The Pune bench of the Income Tax Appellate Tribunal (ITAT) ruled that the India-Italy Double Taxation Avoidance Agreement (DTAA) is not applicable when a domestic company pays Dividend Distribution Tax (DDT) under Section 115O of the Income Tax Act, 1961.
The assessee, Piaggio Vehicles Private Limited, a domestic company, is engaged in the manufacture and sale of three and four-wheeler motor vehicles for the transportation of goods and passengers. Additionally, the company produces two-wheeler vehicles under the brand name ‘Vespa’ and sells spare parts for two-wheelers, three-wheelers, and four-wheelers, as well as manufactures petrol and diesel engines. For the assessment year (AY) 2016-17, the company e-filed its return of income on November 30, 2016, declaring a total income of Rs. 2,44,62,64,850. This return was subsequently revised on March 8, 2018, to declare a total income of Rs. 2,44,75,01,310.
A reference was made to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Income Tax Act to determine the Arm’s Length Price of the international transactions conducted by the assessee with its associate enterprises for the relevant AY. The TPO proposed an upward adjustment of Rs. 7, 36, 97,574, which included Rs. 1, 53, 75,780 concerning the import of traded spares and Rs. 5, 83, 21,794 related to corporate guarantee fees.
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This adjustment was communicated through an order dated October 31, 2019, issued under Section 92CA (3) of the Act. Following this, the Assessing Officer completed the assessment on January 27, 2022, under Section 143(3) read with Section 144C (3) of the Act, assessing the total income at Rs. 2,52,11,98,880.
The assessee appealed before the Commissioner of Income Tax (Appeals) (CIT (A)), contesting the transfer pricing adjustment of Rs. 7, 36, 97,574. The CIT(A) upheld the appeal, referencing a previous decision in the assessee’s favor for the AY 2015-16 that involved similar issues regarding the export of parts and components, service spares, and corporate guarantee fees. During the proceedings, the assessee also claimed a refund of excess taxes paid on dividends distributed.
The assessee argued that the Dividend Distribution Tax (DDT), being a tax on dividend income, should qualify for the benefits outlined in Article 11 of the India-Italy Double Tax Avoidance Agreement (DTAA). The company asserted that the dividend paid to Piaggio & C.S.p.A., Italy, should be taxed at the rates prescribed in the India-Italy DTAA, leading to a claim for a refund of the excess DDT paid.
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The tribunal ruled that when a domestic company declares, distributes, or pays dividends to non-resident shareholders, the Additional Income Tax (Tax on Distributed Profits) as per Section 115-O of the Act applies at the prescribed rate, rather than the rate specified in the DTAA for the non-resident shareholders. The tribunal recognized the sovereign’s right to extend treaty protection to domestic companies through DTAAs, but noted that such benefits could only be claimed if explicitly stated within the treaty.
Therefore, the two-member bench, comprising Dr. Dipak P. Ripote (Accountant Member) and Astha Chandra (Judicial Member), concluded that the DTAA does not apply when a domestic company pays DDT under Section 115-O. Following the precedent set by the Special Bench in Total Oil India (P.) Ltd.’s case, and finding no contrary evidence presented, the ITAT upheld the CIT (A)’s order, rejecting the assessee’s claim.
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