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Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Before: Shri Mahavir Singh, & Shri M. Balaganesh
This appeal of the revenue arises out of the order of the learned CIT(A)-VIII, Kolkata in appeal no. 114/CIT(A)-VIII/Kol/10-11 dated 27-02-2012 against the order of assessment framed for the assessment year 2008-09 u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’).
2. The only issue to be decided in this appeal is as to whether the dividend received from brazilian company could be claimed as not taxable in India in the facts and circumstances of the case.
The brief facts of this issue is that the assessee is a private limited company deriving income from business. During the financial year 2007-08 relevant to Asst Year 2008-09, the assessee company was in receipt of dividend from M/s Millinium Investimentos Ltd of Rua Jose de Andrade, 336, Pargue Alexandre , City of Cotia State of Sao Paula, Brazil amounting to Brazilian Real 367.07 equivalent to Rs. 75,79,791/- which was credited to Axis Bank, 7, Shakespeare Sarani Branch, Kolkata- 700071 on 20.8.2007. The assessee produced a certificate of foreign inward remittance certificate issued by UTI Bank Ltd before the Learned AO evidencing the nature of remittance. The Learned AO observed that only the dividend received from domestic company is exempt u/s 10(34) of the Act. In the instant case, the assesseee company had received dividend from Millinium Investimentos Ltd , which is a foreign company, and hence the same would not fall in the ambit of dividend distribution tax contemplated in section 115O of the Act and accordingly concluded that the said dividend would not be exempt u/s 10(34) of the Act. The assessee tried to explain the provisions of Double Taxation Avoidance Agreement (DTAA) between India and Brazil and the relevant Article 10 on Dividends thereon with regard to the taxability of dividends in the respective country. “ARTICLE 10 : Dividends - 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is a company which is the beneficial owner of the dividends the tax so charged shall not exceed 15 per cent of the gross amount of the dividends.
This paragraph shall not effect the taxation of the company in respect of the profits out of which the dividends are paid.
3. The term "dividends" as used in this Article means income from shares, "jouissance" shares or "jouissance" rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.
4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, and the holding by virtue of which the dividends are paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.
5. Where a resident of India has a permanent establishment in Brazil, this permanent establishment may be subject to a tax withheld at source in accordance with Brazilian law. However, such a tax cannot exceed 15 per cent of the gross amount of the profits of that permanent establishment determined after the payment of the corporate tax related to such profits.
Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.”
We find from Article 10 of DTAA between India and Brazil, dividend received by assessee company is taxable in Brazil at the rate of 15% of gross dividend. Where a resident of India has a permanent establishment in Brazil, this permanent establishment may be subject to tax withheld at source in accordance with Brazilian law. However, such tax cannot exceed 15% of gross amount of profits of that permanent establishment determined after the payment of corporate tax related to such profits.
It would be relevant to reproduce certain facts of the case as under:-
Besco Engineering & Services (P) Ltd (assessee herein), an Indian Company, had invested in 40% Equity Capital of a Brazilian Company named Millenium Investmentos Ltda, which is a Joint Venture Investment Company with remaining 60% Equity held by Citra do Brazil (a Brazilian Company), with the main object of making equity investment in industrial venture for making railway wagon under the Banner of Santa Fe Vagoes Ltda, a Brazilian Company. Millinium Investmentos Ltd had invested 60% Equity of Santa Fe Vagoes , Manufacturing Railway Wagon in Brazil, wherein, balance equity is held by another Brazilian Company. Santa Fe Vagoes Ltda declared dividend and paid the dividend to Millinium Investmentos Ltd and similarly Millinium Investmentos Ltda has paid dividend to its equity holders and one of the equity holders is Besco Engineering & Services (P) Ltd (assessee herein). The assessee submitted certificate issued by Santa Fe Vagoes Ltda in the name of Millinium and the Annual Performance Report (APR) submitted by assessee to RBI by declaring dividend received along with the bank documents and also the Brazilian Audited Balance Sheet of Millinium along with the English translated version which confirm payment of dividend to the assessee after all the statutory compliance of that country. The Learned AR stated that M/s Millinium Investmentos Ltd. had already paid tax at the rate of 34% as per Brazilian Tax Rate and the post tax profits were only distributed as dividend to Besco Engineering & Services Pvt. Ltd (Assessee herein). The evidences in this regard were also produced before the lower authorities. The main grievance of the assessee seems to be that the Learned AO did not consider the provisions of DTAA while considering the taxability of dividend in India. According to Learned AR, Brazil has concluded double taxation treaty with India as Dividend paid by Brazilian companies on profit generated after 1.1.1996 are not subject to withholding tax. The law requires an annual payment of dividends with reference to the minimum portion established in the article of incorporation considering the minimum limit of 25% of the net profit of the year. According to him, in the instant case, the company has fulfilled this criteria also as below:-
Millinium Investmentors Ltda has net profit before tax of 2421,277.28 C Dividend distributed by the company during the year 974376.01 D Hence % of dividend distributed from profit = 974376.01 / 2421277.28 * 100 40.24% 4 M/s. Besco Engineering & Services Pvt. Ltd He argued that minimum limit set is 25% of the net profit for the year and hence Millinium Investmentos Ltda is satisfying the criteria fully hence dividend should not be taxed in India as per Tax treaty.
6. We find that the assessee had furnished fresh evidences regarding the dividend confirmation from Millinium Investmentors Ltda in support of its contention and accordingly the same was forwarded by the Learned CIT(A) to the Learned AO on remand proceedings for his examination and verification. The Learned AO had sent the remand report on 15.2.2012 for which the assessee had filed a rejoinder before the Learned CIT(A). We find that the assessee had produced sufficient material evidence before the lower authorities to show that the dividend had been declared by the Brazilian company from its current profits and that tax had been paid on the same as per Brazilian tax laws. The Learned CIT(A) observed that there are two modes of granting relief under DTAA. One is (a) exemption method and other is (b) tax credit method. Under exemption method, a particular income is taxed in one of the two countries. Under tax credit method, an income is taxable in both the countries in accordance with their respective tax laws read with the DTAA. However, the country of residence of the tax payer allows him credit for the tax charged thereon in the country of source against the tax charged on such income in the country of residence. In India’s DTAA, double taxation relief is provided by a combination of two modes. The effect of DTAA is as follows:-
a. If no tax liability is imposed under the Act, the question of resorting to the agreement would not arise, no provision of the agreement can possibly fasten a tax liability where the liability is not imposed by the Act; b. If a tax liability is imposed by the Act, an agreement may be resorted to for negotiating or reducing it; c. In case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of the Act and can be enforced by the appellate authorities and the court.
It would also be relevant to reproduce Article 23 of DTAA between India and Brazil at this juncture – “ARTICLE 23: Methods for the elimination of double taxation - 1. Subject to the provisions of paragraphs 3 and 4, where a resident of a Contracting State derives income which, in accordance with the provisions of this Convention may be taxed in the other Contracting State, the first-mentioned State shall allow as a deduction from the tax on the income of that resident an amount equal to the tax paid in that other State.
Such deduction shall not, however, exceed that part of the tax, as computed before the deduction is given, which is attributable to the income which may taxed in that other State.
For the deduction mentioned in paragraph 1, the tax paid in that other State shall always be deemed to have been paid at the rate of 25 per cent of the gross amount of interest referred to in paragraph 2 of Article 11 and of royalties referred to in paragraph 2(b) of Article 12, provided however, that the tax so deemed to have been paid shall not exceed the tax leviable on that income in the first-mentioned State.
3. Where a company which is a resident of a Contracting State derives dividends which, in accordance with the provisions of paragraph 2 of Article] 10 may be taxed in the other Contracting State, the first- mentioned State shall exempt such dividends from tax.
4. Where a resident of India derives profits which, in accordance with the provisions of paragraph 5 of Article 10 may be taxed in Brazil, India shall exempt such profits from tax.”
We also find that the withholding tax rates for dividends is 0% as per Brazilian tax laws and also as per DTAA if dividend is paid to non-residents.
From the perusal of DTAA between India and Brazil vide Article 10 paragraphs 1 and 2 as well as Article 23 Paragraph 3 , since dividend is received from Brazil, wherein the same could have been taxed upto a rate not exceeding 15% as per DTAA but have been by Brazilian law declared to be not subject to income tax and the assessee is a resident company of India within the meaning of Article 23 paragraph 3 of DTAA , such dividends shall be exempt from Indian Income Tax. Hence we find no infirmity in the order of the Learned CIT(A) in this regard. Accordingly the ground no.1 raised by the revenue is dismissed.
In the result, the appeal of the revenue is dismissed.
THIS ORDER IS PRONOUNCED IN OPEN COURT ON 4-5 - 2016