state of an alienated resident which here in this case would be Netherland company. However, two exceptions have been provided in the said para: * The first is that gains from alienation of shares issued by company resident in other state which here in this case to the Indian Company, i.e., NOVATEUR INDIA whose shares form part of more than 10% in the capital stock of its company which here in this case was 48.659% shares held by Netherland company and the alienation of shares by way of capital reduction was is in excess of 10%, then the said part of the para provides that the same may be taxed in that other state, i.e., in India if the alienation takes places to its resident of that other state which means if the shares have been sold to a resident of India, then capital gains shall be chargeable to tax in India. * Secondly, such gains shall be taxable in state of an alienator is a resident, i.e., Netherland, if gains are realized in the course of a corporate organisation, re- organisation, amalgamation, division or similar transaction when the buyer or seller own....
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....ny is present, then resident based taxation is shifted to source based taxation and the source country i.e. India has right to tax under DTAA. Accordingly, this ground raised by the assessee is dismissed. 54. With regard to Ground No. 6, Assessing Officer computed surcharge and cess on the rate of tax for dividend (ie, 10%) provided in the tax treaty in the computation sheet to final assessment order. Ld. AR of the assessee submitted that the rate of tax on dividend (ie, 10%) provided under the tax treaty is inclusive of surcharge and cess. Accordingly, the assessee requests to direct the Assessing Officer for not levying the surcharge and cess on the aforesaid rate of 10% provided under the tax treaty in view of the settled position. Ld. AR relied on the decision of Mumbai Bench of the Tribunal in the case of Sunil V. Motiani v. ITO [ITA No. 276/Mum/2012) (Mumbai ITAT). 55. On the other hand, Ld.DR relied on the order of the Authorities below. 56. Considered the rival submissions and material placed on record, we observe that in the case of Sunil V. Motiani v. Income Tax Officer (supra) the Coordinate Bench held as under: - "5. We have perused the records and considered the m....