2021 (6) TMI 855 - AT - Income Tax

Tribunal Considers DTAA Applicability to DDT under Section 115-O, Recommends Special Bench

Deputy Commissioner of Income Tax Circle 11 (3) (1), Mumbai Versus Total Oil India Pvt Ltd And (Vice-Versa)

The Tribunal rejected preliminary objections on timeliness and admissibility in the cross-objection case. However, it raised doubts on the application of ... Tax payable u/s 115-O - dividend distribution tax rate being restricted by the treaty provision dealing with taxation of dividends in the hands of the shareholders (i.e. Article 11 of the Indo French tax treaty, as in this case) - tax at the rate prescribed in the DTAA between India and France in respect of dividend paid by the assessee to the non-resident shareholders i.e. Total Marketing Services and Total Holdings Asie, a tax resident of France - HELD THAT:- A tax treaty protects taxation of income in the hands of residents of the treaty partner jurisdictions in the other treaty partner jurisdiction. In order to seek treaty protection of an income in India under the Indo French tax treaty, the person seeking such treaty protection has to be a resident of France. The expression ‘resident’ is defined, under article 4(1) of the Indo French tax treaty, as “any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature”. Obviously, the company incorporated in India, i.e. the assessee before us, cannot seek treaty protection in India- except for the purpose of, in deserving cases, where the cases are covered by the nationality non-discrimination under article 26(1), deductibility non-discrimination under article 26(4), and ownership nondiscrimination under article 24(5) as, for example, article 26(5) specifically extends the scope of tax treaty protection to the “enterprises of one of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State”. The same is the position with respect of the other non-discrimination provisions. No such extension of the scope of treaty protection is envisaged, or demonstrated, in the present case. When the taxes are paid by the resident of India, in respect of its own liability in India, such taxation in India, in our considered view, cannot be protected or influenced by a tax treaty provision, unless a specific provision exists in the related tax treaty enabling extension of the treaty protection. Taxation is a sovereign power of the State- collection and imposition of taxes are sovereign functions. Double Taxation Avoidance Agreement is in the nature of self-imposed limitations of a State’s inherent right to tax, and these DTAAs divide tax sources, taxable objects amongst themselves. Inherent in the self-imposed restrictions imposed by the DTAA is the fact that outside of the limitations imposed by the DTAA, the State is free to levy taxes as per its own policy choices. The dividend distribution tax, not being a tax paid by or on behalf of a resident of treaty partner jurisdiction, cannot thus be curtailed by a tax treaty provision. For all these reasons independently, as also taken together, we are of the considered view that it is a fit case for the constitution of a special bench, consisting of three or more Members, so that all the aspects relating to this issue can be considered in a holistic and comprehensive manner. In any case, it is a macro issue that touches upon the tax liability of virtually every company which has residents of a tax treaty partner jurisdiction as shareholders, and has substantial revenue implications. The question which may be referred for the consideration of special bench consisting of three or more Members, subject to the approval of, and modifications by, Hon’ble President, is as follows:- Whether the protection granted by the tax treaties, under section 90 of the Income Tax Act, 1961, in respect of taxation of dividend in the source jurisdiction, can be extended, even in the absence of a specific treaty provision to that effect, to the dividend distribution tax under section 115 ‘O’ in the hands of a domestic company? The registry is directed to place the matter before the Hon’ble President for his kind consideration and for the appropriate orders. Issues Involved:1. Timeliness of the cross-objection.2. Admissibility of new issues in cross-objections.3. Application of the India-France Double Taxation Avoidance Agreement (DTAA) to Dividend Distribution Tax (DDT) under section 115-O of the Income Tax Act, 1961.Detailed Analysis:1. Timeliness of the Cross-Objection:The Departmental Representative argued that the cross-objection was time-barred as it was filed much later than the appeal. However, the assessee contended that the cross-objection was filed within the permissible time limit, considering the extension of the limitation period by the Supreme Court's suo motu writ petition. The Tribunal agreed with the assessee, noting that the cross-objection was filed on the next working day after the last date, which was a public holiday. Thus, it was deemed to be filed within the time limit.2. Admissibility of New Issues in Cross-Objections:The Departmental Representative objected to the introduction of new issues in the cross-objection, citing that these were not raised before the lower authorities. The Tribunal, however, held that cross-objections are to be treated on par with appeals, meaning any issue that can be raised in an appeal can also be raised in a cross-objection. The Tribunal relied on the Supreme Court's judgment in the case of National Thermal Power Corporation Ltd vs CIT, which allows the Tribunal to consider questions of law arising in assessment proceedings even if not raised earlier. Consequently, the Tribunal rejected the preliminary objections and decided to address the issue on its merits.3. Application of the India-France DTAA to DDT under Section 115-O:The core issue was whether the DDT paid by the assessee, which has non-resident shareholders domiciled in France, should be limited to the rate prescribed in the India-France DTAA. The assessee argued that the DDT is essentially a tax on dividend income of the shareholders and should not exceed the rate specified in the DTAA. The assessee relied on the decision of the coordinate bench in Giesecke & Devrient India Pvt Ltd vs ACIT, which held that the tax rates specified in the DTAA for dividends should prevail over DDT.The Departmental Representative opposed this view, stating that DDT is a tax on the company distributing the dividends, not on the shareholders. He cited the Supreme Court's decision in Godrej & Boyce Manufacturing Co. Ltd, which categorically held that DDT is a tax on the company and not on the income of the shareholders. The Departmental Representative also highlighted that the DTAA benefits cannot be claimed by the company but only by the shareholders, and since the shareholders are not taxed in India, they cannot claim credit for DDT.The Tribunal noted that the coordinate bench decisions in favor of the assessee did not consider the Supreme Court's judgment in Godrej & Boyce Manufacturing Co. Ltd. Furthermore, the Tribunal observed that the DTAA benefits are meant for residents of the treaty partner jurisdictions and not for domestic companies. The Tribunal also referenced international perspectives, such as the South African High Court's decision on a similar tax, which supports the view that DDT is a tax on the company, not the shareholders.Given the complexities and substantial revenue implications, the Tribunal suggested that the issue be referred to a special bench for a comprehensive evaluation. The proposed question for the special bench was whether the DTAA's protection for dividend taxation in the source jurisdiction extends to DDT under section 115-O in the hands of a domestic company.Conclusion:The Tribunal rejected the preliminary objections regarding the timeliness and admissibility of new issues in the cross-objection. However, it expressed doubts about the correctness of the coordinate bench decisions favoring the assessee's interpretation of the DTAA's application to DDT. Consequently, the Tribunal recommended referring the matter to a special bench for a detailed examination.