SOPHOS TECHNOLOGIES PRIVATE LIMITED,AHMEDABAD vs. THE DCIT, CIRCLE-4(1)(1), AHMEDABAD

Applicability of tax rate on dividends paid to non-resident shareholders On the facts and circumstances of the case and in law, the Hon'ble CIT(A)/Ld. AO erred in not appreciating that the Dividend Distribution Tax (DDT) prescribed under Section 115-0 of the Act is in substance and effect a tax on dividend income of non-resident shareholders and therefore, the DDT paid to the shareholders which are a resident of the United Kingdom, should be restricted to the more beneficial rate of 10% under Article 11 of India - United Kingdom tax treaty. It is prayed that the Appellant be granted the beneficial rate under the treaty and the excess DDT be directed to be refunded to the Appellant.

Short grant of credit of Tax Deducted at Source (TDS') On the facts and circumstances of the case and in law, the Hon'ble CIT(A)/Ld. AO erred in not granting credit of TDS of INR 5,78,321 (i.e., INR 5,28,75.396 as per modified return of income less INR 5.22.97,075 as per assessment order) to the Appellant. It is prayed that the Ld. AO he directed to grant the credit of TDS of INR 5,78,321/-.

Validity of the order passed by the Hon'ble CIT(A) On the facts and circumstances of the case and in law, the Hon'ble CTT(A) erred in observing that the Ld. Assessing Officer (Ld. AO) be directed to verify the claim of the Appellant in relation to refund of excess DDT paid without appreciating that the Hon'ble CIT(A) does not have the jurisdiction to remand/set-aside any issue to the Ld. AO for verification. It is prayed that the order of Hon'ble CIT(A) is bad in law and liable to be quashed. The Appellant craves leave to add to, alter, amend, delete, modify or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before or during the appeal hearing of the aforesaid matter.

We have given our thoughtful consideration and perused the materials available on record including the Paper Books and Case Laws compilation filed by the assessee. Brief facts of the case are that 99.98% of the Assessee company's shares were held by M/s. Sophos Limited and 0.02% of shares were held by M/s. Sophos Nominee Limited (both are Residents of United Kingdom). During the financial year 2015-16, the Assessee company paid dividend to its shareholders and paid DDT on the same at 20.36% (including surcharge and cess)

We find ourself fortified by the observation of Delhi Tribunal in Giesecke & Devrient Ltd. (supra), where with reference to the legislative history of Section 115-0, it emerges with clarity, that DDT, is a levy on the dividend distributed by payer company, being an additional tax is covered within "Tax' as defined in Section 2(43) of Act and, hence, is chargeable as per Section 4, which is subject to other provisions, which include Section 90 and sub-clause (2) thereof, then specially in case of Avoidance of Double Tax, the provisions more beneficial to assessee must be preferred. Considering that the international treaties involve extensive negotiations between two nations, and definitely being conscious of the respective Nation's power to tax, the benefits and detriments of a treaty and particularly a double tax treaty and its avoidance, can only be reciprocal when the flow of trade and Investment between treaty partners rests on balance and it is not allowed for one treaty partner to secure benefit to detriment of other. When a treaty is entered into, it is expected to have considered its impact on trade and investment and since it is mutual arrangement, it must be given full effect to and merely because there are unilateral amendments made on domestic front, the treaty cannot be made ineffective by construing the same in light of domestic law. The Parliament, is not within its power to change the terms of a bilateral treaty, which is a result of negotiated economic bargain between India and UK. A party may not follow the treaty, it may choose to renege from its obligations thereunder, but it cannot amend the treaty on the guise of its domestic law, having undergone change. Amendments to domestic law, cannot be read into treaty provisions, without amending Treaty itself. Since it is necessary for the contracting party to fulfill their obligations under a Treaty in good faith and this includes its accountability under it and act in a manner, not to defeat its purpose and object, we find that the benefit accruing under the DTAA, and Article 11 thereof, cannot be denied as Revenue is of the opinion that the Treaty do not cover 'Dividend' or it is not applicable to a domestic company.

In Tata Tea Company (supra), while pronouncing upon the constitutional validity of Section 115-0 of the Act of 1961, which is a provision for declaration, distribution or payment of dividend by domestic company and imposition of additional tax on dividend, it is held by the Apex Court that the source of the income may be agriculture, but when dividend is declared to be distributed and paid to shareholder of a company, its source is not relevant, as it remains dividend income. Nor does the fact that it is share of the company's profit, is held to be interfere with character of profit, from which it reaches hands of shareholder.

BFAR has based its decision on the definitional and conceptual framework of DDT holding that if it paid by the petitioner to its shareholder, it falls outside scope of DTAA as, (a) Dividend is an amount declared, distributed or paid by the Domestic Company out of the current or accumulated profits; (b) Dividend is additional income tax payable over and above the income tax chargeable in respect in total income of such company. BFAR has concluded that incidence of tax under Section 115-0 is only upon domestic company and not shareholder i.e. Colorcon U.K. and DTAA is not triggered and, therefore, there is no question of its being taxed @ 10% as per DTAA. It also render a finding that Article 11(2) is not triggered at all, as there is no mutual agreement settling the mode of application of tax rates. On perusal of the impugned Ruling by BFAR and on its detail analysis, according to us BFAR has failed to appreciate that section 4 of the Act of 1961 levies income-tax, including additional income tax, in respect of the total income of the previous year of every person. Thus, it is the earning of the 'Income' that attracts the charge. 'Income' has been defined under Section 2(24) of the Act to include 'dividend'. Therefore, the Authority has erred in not appreciating that Section 115-0 levies additional tax on the company on the "amounts declared, distributed or paid by way of dividends". According to us, the declaration, distribution or payment of dividend by company cannot in any manner be regarded as 'income of the company distributing the dividend. Even Section 2(24) has not been amended by the Legislature in as much as regarding the "amounts declared, distributed or paid by way of dividends" as "income" of the company distributing dividends. Moreover, the Hon'ble Supreme Court in UOI v. Tata Tea Co. Ltd. (supra), has, in no uncertain words held that "income as defined in Section 2(24) 'dividend' and that "section 115-0 pertain to A.Y. 2016-17 Page No 9 Sophos Technologies Pvt. Ltd. vs. DCIT declaration, of the 1961 Act is the inclusive definition including specifically distribution or payment of dividend by company and imposition of additional tax on dividend is thus clearly covered by subject as embraced by Entry 62 Once the Hon'ble Supreme Court has held that dividend connotes income, the natural corollary is that as per section 4, the said income should be chargeable to tax in the hands of the person earning such income. However, from a combined reading of Section 115-0 and 10(34), along with the legislative history narrated earlier, it is evident that DDT is a tax on the dividend income of the shareholder, though the incidence of tax has shifted from the shareholder to the company paying the dividend. Any other interpretation of the provisions will render the section 115-0 of the Act unconstitutional as it will fall foul of Entry 82, since what is sought to be taxed by the Respondent is not 'income' of the company.

The Board of Advanced Ruling has further failed to appreciate that in view of the statutory provisions and legislative background of Section 115-0 of the Act, DDT paid by a company distributing dividend is not an income tax on profits or income of the company, but, is a tax on the dividend, which is income of the shareholder of the company. Hence, DDT is tax on the dividend income of the shareholder, which is merely, for administrative convenience, charged in the hands of, and recovered from the company distributing dividend. There is no denying that dividend income is not chargeable to tax and is exempt in the hands of the shareholders in light of the provisions of Section 10(34) of the Act, since the burden of taxation has been shifted to the company distributing the dividend, from the shareholder. While the DDT is a tax payable by the company, and not the shareholders, in pith and substance, it is a tax on dividends that is income of the shareholders.

We must also note that BFAR has grossly erred in rejecting the distinction and has failed to consider the binding dictum of the Apex Court in Tata Tea (supra) and on the other hand its reliance upon Godrej and Boyce (supra) is misplaced, decision in Godrej & Boyce was rendered on an issue whether expenses incurred in relation to earning an exempt income by way of dividend was to be disallowed under Section 14A of the Act. The Assessee argued that dividend income could not be treated as 'exempt' as the income suffered tax under Section 115-0 in hands of the company distributing dividend. It was argued that DDT under Section 115-0 was nothing but tax paid on behalf of the shareholder and such income which had attracted tax could not be said to be 'exempt'.

Thus, the BFAR erred in not appreciating that the tax under Section 115-0 is an additional tax under its sub section (4) which in turn is a part of the Income tax statute and legislation subject to section 90 read with the relevant DTAA. Therefore, levy of tax on dividend paid/distributed by A.Y. 2016-17 Page No 11 Sophos Technologies Pvt. Ltd. vs. DCIT

Regarding Ground No. 2 & 3 on levy of additional interest under sections 234B and 234C of the Act pursuant to the Advance Pricing A.Y. 2016-17 Page No 13 Sophos Technologies Pvt. Ltd. vs. DCIT Agreement entered into with the CBDT. Ld Counsel submits that the issue involved in the present grounds of appeal are also squarely covered by the decision of the Hon'ble Delhi ITAT in the case of M/s. Colt Technology Services (I) Pvt Ltd. -Vs- DCIT in 2015, wherein it has been categorically held that the levy of additional interest u/s. 234B and 234C of the Act on additional income as per the Advance Pricing Agreement entered into with the CBDT was illegal and void and had directed the AO to delete the same. Applying the above decision of the Delhi Tribunal, the Ld Counsel humbly prayed that the JAO be directed to delete the additional interests levied under section 234B and section 234C of the Act. In further support the above contentions, Ld Counsel also placed reliance on the following judicial pronouncements:

Brief facts are that pursuant to Advance Pricing Agreement dated 19 August 2019 entered with the CBDT, the assessee company filed a modified Return of Income under section 92CD of the Act on 14-11- 2019 declaring a total income of INR 157,70,06,240/- and forthwith A.Y. 2016-17 Page No 14 Sophos Technologies Pvt. Ltd. vs. DCIT paid the entire additional tax on the income. In the modified return filed, the Assessee company inadvertently paid interest u/s. 234B of the Act amounting to INR 55,60,425/- and interest u/s 234C of the Act amounting to INR 19,55,705/- by computing the said interest on the entire income of INR 157,70,06,240/- including the incremental/ enhanced income computed pursuant to the APA, amounting to INR 8,47,09,100/-. However, the lower authorities without appreciating that such interest was not leviable in the Assessee’s case did not grant any relief. It is pertinent to note that there were no additions made by the TPO in his order. Ld Counsel further submits that the advance tax installments were due and payable during the period from April 2015 to March 2016 and the time limit for filing the original ROI subsisted only upto 30th November 2016. However, the incremental income got crystallized and determined only pursuant to the signing of the APA on 19-08-2019, which is a subsequent event which could not have been foreseen by the Assessee, it was impossible for the Assessee to estimate the increment in income pursuant to APA. Thus, advance tax could not have been paid on such incremental income and was accordingly, advance tax was paid only on the current income of the Appellant. On identical case co-ordinate Bench of the Delhi ITAT in the case of M/s. Colt Technology Services (I) Pvt Ltd. [cited supra] held as follows:

Per contra, the Ld. DR has relied on the observations and conclusions of the Lower Authorities.

We have heard the Ld. AR and also Ld. DR on the issue in dispute, we are agreeing with the argument of the Ld. AR.

In the case of Prime Securities Ltd. Vs. Assistant Commissioner of Income Tax (Investigation), [2012] 20 taxmann.com 757 (Bombay), the Hon'ble High Court of Karnataka, while dealing with the issue of levying interest u/s sections 234A, 2348 and 234C for non/short payment of advance tax installment and delay in payment of income tax held as under:- “9. Perusal of the above provisions shows that liability to pay interest arises on failure of the assessee to pay advance tax under section 208 or advance tax payable under section 210 is paid less than 90 per cent. Perusal of the provisions of sections 208 and 209 shows that for the purpose of payment of advance tax the assessee has to estimate his current income and then he has to calculate income- tax on that income at the rate in force in the financial year. Thus, the amount of advance tax is to be decided by the assessee after estimating his current income and then applying law in force for deciding the amount of tax. It is an admitted position in the present case that the date on which the appellant paid the advance tax it had estimated its income and liability for payment of advance tax in accordance with law that was in force. Therefore, it is obvious that there was no failure on the part of the appellant to pay advance tax in accordance with the provisions of sections 208 and 209. So far as the judgment of the Supreme Court in the case of Ghaswala (20011 252 ITR 1 is concerned, the Supreme Court was concerned with the powers of the Settlement Commission in granting waiver of interest and for that purpose the Supreme Court considered the provisions of sections 234A, 2348 and 234C. The Supreme Court in no uncertain terms held that the interest is compensatory in nature. The court read the provisions of sections 234A, 234B and 234C as mandatory in character holding that after the amendment in the provisions in the Finance Act, 1987, that with the use of the expression "shall" therein the Legislature clearly indicated that its intention to make the collection of statutory interest mandatory. It is for this purpose that the court proceeded to decide that even the Settlement Commission which was vested with the vast power had no power to waive the interest payable under these provisions. Going by this interpretation of sections 234A, 234B and 234C as given by the Constitution Bench of the Supreme Court, it is clear that the A.Y. 2016-17 Page No 16 Sophos Technologies Pvt. Ltd. vs. DCIT

By following the ratio laid down in the judgment mentioned supra, we hold that, the levy of interest u/s 234B and 234C of the Income Tax Act on additional income agreed as per advance pricing agreement entered between appellant and the CBDT is illegal. Ergo, we allow the additional grounds of appeal.

Regarding Ground No. 4: Short grant of credit of Tax deducted at source (TDS) of Rs.5,78,321/-. The JAO is directed to verify the same and grant TDS credit as claimed in the modified return and as per the provisions of law.

Ground No. 5: Validity of the order passed by the Hon'ble CIT(A). Consequential to the relief given to the assessee, this ground is does not require separate adjudication and dismissed.

In the result the appeal filed by the assessee is allowed.