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Facts
The Revenue appealed against the CIT(A)'s order concerning Assessment Year 2019-20. The case involved disallowance of payments made to non-residents and a refund of excess Dividend Distribution Tax (DDT) paid. The assessee, Durr India Pvt. Ltd., had made payments which were initially disallowed under Section 40(a)(i) and claimed a refund of DDT paid at a rate higher than the DTAA rate.
Held
The Tribunal held that the disallowance should be restricted to 30% under Section 40(a)(ia) as payments were made to residents. Regarding DDT, it was held that DDT is a tax on company profits, not dividend income, and thus the beneficial rate under the DTAA cannot be applied to cap it. Consequently, no refund of excess DDT is allowable.
Key Issues
Whether the disallowance for payments made to residents without TDS should be 100% or 30%, and whether excess Dividend Distribution Tax paid beyond the DTAA rate is refundable to the assessee.
Sections Cited
250, 40(a)(i), 40(a)(ia), 115-O, 237, 10
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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K & SHRI S.R. RAGHUNATHA
आदेश/ O R D E R
PER GEORGE GEORGE K, VICE PRESIDENT:
This appeal filed by the Revenue is directed against the order of Commissioner of Income Tax (Appeal), Addl/JCIT(A)-2, Ahmedabad dated 30.01.2025, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2019-20.
2 -: 2. There is a delay of 35 days in filing this appeal. The Department has filed a condonation petition praying for condoning the delay in filing this appeal. On perusal of the reasons stated in the condonation petition, we are of the view that there is sufficient cause for late filing of this appeal and no latches can be attributed to the Department. Hence, we condone the delay in filing this appeal and proceed to dispose off the appeal on merits.
The grounds raised
read as follows:-
1. The order of the Ld.CIT(A) is contrary to law, facts and circumstances of the case.
2. The Ld.CIT(A) has erred in restricting the disallowance u/s.40(a)(i) to 30% of the total disallowance of Rs.58,00,953/-. 2.1. The Ld.CIT(A) has ought to have remitted back the matter to the file of AO for verification as to why the audited reports of the company considered the payments made to non-residents. The claim of the assessee that the payments were made to residents ought to have been verified before grant of relief. 3.The Ld.CIT(A) erred in holding that the provisions of DTAA override the domestic tax laws and as per settled legal principles, the taxpayer is entitled to avail the benefits of the lower DDT rate, accordingly, the AO was directed to grant relief to the appellant by allowing the refund of the excess DDT paid. 3.1.The Ld.CIT(A) erred in not taking into cognizance of the provisions of Section 115-0 (3) and (4) that the tax on distributed profits so paid by the company shall be treated as the final payment of tax and no further credit therefore shall be claimed by the company or by any other person in respect of the amount of tax so paid. Furthermore, no deduction under any other provision of this Act shall be allowed to the company or a shareholder. These provisions also show that shareholder does not enter the domain of DDT at all. 3.2.The Ld.CIT(A) erred in not following the Hon'ble Apex Court's decision in the case of Godrej &Boyce Manufacturing Co. Ltd. wherein 3 -: it is held that the deduction of income tax u/s. 115-O is a tax on profit of the company and not a tax on dividend. 3.3.The Ld.CIT(A) erred in not appreciating the fact that DTAA is to be looked at from recipient's taxability perspective whose income has suffered double tax. Since DDT is a charge on the domestic company and not on behalf of the shareholder, the domestic company does not enter the DTAA domain. 4.For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld.CIT(A) may be set aside and that of the Assessing Officer be restored.
Brief facts of the case are as follows: The assessee is a company engaged in the business of providing paint finishing system and related services to automotive manufacturer. For the assessment year 2019-20, the return of income was filed by the assessee on 30.11.2019 declaring total income of Rs.29,64,17,810/-. The return was processed u/s.143(1) of the Act on 16.02.2021 wherein total income was assessed at Rs.30,22,18,755/- after making various adjustments.
Aggrieved by the intimation issued u/s.143(1) of the Act, assessee preferred appeal before the First Appellate Authority (FAA). The FAA partly-allowed the appeal of the assessee by i. Restricting the disallowance u/s 40(a)(i) of the Act to 30% (Rs.17,40,286/-) treating it as u/s 40(a)(ia) of the Act.
4 -: ii. Directing refund of excess Dividend Distribution Tax (DDT) paid beyond the 10% rate under the India-Germany Double Taxation Avoidance Agreement (DTAA), relying on tribunal decisions.
Aggrieved by the order of the FAA, Revenue has filed the present appeal before the Tribunal. Two issues arise for our adjudication. We shall adjudicate the issues as under:
Restriction of disallowance u/s.40(a)(i) of the Act In the intimation issued u/s.143(1) of the Act, disallowance was made u/s.40(a)(i) of the Act amounting to Rs.58,00,953/- being 100% of the payments made. Adjustment was made u/s.143(1) of the Act, since it was reported in Form 3CD, payments were made to non-resident without TDS deduction. Before the FAA, the assessee submitted that there was an error in reporting in Form 3CD. It was submitted that payments were made to the residents and hence, provisions of section 40(a)(ia) of the Act has application. Accordingly, 30% of the expenditure/payment only needs to be disallowed. The FAA on perusal of the payments made found that the payees are resident Indians and section 40(a)(ia) of the Act has application. The relevant findings of the FAA read as follows:-
5 -: 7.3 Ground no. 2 to 3 pertains to disallowance under section 40(a)(ia). While filing the return of income, the appellant has claimed 100% of the payment made to residents under the provisions of section 40(a)(i), amounting to Rs.58,00,953/-. The AO CPC has fully disallowed of the claim of the appellant. The provisions of Section 40(a)(ia) restrict the disallowance to 30% of payments made to residents without deduction of tax at source. Judicial precedents, including CIT v. Calcutta Export Co. [(2018) 404 ITR 654 (SC)], clarify that procedural lapses should not lead to excessive disallowances. The appellant has produced document that payment has been made to the resident. Hence, based on the factual and legal position on the issue, the disallowance is restricted to Rs.17,40,286/- and the ground no.2 to 3 is partly-allowed.
Aggrieved, the Revenue has raised this issue before the Tribunal. The Ld. DR submitted that the CPC had rightly invoked disallowance u/s. 40(a)(i) of the Act, since the audit report in Form 3CD itself disclosed payments made to non-residents without deduction of tax at source. The assessee’s contention that such payments were in fact made to residents was never substantiated with evidence, nor was any verification carried out by the CIT(A). The Ld.DR submitted that in such circumstances, the matter ought to have been restored to the file of the AO for proper verification, particularly when the audit report prima facie reflected non-compliance with Chapter XVII-B in respect of payments to non-residents.
It was further contended that section 40(a)(i) of the Act mandates 100% disallowance of payments made to non-residents 6 -: without TDS, unlike section 40(a)(ia) of the Act which provides for 30% disallowance in the case of payments to residents. She further stated that the reliance placed by the CIT(A) on the decision of the Hon’ble Supreme Court in CIT v. Calcutta Export Co. [2018] 404 ITR 654 (SC) is misplaced, as it pertains to procedural lapses under section 40(a)(ia) relating to resident payees, and does not govern the clear statutory distinction between residents and non-residents. Hence, without first ascertaining the residential status of the recipients, the relief allowed by the CIT(A) is unsustainable in law.
The Ld.AR on the other hand has filed a paper-book enclosing therein the details of break-up of the assessee’s vendors and the payments made to them. By referring to the same, the Ld.AR submitted that it is clearly disenable that payments were made to resident Indians and hence, section 40(a)(ia) of the Act applies, which warrants only 30% disallowance of the total expenditure, instead of 100% u/s. 40(a)(i) of the Act.
We have heard rival submissions and perused the material on record. The assessee had produced the documents to show 7 -: that payments were made to ‘residents’ and not to ‘non- residents’. The evidence placed before the FAA has been produced on record at page 94 of the paper-book submitted by the assessee. On perusal of the same, it is clearly disenable that these payments are being made to the vendors who are based in India. The Ld.DR has not placed any contrary material to show that payments were made to non-residents and provisions of section 40(a)(i) of the Act has application. In light of the categoric finding of the FAA and on the material on record, we hold that the FAA is justified in restricting the disallowance to Rs.17,40,286/- instead of Rs.58,00,953/- made as adjustment u/s.143(1) of the Act. It is ordered accordingly.
In the result, the Ground No.2 and its sub-ground filed by the Department are dismissed.
Directing refund of excess Dividend Distribution Tax (DDT) 12. The FAA had directed refund of excess Dividend Distribution Tax (DDT) paid beyond 10% of rate under the India-Germany Double Taxation Avoidance Agreement (DTAA) by observing as under:- 7.5 Ground no. 7 to 9 pertains to Excess DDT Paid. Under the provisions of the India Germany Double Taxation Avoidance 8 -: Agreement (DTAA), the applicable rate of DDT for dividends paid to non-resident shareholders in Germany is 10%. The appellant has submitted that during the year appellant has distributed dividend and paid a dividend distribution tax at the rate of 20.56 % under the section 115-O of the Act. Now, the appellant has submitted that rate of tax on dividend under DTAA shall be applied for the distribution of dividend which is at 10%. The appellant has relied upon the following judicial pronouncement for the same:-
• Hon’ble Delhi Bench of the tribunal in case of Giesecke &Derient (India) Pvt Ltd Vs ACIT (2020)(TS-522-ITAT-2020(del). • Hon’ble ITAT (Kolkata Bench) in the case of Indian Oil Petrnas Private Limited TS324-Tribunal-2021(kol)
I have gone through the authority relied upon by the appellant and is of the considered view that DDT paid in excess is refundable to the appellant as per provision of section 237 read with article 256 of the constitution which emphasises that only legitimate taxes can be collected from the appellant. It is also pertinent to mention that the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT [(2021) 432 ITR 471 (SC)] emphasized the need to apply DTAA rates. Accordingly, the provisions of the DTAA override the domestic tax laws, and as per settled legal principles, the taxpayer is entitled to avail the benefits of the lower DDT rate in this case. The appellant has produced the tax residency certificate in this regard to the person to whom the dividend has been paid. In view of the above, the claim of the appellant for the excess DDT paid beyond the treaty rate of 10% is allowed. The AO is directed to grant relief to the appellant by allowing the refund of the excess DDT paid. Hence, this ground of the appeal is allowed.
The Ld.DR submitted that the case laws relied on by the FAA has been reversed by the Special Bench order of the Tribunal in the case of DCIT vs. Total Oil India Pvt. Ltd., [2023] reported in 149 taxmann.com 330. Further, the Ld.DR submitted that the DDT is a tax on company’s profits and not on dividend income. In
The Ld.AR relied on the findings of the FAA.
We have heard rival submissions and perused the material on record. DDT u/s 115-O is a tax on the company's distributed profits, treated as final payment u/s 115-O (3) & (4) of the Act. No further credit or deduction is allowable to the company or shareholder. The shareholder does not enter the DDT domain. DDT is a tax on the company's profits, not on dividend income. This is settled by the Hon'ble Supreme Court in Godrej & Boyce Mfg. Co. Lid. v. Dy. CIT [2017] 394 ITR 449 (SC), where it was held: "Section 115O imposes an additional income tax on the company, not on the shareholder. It is a tax on the profits of the company which are distributed as dividends, and it is not a tax on the dividend income in the hands of the shareholder." (Para 15)
The above ruling of the Hon’ble Supreme Court applies squarely, as DDT is levied on the company irrespective of the shareholder's taxability. DTAA applies to the recipient's income, 10 -: not the company's DDT liability. Article 10 of the India-Germany DTAA governs tax on dividends in the shareholder's hands, not DDT on the company. The CIT(A)'s reliance on Giesecke & Devrient (India) Pvt. Ltd. v. ACIT |2020] (TS-522-ITAT- 2020(DEI)) and Indian Oil Petronas Pvt. Ltd. [TS-324-ITAT- 2021(KOL)] is incorrect, as these orders of ITAT are overruled by the Special Bench in the case of DCIT v. Total Oil India Pvt. Ltd., reported in [2023| 149 taxmann.com 832 (Mumbai - Trib.) (SB), holding: "DDT under section 115-O is a tax on the domestic company distributing dividends and not a tax on the non-resident shareholder receiving the dividend. Therefore, the beneficial tax rate provided under the DTAA for dividends cannot be applied to the DDT liability of the Indian company. DDT is not covered under the DTAA, as it is a charge on the company's profits and not on the shareholder's income." (Para 45)
The Special Bench ruling is binding on all ITAT benches, which confirms that DTAA rates do not cap DDT, following the Supreme Court's view in Godrej & Boyce (supra). The assessee company paid DDT at 20.56% (including surcharge and cess) on dividends to its German parent. No refund is allowable, as DDT is final and non-creditable.
11 -: 18. In light of the aforesaid reasoning and placing reliance on the judicial pronouncement cited supra, we allow the Ground No.3 and its sub-grounds filed by the Department.
In the result, the appeal filed by the Revenue is partly-allowed.
Order pronounced in the open court on 26th September, 2025 at Chennai.