2025 (7) TMI 1027 - AT - Income Tax

ITAT upholds DDT payment at statutory rates over DTAA rates for UK dividend recipient

Intertek India [P] Ltd Versus The A.C.I.T Circle – 10 (1), Delhi

The ITAT Delhi dismissed the assessee's appeal for refund of excess DDT payment. The assessee claimed DDT on dividends paid to UK shareholder should be ... Rejection of refund of excess Dividend Distribution Tax [DDT] payment made by the assessee - It is the say of the assessee that the rate of DDT on dividends paid by assessee to Intertek Holdings Limited, UK, ought to be restricted to 10% of gross amount of dividend in accordance with Article 11 of India-UK DTAA, instead of 20.56% charged in terms of section 115-O of the Act - Whether CIT(A) erred in concluding that DDT is not a tax on behalf of recipient of dividend and failed to appreciate that tax can be levied under the Act only on income and that dividend is income of shareholder? HELD THAT:- We find that the ld. CIT(A), relying on the Special Bench of ITAT, Mumbai in the case of DCIT vs Total Oil India Pvt. Ltd. [2023 (4) TMI 988 - ITAT MUMBAI (SB)] concluded that where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder, which attracts DDT referred to in Section 115-O of the Act, such DDT 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 as specified in the relevant DTAA with reference to such dividend income. Wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying DDT, only then, the domestic company can claim benefit of the DTAA, if any. Also in the case of Total Oil India Pvt Ltd. [2023 (4) TMI 988 - ITAT MUMBAI (SB)] held DTAA does not get triggered at all when a domestic company pays DDT u/s.115O of the Act. We are further informed that the correct rate of Dividend distribution tax i.e., rate under DTAA vs Section 115-O is under consideration of Hon'ble Delhi High court. We are therefore of the considered view that till such time the Hon'ble High Court decides the issue decided in Total Oil India Pvt Limited, (supra), we are bound by the Special Bench decision. Respectfully following the decision in the case of Total Oil India Pvt Limited, (supra), we find no reason to interfere with the decision of the CIT(A). Accordingly, we sustain the decision of CIT(A). The grounds of appeal 1 to 5 are dismissed. Issues Presented and ConsideredThe core legal questions considered by the Tribunal in this appeal are:1. Whether the rate of Dividend Distribution Tax (DDT) payable by the domestic company on dividends declared and paid to its non-resident shareholder (a UK resident company) should be restricted to 10% under Article 11 of the India-UK Double Taxation Avoidance Agreement (DTAA), or whether the higher domestic rate of 20.56% under section 115-O of the Income Tax Act applies.2. Whether the DDT levied under section 115-O is a tax on the company or a tax on the shareholder, and consequently, whether the DTAA provisions relating to dividends apply to the DDT paid by the domestic company.3. Whether the domestic company paying DDT can claim refund of excess DDT paid beyond the DTAA rate by invoking the provisions of section 237 of the Act.4. The applicability and interpretation of judicial precedents and the Special Bench decision in DCIT vs Total Oil India Pvt. Ltd. regarding the nature of DDT and its interaction with DTAA provisions.5. The scope and effect of treaty provisions, including the presence or absence of specific protocols or clauses extending treaty benefits to DDT paid by domestic companies.Issue-wise Detailed AnalysisIssue 1: Applicable Rate of DDT - Domestic Law vs DTAAThe legal framework involves section 115-O of the Income Tax Act, which imposes DDT on companies distributing dividends at a specified domestic rate (20.56% in this case), and Article 11 of the India-UK DTAA, which caps tax on dividends at 10% for beneficial owners resident in the other contracting state.The assessee contended that since the dividend was paid to a UK resident company, the DDT rate should be restricted to 10% under the DTAA. The assessee relied on precedents from ITAT Delhi and Kolkata, arguing that the DTAA rate overrides the domestic rate.The Tribunal, however, relying heavily on the Special Bench decision in DCIT vs Total Oil India Pvt. Ltd., held that the DTAA provisions relating to dividends apply to the shareholder's tax liability and not to the tax liability of the domestic company paying the dividend. Since DDT is a tax on the company and not on the shareholder, the DTAA rate cap does not apply to the DDT paid by the domestic company under section 115-O.The Tribunal noted that the India-Hungary DTAA contains a specific protocol deeming DDT paid by the company as tax paid by the shareholder and limiting the rate to 10%, but no such provision exists in the India-UK DTAA. Therefore, the domestic company paying DDT in India is liable to pay tax at the domestic rate under section 115-O, and the DTAA does not provide relief in this context.Issue 2: Nature of DDT - Tax on Company or ShareholderThe Tribunal examined the nature of DDT through judicial precedents and statutory provisions. The assessee argued that DDT is effectively a tax on the shareholder's income and hence should be governed by DTAA provisions applicable to the shareholder.The Tribunal referred to authoritative decisions, including the Special Bench in Total Oil India and judgments of the Bombay High Court, which held that DDT is a tax on the company's income and not on the shareholder. The Supreme Court's decision in Tata Tea was noted for not conclusively deciding whether DDT is a tax on the company or shareholder, but it did not disturb the principle that DDT is not a payment on behalf of the shareholder.Section 115-O(3) and (4) were highlighted, which clarify that the tax paid under this section is a final tax and no credit is allowed to the company or any other person, reinforcing that DDT is a separate tax on the company's distributed profits.The Tribunal concluded that since DDT is a tax on the company and not on the shareholder, the DTAA provisions that limit tax on dividend income of the shareholder do not apply to the DDT liability of the company.Issue 3: Claim for Refund of Excess DDT PaidThe assessee filed a refund claim under section 237 of the Act, seeking refund of DDT paid in excess of 10%, relying on DTAA provisions and ITAT precedents.The Assessing Officer and CIT(A) rejected the refund claim, holding that the DTAA does not apply to the DDT paid by the company and that the domestic rate under section 115-O is applicable.The Tribunal upheld this view, dismissing the refund claim. It observed that the DTAA does not govern the tax liability of the company paying DDT unless the treaty specifically extends such protection, which is absent in the India-UK DTAA.Issue 4: Interpretation of Judicial Precedents and Special Bench DecisionThe Tribunal extensively relied on the Special Bench decision in DCIT vs Total Oil India Pvt. Ltd., which analyzed the nature of DDT and its relationship with DTAA provisions. The Special Bench held that the DTAA is designed to avoid double taxation of the same income in the hands of the taxpayer, but since DDT is a tax on the company's income and not on the shareholder's income, the DTAA provisions relating to dividends do not apply to DDT.The Tribunal also noted that tax treaties are agreements between sovereign states that impose self-limiting obligations on taxing rights. Unless the treaty expressly extends protection to DDT paid by the company, the domestic tax law applies.The Tribunal further emphasized that the protocol to the India-Hungary treaty, which specifically extends treaty protection to DDT, is an exception and cannot be generalized to other treaties lacking such provisions.Issue 5: Scope and Effect of Treaty Provisions and ProtocolsThe Tribunal analyzed the treaty provisions and protocols, noting that the India-UK DTAA does not contain any protocol or clause that treats DDT paid by the company as tax paid by the shareholder or limits the DDT rate.It was held that treaty benefits can only be claimed by residents of the treaty partner jurisdiction and that the company resident in India cannot claim treaty protection for taxes paid on its own income unless specific provisions exist.The Tribunal rejected the argument that DTAA should be interpreted liberally to extend benefits to DDT paid by the company, emphasizing that treaties must be interpreted as they exist and not on the basis of what they ideally should be.Significant Holdings'DDT is paid by the domestic company resident in India. It is a tax on the domestic company's income and not tax paid on behalf of the shareholder. In such circumstances, the domestic company paying DDT under Section 115-O of the Act does not enter the domain of DTAA at all.''If domestic company has to enter the domain of DTAA, the countries should have agreed specifically in the DTAA to that effect. In the treaty between India and Hungary, the Contracting States have extended the treaty protection to profits distributed by the Indian company by deeming the DDT paid by the Indian company as tax paid by shareholder and restricting the DDT rate to 10%. In the absence of similar deeming provision under other DTAAs, treaty benefit cannot be granted to the Indian company paying the DDT in such other DTAAs.''A tax treaty protects taxation of income in the hands of residents of the treaty partner jurisdictions in the other treaty partner jurisdiction. Therefore, 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 company incorporated in India cannot seek treaty protection in India for taxes paid on its own income.''Taxation is a sovereign power of the State. 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. 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.'Final determination: The Tribunal dismissed the appeal and upheld the order of the CIT(A), confirming that the domestic company is liable to pay DDT at the rate specified under section 115-O of the Act, and the DTAA provisions relating to dividend income of the shareholder do not apply to the DDT paid by the company. Consequently, no refund of excess DDT paid beyond the DTAA rate is allowable.