TIMKEN INDIA LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1, JAMSHEDPUR, JAMSHEDPUR

It was submitted by AR that the tax payable on the dividend should be restricted to the rate prescribed under Article 10 of India Singapore DTAA. At the time of hearing, it was informed to ld AR that this issue stands covered by the decision of Hon’ble Special Bench Mumbai in the case of DCIT v. Total Oil India

A reading of Article 10 of the model OECD DTAA shows that Dividends paid by a company which is a resident of a Contracting State, say India to a resident of the other Contracting State (say France) may be taxed in that other State (France). However, if the beneficial owner of the Dividend is a resident in France, the tax so charged shall not exceed specified percent. The first condition is that the non-resident in France should be taxed in India. We have to look at the DTAA from the receipients taxability perspective. DDT is paid by the domestic company resident in India. It is a tax on its income and not tax paid on behalf of the shareholder. In such circumstances, the domestic company u/s.115-O does not enter the domain of DTAA at all.

If domestic company has to enter the domain of DTAA, the countries should have agreed specifically in the DTAA to that effect. In the Treaty between India and Hungary, the Contracting States have extended the Treaty protection to the dividend distribution tax. It has P a g e 3 | 31 been specifically provided in the protocol to the Indo Hungarian Tax Treaty that, when the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend. While making Reference in the case of TotalOil (supra), the ld. Division Bench has made the following observations on this aspect f) Wherever the Contracting States to a tax treaty intended to extend the treaty protection to the dividend distribution tax, it has been so specifically provided in the tax treaty itself. For example, in India Hungry Double Taxation Avoidance Agreement [(2005) 274 ITR (Stat) 74; Indo Hungarian tax treaty, in short], it is specifically provided, In the protocol to the Indo Hungarian tax treaty it is specifically stated that "When the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend". That is a provision in the protocol, which is essentially an integral part of the treaty, and the protocol to a treaty is as binding as the provisions in the main treaty itself. In the absence of such a provision in other tax treaties, it cannot be inferred as such because a protocol does not explain, but rather lays down, a treaty provision. No matter how desirable be such provisions in the other tax treaties, these provisions cannot be inferred on the basis of a rather aggressively creative process of interpretation of tax treaties. The tax treaties are agreements between the treaty partner jurisdictions, and agreements are to be interpreted as they exist and not on the basis of what ideally these agreements should have been. (g) A tax treaty protects taxation of income in the hands of residents of the treaty partner jurisdictions in the other treaty partner jurisdiction. Therefore, in order to seek treaty protection of an income in India under the Indo French tax treaty, the person seeking such treaty protection has to be a resident of France. The expression 'resident' is defined, under article 4(1) of the Indo French tax treaty, as "any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile,residence, place of management or any othercriterion of a similar nature". Obviously, the company incorporated in India, i.e. the assessee before us, cannot seek treaty protection in India- except for the purpose of, in deserving cases, where the cases are covered by the nationality non-discrimination under article 26(1), deductibility non-discrimination under article 26(4), and ownership non- discrimination under article 24(5) as, for example, article 26(5) specifically extends the scope of tax treaty protection to the "enterprises of one of the Contracting States, the capital of which is wholly or partly owned or P a g e 4 | 31 controlled, directly or indirectly, by one or more residents of the other Contracting State". The same is the position with respect of the other non- discrimination provisions. No such extension of the scope of treaty protection is envisaged, or demonstrated, in the present case. When the taxes are paid by the resident of India, in respect of its own liability in India, such taxation in India, in our considered view, cannot be protected or influenced by a tax treaty provision, unless a specific provision exists in the related tax treaty enabling extension of the treaty protection. (h) Taxation is a sovereign power of the State- collection and imposition of taxes are sovereign functions. Double Taxation Avoidance Agreement is in the nature of self-imposed limitations of a State's inherent right to tax, and these DTAAs divide tax sources, taxable objects amongst themselves. Inherent in the self-imposed restrictions imposed by the DTAA is the fact that outside of the limitations imposed by the DTAA, the State is free to levy taxes as per its own policy choices. The dividend distribution tax, not being a tax paid by or on behalf of a resident of treaty partner jurisdiction, cannot thus be curtailed by a tax treaty provision."

We are of the view that the above exposition of law is correct and we agree with the same. Therefore, the DTAA does not get triggered at all when a domestic company pays DDT u/s.115O of the Act. Conclusion:

For the reasons give above, we hold that where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts Additional Income-tax (Tax on Distributed Profits) referred to in sec.115-O of the Act, such additional income tax payable by the domestic company shall be at the rate mentioned in section 115-O of the Act and not at the rate of tax applicable to the non-resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. Nevertheless, we are conscious of the sovereign's prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAs. Thus, wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Thus, the question before the Special Bench is answered, accordingly. “

As this issue is now squarely covered by the Special Bench decision in the case of Total Oil India Pvt. Ltd (supra) this issue is held against the assessee. Consequently, Gound No.8 is dismissed.

Ground No.9 is in relation to charging of interest u/s.234B. Same is consequential in nature.

Ground No.10 is against initiation of penalty u/s.270A of the Act. This issue is consequential in nature.

Coming to issue raised in Ground No.1 to 4, which are transfer pricing addition. It was submitted by ld AR that the assessee is in the business of manufacturing and sale of bearings. It was the submission that the assessee manufactures various types of bearings. It was also the submission that there are some bearings, which the assesse do not manufacture but are required in the industries. Such bearings are manufactured by the AEs of the assessee. The assessee sources the bearings from its AEs on the basis of orders received by the assessee from the end users and sells the same to the end users. It was the further submission that the assessee is also doing the distribution and trading in respect of ancillary products such as grease, seal ware rings, adapters and sleeves. It was the submission that the assessee does not manufacture nor does any of the AEs any of these products being grease, seals, ware rings,adapters, etc. The assessee and its AEs are exclusively in the manufacture and sale of bearings. It was the submission that from the assessment year 2003-04 till the P a g e 6 | 31 impugned assessment years, no specific TP adjustment have ever been made on the assessee. It was the submission that during the relevant impugned assessment year, the AO rejected the TNMM method applied by the assessee and applied the resale price method for benchmarking the international transactions of purchase of finished goods, such as bearings for resale in the distribution segment without appreciating the business models of the assessee. It was the submission that in the distribution of the bearings, which was sourced from the AEs of the assessee, the same was treated as related transaction and the margin was determined at 7.30%. It was the submission that the assessee sourced the grease, seals, ware rings, adapters, etc., from local suppliers an in some cases from imports. The profit margin earned by the assessee on such unrelated products to the manufacturing activity of the assessee, the assesse earned 19.68% profit. The AO compared the profit margin on such unrelated products with that of the related products even though there is variation and accordingly determined shortfall in gross profit margin at 12.38% in respect of sales in regard to related products. It was the submission that for the application of resale price method, the same is normally applicable to distributors who are carrying risk in the market and stock inventory. It was the submission that in respect of related products, the assessee gets the order from end users and on the basis of the requirement of the end users, initiate orders with AEs, who manufacture such specific bearings, imports such bearings and sale it to the end users at the predetermined price. It was the submission that the assessee was P a g e 7 | 31 not holding any closing stock specifically much less any additional stock in relation to any of such bearings, which have been sold by the assessee by import from its AEs. It was the further submission that in relation to the unrelated products being grease, seals, ware rings, adapters, etc, the assessee acts as distributor and holds the stock of such items such items are sourced locally from the local manufactures and some portions are imported as required. It was the submission that these products are used for the installation of the bearings both manufactured by the assessee and such bearings as are imported and supplied to the end users. It was the submission that in relation to bearing which is considered as related segments, the assessee carries no market risk nor any inventory risk but acts only as a supply agent on the basis of the order that it receives from end users. Consequently, its margin is 7.3% and in respect of the unrelated products. It was the submission that the assessee did carry the market risk and the inventory risk insofar as the assessee was stocking such items for the purpose of the distribution and stock did not depend the orders received by the assessee. It was the submission that in regard to such unrelated items, if the items are not manufactured by the assessee nor tis AEs, the assessee derived profit margin at 19.68%. It was the submission that comparing the bearings as related products with the lubricants such as grease, seals, ware rings, adapters, etc, which are not manufactured by the assessee but purchased and sold as distributor by the are un-comparable insofar as the profit margin of the two products are normally different. It is not possible that the P a g e 8 | 31 assessee can at any point of time gets fixed percentage of profit in respect of all products that it sales. Each products would have a different margin. It was the further submission that in the TP study done by the assessee, the assessee had applied TNMM method. Ld AR drew our attention to TP study of the assessee, wherein in page 200 of PB, which is the para- H of TP study, the arithmeticalmeans in respect of comparable in the distribution segment was 3.7% whereas the profit margin of the assessee was 2.54%, which is seen from the segment -H, which reads as follows:

In the further study of overall segment: which is at page 208 as follows:

The weighted average of the profit wis 6.42% in respect of comparable whereas the net profit margin of the assessee is shown at 11.97%. It was the submission that even for the assessment year 2012-13, similar study had been done which wasshown at page 392 of PB, which reads as follows

In reply, ld CIT DR submitted that the assessee in the business of distribution segment which is under dispute. There is no dispute in regard to manufacturing segment of the assessee and nor is there any dispute in regard to commission segment of the assessee. Only in regard to distribution segment, the dispute has arisen because the assessee has shown profit margin from import and sale supply of bearings had only 7.33 as against 19.68% on the purchase and sale of distribution of grease, seal ware rings, adapters and sleeves, which are ancillary to the use of such bearings. It was the submission that the adjustment as done by the TPO has been rightly made and same does not call for any interference. It wasthe submission that the resale price method has rightly been applied as it is the distribution of two connected products which have been compared.

We have considered the rival submissions. A perusal of the facts in the present case clearly shows that the issue under dispute inthe transfer pricing is in regard to whetherthe resale price method is to be applied or TNMM method is to be applied. The resale method admittedly has been applies where the assessee purchase of particular product when sale it. The profit margin should be comparable. Now what the assessee purchases is bearing. These bearings are purchased at the instance of the end-users. The assessee is not a stockist of such bearings. The assessee is facilitating end users in obtaining such bearings. The AO has compared the profitability in respect of such bearings with the profitability from the purchase and sale of grease, seal ware rings, adapters and sleeves. These are ancillary products for the effective installation and functioning of such bearings from the products made of the material used in the manufacture of these bearings either. These are totally unrelated products. Obviously, the profit margin in respect of totally unrelated cannot be compared. It would be like saying that the apple and orange are fruits and , therefore, they should both have same price of purchase and sale should have been provided. It is not possible. As the AO has applied the resale price method in resect of two totally uncomparable products, we are of the view that the method applied by the AO is erroneous. Even in the earlier years i.e. for the assessment year 2012- 13, 2013-14 and 2014-15, similar TP study had been done, similar transaction had been done and they had been accepted. For the assessment year 2015-16 and 2016-17, there is noTP order and TP order has now been done for making

In Ground No.5.1 and 5.2 the assessee has challenged the disallowance u/s.14A r.w.s 8D in regard to both normal provisions as well as book profit computed u/s.115J of the Act.

It was submitted by ld AR that under the normal provisions of the Act, regard to computation of the disallowance u/s.14 A of the Act r.w.s 8D Rules, the satisfaction recorded by the AO is not clear.

We have considered the rival submissions and we have gone through the assessment order. The AO has given categorical findings that there is variation in respect of disallowance under rule 8D9999 and same requires to be recomputed, we are of the view that the A has recorded the satisfaction and the disallowance made u/s.14A r.w.s 8D stands upheld.

In regard to computation u/s.115JB of the Act, it is noticed that this issue is now squarely covered by the decision of the Special Bench of this Tribunal Delhi Tribunal in the case of ACIT vs Vireet Investment (P Ld.,82 taxmann.com

Consequently, the action of the AO in regard to the addition under Rule 8D in computing the book profit under 115JB stands upheld. Ground No.5.1 and 5.2 stands dismissed.

In the result, appeal of the assessee stands partly allowed.

As we have disposed of the appeal, the stay petition has become infructous Order dictated and pronounced in the open court on 12/06/2025.