DTAA rate not applicable to Dividend Distribution Tax under section 115O: ITAT Mumbai

The Mumbai ITAT Special Bench in DCIT Vs Total Oil India Pvt. Ltd held that Dividend Distribution Tax (DDT) levied under section 115-O of the Income-tax Act is an independent tax liability of a domestic company and cannot be restricted by the dividend tax rate prescribed under an applicable Double Taxation Avoidance Agreement. The Tribunal rejected the argument that DDT is merely a tax on shareholder income collected through the company, relying on binding Supreme Court rulings which clearly establish that DDT is neither paid by nor on behalf of shareholders. Since tax treaties apply only to residents of the contracting states and regulate taxation of dividend income in the hands of shareholders, a resident Indian company cannot invoke treaty benefits meant for non-resident shareholders. The Special Bench also noted that treaties do not provide any mechanism for granting credit of DDT to shareholders, and extending treaty relief would distort treaty objectives. Accordingly, DDT payable under section 115-O must be applied strictly as per domestic law.

Facts:

• Total Oil India Pvt. Ltd. is a company incorporated in India under the provisions of the Companies Act and is a domestic company within the meaning of the Income-tax Act, 1961. The assessee forms part of a multinational corporate group and, during the relevant period, its shareholding structure comprised both resident shareholders and non-resident shareholders, including foreign group entities which were tax residents of France within the meaning of Article 4 of the India–France Double Taxation Avoidance Agreement.
• During the previous year relevant to the assessment year 2016–17, the assessee earned distributable profits and, in accordance with the provisions of the Companies Act and its Articles of Association, declared and distributed dividends to its shareholders. The dividends were paid proportionately to all shareholders, including the said non-resident shareholders resident in France. At the relevant point of time, the taxation of dividends was governed by the special statutory regime contained in Chapter XII-D of the Income-tax Act, particularly section 115-O, which imposed an additional income-tax on domestic companies in respect of any amount declared, distributed or paid by way of dividend, whether interim or otherwise.
• In terms of the statutory framework then in force, while the liability to pay tax on distributed dividends was cast upon the domestic company under section 115-O, the corresponding dividend income referred to in that provision was exempt in the hands of shareholders under section 10(34) of the Act. Acting in compliance with section 115-O, the assessee computed and paid Dividend Distribution Tax at the rate prescribed under the Act on the entire amount of dividends declared and distributed, including the portion of dividend paid to its non-resident shareholders. It was undisputed that such tax was paid within the time prescribed under section 115-O(3) and that the shareholders were not subjected to tax on such dividend income in view of the statutory exemption.
• Subsequently, in the course of appellate proceedings arising from the assessment for the relevant year, the assessee raised an additional plea by way of a cross-objection, contending that insofar as dividends were paid to non-resident shareholders who were residents of France, the rate of Dividend Distribution Tax payable by the assessee under section 115-O ought not to exceed the rate of tax on dividends prescribed under the India–France DTAA. The assessee invoked section 90(2) of the Act and asserted that, where treaty provisions are more beneficial, they override the provisions of the domestic law.
• The assessee’s contention was founded on the premise that Dividend Distribution Tax, though statutorily collected from the company, is in substance a tax on dividend income, which is the income of the shareholder. It was contended that the statutory scheme merely shifted the incidence of tax collection to the company for administrative convenience and did not alter the essential character of the levy as a tax on dividend income. On this basis, it was argued that the provisions of the DTAA governing taxation of dividends in the hands of non-resident shareholders necessarily limited the rate at which such income could be taxed in India.
• In support of this position, the assessee placed reliance on decisions of coordinate benches of the Income Tax Appellate Tribunal, including Giesecke & Devrient India Pvt. Ltd. v. ACIT (2020) 120 taxmann.com 338 (Delhi – Trib.) and DCIT v. Indian Oil Petronas Pvt. Ltd. (2021) 127 taxmann.com 389 (Kolkata – Trib.), wherein it was held that Dividend Distribution Tax, being a tax on dividend income, should not exceed the rate of tax prescribed under the applicable Double Taxation Avoidance Agreement governing the non-resident shareholder.
• The Revenue authorities opposed the assessee’s claim and contended that section 115-O constitutes a distinct and independent charging provision imposing a tax liability exclusively on the domestic company. It was argued that Dividend Distribution Tax is not a tax paid on behalf of the shareholder and that the company, being a resident of India, cannot invoke treaty benefits intended to protect non-resident taxpayers. In support of this position, reliance was placed on the judgment of the Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (2010) 328 ITR 81 (Bom.), wherein it was observed that Dividend Distribution Tax is a tax on the company and not on the shareholder.
• When the matter came up before the Division Bench of the Tribunal, serious doubts were expressed regarding the correctness of the earlier coordinate bench decisions relied upon by the assessee. The Division Bench noted that the reasoning adopted therein appeared to be inconsistent with authoritative pronouncements of the Supreme Court, particularly Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (2017) 394 ITR 449 (SC), wherein the Supreme Court affirmed that Dividend Distribution Tax is a liability of the company and not a tax paid on behalf of shareholders, and Union of India v. Tata Tea Co. Ltd. (2017) 398 ITR 260 (SC), wherein the constitutional validity and legislative character of section 115-O were examined.
• The Division Bench further observed that extending treaty benefits to Dividend Distribution Tax could lead to structural and conceptual inconsistencies, since tax treaties do not provide any mechanism for granting credit of Dividend Distribution Tax in the hands of shareholders and any reduction in such tax would economically benefit only the domestic company and not the non-resident shareholder. Reference was also made to comparative international jurisprudence, including the decision of the South African High Court in Volkswagen of South Africa (Pty) Ltd. v. Commissioner for the South African Revenue Service (Case No. 24201/2007), which held that a similar dividend tax was a tax on the company declaring the dividend and not on the recipient shareholder.
• It was further noticed that identical questions of law had arisen in several other pending appeals, including those concerning Maruti Suzuki India Ltd. (ITA NO.961/Del/2015) and Gujarat Gas Co. Ltd. (ITA No. 123/Ahd/2012), and that conflicting views taken by different benches of the Tribunal had resulted in uncertainty on an issue of substantial importance in the field of international taxation.
• In view of the recurring nature of the controversy, the conflicting judicial precedents, and the substantial legal implications involved, the Hon’ble President of the Income Tax Appellate Tribunal, in exercise of powers under section 255(3) of the Income-tax Act, constituted a Special Bench to authoritatively decide the issue arising from the aforesaid factual and statutory background, namely whether the additional income-tax payable by a domestic company under section 115-O on dividends paid to non-resident shareholders could be restricted by reference to the rate prescribed under the applicable Double Taxation Avoidance Agreement.

Issues:

• Whether the Dividend Distribution Tax payable under section 115-O of the Income-tax Act, 1961, on dividends declared by a domestic company to non-resident shareholders can be restricted to the rate prescribed under the applicable Double Taxation Avoidance Agreement.
• Whether Dividend Distribution Tax under section 115-O constitutes a tax on the dividend income of the shareholder or an independent tax liability of the domestic company.

Observations:

• The Special Bench carefully considered the statutory scheme governing Dividend Distribution Tax, the nature and incidence of the levy under section 115-O of the Income-tax Act, 1961, and the scope and applicability of Double Taxation Avoidance Agreements. At the outset, the Bench observed that section 115-O is a self-contained charging provision which imposes an additional income-tax on a domestic company in respect of the amount of profits declared, distributed or paid by way of dividend. The levy is attracted at the stage of declaration, distribution or payment of dividend, whichever is earlier, and the liability to pay such tax is statutorily cast upon the domestic company itself.
• The Bench rejected the contention that Dividend Distribution Tax is merely a collection mechanism for taxing dividend income in the hands of shareholders. Relying upon the authoritative pronouncement of the Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (2017) 394 ITR 449 (SC), the Bench observed that the tax paid under section 115-O is not a tax paid by, or on behalf of, the shareholder. The Supreme Court had categorically held that the payment of Dividend Distribution Tax does not discharge any tax liability of the shareholder and that the levy is a distinct tax liability of the company. The Special Bench noted that this position conclusively negatives the theory that the incidence of tax remains on the shareholder with only the machinery of collection shifted to the company.
• The Bench further examined the constitutional validity and legislative character of section 115-O in the light of the decision of the Supreme Court in Union of India v. Tata Tea Co. Ltd. (2017) 398 ITR 260 (SC). It was observed that while the Supreme Court upheld the levy as a tax on income referable to Entry 82 of List I of the Seventh Schedule to the Constitution, the Court did not hold that Dividend Distribution Tax is a tax on shareholders. On the contrary, the levy was upheld precisely because it is imposed on the company on the occurrence of a taxable event contemplated by Parliament. The Bench clarified that the constitutional character of the levy cannot be conflated with the person on whom the legal incidence of tax is imposed.
• The Special Bench then turned to the argument founded on section 90(2) of the Act and the provisions of the applicable tax treaties. It was observed that a Double Taxation Avoidance Agreement operates as a limitation on the taxing rights of a Contracting State only in respect of income of persons who are residents of the other Contracting State. The Bench held that treaty protection is personal and cannot be extended to a person who is not a resident of the treaty partner jurisdiction. Since the domestic company paying dividend is a resident of India, it cannot invoke treaty provisions meant to govern the taxation of dividend income in the hands of non-resident shareholders.
• The Bench emphasized that the articles dealing with dividends in tax treaties, including the India–France DTAA, regulate the taxation of dividend income in the hands of the recipient shareholder. They do not govern, either expressly or by implication, a tax imposed on the company distributing dividends. The absence of any provision in the relevant DTAA extending treaty protection to Dividend Distribution Tax was held to be decisive. In this context, the Bench drew support from the specific protocol to the India–Hungary DTAA, which expressly provides that tax on distributed profits shall be deemed to be taxed in the hands of shareholders. The existence of such an express provision in one treaty, and its absence in others, was held to indicate conscious treaty design and to negate any inference by interpretative process.
• The Special Bench also noted that tax treaties do not provide any mechanism for granting credit of Dividend Distribution Tax to shareholders in their country of residence. It was observed that extending treaty protection to Dividend Distribution Tax would, therefore, result in a situation where the economic benefit accrues solely to the domestic company, while the non-resident shareholder derives no treaty-related relief. Such an outcome was held to be inconsistent with the object and scheme of tax treaties, which are intended to avoid juridical double taxation of the same income in the hands of the same taxpayer.
• The Bench expressly disagreed with the reasoning adopted by the coordinate benches in Giesecke & Devrient India Pvt. Ltd. v. ACIT (2020) 120 taxmann.com 338 (Delhi – Trib.) and DCIT v. Indian Oil Petronas Pvt. Ltd. (2021) 127 taxmann.com 389 (Kolkata – Trib.). It was held that those decisions proceeded on an erroneous assumption that Dividend Distribution Tax is a tax on shareholder income and that the statutory liability of the company can be equated with payment of tax on behalf of the shareholder. The Special Bench found such reasoning to be inconsistent with binding Supreme Court authority and contrary to settled principles governing treaty interpretation.
• The Bench also took note of comparative international jurisprudence, particularly the decision of the South African High Court in Volkswagen of South Africa (Pty) Ltd. v. Commissioner for the South African Revenue Service, wherein a similar dividend distribution tax was held to be a tax on the company declaring dividends and not on the recipient shareholder. While observing that foreign judgments are not binding, the Bench found the reasoning persuasive and consistent with the Indian statutory scheme.
• In conclusion, the Special Bench held that Dividend Distribution Tax under section 115-O is an independent and distinct tax liability of the domestic company, that such tax is not paid on behalf of shareholders, and that the rate prescribed under section 115-O cannot be curtailed by reference to the rate of tax applicable to dividends under a Double Taxation Avoidance Agreement. The Bench held that extending treaty benefits to such a levy would amount to rewriting both the statute and the treaty, which is impermissible in law