2025 (12) TMI 677 - HC - Income Tax

DDT u/s 115-O Treated as Dividend Income, Capped at 10% via India-UK DTAA Article 11

HC held that Dividend Distribution Tax (DDT) under Section 115-O is, in pith and substance, a tax on dividend income of shareholders, though levied and ... Tax on dividends paid/distributed by the Appellant (Non-Resident) - governed by Double Tax Avoidance Agreement between (DTAA) between India and United Kingdom or in accordance with Section 115O of the Income Tax Act, 1961 - tax credit are envisaged in the hands of shareholders in respect of dividend distribution tax payable to company in which shares are held - bilateral treaty between India and UK - Appeal against Advanced Rulings - Whether DDT is a tax on domestic resident company in India/ the appellant and not on the shareholder/resident of UK, and its levy does not give rise to any “Juridical double taxation? - whether DDT paid by Appellant is outside scope of India-UK DTAA ? Admissibility or otherwise of deduction of expenditure incurred in earning dividend income, which is not included in the total income of the assessee by virtue of Section 10(33) of the Income Tax Act 1961, which was in force at the relevant Assessment Year 2002-03 HELD THAT:- The definition of term ‘Income’ in 2(24) of the Act of 1961 was held to be an inclusive definition and, therefore, the pivotal question to be answered in the Appeal was determined as, “Whether the provisions of Section 115O which contain a provision imposing additional tax on the dividends which are declared, distributed or paid by a Company, are within the fold of legislative field covered by List 1 or it relates to legislative field assigned under List 2. Treaty shall prevail over domestic law. We find ourself fortified by the observation of Delhi Tribunal in Giesecke & Devrient Ltd. [2020 (10) TMI 750 - ITAT DELHI] where with reference to the legislative history of Section 115O, it emerges with clarity, that DDT, is a levy on the dividend distributed by payer company, being an additional tax is covered within ‘Tax’ as defined in Section 2(43) of Act and, hence, is chargeable as per Section 4, which is subject to other provisions, which include Section 90 and sub-clause (2) thereof, then specially in case of Avoidance of Double Tax, the provisions more beneficial to assessee must be preferred. A party may not follow the treaty, it may choose to renege from its obligations thereunder, but it cannot amend the treaty on the guise of its domestic law, having undergone change. Amendments to domestic law, cannot be read into treaty provisions, without amending Treaty itself. Since it is necessary for the contracting party to fulfill their obligations under a Treaty in good faith and this includes its accountability under it and act in a manner, not to defeat its purpose and object, we find that the benefit accruing under the DTAA, and Article 11 thereof, cannot be be denied as Revenue is of the opinion that the Treaty do not cover ‘Dividend’ or it is not applicable to a domestic company. Hon’ble Supreme Court in UOI v. Tata Tea Co. Ltd. [2017 (9) TMI 1300 - SUPREME COURT] has held that dividend connotes ' income ', the natural corollary is that as per section 4, the said income should be chargeable to tax in the hands of the person earning such income. However, from a combined reading of Section 115O and 10(34), alongwith the legislative history narrated earlier, it is evident that DDT is a tax on the dividend income of the shareholder, though the incidence of tax has shifted from the shareholder to the company paying the dividend. Any other interpretation of the provisions will render the section 115O of the Act unconstitutional as it will fall foul of Entry 82, since what is sought to be taxed by the Respondent is not 'income' of the company. The Board of Advanced Ruling has further failed to appreciate that in view of the statutory provisions and legislative background of Section 115O of the Act, DDT paid by a company distributing dividend is not an income tax on profits or income of the company, but, is a tax on the dividend, which is income of the shareholder of the company. Hence, DDT is tax on the dividend income of the shareholder, which is merely, for administrative convenience, charged in the hands of, and recovered from the company distributing dividend. There is no denying that dividend income is not chargeable to tax and is exempt in the hands of the shareholders in light of the provisions of Section 10(34) of the Act, since the burden of taxation has been shifted to the company distributing the dividend, from the shareholder. While the DDT is a tax payable by the company, and not the shareholders, in pith and substance, it is a tax on dividends that is income of the shareholders. There is nothing in the Article which suggests that the income has to be taxed in India in the hands of the shareholders. It merely deals with the nature of income, viz. dividend, which cannot be taxed in India at a rate exceeding 10%, if other stipulated conditions are met. The nature of income is a apropos element to invoke the said Article, and not the person who is subjected to tax, in whose hands the tax is levied, is not relevant for application of Article 11, as DDT is a ‘tax on dividend income of the shareholder’. The entire legislative history of Section 115-O corroborates this. More importantly, the Apex Court in the case of Tata Tea [2017 (9) TMI 1300 - SUPREME COURT] too has confirmed the nature of income being dividend income, which is subject to DDT and under Section 115O the dividend income is sought to be taxed at a rate of 20.36%. Section 90(2) of the Act of 1961 allow the appellant to apply the lower rate under the DTAA and Article 11(2) restrict tax rate of such dividend income to 10% and there is no embargo in Article 11 of the DTAA on the Appellant to apply the lower tax rate stipulated in Article 11(2). Authority has erred in not appreciating that DDT erroneously collected in excess of 10% as provided by India-UK DTAA is erroneous and contrary to law and retention of excess tax would be contrary to Article 265 of the Constitution of India. As a result of the above, the Appeal is allowed by setting aside the Ruling passed by the Board For Advanced Rulings, New Delhi, by declaring that, on the facts and circumstances of the case and in law, Colorcon Asia Pvt. Ltd (“Colorcon India” or “the Applicant” or “Company”) is entitled to restrict the tax rate on dividends distributed by it to Colorcon Ltd, United Kingdom (UK), at 10% under Article 11 of the India - UK Tax Treaty. Upon the said question being answered the Department is at liberty to gross up the tax rate in an appropriate manner. Issues: (i) Whether Dividend Distribution Tax (DDT) levied under Section 115-O of the Income-tax Act, 1961 on dividends paid by an Indian resident company to a UK resident shareholder falls within the scope of the IndiaUK DTAA and, if so, whether the tax rate on such dividends is restricted to 10% under Article 11(2)(b) of the DTAA; (ii) If Article 11(2)(b) applies, whether the 10% treaty rate may be grossed up for computing tax liability.Issue (i): Whether DDT under Section 115-O is covered by the IndiaUK DTAA and whether Article 11(2)(b) restricts the tax rate on dividends paid to a UK resident beneficial owner to 10%.Analysis: The court examined the definition and legislative history of dividend and Section 115-O, the scope of Article 2 and Article 11 of the IndiaUK DTAA, and the effect of Section 90 of the Income-tax Act. It considered precedents concerning treaty interpretation (including Azadi Bachao Andolan and Engineering Analysis), relevant tribunal and High Court decisions, and the legislative memoranda showing shifts in incidence of tax for administrative convenience. The analysis found that dividend remains income as defined in Section 2(24), that DDT is an additional tax on dividends whose incidence was shifted to the company for administrative convenience, and that Article 2(1)(b) and Article 2(2) of the DTAA cover income-tax and identical or substantially similar taxes. Applying Section 90(2) and treaty interpretation principles, the court held that the DTAAs Article 11 is triggered where its conditions are met and that Article 11(2)(b) imposes a cap of 10% on tax chargeable by the source state when the beneficial owner is a UK resident.Conclusion: The DDT charged in excess of the 10% rate specified in Article 11(2)(b) of the IndiaUK DTAA is not permissible; Article 11(2)(b) applies and restricts the tax rate on dividends paid to the UK resident beneficial owner to 10%.Issue (ii): Whether the 10% rate under Article 11(2)(b) is to be grossed up in computing the tax liability.Analysis: Having answered Issue (i) in favour of treaty application, the court considered the appropriate computational effect. The BFARs ruling denied treaty applicability; the court set aside that ruling and observed that, upon application of Article 11(2)(b), the Department is at liberty to gross up the tax rate in an appropriate manner consistent with the treaty and domestic law to give effect to the 10% cap.Conclusion: The 10% treaty rate applies and may be grossed up by the Department in an appropriate manner to compute the tax liability.Final Conclusion: The impugned ruling of the Board for Advance Rulings is set aside; on the facts and law the taxpayer is entitled to restrict the tax rate on dividends paid to its UK resident beneficial owner to 10% under Article 11 of the IndiaUK DTAA, and the revenue may gross up the rate appropriately.Ratio Decidendi: Where a DTAA notified under Section 90(2) applies, treaty provisions that grant a more beneficial treatment to the assessee prevail over inconsistent domestic provisions; DDT under Section 115-O, being a tax on dividend income whose incidence was shifted to the company for administrative convenience, falls within the scope of the DTAA and is subject to the rate limitation in Article 11(2)(b).