2025 (1) TMI 455 - AT - Income Tax

Dividend distribution tax under section 115-O cannot claim DTAA rates for non-resident shareholders

The ITAT Chennai held that dividend distribution tax paid by a domestic company under section 115-O cannot benefit from DTAA rates applicable to ... Dividend Distribution Tax paid by the Company is a tax on shareholders income or the company itself - HELD THAT:- The aforesaid issue is squarely covered against the assessee by decision of Total Oil India Pvt. Ltd.[2023 (4) TMI 988 - ITAT MUMBAI (SB)] hold that where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts Additional Income-tax (Tax on Distributed Profits) referred to in sec.115-O of the Act, such additional income tax payable by the domestic company shall be at the rate mentioned in section 115-O of the Act and not at the rate of tax applicable to the non-resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. We are conscious of the sovereign's prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAs. Thus, wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Decided against assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are as follows:Whether the Dividend Distribution Tax (DDT) paid by an Indian company is a tax on the income of the shareholders or the company itself.Whether the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Germany apply to determine the tax rate on dividends paid to non-resident shareholders.Whether amendments to domestic law regarding dividend taxation override the provisions of international tax treaties.Whether Section 115-O of the Income-tax Act, which imposes DDT, overrides the provisions of tax treaties entered into under Section 90 of the Act.Whether the appellant is eligible for a refund of DDT, and if so, whether the time limits prescribed under Section 239 of the Act apply to such refund claims.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Nature of DDTRelevant Legal Framework and Precedents: The appellant argued that DDT is a tax on the income of shareholders, relying on the legislative history and judicial precedents. However, the lower authorities, including the CIT(A), considered DDT as a tax on the company's profits.Court's Interpretation and Reasoning: The court upheld the view that DDT is a tax on the company, not on the shareholders, aligning with the Special Bench decision in Total Oil India Pvt. Ltd.Key Evidence and Findings: The court noted that DDT is levied on the company distributing the profits, not directly on the shareholders.Application of Law to Facts: The court applied Section 115-O, which specifies that DDT is an additional income tax on the company's distributed profits.Treatment of Competing Arguments: The appellant's argument that DDT should be considered a tax on shareholder income was dismissed based on the statutory provisions and judicial precedent.Conclusions: The court concluded that DDT is a tax on the company, not the shareholders, and thus the appellant's claim for a refund based on this argument was unfounded.Issue 2: Application of DTAARelevant Legal Framework and Precedents: The appellant contended that the DTAA between India and Germany should apply, allowing for a lower tax rate on dividends.Court's Interpretation and Reasoning: The court reasoned that the DTAA provisions do not apply to DDT as it is a tax on the company, not on the shareholder's income.Key Evidence and Findings: The court found that Article 10 of the India-Germany DTAA pertains to shareholder taxation, not company-level taxes like DDT.Application of Law to Facts: The court applied the statutory provisions of Section 115-O, which take precedence over treaty provisions in this context.Treatment of Competing Arguments: The appellant's reliance on DTAA provisions was rejected, as DDT is not covered under the treaty's dividend provisions.Conclusions: The court held that the DTAA does not apply to DDT, reaffirming the domestic tax rate stipulated by Section 115-O.Issue 3: Amendments to Domestic Law and Treaty ObligationsRelevant Legal Framework and Precedents: The appellant argued that amendments to domestic law should not affect treaty obligations.Court's Interpretation and Reasoning: The court noted that while treaties are binding, domestic law amendments regarding DDT do not conflict with treaty obligations as DDT is not covered by the treaty.Key Evidence and Findings: The court found no specific treaty provision that would override the domestic law concerning DDT.Application of Law to Facts: The court applied the principle that domestic law amendments are valid unless they explicitly contradict treaty obligations, which was not the case here.Treatment of Competing Arguments: The appellant's argument was dismissed due to the lack of a direct treaty provision affecting DDT.Conclusions: The court concluded that domestic amendments regarding DDT are valid and do not violate treaty obligations.Issue 4: Section 115-O and Treaty ProvisionsRelevant Legal Framework and Precedents: The appellant contended that Section 115-O should not override treaty provisions.Court's Interpretation and Reasoning: The court upheld the view that Section 115-O, with its non-obstante clause, overrides other provisions, including treaty provisions concerning DDT.Key Evidence and Findings: The court relied on the precedent set by the Special Bench in Total Oil India Pvt. Ltd.Application of Law to Facts: The court applied Section 115-O as the governing provision for DDT, dismissing treaty applicability.Treatment of Competing Arguments: The appellant's reliance on treaty provisions was rejected in light of the statutory language of Section 115-O.Conclusions: The court concluded that Section 115-O takes precedence over treaty provisions concerning DDT.Issue 5: Eligibility for DDT Refund and Time LimitsRelevant Legal Framework and Precedents: The appellant claimed eligibility for a DDT refund, arguing that the time limits under Section 239 do not apply to DDT.Court's Interpretation and Reasoning: The court found that the time limits under Section 239 apply to all refund claims, including DDT.Key Evidence and Findings: The court noted that the appellant failed to demonstrate any exemption from the statutory time limits for DDT refunds.Application of Law to Facts: The court applied Section 239, which governs the time limits for refund claims, to the appellant's DDT refund claim.Treatment of Competing Arguments: The appellant's argument for a separate treatment of DDT refunds was dismissed based on statutory language.Conclusions: The court concluded that the appellant was not eligible for a DDT refund due to the expiration of the applicable time limits.3. SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: 'For the reasons given above, we hold that where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts Additional Income-tax (Tax on Distributed Profits) referred to in sec.115-O of the Act, such additional income tax payable by the domestic company shall be at the rate mentioned in section 115-O of the Act and not at the rate of tax applicable to the non-resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income.'Core Principles Established: DDT is a tax on the company, not the shareholders. Section 115-O overrides treaty provisions concerning DDT, and the DTAA does not apply to DDT.Final Determinations on Each Issue: The court dismissed all appeals, affirming that DDT is governed by domestic law provisions, and the appellant is not entitled to a refund.