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Foseco India Limited, Pune vs ACIT | ITAT Pune 2024 | BharatTax

FOSECO INDIA LIMITED,PUNE vs. ACIT CIRCLE 1(1), PUNE

ITA 1120/PUN/2024Status: DisposedITAT Pune11 November 2024AY 2020-21Bench: SHRI R.K. PANDA (Vice President), MS. ASTHA CHANDRA (Judicial Member)10 pages

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Cases cited in this judgment

Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.

Godrej & Boyce Manufacturing Company Ltd. v. DCIT
81 Taxmann.com 111 · 2017 · SC
679 citing
Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT
194 Taxmann 203 · 2010 · HC
144 citing
Trib.) Giesecke & Devrient 16.994%). India Pvt Ltd. v. ACIT
120 Taxmann.com 338 · 2020 · HC
52 citing
Union of India v. Tata Tea Co Ltd.
85 Taxmann.com 346 · 2017 · SC
38 citing
DCIT v. Indian Oil Petronas Pvt. Ltd.
127 Taxmann.com 389 · 2021
17 citing

Income Tax Appellate Tribunal, “A” BENCH, PUNE

Before: SHRI R.K. PANDA & MS. ASTHA CHANDRA

For Appellant: Shri Atul Poddar

For Respondent: Shri Ramnath P. Murkunde

आदेश / ORDER

PER ASTHA CHANDRA, JM :

1.

The seven appeals filed by the assessee are directed against the separate order(s) all dated 28.03.2024 of the Ld. Commissioner of Income Tax (Appeals)-13, Pune [“CIT(A)”] pertaining to Assessment Years (“AYs”) 2014-15 to 2020-21. Since the issue(s) involved are identical, these were heard together and are being disposed of by this common order.

2.

We take up the appeal in for AY 2014-15 as the lead case.

3. The assessee has raised the following grounds of appeal in AY 2014-15 :

1. That on the facts and in the circumstances of the case, the Ld. CIT(A) has been grossly erroneous and unjustified in not providing appropriate relief to the appellant.

2. That on the facts and in the circumstances of the case, the Ld. CIT(A) has been grossly erroneous and unjustified in not admitting that dividend distribution tax is tax in the hands of the shareholders and not in the hands of the company as the onus to pay dividend distribution tax has shifted from shareholders to the company to only simplify the administrative burden of collection process.

3.

That on the fact and in the circumstances of the case, DDT paid u/s 115- O of the Act on dividends declared and paid to foreign shareholders - Vesuvius Holdings Limited (VHL), Foseco Overseas Limited (FOL) & Foseco UK Limited (FUL), who are tax residents of United Kingdom cannot exceed the rate provided under Article 11 to the Double Taxation Avoidance Agreement between India and UK.

4.

Briefly stated, the assessee is a domestic company engaged in the business of manufacture, marketing and trading of foundry chemicals and foundry fluxes for the metallurgical industry, including the steel and foundry industry. It is a part of the Ceramics division of the Vesuvius group. For AY 2014-15, the assessee filed its return of income on 30.11.2024 disclosing a total income of Rs.27,17,03,590/- and book profit amounting to Rs.25,66,62,099/- under the provisions of section 115JB of the Income Tax Act, 1961 (the “Act”). During the relevant AY 2014-15, the assessee distributed dividend, amongst others, to its three foreign shareholders i.e. (i) Vesuvius Holdings Limited (“VHL”), Foseco Overseas Limited (“FOL”) and Foseco UK Limited (“FUL”) who all are the tax residents of UK, aggregating to Rs.7,66,30,021/-. On the dividend distributed to VHL, FOL and FUL, the assessee paid Dividend Distribution Tax (“DDT”) amounting to Rs.1,30,23,272/- under the provisions of section 115-O of the Act. The assessee filed an application on 12.05.2021 before the Ld. Assessing Officer (“AO”) requesting for refund of excess DDT paid under the relevant provisions of the Act over and above the rates prescribed under Article 11 of the India-UK Double Taxation Avoidance Agreement (“India-UK DTAA”) on the ground that the DDT is a tax on shareholders and covered under the India-UK DTAA and that the foreign shareholders viz. VHL, FOL and FUL are entitled to take the recourse to the beneficial provisions of India-UK DTAA vis-à-vis the provisions of the Act and relying on certain judicial pronouncements wherein it has been held that the DDT levied shall not exceed the rate specified in the DTAA. Therefore, the assessee claimed that it is eligible for refund of the DDT amounting to Rs.15,28,769/- (Rs.1,30,23,272/- - Rs.1,14,94,503/-) paid in excess of the rate prescribed under the India-UK DTAA. After analyzing the submission of the assessee and relevant provisions of the Act and India-UK DTAA, the Ld. AO rejected the assessee’s application for refund on account of excess DDT paid by it vide his order passed u/s 237 of the Act dated 25.11.2022 observing that the DDT is an additional income-tax on companies and it is the company which is subject to tax u/s 115-O of the Act and not the shareholder and hence, the assessee is not entitled to benefit of reduced rate of tax as per the India-UK DTAA.

5. Aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A) challenging the order passed u/s 237 of the Act by the Ld. AO whereby he rejected its application for refund of excess DDT paid. Before the Ld. CIT(A), the assessee submitted that in respect of the dividend declared by it, DDT has been paid @ 16.994% (grossed up) as per the provisions of section 115-O of the Act as against the rate of 15%/10% provided in India-UK DTAA and therefore the reduced rate of 15% as per the India-UK DTAA should be applied for the payment of DDT and the excess tax paid should be refunded to the assessee. However, the Ld. CIT(A) did not accept the above contention of the assessee and dismissed the appeal by relying on the decision of the Special Bench of the Tribunal in the case of Total Oil India Pvt. Ltd. & Oth Vs. DCIT vide dated 20.04.2023 decided in favour of the Revenue. The relevant para of the Ld. CIT(A)’s order reads as under : “2.3 I have carefully considered the facts of the case and submission filed by the appellant. The issue is regarding claim of refund of excess dividend distribution tax paid by the appellant u/s 115-0 on repatriation of dividend income to its holding company viz. non-resident shareholder companies, Vesuvius Holding Limited (VHL) holding 8.52% shares, Foseco (UK) Limited (FULL) holding 8.46% shares and Foseco Overseas Limited (FOL) holding 58% shares. Briefly, the appellant company distributed dividend of Rs.7,66,30,021 to VHL, FUL, and FOL during FY 2013-14. The appellant company deducted DDT on this as per section 115-0 of the Act amounting to Rs.1,30,23,272 (@16.994%). The appellant has claimed that instead of Tax deducted 16.994% (grossed up), the DDT should have been restricted @10% as per of Article 11 of the India-UK Double Taxation Avoidance Agreement (the DTAA' or the tax treaty) read with section 90(2) of the Act. It is seen that section 90 is under Chapter IX of the Income Tax Act which is on double taxation relief. This primarily deals with non-resident assesses and section 90(2) states the principle for granting relief of tax for non-resident assesses for avoidance of double taxation. It is not furnished how the dividends have been taxed in both India and UK for the non- resident parent entity and further in Indo-UK DTAA, the contracting states have not extended the treaty protections to profits distributed by Indian company by deeming the DDT paid by the Indian company as tax paid by shareholder and restricting the DDT rate.

81.

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 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 Total Oil (supra), the Id. 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 other criterion 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 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 82. 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 company pays DOT u/s 1160 of the A Act when a domestic company pays DDT u/s. 115O of the Act. Conclusion : 83. 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. 115-0 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. UNQUOTE" On the basis of the reasoning given above, it is concluded that where dividend is declared, distributed or paid by a domestic company to a non- resident shareholder, which attracts DDT referred to in Section 115-0 of the Act, such DDT payable by the domestic company shall be at the rate mentioned in Section 115-0 of the Act and not at the rate of tax applicable to the non-resident shareholder as specified in the relevant DTAA with reference to such dividend income. Wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying DDT, only then, the domestic company can claim benefit of the DTAA, if any.”

7.

Both the Ld. Representatives of the parties fairly conceded that the impugned issue stands decided against the assessee by the decision of the Special Bench of the Tribunal in the case of Total Oil India Pvt. Ltd. & Oth (supra), which has been followed by the Ld. CIT(A). The Ld. AR, however filed the written submission in support of its claim and made a request to consider the same. The written submission filed by the Ld. AR reads as under : Gr. Particulars Key submissions No. 1 to 5 Refund of excess DDT 1. In terms of Memorandum explaining the paid u/s 115-0 amounting provisions of Finance Bill, 1997, 2002, 2003, to Rs.15,28,769/- 2016 & 2020, in relation to dividend distribution it is apparent that dividend is Brief Facts During the taxable in the hands of the recipient. For previous year relevant to the administrative purpose, provision of DDT assessment year under was introduced in the statute books to consideration, the appellant simplify the collection process by making the had distributed dividend, company liable to pay tax on such dividend among other shareholders, distributed. The relevant portion of the to its foreign shareholders, Memorandum are enclosed and collectively Vesuvius Holdings Limited marked as Annexure – 1. In essence, tax ('VHL'), Foseco 2. Overseas on shareholders was collected through Limited ('FOL) & Foseco UK companies. Limited (FUL') aggregating to Rs.7,66,30,021/-. VHL, FOL 2. There are several decisions wherein it has & FUL are tax residents of been held that DDT being a tax on United Kingdom ('UK"). On shareholder and not on the company, the tax the dividend distributed to rates specified in DTAA in respect of VHL, FOL & FUL, the dividend must prevail over DDT- appellant had paid Dividend Distribution Tax ('DDT') M/s. Indian Oil Petronas Pvt. Ltd. vs. amounting to DCIT 120211 127 taxmann.com 389 Rs.1,30,23,272/- @ (Kolkata - Trib.) Giesecke & Devrient 16.994%). India Pvt Ltd. vs ACIT [20201 120 taxmann.com 338 (Delhi -Trib.) In terms of Article 11 of India-UK Double Taxation 3. However, the Ld. CIT(A) had dismissed Avoidance Agreement appeal by placing reliance on judgment of the (DTAA'), dividend shall be Special Bench (SB) of Hon'ble Mumbai ITAT taxable @ 15% in the hands in case of DCIT Vs Total Oil India Pvt. of beneficial owner of the Ltd.

dated 20- dividend i.e. shareholders. 04-2023. The Ld. CIT(A) stated that the Consequently, dividend of Protocol to India- Hungary DTAA have Rs.7,66,30,021/- paid to extended the Treaty protection to DDT VHL, FOL & FUL of UK shall wherein it has been specifically provided be taxable at the beneficial that when the Co. paying dividend is a rate of 15% as prescribed resident of India, the tax on distributed under DTAA, i.e., Rs. profits shall be deemed to be taxed in the 1,14,94,503/-. Hence, the hands of shareholders and it shall not appellant is eligible for exceed 10% of gross amount of dividend. refund of the DDT paid in Referring to the same, it was held that excess of the rates wherever the Contracting States to a tax prescribed under applicable treaty intend to extend the treaty protection DTAA amounting to to the domestic company paying DDT, only Rs.15,28,769/- then, the domestic company can claim (Rs.1,30,23,272/- less benefit of the DTAA, if any. Rs.1,14,94,503/-). However, the aforesaid judgment have not On the basis of the above considered the following aspects: understanding, the appellant has filed a petition Though SB has held that Sec. 115-0 is a u/s 237 of the Act dated 13- complete code independent from the concept 04-2021 (filed on 12-05- "total income" as envisaged under the 2021) for claiming refund of statute, however, it is worthwhile to mention excess DOT paid over and that in terms of entry 82 of List I of Schedule above the rates specified in VII of the Constitution of India and as per the India-UK DTAA for dividend conjoint reading of the Preamble, Sec. 4 & 5 distributed to non-resident of the Act, a tax under the Act can only be shareholders levied on the income of the person assessable under the statute and if such Post filing of the above distributed profits are not part of "total petition, letter u/s 154 of the income", then such levy is not in accordance Act dated 19 07-2021 was with law; issued by Ld. ACIT wherein it has been duly stated that In terms of the memorandum to the Finance the option to modify the DOT Bill, 2020 the legislature in its wisdom has payment is not available in restricted the operation of Sec. 115-0 of the the system with the Ld. Act till March 31, 2020, whilst categorically ACIT and as soon as the noting that dividend was the income of the functionality is updated in shareholder and Sec. 115-0 of the Act was the system, the same will be introduced for casement of tax collection. rectified. Against the said This, in itself, fortifies the view that tax letter, the appellant filed levied u/s 115-0 was nothing but a tax on reply dated 17- 08-2021 dividend income of the shareholder. Further, wherein the appellant the law as it stands today also provides that humbly prayed that dividend income of the non-resident technical difficulty shall hold shareholder suffers withholding tax u's 195 no ground to restrain the of the Act subject to benefits available under refund entitled to the the DTAA; appellant and requested the Ld. ACTT to pass order u/s -SB completely overlooked the cardinal 237 of the Act. principle of law that unless a DTAA is amended jointly by the sovereigns, the However, subsequently, the benefits granted thereunder cannot be La ACIT rejected the altered unilaterally by way of an amendment application filed u/s 237 for in the domestic law. In sun and substance, refund on account of excess the Special Bench ought to have considered DDT and passed the order that a unilateral amendment being a shift in u/s 237 of the Act dated 25- the incidence of tax on dividend income of 11- 2022 stating that DDT is the shareholder in the hands of the company an "Additional Income-tax u/s 115-0 of the Act cannot restrict the companies and it is the benefits as provided under the DTAA: company which is subject to tax u/s 115-0 and not the -SB completely miscues on expounding the shareholder and, hence, the real nature of the income taxed w/s 115-0 of appellant is not entitled to the Act. A tax on distributed profits of the benefit of reduced rate as company u/s 115-0 is an additional income per the DTAA. tax levied on any amount declared, distributed or paid by way of dividends by Against the aforesaid order the domestic company to its shareholders. u/s 237, the appellant filed By no stretch of imagination, any sum being an appeal before Ld. CIT(A) distributable profits declared by way of and Ld. CIT(A) upheld the dividends can be characterized as "income" order of Ld. AO vide order of the domestic company itself and not passed u/s 250 dated 28- dividend income in the hands of the 03- 2024 by relying on the shareholders; judgment of Hon'ble Special Bench in case of DCIT Vs Further, SB relied on the judgement of Total Oil India Pvt. Ltd. Hon'ble Jurisdictional High Court in the Case [ITA No 6997/MUM/2019 of Small Industries Development Bank of dated 20-04-2023. India (SIDBI) vs. CBDT 1133 taxmann.com 1581 dated 02-12-2021 wherein the Hon'ble HC held the charge u/s 115-0(1) of the Act is not on income by way of dividend in the shareholder's hands. Therefore, the additional income-tax payable on profits of a domestic company u/s 115-0 of the said Act is not a tax on dividend. Further, the amount distributed or paid by way of dividend falls in the category of income, profit or gains derived. Accordingly, for an entity which falls u/s 50 of the SIDBI Act and its entire income is exempt from tax under Income Tax Act shall not be required to pay DDT on dividend distributed to shareholders. However, the said view is against the judgement of Hon'ble Apex court in the case of UOI vs. Tata Tea Co. Ltd. |2017 85 taxmann.com 346 (SC) dated 20-09-2017 (Division Bench Judgement) wherein the Apex Court while dealing with the issue with respect to constitutional validity of DDT on composite income of tea company held that the provisions of Sec. 115-0 of the Act shall be applicable on dividend distributed from agricultural income also. The Hon'ble Apex Court held that when dividend is declared to be distributed and paid to company's shareholder, it is not impressed with the character of source of its income. In the light of above, the appellant humbly submits that reliance of SB on judgement of Bombay HC is misplaced, The Hon'ble SB held that, the Godrej & Boyce Mfg. Co., Ltd. vs. DCIT 120101 194 Taxman 203 (Bombay HC) decision lays down the principle that DDT is not a tax paid on behalf of the shareholder. The said principle has also been upheld by Godrej & Boyce Manufacturing Company Ltd. vs. DCIT (2017) 81 taxmann.com 111 (SC). However, the said principle does not dilute the principle that it is tax on 'dividend income, with merely the incidence of tax being on the resident company declaring such dividend. Further, the Godrej & Boyce HC decision and G&B SC decision have not laid down any principle contrary to those laid down by the Hon'ble SC in the case of Union of India Vs Tata Tea Co Lad (supra) and both the decisions operate in different fields since those cases pertained to the issue concerning disallowance of expenditure u/s 14A of the Act. Further, the Tata Tea decision of Hon'ble SC specifically discusses regarding the characterization and validity of DDT u/s 115-0 of the Act & accordingly, the said ruling is binding in the present context; SB stated that 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 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. However, the Hon'ble ITAT did not appreciate the fact that there is no such requirement and dividend has always been considered as tax in the hands of beneficial owner.