2023 (4) TMI 988 - AT - Income Tax

Domestic company must pay dividend distribution tax under s.115-O; DTAA relief applies only if treaty expressly extends to payer

ITAT (Mum) (SB) - AT held that where a domestic company declares, distributes or pays dividends to non-resident shareholders, the additional income tax ... Dividend Distribution Tax - tax on distributed profits - incidence and taxable event - treaty override under section 90(2) - double taxation avoidance agreement (DTAA) - charging provision and non-obstante clauseDividend Distribution Tax - tax on distributed profits - incidence and taxable event - double taxation avoidance agreement (DTAA) - treaty override under section 90(2) - Whether additional income-tax under section 115-O payable by a domestic company in respect of dividend distributed to non-resident shareholders is to be computed at the rate specified in section 115-O or at the lower rate provided in the applicable DTAA. - HELD THAT: - The Special Bench held that the additional income-tax levied by section 115-O is a charge on the amount declared, distributed or paid as dividend by the domestic company and, in substance and under the statutory scheme, is a tax on distributed profits payable by the company. Section 115-O constitutes a self-contained code with a non-obstante clause, prescribes the person liable (the company and its principal officer), the timing of levy and machinery for collection, and provides that tax so paid is final with no credit or deduction available to shareholders. The Bench analysed precedents (including the decisions of the Bombay High Court and the Supreme Court) and statutory structure to conclude that DDT does not operate as a payment of the non-resident shareholder's tax liability discharged by the company; therefore DTAA protections do not automatically apply. The Bench further explained that DTAAs operate to relieve double taxation of income in the hands of resident recipients and will not curtail a domestic levy imposed on a resident company unless the contracting states have expressly extended treaty protection to the company/levy (illustrated by the specific protocol clause in the India-Hungary treaty). Consequently, absent an express treaty provision treating the distributed-profits tax as the tax of the shareholder, the rate in section 115-O governs. [Paras 71, 74, 82, 83]Additional income-tax payable under section 115-O shall be at the rate specified in section 115-O and not at the rate applicable to the non-resident shareholder under the DTAA, unless the DTAA expressly extends treaty protection to the domestic company paying the tax.Final Conclusion: The Special Bench answers the referred question by holding that DDT/ tax on distributed profits under section 115-O is payable at the statutory rate in section 115-O and not at the lower DTAA rate applicable to non-resident shareholders, except where a tax treaty expressly extends its protection to the domestic company paying the tax; the connected appeals/COs are restored to respective Division Benches for disposal of remaining issues. Issues Involved:1. Nature of Dividend Distribution Tax (DDT)2. Applicability of Double Taxation Avoidance Agreement (DTAA) to DDTSummary:1. Nature of Dividend Distribution Tax (DDT):The primary issue was whether DDT is a tax on the company or the shareholder. The judgment clarified that DDT is a tax on the company's profits and not on the shareholder. The judgment referenced several cases, including the Hon'ble Supreme Court's decision in Tata Tea Co. Ltd., which upheld the constitutional validity of Section 115-O of the Income Tax Act, 1961, establishing that DDT is within the legislative competence of the Parliament as a tax on income. The Hon'ble Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. further clarified that DDT is not a tax paid on behalf of the shareholder but is a tax on the company's distributed profits. The judgment emphasized that the provisions of Chapter XII-D, including Sections 115-O, 115-P, and 115-Q, form a complete code for DDT, indicating that the tax is on the company and not on the shareholder.2. Applicability of Double Taxation Avoidance Agreement (DTAA) to DDT:The judgment examined whether the rate of DDT should be aligned with the tax rate specified in DTAA for dividends paid to non-resident shareholders. It concluded that DTAA provisions do not apply to DDT because DDT is a tax on the company's profits and not on the shareholder's income. The judgment referenced the Indo-Hungarian DTAA, which explicitly includes a provision for DDT, contrasting it with other DTAAs that do not extend similar protections. The judgment emphasized that unless a DTAA specifically provides for the application of its provisions to DDT, the domestic company must pay DDT at the rate specified in Section 115-O of the Income Tax Act, 1961, and not at the rate applicable to the non-resident shareholder under the DTAA.Conclusion:The Special Bench concluded that the additional income tax payable by a domestic company on dividends declared, distributed, or paid to non-resident shareholders should be at the rate mentioned in Section 115-O of the Income Tax Act, 1961, and not at the rate specified in the relevant DTAA. The judgment acknowledged the sovereign prerogative to extend treaty protection to domestic companies paying DDT through specific provisions in DTAAs.