Dividend income of Indian co. was exempt if Brazilian co. had paid taxes above 15% before distribution of dividend

Facts:

a)    Assessee, an Indian company, invested certain amount in equity capital of Brazilian company and received certain dividend income during the year.

b)    Assessing Officer (AO) contended that dividend was received by assessee from a foreign company. Therefore, it would not fall in the ambit of dividend distribution tax as contemplated in section 115-O and, accordingly, it would not be exempt under section 10(34).

c)    Assessee contended that Brazilian company had already paid tax at the rate of 34% on its profits , i.e., in excess of rate of 15% as prescribed in paragraph 2 of Article 10 of DTAA between India and Brazil (DTAA), before distribution of dividend income. Therefore, it wouldn’t be liable to pay tax on such dividend income in India in terms of Paragraph 3 of Article 23 of India-Brazil DTAA.

d)    CIT (Appeals) set aside the addition taking view that the AO did not consider DTAA provisions while considering the taxability of dividend in India.

e)    Aggrieved by the order of CIT (A), revenue filed the instant appeal before the tribunal.

Tribunal held in favour of assessee as under:

1)                 Tribunal held in favour of assessee as under:

1)                   As per Article 10 of DTAA, dividend received by assessee could be taxed in Brazil at the rate not exceeding 15% of the gross amount of the dividends. However, no income-tax was payable by assessee on such income as per Brazilian law.

2)                  Article 23 of DTAA provides that India shall exempt such dividends from tax if same may be taxed in Brazil in terms of Article 10.

3)               The assessee had produced sufficient evidence to show that the dividend had been declared by the Brazilian company from its current profits and it had already paid tax at the rate of 34% on its profits, before distribution of dividend income.

4)                 Therefore, assessee would not be liable to pay tax in India on such dividend income as same could be taxed in Brazil as per Article 10 even though the Brazilian law had declared such income to be not subjected to income tax. - [2016] 70 taxmann.com 22 (Kolkata - Trib.)