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2021 (5) TMI 566 - AAR - Income TaxAdmissibility of application for Advance ruling under section 245R - only objection of the Department is that the proceeding was pending on the date of filing of present application therefore the application was not admissible under clause (i) of the proviso to section 245R(2) - HELD THAT - The question No. 21 was in respect of dividend income earned by the applicant and had no relevance to the dividend declared by the applicant. Further question No. 23 regarding difference in tax credit in form 26AS and return large outward remittance to non-resident the gross total income being less than value of foreign remittances and high ratio of refund to TDS are also not found connected with the dividend declared by the applicant and dividend distribution tax made thereon. As already mentioned earlier the applicant had not only deducted and paid dividend distribution tax under section 115-O of the Act on the dividend declared at the prescribed rate but no refund of dividend distribution tax was claimed in the return. Therefore there could have been no basis to raise this issue in the questionnaire. From the copy of questionnaire sent with notices under section 142(1) of the Act brought on record we do not find the issue of dividend distribution tax appearing in any of the questions. The claim for the refund of excess dividend distribution tax was made vide applicant s letter dated November 30 2018 which was after the filing of the present application. The pendency has to be considered on the date of filing of the application and there was no pendency on that date. Merely because the applicant had raised the issue of excess dividend distribution tax in his subsequent letter dated November 30 2018 it does not create any pendency of the date of application filed earlier. Thus the questions raised in the present application is not found pending before the Income-tax authority on the date of filing of the application. As held in the case of Hyosung Corporation v. AAR 2016 (2) TMI 575 - DELHI HIGH COURT that a notice under section 143(2) merely asking for certain information from the assessee issued prior to filing of application before Authority for Advance Rulings will not constitute bar in terms of clause (i) of the proviso to section 245R(2) on Authority for Advance Rulings entertaining and allowing the application. Consequently the mere fact that such a notice was issued prior to the filing of the application by the petitioner before the Authority for Advance Rulings will not constitute a bar in terms of clause (i) of the proviso to section 245R(2) of the Act on the Authority for Advance Rulings entertaining and allowing the applications . The same principle applies in respect of other notices issued under section 142(1) of the Act. As already discussed earlier the specific questions of dividend distribution tax being a tax on dividend or otherwise and lower rate of 10 per cent. in respect of dividend distribution tax payable to non-resident shareholder under article 10 of the India-Japan DTAA did not form part of any of the questionnaires or notices. Therefore such notices issued prior to filing of the application cannot be a bar in terms of clause (i) of the proviso to section 245R(2) of the Act for admitting the application. As found that the issue involved in the questions raised in the application filed before us was not pending before the Income-tax authority and the bar in terms of clause (i) of the proviso to section 245R(2) is not found attracted. Therefore the application is admitted under section 245R(2) of the Act.
The core legal questions considered by the Authority for Advance Rulings (AAR) pertain to the nature and tax treatment of dividend distribution tax (DDT) paid by an Indian resident company to its non-resident parent company, specifically under section 115-O of the Income-tax Act, 1961, and the applicability of the India-Japan Double Taxation Avoidance Agreement (DTAA). The issues are:
1. Whether the dividend distribution tax paid by the Indian company under section 115-O is, in substance and effect, a tax on dividends. 2. Whether the Indian company, being a resident of India, is entitled to apply the lower tax rate of 10% under Article 10 (dividends) of the India-Japan DTAA with respect to the dividend distribution tax payable on dividends to its Japanese parent. 3. Whether the applicant is entitled to a refund of excess dividend distribution tax paid, i.e., the amount paid over the 10% rate prescribed by the treaty. Additionally, the admissibility of the application itself was challenged by the Revenue on the ground that the questions raised were already pending before the Income-tax authorities, invoking clause (i) of the proviso to section 245R(2) of the Act. Issue-wise Detailed Analysis: Admissibility of the Application (Pendency of Issue before Income-tax Authorities) The Revenue argued that since a notice under section 143(2) was issued for the relevant assessment year prior to the filing of the application, and subsequent notices under section 142(1) with questionnaires were issued, the matter was pending before the Assessing Officer (AO), thus barring the application under section 245R(2). The Revenue relied on the questionnaire items referring to dividend income and tax credit discrepancies to support this contention. Further, the Revenue pointed out that the applicant had filed an application under section 144A after filing the present application, seeking refund of excess DDT, which was rejected, and an appeal was pending, indicating pendency of the issue. The applicant contended that the notices issued prior to the application were standard scrutiny notices and did not specifically raise the issues now before the AAR. The questionnaires did not address the question of dividend distribution tax or its treaty applicability. The application under section 144A was filed after the present application and hence irrelevant to the pendency test at the time of filing. The applicant relied on precedents where issuance of a general scrutiny notice was held not to constitute pendency of the specific question raised before the AAR. The Authority examined the relevant statutory provision, section 245R(2), which prohibits admission of an application if the question is pending before any Income-tax authority or Appellate Tribunal. It was noted that the notice under section 143(2) was a computer-aided scrutiny selection (CASS) notice without specific allegations or issues. The Schedule DDT in the return showed that DDT was paid at the prescribed rate and no refund claim was made in the return. The questionnaires issued under section 142(1) did not specifically relate to the DDT or the treaty applicability questions. The refund claim was made only after filing the present application. The Authority relied on the precedent of the Delhi High Court which held that a general notice under section 143(2) without specific issues does not bar the Authority from admitting an application. Accordingly, the Authority concluded that the questions raised were not pending before the Income-tax authorities on the date of filing the application and the bar under section 245R(2) proviso clause (i) was not attracted. The application was thus admitted. Nature of Dividend Distribution Tax under Section 115-O Though the judgment primarily focused on admissibility, the underlying legal question concerns whether DDT under section 115-O constitutes a tax on dividends or a tax on the company distributing dividends. This is relevant to treaty benefits under Article 10 of the India-Japan DTAA, which limits tax on dividends to 10% for residents of the other contracting state. The applicant contended that DDT is in substance a tax on dividends paid to shareholders and hence the treaty benefits should apply to reduce the rate to 10%. The Department's position was not elaborated in detail in the ruling but generally, the Revenue treats DDT as a tax on the company and not on the shareholder, which affects treaty applicability. Since the Authority admitted the application, it implied that this substantive question required adjudication but was not barred by pendency. Applicability of Lower Treaty Rate under Article 10 of the India-Japan DTAA The applicant sought a ruling on entitlement to the 10% tax rate under the treaty on dividend distribution tax paid to the Japanese parent company. The contention was that since the parent is a resident of Japan, the treaty rate should apply to the DDT deducted by the Indian subsidiary. The Department's objection was primarily on procedural grounds regarding pendency and admissibility. The substantive treaty interpretation was reserved for hearing after admission. Refund of Excess Dividend Distribution Tax The applicant claimed refund of excess DDT paid over the treaty rate of 10%. The Department rejected the refund application under section 144A and the matter was under appeal. The Authority observed that the refund claim was made after filing the present application and thus did not constitute pendency at the time of filing. The refund issue was linked to the substantive question of treaty applicability and DDT characterization. Significant Holdings: The Authority held that "a notice under section 143(2) merely asking for certain information from the assessee issued prior to filing of application before Authority for Advance Rulings will not constitute bar in terms of clause (i) of the proviso to section 245R(2), on Authority for Advance Rulings entertaining and allowing the application." It further held that "the question raised in the applications by the petitioner before the Authority for Advance Rulings do not appear to be forming the subject matter of the notices under section 143(2) of the Act. Consequently, the mere fact that such a notice was issued prior to the filing of the application by the petitioner before the Authority for Advance Rulings will not constitute a bar." The Authority established the principle that pendency for the purpose of section 245R(2) must be assessed strictly with reference to whether the specific question raised in the application is pending before any Income-tax authority on the date of filing. General scrutiny notices or unrelated queries do not amount to pendency. Accordingly, the Authority admitted the application for advance ruling under section 245R(2) of the Income-tax Act, enabling it to consider the substantive questions concerning the nature of dividend distribution tax, treaty applicability, and refund claims.
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