Section 115-O Rate Applies for Additional Tax on Dividends to Non-Residents, Not DTAA Rate

Sennheiser Electronics India Private Limited Vs Circle – 4 (1) (ITAT Delhi)

Introduction: The recent appeal of Sennheiser Electronics India Private Limited against the order of the CIT(A), National Faceless Appeal Centre, Delhi, has shed light on the application of Section 115-O of the Income Tax Act concerning Dividend Distribution Tax (DDT). The central question revolves around the justification of not granting a refund of DDT for the Assessment Year 2019-20.

Detailed Analysis: The primary issue in this appeal is whether the National Faceless Appeal Centre (NFAC) was justified in denying a refund of DDT in the given circumstances. The assessee, engaged in the sales and distribution of audio equipment, distributed dividends to its shareholders during the relevant assessment year. The DDT was paid under Section 115-O of the Act.

The specific details of the dividends, DDT paid, and the taxation in terms of the Double Taxation Avoidance Agreement (DTAA) are outlined in the appeal. The critical contention of the assessee is the claim for a refund of Rs. 44,33,224, asserting that it had overpaid DDT.

However, the Income Tax Appellate Tribunal (ITAT) Delhi, relying on a recent Special Bench decision of the Mumbai Tribunal in the case of DCIT vs. Total Oil India Private Limited, dismissed the grounds raised by the assessee. The Mumbai Tribunal’s decision emphasized that when dividends are distributed to non-resident shareholders, the additional income tax (Tax on Distributed Profits) under Section 115-O of the Act prevails over the rate specified in the relevant DTAA.

In alignment with the Mumbai Tribunal’s decision, the ITAT Delhi ruled that the grounds raised by the assessee are dismissed, emphasizing the applicability of Section 115-O for non-resident dividend taxation.

Conclusion: The decision by the ITAT Delhi in the Sennheiser Electronics India Private Limited vs. Circle – 4 case underscores the precedence of Section 115-O over DTAA rates for additional tax on dividends to non-residents. The dismissal of the appeal aligns with the recent legal interpretation, providing clarity on the applicable provisions and settling the dispute on the refund of excess DDT payment. This case contributes to the evolving landscape of taxation laws, emphasizing the importance of statutory provisions in determining tax liabilities. 

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal of the Assessee arises out of the order of the CIT(A), National Faceless Appeal Centre, Delhi, [hereinafter referred to as [‘NFAC’] in Appeal No. CIT(A),Gurgaon ­1/10181/2020-21, dated 22/07/2020 against the order passed by Central Processing Unit, Bengaluru u/s 143(1) of the Income Tax Act (hereinafter referred to as ‘the Act’) on 22/07/2020 for the Assessment Year 2019-20.

2. Though the assessee has raised several grounds of appeal before us, the only effective issue to be decided in this appeal is as to whether the NFAC was justified in not granting refund of the Dividend Distribution Tax (DDT) in the facts and circumstances of the instant case.

3. We have heard the rival submissions and perused the materials available on record. The assessee is engaged in the business of sales and distribution of headphones, microphones, monitoring systems, tour guide systems and aviation headsets. It imports goods from Sennheiser group companies for reselling through its distributors in India. The return of income for the assessment year 2019-20 was filed by the assessee company on 27.11.2019 which was later revised on 09.03.2020 declaring total income of Rs.3,77,00,470/-.

4. During the year under consideration the assessee distributed dividends to its share holders (Sennheiser Global Operations GMBH, Germany and Sennheiser Electronic GMBH & Co. KG, Germany) and paid DDT on distribution of dividends under section 115-O of the Act as under:-

6. In this appeal, the assessee is now seeking refund of Rs.44,33,224/- on the ground that it has paid excess DDT. We find that this issue is no longer res integra in view of the recent Special Bench decision of Mumbai Tribunal in the case of DCIT Vs. Total Oil India Private Limited reported in 149 taxmann.com 332 wherein it was held as under :-

“83. For the reasons give above, we hold that where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts Additional Income-tax (Tax on Distributed Profits) referred to in sec. 115-0 of the Act, such additional income tax payable by the domestic company shall be at the rate mentioned in section 115-O of the Act and not at the rate of tax applicable to the non-resident shareholders(s) as specified in the relevant DTAA with reference to such dividend income. Nevertheless, we are conscious of the sovereign’s prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAS. Thus, wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Thus, the question before the Special Bench is answered, accordingly.”

8. Respectfully following the aforesaid decision, the grounds raised by the assessee are hereby dismissed.

9. In the result, the appeal of the assessee is dismissed.

Order pronounced in the open court on 28.11.2023.