2021 (3) TMI 204 - AAR - Income Tax

Advance ruling - tax liability u/s 115-O - application of beneficial provision of India-Singapore DTAA in respect of DDT on dividend paid/payable to non-resident shareholder - transaction was designed prima-facie for avoidance of tax - whether the Dividend distribution tax ( DDT ) paid/payable by Comstar Automotive Technologies Private Limited (Comstar or the Applicant or the Company) under the provisions of Section 115-O on dividend paid/payable to Singapore VII Topco III Pte. Ltd. ( Singapore Topco ) and Comstar Mauritius Limited ( Comstar Mauritius ) is in substance and effect a tax on dividends? - Whether Applicant being a resident of India is entitled to apply the lower tax rate of 10% provided under Article 10 of India-Singapore DTAA and 5% under Article 10 of India-Mauritius DTAA in respect of DDT payable on dividend paid to Singapore Topco and Comstar Mauritius respectively under Section 115- O of the Act? - HELD THAT - We do not find any design to avoid tax by any illegal or improper means. The objection of the Department is found to be rather on merits of the questions raised in the present application. An Identical issue was considered by us in the case of Signify Innovations India Private Limited 2021 (2) TMI 1062 - AUTHORITY FOR ADVANCE RULINGS NEW DELHI wherein it has been held that if the applicant has raised question to avail treaty benefit in respect of its tax liability u/s 115-O of the Act. it cannot be considered as a transaction designed for avoidance of tax. Following that ruling the application is admitted u/s 245 R (2) of the Act The date of next hearing will be intimated in due course.

Summary

Issues:
1. Interpretation of Dividend distribution tax (‘DDT’) under Section 115-O of the Income-Tax Act, 1961.
2. Applicability of lower tax rates under India-Singapore DTAA and India-Mauritius DTAA.
3. Determination of beneficial ownership under Double Taxation Avoidance Agreement.
4. Entitlement to refund of taxes under different tax rates for foreign dividends.
5. Entitlement to interest on refund under Section 244A of the Act.

Issue 1 - Interpretation of DDT:
The applicant sought clarification on whether DDT paid by the company on dividends to Singapore and Mauritius entities is essentially a tax on dividends. The Revenue objected, alleging the transaction aimed at tax avoidance. However, the Authority found no improper design to avoid tax, emphasizing that DDT is a tax incidence on the company, not the shareholder. Referring to a previous ruling, the Authority admitted the application under Section 245 R (2) of the Act for further consideration.

Issue 2 - Applicability of Lower Tax Rates:
The applicant inquired about applying lower tax rates of 10% and 5% under the India-Singapore DTAA and India-Mauritius DTAA, respectively, on DDT paid to foreign shareholders. The Revenue contended that the provisions of DTAA cannot be availed due to alleged tax avoidance. However, the Authority found no illegal means in the transaction and admitted the application for ruling, citing a previous judgment for reference.

Issue 3 - Determination of Beneficial Ownership:
The question arose regarding whether the Singapore and Mauritius entities are beneficial owners of the dividend income under the respective DTAA agreements. The Authority noted that the objection by the Revenue was based on the merits of the case rather than improper tax avoidance. Referring to a similar case, the Authority admitted the application for further consideration without finding any tax avoidance motive.

Issue 4 - Entitlement to Refund of Taxes:
The applicant sought clarification on the entitlement to a refund of taxes paid under different rates for foreign dividends. The Authority acknowledged the Revenue's objection regarding tax avoidance but found no evidence of such intent. Referring to a past ruling, the Authority admitted the application for detailed consideration under Section 245 R (2) of the Act.

Issue 5 - Entitlement to Interest on Refund:
The final query pertained to whether the applicant would be entitled to interest on any refund of excess DDT paid. The Authority did not provide a specific ruling on this issue in the summary provided, indicating that further consideration and a subsequent hearing would be scheduled to address this aspect.