2025 (6) TMI 1316 - AT - Income Tax

IFC dividends excluded from DDT calculation under Section 115-O due to statutory tax immunity

Polycab India Limited Versus The Assistant Commissioner of Income Tax, Circle 5 (2) Mumbai

The ITAT Mumbai held that dividends paid to International Finance Corporation (IFC), which enjoys statutory immunity from taxation under the IFC Act 1958, ... Refund of Dividend Distribution Tax (DDT) paid u/s 115-O - dividends paid to an entity enjoying immunity from taxation u/s 9 of Article VI of the International Finance Corporation (Status, Immunities and Privileges) Act, 1958 (IFC Act, 1958) - HELD THAT:- Nuanced and purposive reading of the statute reveals that this levy of tax is not intended to apply indiscriminatory, particularly in case where recipient IFC enjoys unequivocal statutory immunity from taxation in India. Where the shareholder in question is cloaked with comprehensive exemption under the Income Tax Act, then such exemption is not merely limited to income but it extends in its full amplitude to the IFC’s assets, property, operations, transactions and all manifestation of financial activity. Denial of reduction of the amount of dividend paid to IFC from the computation of the amount of dividend paying company will lead to anomaly as the company is paying additional tax on the dividend paid to an entity which is beyond the taxing ambit in India. To permit taxation of a transaction vis-à-vis wholly taxed immune entity, even indirectly on the dividend disbursing company will violate the legislative intent that enshrines such immunity. Thus, Sub-Section 1A of Section 115O assumes particular salience, as it expressly contemplates the reduction of amounts paid to exempt entities from the dividend amount liable to be DDT. Any construction to the contrary would antamount to penalising compliance for statutory exemption and alien to taxation laws and purposive interpretation. Accordingly, we hold that dividend paid to entities enjoying absolute immunity under the Income Tax Act such as international multinational institutions such as IFC which has been accredited tax free status should in all form be excluded from the taxable base for the purpose of DDT. Accordingly, we hold that amount of dividend paid to IFC should be reduced while calculating the DDT paid. Thus, the grounds raised by the assessee are allowed, that is, the amount of dividend paid to IFC is to be reduced from the total amount on which DDT is payable. The core legal issue considered is whether the Assessing Officer (AO) was justified in rejecting the claim for refund of Dividend Distribution Tax (DDT) paid under section 115-O of the Income Tax Act on dividends paid to the International Finance Corporation (IFC), an entity enjoying immunity from taxation under section 9 of Article VI of the International Finance Corporation (Status, Immunities and Privileges) Act, 1958 (IFC Act, 1958).Additional sub-issues include:Whether DDT under section 115-O is a tax on the dividend income of the shareholder or on the company distributing the dividend;Whether the immunity granted to IFC under the IFC Act, 1958 extends to exemption from DDT levied on dividends paid to it;Whether the company is required to pay DDT on dividends distributed to IFC despite IFC's immunity;Whether the dividend amount paid to IFC should be excluded from the total dividend amount for calculating DDT liability under section 115-O;The applicability and interpretation of sub-section (1A) of section 115-O regarding reduction of dividend amounts paid to exempt entities from DDT computation;Whether the overriding effect of the IFC Act, 1958 negates or modifies the applicability of the Income Tax Act, 1961 in this context.Issue-wise Detailed Analysis1. Nature of DDT under Section 115-O and its Applicability to Dividends Paid to IFCThe legal framework involves section 115-O of the Income Tax Act, which levies an additional income tax on domestic companies on any amount declared, distributed, or paid by way of dividends. The section contains a non-obstante clause indicating that this charge is independent of the taxability of dividend income in the hands of shareholders.Precedent relied upon includes the decision of the ITAT Mumbai Special Bench in Total Oil India Pvt. Ltd., which held that DDT under section 115-O is a tax on the company's profits and not on the shareholder's income. The Special Bench emphasized that the non-obstante clause in section 115-O overrides other provisions, including section 4 of the Income Tax Act. The Bombay High Court ruling in Small Industries Development Bank of India vs. CBDT was also cited, affirming that the charge under section 115-O is on the company's profits.The AO and the CIT(A) adopted this reasoning to reject the refund claim, holding that the tax liability for DDT arises in the hands of the company irrespective of the shareholder's tax status or immunity.The assessee's argument that DDT is a tax on the dividend income of the shareholder and thus should not apply to IFC, which enjoys immunity, was rejected on the ground that the statute does not differentiate between shareholders for DDT purposes.The Tribunal accepted the contention that DDT is a tax on the company and not on the shareholder, and thus the company must pay DDT on dividends declared, including those paid to IFC.2. Immunity of IFC under the IFC Act, 1958 and its Impact on DDT LiabilityIFC is an international institution established under an agreement signed by India and other countries, with the IFC Act, 1958 enacted to implement this agreement domestically. Section 3(1) of the IFC Act provides that the provisions of the IFC Agreement have the force of law in India, overriding other laws. Section 9 of Article VI of the IFC Act grants immunity to IFC from all taxation and customs duties on its assets, property, income, operations, and transactions.The assessee contended that this immunity is absolute and overrides the Income Tax Act, including the levy of DDT on dividends paid to IFC. It was argued that the dividend paid to IFC constitutes a transaction covered by the IFC Act, and thus no tax should be levied on such dividend payments.The Revenue contended that the immunity granted to IFC does not extend to exempting the company from paying DDT, as the tax is on the company's profits, not on the shareholder's income.The Tribunal acknowledged the overriding effect of the IFC Act and the absolute immunity granted to IFC from taxation in India. It reasoned that denying reduction of dividend amounts paid to IFC from the DDT computation would lead to an anomaly, as the company would be paying additional tax on dividends paid to an entity beyond the taxing ambit of India.Thus, the Tribunal held that the immunity granted to IFC must be given effect to, and the dividend paid to IFC should be excluded from the dividend amount on which DDT is calculated.3. Interpretation of Sub-section (1A) of Section 115-O and Analogous ExemptionsSub-section (1A) of section 115-O provides for reduction of the dividend amount for DDT computation by the amount of dividend received from subsidiaries that have paid tax and by dividends paid to the New Pension System (NPS) Trust, which is exempt under section 10(44).The assessee argued by analogy that since the statute explicitly excludes dividends paid to the NPS Trust from DDT liability, dividends paid to IFC, which enjoys statutory immunity, should similarly be excluded.The Tribunal noted that while the statute does not specifically mention IFC in sub-section (1A), the principle underlying the exemption for the NPS Trust applies by parity of reasoning to entities like IFC that enjoy absolute immunity under a special statute.The Tribunal referred to other international and national institutions such as the Reserve Bank of India, SEBI, IMF, UN, and the World Bank Group, whose income is exempt from taxation under their respective Acts or international agreements, and noted that courts have recognized immunity for their income and related transactions.Accordingly, the Tribunal held that the dividend paid to IFC should be treated similarly and excluded from the dividend amount on which DDT is payable, consistent with the overriding effect of the IFC Act and principles of statutory interpretation.4. Treatment of Competing Arguments and HypotheticalsThe Revenue's concern that exempting dividends paid to IFC from DDT would create an anomalous situation where the company's tax liability varies with the shareholder's status was addressed by the Tribunal. It reasoned that the statutory immunity granted to IFC is a sovereign commitment and must be given effect to, even if it results in such differentiation.The Tribunal rejected the Revenue's hypothetical scenarios where the company's DDT liability would fluctuate based on shareholder composition, emphasizing that the statute does not envisage such exceptions except where immunity is expressly granted by law.The Tribunal also distinguished the IFC's immunity from tax treaties such as the Indo-Hungary DTAA, noting that the IFC Act provides a broader, overriding immunity that must be respected.5. Application of Law to Facts and Final ConclusionGiven that IFC held significant shareholding in the assessee company during the relevant assessment years and that dividends were paid to IFC, the Tribunal held that the dividend amounts paid to IFC should be excluded from the dividend base for calculating DDT under section 115-O.This conclusion was reached by harmonizing the overriding effect of the IFC Act, the statutory provisions of the Income Tax Act, and the principle of purposive and equitable interpretation, ensuring that the sovereign immunity granted to IFC is not undermined by indirect taxation on the distributing company.Significant Holdings'Section 115-O is a code and the non-obstante clause in the said section is an indication that the charge under this section is independent and not covered under the 'total income' under the Act. By virtue of this non-obstante clause, provisions of section 115-O of the Act override provisions of all other sections of the Act including section 4 of the Act. Further, the Bench held that DDT is a charge to tax profits of the company and not a charge in the hands of the shareholder or tax paid on behalf of the shareholder by the domestic company.''The immunity provided under the IFC Act, 1958 will also prevail and will have the overriding effect of the Income Tax Act, 1961. Otherwise Section 9 of IFC Act granting immunities from taxation will become otiose.''Sub-Section 1A of Section 115O assumes particular salience, as it expressly contemplates the reduction of amounts paid to exempt entities from the dividend amount liable to be DDT. Any construction to the contrary would amount to penalising compliance for statutory exemption and alien to taxation laws and purposive interpretation.''Where the shareholder in question is cloaked with comprehensive exemption under the Income Tax Act, then such exemption is not merely limited to income but it extends in its full amplitude to the IFC's assets, property, operations, transactions and all manifestation of financial activity. The denial of reduction of the amount of dividend paid to IFC from the computation of the amount of dividend paying company will lead to anomaly as the company is paying additional tax on the dividend paid to an entity which is beyond the taxing ambit in India.'Accordingly, the Tribunal held that the amount of dividend paid to IFC should be excluded while calculating DDT liability under section 115-O, and allowed the assessee's appeals.