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TMI Blog2020 (10) TMI 750X X X X Extracts X X X X X X X X Extracts X X X X ..... ghts Techno Park Pvt Ltd for office premises in Chennai but f or some reason, the assessee could not take possession of the office premises and the lessor did not repay the said security deposits - HELD THAT:- We find that the assessee has furnished additional evidences before the DRP. We are of the considered view that such additional evidences should have been examined thoroughly. We, accordingly, restore this issue to the file of the Assessing Officer. The assessee is directed to furnish all the additional evidences in support of the claim of write off and the Assessing Officer is directed to examine the same and decide the issue afresh after giving reasonable opportunity of being heard to the assessee. Income accrued in India - dividend income - benefit of applicable Double Taxation Avoidance Agreement between India and Germany ( DTAA ) qua the rate of tax on payment of dividend to the shareholder (Giesecke Devrient GmbH) - interplay between Section 115-0 of the Act on one hand, and Article 10 of DTAA governing taxation of dividend on the other - whether the Dividend Distribution Tax [DDT] is tax on the company or the shareholder since the admissible surplus stands reduced to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al memo (iii) Disallowance of expenditure u/s 40a(ia) of the Act which covers ground Nos 29 to 38 of the appeal memo. 3. Representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules and have also perused the judicial decisions relied upon by both the sides. 4. G & D, the appellant, was incorporated in 2001 as a 100% subsidiary of G &D GmbH, with its corporate office located in Gurgaon. The appellant primarily deals in trading of Currency Verification and Processing Systems. G&D India imports these machines from its AEs for resale in India and as part of the related services, G&D also buys and resells annual maintenance contracts to its customers in India. The appellant is also engaged in distribution and personalization of smart cards in India, which are imported from its AEs. These smart cards are for Payment Card industry and in the nature of chip cards, magnetic cards etc. The primary customer of the smart card is the banking sector. The appellant also renders software developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d operating cost as ₹ 15,98,34,215/-, which matches with the total of trading and service segments. 8. Objections were raised before the DRP but the DRP did not give any relief with respect to the selection of comparables. However, the DRP gave partial relief with the direction that benchmarking should be undertaken in terms of earlier years. 9. In the meanwhile, the margin of comparables was rectified from 8.75% to 6.79% and thereafter, from 6.79% to 2.52% and, accordingly, adjustment was reduced from ₹ 3,72,23,538/- to ₹ 2,88,52,420/-. While giving effect to the directions of the DRP, though the TPO made reference to the orders of A.Y 2009-10 and 2010-11, and noted that adjustment is to be restricted to the value of international transaction with AES. However, an adhoc adjustment of ₹ 88,86,545/- was sustained. It appears that the TPO once again erred in taking gross numbers of trading and service segments. 10. The same can be understood from the following chart: Sl. No Particulars Amount Reference 1. Operating Revenue [A] 13,43,67,865 Total of sales and service income in trading and service segment 2. Arm's length margin (%) [B] 2.52% 3. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es out of 10 comparables selected by the assessee and introduced 8 new comparables and came to a final set of 14 comparables. The working capital adjusted OP/OC margin of the comparables was 20.71%. Accordingly, under DCI Division, adjustment of ₹ 3,28,86,862/- was proposed and under CCI Division, adjustment of ₹ 1,88,81,141/- was proposed. 16. Objections were raised before the DRP demonstrating the reasons for exclusion of Infosys Ltd and Larsen and Toubro Infotech Ltd as comparables. However, the DRP upheld the order of the TPO vide directions dated 18.09.2017. 17. Before us, the same reasons were given for exclusion of Infosys Limited and Larsen and Toubro Infotech Ltd which were given before the lower authorities. INFOSYS LTD 18. The risk profile of the appellant shows that it operates at minimal risk as 100% services are provided to AES whereas Infosys Ltd operates as full-fledged risk-taking entrepreneur. Further, the appellant provides software development testing support and technical support services whereas Infosys Ltd provides end to end solutions, technical consultancy, design development, re-engineering maintenance etc. along with software products. Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 17,76,704/-. 23. When objections were raised before the DRP, the DRP directed for deletion of ₹ 4,22,386/- pertaining to training expenses and ₹ 3,21,873/- pertaining to recovery of expenses. However, balance disallowance of ₹ 10,32,445/- was sustained. 24. Before us, the learned counsel for the assessee pointed out that the same pertains to pension of the Managing Director, purchase of office merchandise like calendar etc., recovery of damages to apartments etc. It is the say of the learned counsel that these are nothing but pure reimbursements and the facts of the decision of the Hon'ble Delhi High Court in the case of Centrica India Offshore Pvt Ltd 364 ITR 336 are clearly distinguishable. The learned counsel pointed out that on identical set of facts, the coordinate bench in A.Y 2011-12 has allowed the expenditure. 25. Per contra, the ld. DR strongly supported the findings of the lower authorities. 26. We find that some additional evidences were furnished before the DRP. Though the DRP has noted the additional evidences, yet followed the decision of the Hon'ble Jurisdictional High Court in the case of Centrica India Offshore Pvt Ltd [supra[. We fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly, restore this issue to the file of the Assessing Officer. The assessee is directed to furnish all the additional evidences in support of the claim of write off and the Assessing Officer is directed to examine the same and decide the issue afresh after giving reasonable opportunity of being heard to the assessee. Ground Nos 39 to 42 are, accordingly, treated as allowed for statistical purposes. ADDITIONAL GROUNDS 34. Vide application dated 11.09.2019, the assessee has raised the following additional grounds of appeal: "Ground 3.1: That the Assessing Officer ("AO") erred in not extending the benefit of applicable Double Taxation Avoidance Agreement between India and Germany ("DTAA ") qua the rate of tax on payment of dividend to the shareholder (Giesecke & Devrient GmbH) Ground 3.2: That the AO failed to appreciate that the dividend income was that of the non-resident recipient who was governed by the provisions of relevant DTAA. Ground 3.3: That the AO also failed to appreciate that in terms of section 90(2) read with section 10(34) of the Act the income being taxable in the hands of non-resident could not be subjected a rate in excess of the rate prescribed under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 41. The aforementioned additional grounds of appeal raise a purely legal issue and the issue needs to be adjudicated as to whether the Dividend Distribution Tax [DDT] levied in terms of section 115-0 of the Act should be restricted to the rate of tax on dividends as provided in the applicable DTAA governing non-resident shareholders. 42. In other words, what needs to be examined is the interplay between Section 115-0 of the Act on one hand, and Article 10 of DTAA governing taxation of dividend on the other. 43. Section 115-0 contained in chapter XVII-D of the Act reads as under: "115-O. (1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of fifteen per cent. (1A) The amount referred to in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt of section 14A r.w.s 115-0 of the Act. The relevant findings of the Hon'ble Bombay High Court read as under: "35. Section 115-O has been enacted with a view to exempt dividend income. Prior to the insertion of Section 115-O, domestic companies were liable to pay tax on the total income (including profits distributed as dividends) and shareholders were liable to pay tax on dividend income received. Domestic companies distributing profits as dividends were liable to deduct tax at source and shareholders receiving the dividend were entitled to take credit of such tax deducted at source. As this method was found to be cumbersome, Parliament chose to exempt dividend income in the hands of the shareholder and chose to levy additional income-tax on the amount of profits declared, distributed or paid as dividend by the domestic companies. Thus, by inserting Section 115-O, additional income-tax is levied on the amount of profits declared, distributed or paid as dividend and by inserting Section 10(33) it is made clear that the dividends referred to in Section 115-O would be exempt from tax." 50. Thus, it can be stated that the Hon'ble Bombay High Court has unequivocally held that DDT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibuting the dividends] rather than compel the companies to compute income tax deductible from the dividend income in the hands of the shareholders. 55. Memorandum to Finance Bill 1997 and 2003 clearly establish that levy of tax on the company was driven by administrative considerations rather than legal necessity and further emphasis on the fact that levy is for all intents and purposes, a charge on dividends. Even if we go by economical considerations, the burden of DDT falls on the shareholders rather than on the company, as the amount of distributed profits available for shareholders stands reduced to the extent of DDT levied. 56. As mentioned elsewhere, section 4 provides for charge of Income tax and Section 5 provides that total income of resident includes all income which is : (a) received or is deemed to be received in India (b) accrues or arises or is deemed to accrue or arise in India (c) accrues or arises outside India during the previous year. 57. In the case of non-resident, total income includes all income from whatever source derived, (a) received or is deemed to be received or (b) accrues or arises or is deemed to accrue or arise in India during such yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections "subject to the provisions" of the Act". The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income- tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC. 63. We have already discussed the Memorandum to the Finance Bill 1997 and 2003. It would be very pertinent to discuss the Memorandum to the Finance Bill, 2020 by which section 115-0 is removed. In this Finance Bill, it has been specifically mentioned for removal of DDT and moving to classical system of taxing dividend in the hands of shareholders. It has been mentioned in this bill that incidence of tax is on the payer company and not on the recipient where it should normally be as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by both the Contracting States to each other of the procedure required under their laws in accordance with Article 28 of the said Agreement; Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act 1961 (43 of 1961), and section 44A of the Wealth-tax Act, 1957 (27 of 1957), the Central Government hereby directs/that all the provisions of the said Agreement shall be given effect to in the Union of India." 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 the beneficial owner of the dividends, the tax so charged shall not exceed 10 per cent of the gross amount of the dividends. This paragraph shall not affect 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 - (a) dividends on shares including income from shares, "j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a vis the international treaty and the Hon'ble High Court held as under: "41. This Court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this Court, indefensible. 42. It takes little imagination to comprehend the extent and length of negotiations that take place when two nations decide to regulate the reach and application of their legitimate taxing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore clearly states that an amendment to a treaty must be brought about by agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. 44. We do not however rest our decision on the principles of the VCLT, but root it in the inability of the Parliament to effect amendments to international instruments and directly and logically, the illegality of any Executive action which seeks to apply domestic law amendments to the terms of the treaty, thereby indirectly, but effectively amending the treaty unilaterally. As held in Azadi Bachao Andolan39these treaties are creations of a different process subject to negotiations by sovereign nations. The Madras High Court, in Commissioner of Income Tax v VR. S.RM. Firms Ors40 held that "tax treaties are...... considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries". XXXX XXXX 52. Thus, an interpretive exercise by the Parliament cannot be taken so far as to control the meaning of a word expressly defined in a treaty. Parliament, supreme as it may be, is not equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough an amendment to the original law, make the amendment effective. Similarly, amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. 53. Finally, States are expected to fulfill their obligations under a treaty in good faith. This includes the obligation to not defeat the purpose and object of the treaty. These obligations are rooted in customary international law, codified by the VCLT, especially Article 26 (binding nature of treaties and the obligation to perform them in good faith); Article 27 (Internal law and observance of treaties, i.e provisions of internal or municipal law of a nation cannot be used to justify omission to perform a treaty); General rule of interpretation under Article 31(1) (i.e. that it shall be interpreted in good faith, in accordance with ordinary meaning to be given to the terms of a treaty) and Article 31 (4) (A special meaning shall be given to a term if it is established that the parties so intended). The expression "process" and treaty interpretation in this case." 71. In light of the aforesaid decision, we are of the considered view that tax rates specified in DTAA in respect of dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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