Giesecke & Devrient [India] Pvt Ltd. Vs ACIT (ITAT Delhi)
To recapitulate, the DDT is levy on the dividend distributed by the payer company, being an additional tax is covered by the definition of ‘Tax’ as defined u/s 2(43) of the Act which is covered by the charging section 4 of the Act and charging section itself is subject to the provisions of the Act which would include section 90 of the Act.
- In our humble opinion, the liability to DDT under the Act which falls on the company may not be relevant when considering applicability of rates of dividend tax set out in the tax treaties. The generally accepted principles relating to interpretation of treaties in the light of object of eliminating double taxation, in our view does not bar the application of tax treaties to DDT.
The date of Notification No. G. S. R. 836(E) is very relevant, which is, 29.11.1996 whereas, as mentioned elsewhere, section 115-O was inserted in the Act by Finance Bill, 1997 which means that the DTAA between India and Germany is pre dated to the amendment. Clause (2) of the aforesaid Article 10 clearly mentions that the dividends may also be taxed in the contracting state on which the company paying the dividend is a resident. However, a rider is also put that if the resident is beneficial owner of the dividend, the tax so charged shall not exceed 10% of the gross amount of the dividend.
The Hon’ble Jurisdictional High Court at Delhi in the case of New Skies Satellites 382 ITR 114 had an occasion to consider the amendment to the Act vis a vis the international treaty and the Hon’ble High Court held as under:
“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 equipped, with the power to amend a treaty. It is certainly true that law laid down by the Parliament in our domestic context, even if it were in violation of treaty principles, is to be given effect to; but where the State unilaterally seeks to amend a treaty through its legislature, the situation becomes one quite different from when it breaches the treaty. In the latter case, while internationally condemnable, the State’s power to breach very much exists; Courts in India have no jurisdiction in the matter, because in the absence of enactment through appropriate legislation in accordance with Article 253 of the Constitution, courts do not possess any power to pronounce on the power of the State to enact a law contrary to its treaty obligations. The domestic courts, in other words, are not empowered to legally strike down such action, as they cannot dictate the executive action of the State in the context of an international treaty, unless of course, the Constitution enables them to. That being said, the amendment to a treaty is not on the same footing. The Parliament is simply not equipped with the power to, through domestic law, change the terms of a treaty. A treaty to begin with, is not drafted by the Parliament; it is an act of the Executive.
Logically therefore, the Executive cannot employ an amendment within the domestic laws of the State to imply an amendment within the treaty. Moreover, a treaty of this nature is a carefully negotiated economic bargain between two States. No one party to the treaty can ascribe to itself the power to unilaterally change the terms of the treaty and annul this economic bargain. It may decide to not follow the treaty, it may chose to renege from its obligations under it and exit it, but it cannot amend the treaty, especially by employing domestic law. The principle is reciprocal. Every treaty entered into be the Indian State, unless self-executory, becomes operative within the State once Parliament passes a law to such effect, which governs the relationship between the treaty terms and the other laws of the State. It then becomes part of the general conspectus of domestic law. Now, if an amendment were to be effected to the terms of such treaty, unless the existing operationalizing domestic law states that such amendments are to become automatically applicable, Parliament will have to by either a separate law, or through 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.”
In light of the aforesaid decision, we are of the considered view that tax rates specified in DTAA in respect of dividend must prevail over DDT.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the assessee is preferred against the order dated 26.10.2017 pertaining to A.Y 2013-14 framed u/s 143(3) r.w.s 144C(5) of the Income tax Act, 1961 [hereinafter referred to as ‘the Act’ for short].
2. Substantive grievances of the assessee can be summarised as under
(i) Transfer pricing adjustment in smart cards distribution segment which covers grounds Nos 4 to 16 of the appeal memo;
(ii) Transfer pricing adjustment on software development segment which covers Ground Nos 17 to 22 of the appeal 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 O D, the appellant, was incorporated in 2001 as a 100% subsidiary of G OD GmbH, with its corporate office located in Gurgaon. The appellant primarily deals in trading of Currency Verification and Processing Systems. GOD India imports these machines from its AEs for resale in India and as part of the related services, GOD 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 development services to GOD GmbH, wherein it develops application software for GOD GmbH for smart cards module through Development Centre India.
5. The international transactions reported by the appellant are as under:
