2019 (11) TMI 651 - AT - Income Tax

Income accrued in India - dividend received from Brazilian subsidiary - HELD THAT - We find from the combined reading of Article 23(3) and Article 10(2) supra that if the dividend is paid by Brazilian company to Indian Company, the same may be taxed in Brazil as per their local laws which shall not exceed 15% of gross dividend and the said dividend shall be treated as exempt in India. We find that assessee had also enclosed certificate dated 04/04/2017 from Dorfketal BrasilItda stating clearly that the dividends paid in the FY 2005-06 were related to the year 2004 and that it had paid taxes from its net profits after taxes at more than 15% and that there is no separate taxes on dividend in Brazil. The assessee had also submitted the financials of Dorfketal BrasilItda for the A.Y.2005-06 together with the respective computation of total income to evidence the fact that the rate of taxes applied is more than 15% in both the years in which the actual distribution of dividend had taken place. The assessee had also furnished the financials of F.Y.2005-06 of Dorfketal BrasilItda alongwith schedule of retained earnings evidencing the fact that only net profit after taxes is transferred to retained earnings and that dividends are distributed from that, which means that dividends are declared and distributed after paying due taxes in Brazil. Accordingly, we hold that the dividend received by the assessee is to be treated as exempt in India The assessee had also submitted before the ld. CIT(A) that similar claim of exemption in respect of dividend received from Brazilian Subsidiary had been allowed by the ld. AO for A.Y.2007-08, 2008-09 and 2009-10 and in support of this copy of the orders were also furnished thereon. In view of the aforesaid observations, applying principle of consistency and respectfully following the aforesaid decision of Kolkata Tribunal, we hold that dividend received from Brazilian subsidiary is exempt from tax . Accordingly, the grounds raised by the assessee are allowed.

Summary

Issues Involved:

1. Legality of fresh claims in returns filed under Section 153A of the Income Tax Act.
2. Adherence to judicial discipline by the Commissioner of Income Tax (Appeals) [CIT(A)].
3. Adjudication on the merits of the claim for exemption of dividend income under the India-Brazil Double Taxation Avoidance Agreement (DTAA).

Issue-wise Detailed Analysis:

1. Legality of Fresh Claims in Returns Filed under Section 153A:

The primary contention was whether fresh claims could be made in returns filed under Section 153A of the Income Tax Act. The assessee had filed a return of income under Section 153A, which included additional claims amounting to ?1,19,03,847/-, differing from the original return. These claims were not allowed by the Assessing Officer (AO), and the CIT(A) upheld this disallowance, relying on the Supreme Court's decision in Sun Engineering Works Pvt. Ltd. (1992) 198 ITR 297, which stated that fresh claims cannot be made in returns filed under Section 153A. However, the Tribunal, in its previous order dated 10.02.2017, distinguished between reassessment under Section 147 and proceedings under Section 153A, concluding that legally admissible claims could be entertained while framing the assessment under Section 153A. This position was supported by the Nagpur Tribunal's decision in M/s Narendra Vegetable Products P Ltd (ITA No.118 to 124/Nag/2013).

2. Adherence to Judicial Discipline by CIT(A):

The Tribunal had previously remanded the case to the CIT(A) with specific directions to adjudicate the claim of exemption for dividend received from the Brazilian subsidiary on merits. However, the CIT(A) failed to comply with these directions and instead addressed the legal aspects of Section 153A assessments, concluding that no alteration to the total income could be made in the absence of incriminating material found during the search. The Tribunal noted that the CIT(A) did not act in accordance with its binding directions and emphasized that the CIT(A) cannot travel beyond the Tribunal's directions. Since the revenue did not appeal against the Tribunal's original order, the CIT(A) was bound by it.

3. Adjudication on the Merits of the Claim for Exemption of Dividend Income:

The Tribunal proceeded to decide the taxability of the dividend received from the Brazilian company on merits, given the prolonged duration of the case and the CIT(A)'s failure to comply with its directions. The assessee had received dividends from its Brazilian subsidiary, which were claimed as exempt under the India-Brazil DTAA. The Tribunal examined the relevant articles of the DTAA, particularly Article 10 (Dividends) and Article 23 (Methods for elimination of double taxation). It was found that dividends paid by a Brazilian company to an Indian company could be taxed in Brazil but should not exceed 15% of the gross amount of the dividends, and such dividends should be exempt from tax in India. The assessee provided evidence, including certificates and financial statements, to demonstrate that the dividends were distributed after paying due taxes in Brazil. The Tribunal also referred to a similar decision by the Kolkata Tribunal in the case of ITO vs. Besco Engineering and Services Pvt. Ltd. (ITA No.727/Kol/2012), which supported the assessee's claim for exemption.

Conclusion:

The Tribunal allowed the appeal, holding that the dividend received from the Brazilian subsidiary is exempt from tax in India under the DTAA. The grounds raised by the assessee were allowed, and the order was pronounced in the open court on 06/11/2019.