ITAT Ahmedabad on DDT, APA-Based Interest and TDS Credit: Sophos Technologies Private Limited Vs DCIT (AY 2016-17)

The Ahmedabad Bench “A” of the Income Tax Appellate Tribunal has delivered an important ruling in the case of Sophos Technologies Private Limited Vs DCIT for Assessment Year 2016-17, dealing with three key issues:

  1. Limitation of Dividend Distribution Tax (DDT) on dividends remitted to UK-resident shareholders to the treaty rate under the India–UK DTAA
  2. Deletion of interest under Section 234B and Section 234C on income enhanced pursuant to an Advance Pricing Agreement (APA)
  3. Direction to grant due credit of Tax Deducted at Source (TDS) and verification of short credit

The decision provides significant guidance for companies with foreign shareholders, entities operating under APAs, and assessees facing disputes on interest and treaty overlap in relation to Section 115-O.

Factual Background

Corporate Profile and Returns Filed

The assessee, Sophos Technologies Private Limited, is a private limited company engaged in:

  • Providing network security solutions
  • Contract software development services
  • Contract support services

For AY 2016-17, the assessee:

  • Filed an original return of income on 30-11-2016, declaring total income of Rs. 148,86,82,230
  • Subsequently filed a revised return on 27-03-2018, declaring total income of Rs. 149,22,97,140

Later, the assessee entered into an Advance Pricing Agreement (APA) with the Central Board of Direct Taxes (CBDT) on 19-08-2019 under Section 92CC of the Income Tax Act, 1961 for AYs **2016-17 to 2020-21`.

Pursuant to this APA:

  • A modified return under Section 92CD was filed on 14-11-2019
  • The modified return declared enhanced total income of Rs. 157,70,06,240
  • Additional tax on the incremental income determined as per the APA was duly paid

Scrutiny Assessment and TPO Proceedings

During scrutiny:

  • The case was selected for assessment under Section 143(3) read with Section 144B
  • A reference was made to the Transfer Pricing Officer (TPO) under Section 92CA(3) to determine the arm’s length price of the international transactions
  • The TPO accepted the transfer pricing analysis and recorded no TP adjustment in order dated 28-10-2019

Subsequently, the Assessing Officer (AO):

  • Accepted the modified returned income
  • Completed assessment under Section 143(3) r.w.s. 144B vide order dated 31-08-2021
  • Did not make any addition to income
  • However, refused to grant relief on the claim for refund of excess DDT and continued to levy interest under Section 234B and Section 234C

Issues Raised Before CIT(A)

The assessee challenged, inter alia:

  1. Non-grant of refund of excess DDT collected on dividends paid to UK-resident shareholders
  2. Levy of interest under Section 234B and Section 234C on the incremental income offered pursuant to the APA
  3. Short grant of TDS credit of Rs. 5,78,321
  4. The jurisdiction of the CIT(A) in remanding the DDT issue to the AO for “verification”

The CIT(A), NFAC:

  • Directed the AO to verify the claim of refund of DDT paid in excess of the DTAA rate prescribed under Article 10 / Article 11 of the India–UK DTAA and to deal with consequential interest under Section 234B and Section 234C
  • However, in subsequent proceedings, the AO rejected the relief by invoking the decision of the Hon’ble Supreme Court in Goetze India Ltd.

Being aggrieved, the assessee carried the matter to the ITAT, raising multiple grounds covering DDT, interest, TDS credit, and validity of the CIT(A)’s approach.

Issue 1: DDT on Dividends to UK Residents – Restricted to DTAA Rate

Assessee’s Contention

The assessee’s capital was almost entirely held by UK residents:

  • 99.98% shares held by Sophos Limited (UK)
  • 0.02% shares held by Sophos Nominee Limited (UK)

In FY 2015-16, the assessee:

  • Declared and paid dividend to these non-resident shareholders
  • Discharged DDT at 20.36% (inclusive of surcharge and cess) under Section 115-O
  • Paid DDT amounting to INR 19,43,46,453 on such distributed profits