Treaty protection for dividend taxation limits domestic dividend distribution tax where the payment remains dividend income.

Dividend distribution tax on dividends paid by a domestic company to a United Kingdom resident shareholder was treated as falling within the India-UK tax treaty, because the underlying payment remained dividend income even though the tax was collected from the company. Section 115-O was characterised as a collection mechanism introduced for administrative convenience, not as changing the nature of the income. As Article 11 specifically governs dividends and section 90 gives effect to the more beneficial treaty provision, the treaty cap prevailed. The source-state taxing right was therefore limited to 10%, and the domestic company was entitled to the treaty rate.

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Issues: Whether dividend distribution tax paid by a domestic company on dividends paid to a United Kingdom resident shareholder is governed by Article 11 of the India-UK tax treaty so as to restrict the tax rate to 10% instead of the rate under section 115-O of the Income-tax Act, 1961.

Analysis: The dividend paid by the domestic company was held to remain dividend income notwithstanding the shift of the incidence of collection of tax from the shareholder to the company. The legislative history of section 115-O showed that the levy was introduced and reintroduced as a mode of collection for administrative convenience, but the nature of the underlying receipt as dividend did not change. Since section 2(24) of the Income-tax Act, 1961 treats dividend as income and section 90 gives effect to a more beneficial treaty provision, the India-UK treaty was required to be applied on its own terms. Article 1 extends the convention to residents of one or both contracting states, Article 2 covers income-tax and substantially similar taxes, and Article 11 specifically governs dividends. The treaty language was found to apply to dividend paid by a resident of India to a resident and beneficial owner in the United Kingdom, with the source state's taxing right capped at 10% under Article 11(2)(b). The authority below erred in treating DDT as outside the treaty merely because it was collected from the domestic company.

Conclusion: The tax on dividends paid to the United Kingdom resident shareholder is restricted by Article 11 of the India-UK treaty, and the company is entitled to the 10% treaty rate.

Ratio Decidendi: Where a domestic levy is in substance tax on dividend income and the applicable tax treaty specifically regulates dividend taxation, section 90 requires the treaty cap to prevail over the higher domestic rate to the extent it is more beneficial to the assessee.

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