TaxTMI 
TaxTMI 
2023 (4) TMI 988
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....Advocate/CA S/Shri 1. 423/Mum/2017 Astra Zeneca Pharma India Ltd. Rajan Vora, & Nikhil Tiwari 2. 7189/Mum/2018& 7858/Mum/2019 GE Power India Ltd. Ms. Fereshte Sethna & Mrunal Parikh 3. C.O 01/Kol/2020 Exide Industries Ltd. Anup Sinha (FCA) 4. 3643/Mum/2021 Tech Mahindra Ltd. J.D.Mistry, Sr.Adv. 5. 1942/Del/2021 Sennheiser Electronics India Pvt. Ltd. Neeraj Jain, Adv. & Alok Vasant 6. 625/Del/2021 J.C.Bamford Excavators Pvt. Ltd. Ajay Vohra, Sr. Adv, Vishal Kalra, Amit Bablani & Sahil Gupta Shri G. S. Pannu, President, Shri N.V.Vasudevan, Vice President And Shri Vikas Awasthy, Judicial Member For the Assessee : S/Shri Ajay Vohra, Sr. Advocate, V.Sridharan, Sr. Advocate, Neeraj Jain Adv., Anshul Sachar, Alok Vasant, Ravi Sawana & Dinesh Kukreja, Shri Niraj Sheth For the Revenue : Sh. Vinod Tanwani ORDER The question for consideration before Special Bench is:- "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 section 115-O of the Income-Tax Act, 1961 (in sh....
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....ken by the Ld. Delhi Bench in the case of Giesecke & Devrient India Pvt.Ltd. (supra) firstly, was that DDT is a levy on the dividend distributed by the payer company, being an additional tax, falls within the definition of 'Tax' as defined u/s 2(43) of the Act, which is subject to the charging section 4 of the Act and charging section itself is subject to the provisions of the Act thereby bringing it within the sweep of which section 90 of the Act. Secondly, the Bench held that payment of dividend distribution tax u/s 115-O by the Domestic Company was for and on behalf of the shareholder and in discharge of shareholders liability to pay tax on dividend distributed. Reliance was also placed on the decision of Kolkata Bench in the case of DCIT vs. Indian Oil Petronas Pvt. Ltd., 127 taxmann.com 389, wherein similar view was taken. 4. The Tribunal in the case of Giesecke & Devrient India Pvt. Ltd. (supra) examined the nature of DDT and observed as under: "44. The genesis of charge for levy of additional Income Tax u/s 115-0 on the profits declared/distributed and paid by a corporate assessee by way of dividend can be traced to the charging provisions of Section 4 of....
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.... method was found to be cumbersome, Parliament chose to exempt dividend income in the hands of the shareholder and chose to levy additional income-tax on the amount of profits declared, distributed or paid as dividend by the domestic companies. Thus, by inserting Section 115-O, additional income- tax is levied on the amount of profits declared, distributed or paid as dividend and by inserting Section 10(33) it is made clear that the dividends referred to in Section 115-O would be exempt from tax." 50. Thus, it can be stated that the Hon'ble Bombay High Court has unequivocally held that DDT is tax 'on the company' and not 'on the shareholder'. 51. There is no dispute that the liability is on the payer company to pay DDT, but, at the same time, we must not lose sight of the fact that additional Income tax is part of tax as defined in Section 2(43) of the Act and levy of additional Income tax u/s 115 O has its genesis in charging provision of Section 4 of the Act. We must also remember that this additional Income tax [DDT] levied u/s 115 O is a tax on income and definition of "Income" includes dividend. 52. As per the Income Tax Rules, re....
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....cluded that DTAA will prevail over the Act in view of Sec.90(2) of the Act. The Tribunal finally concluded as follows: "71. In light of the aforesaid decision, we are of the considered view that tax rates specified in DTAA in respect of dividend must prevail over DDT. 72. Article 10.4 above specifies that clause 1 and 2 will not be applicable if beneficial owner of dividend carries on business in other contracting state of which the company paying dividend is a resident through PE situated therein. Though supporting documents have been filed before us, but these documents need verification from primary officer, that is, the Assessing Officer. We, therefore, deem it fit to restore this issue for limited purpose of verification in the light of the aforesaid Articles of DTAA. 73. Considering the above in totality, in our considered opinion, the DDT levied by the appellant should not exceed the rate specified in Article 10 in India Germany DTAA. 74. The additional ground is, accordingly, allowed on principle, though subject to verification as directed hereinabove." 7. In the case of Indian Oil Petronas (P) Ltd. (supra), the Kolkata Bench held as u....
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.... Giesecke & Devrient India Pvt Ltd vs. ACIT (supra) and DCIT vs. Indian Oil Petronas Pvt. Ltd. (supra). The Division Bench observed: "10. The reasons for our doubting the correctness of the decisions of the coordinate bences, on the dividend distribution tax rate being restricted by the treaty provisions dealing with taxation of dividends in the hands of the shareholders (i.e. Article 11 of the Indo-French tax treaty, as in this case), are as set out below: (a) Hon'ble Supreme Court, in the judgment reported as Godrej & Boyce Mfg Co Ltd Vs DCIT *(2017) 394 ITR 449 (SC)+, has observed that "the fact that section 10(3) and section 115 O of the brought in together, deleted and reintroduced in a composite manner also does not assist the assessee" and that "if the argument is that tax paid by the dividend paying company under section 115- O is to be understood to be in behalf of the recipient assessee, the provisions of Section 57 should enable the assessee to claim deduction of expenditure incurred to earn the income on which such tax is paid" which is wholly incongruous in view of the provisions of Section 10(33). The payment of dividend distribution tax under sectio....
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....thus, in our considered view, misplaced. (c) Under the scheme of the tax treaties, no tax credits are envisaged in the hands of the shareholders in respect of dividend distribution tax paid by the company in which shares are held. The dividend distribution tax thus cannot be equated with a tax paid by, or on behalf of, a shareholder in receipt of such a dividend. Infact, the payment of dividend distribution tax does not, in any manner, prejudice the foreign shareholder, and any reduction in the dividend distribution tax does not, in any manner, act to the benefit of the foreign shareholder resident in the treaty partner jurisdiction. This taxability is wholly tax-neutral vis-à-vis foreign resident shareholder and the treaty protection, when given in respect of dividend distribution tax, can only benefit the domestic company concerned. The treaty protection thus sought goes well beyond the purpose of the tax treaties. (d) Hon'ble Delhi High Court's judgment in the case of DIT v. New Skies Satellite BV [(2016) 382 ITR 114 (Del)] does lay down the principle that an amendment in the domestic law will not influence the interpretation of that expression in the ta....
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....s not a taxation of the recipient of the dividend, and consequently as stated earlier Article 7 of the DTA does not apply to STC. The above conclusion is further supported by a proper reading and analysis of Article 7(2)(a) which refers to a recipient of dividends and not to a company declaring the dividend. The benefits conferred by the said Article are to be enjoyed by the recipients of the dividends and not the company declaring the dividends (e) While the views so expressed by a foreign judicial body do not bind us, or, for that purpose, any judicial body in India, these views at least suggest that this school of thought reflected in the said decision deserves to examined in a fair, judicious and open-minded manner. (f) Wherever the Contracting States to a tax treaty intended to extend the treaty protection to the dividend distribution tax, it has been so specifically provided in the tax treaty itself. For example, in India Hungry Double Taxation Avoidance Agreement [(2005) 274 ITR (Stat) 74; Indo-Hungarian tax treaty, in short], it is specifically provided, In the protocol to the Indo-Hungarian tax treaty it is specifically stated that "When the comp....
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....s are paid by the resident of India, in respect of its own liability in India, such taxation in India, in our considered view, cannot be protected or influenced by a tax treaty provision, unless a specific provision exists in the related tax treaty enabling extension of the treaty protection. (h) Taxation is a sovereign power of the State- collection and imposition of taxes are sovereign functions. 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. Inherent in the self-imposed restrictions imposed by the DTAA is the fact that outside of the limitations imposed by the DTAA, the State is free to levy taxes as per its own policy choices. 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". 9. Moreover, the Revenue in the case of Maruti Suzuki India Private Limited(in short 'Maruti Suzuki') in ITA NO.961/Del/2015 for Assessment Year 2010-11 also made an application for reference of a similar issue to the Special Bench. Simila....
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....ax @10% on dividends received by certain category of tax payers. Such tax was brought to cover the disparity of effective DDT rate of 20% approximately on dividend income as compared to headline tax rate of 30% on income other than dividend earned by tax payers. In Finance Bill 2020, the regime of DDT on dividend declared by Indian Companies have been done way with w.e.f. 01/4/2020. Henceforth, dividend to shareholders would not be subject to DDT u/s. 115-O of the Act, but would be taxable in the hands of the resident shareholders at the applicable rates. 12. Shri Ajay Vora explaining the nature of levy u/s. 115-O of the Act submitted, that genesis of the charge for additional income tax u/s. 115-O of the Act on the profits declared, distributed and paid by corporate assessee by way of dividends can be traced to the charging provisions of section 4 of the Act. From a bare perusal of section 4(1) of the Act, it would be seen that the said section provides for charging of tax including additional income tax on the total income. The term tax as defined u/s. 2(43) of the Act would also cover additional income tax levied u/s. 115-O(2) of the Act. He submitted that section 115-O(2) of....
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....e. clause-33 was inserted in section-10 to exempt the dividend income in the hands of shareholders. 14. The ld.Counsel for the assessee argued that provisions of section 115-O were inserted only to facilitate collection of tax. He asserted that constitutional validity of section 115-O of the Act was challenged before the Hon'ble Calcutta High Court in the case of Jayshree Tea & Industries Ltd. vs. Union of India, 253 ITR 608. The Single Judge of the Hon'ble High Court upheld constitutional validity of section 115-O of the Act. On appeal, the Division Bench of the Hon'ble Calcutta High Court upheld the decision of Single Bench holding the constitutional validity of section 115-O of the Act. It was further held that the tax payable ought to be restricted to 40% of dividend distributed, equal to the percentage of income liable to tax under the Act. The Revenue carried the latter part of judgment before the Hon'ble Supreme Court of India in the case of Union of India vs. Tata Tea Company Ltd., 398 ITR 260(SC). The Hon'ble Apex Court after examining the provisions of section 115-O, the scheme of the Act held that Division Bench was not right in restricting the levy of tax und....
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.... by way of introducing a different mechanism for collecting tax on such dividend income would be contrary to the principle of treaty override as enshrined in Article 26 and 27 of Vienna Convention. Such an approach cannot be countenanced and was held to be unacceptable in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT (supra). 16. Referring to the decision of Delhi Bench of the Tribunal in the case of Giesecke & Devrient India Pvt Ltd vs. DCIT (supra), the ld. Counsel for the assessee submits that the Division Bench has rightly held that DDT levied in terms of section 115-O of the Act should be restricted to the rate of tax on dividend as provided in the applicable DTAA governing non-resident shareholders. Further referring to the decision of Kolkata Bench of the Tribunal in the case of India Oil Petrona Pvt. Ltd. (supra), he submitted that the Division Bench has held that DDT is a tax on dividend income and not on undistributed profits of the Company. It was also held that the company paying dividend is person responsible for distributing dividend income among shareholders including non-resident shareholders. Hence, the rate of tax on such dividend inco....
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....an Company was not liable to tax in India in view of Article -XI of India Malaysia Tax treaty, according to which dividend was taxable only in Malaysia. In principle Hon'ble Supreme Court accepted that a resident of India could avail the benefits under a distributive role of tax treaty vis-à-vis taxation of income in India. 18. Without prejudice to the above submissions, the ld. Counsel for the assessee asserted that the rate of taxation of dividend paid to non-resident shareholders as provided in DTAA with Japan is required to be substituted and supplanted in section 115-O of the Act. Even if there were to be an ambiguity in this respect and the same is open to two interpretations, the benefit of the same certainly flows to the tax payer. In support of his arguments the ld. Counsel for the assessee placed reliance on the decision in the case of Commissioner Customs (Imports), Mumbai vs. Dilip Kumar & Co.,95 taxmann.com 327. 19. Shri V. Sridharan, Senior Advocate appearing on behalf of Maruti Suzuki India Pvt. Ltd (in ITA No. 1953/Del/2022) submitted that the machinery provision for collection of tax does not change the nature of tax. The nomenclature given to levy tax....
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....eceived from domestic companies on or after 01/06/1997. The Bill also proposes to introduce new provisions for levying a moderate rate of distributed profits. The ld. Counsel referring to the Rule of contextual interpretation submits that a conjoint reading has to be made of all the amendments introduced in the other provisions on the Act, at the time when section 115-O of the Act was introduced/deleted. At the time when section 115-O of the Act was introduced corresponding amendments were made in other relevant sections of the Act and some of the sections were simultaneous introduced. 22. The sections amended along with introduction of section 115-O were section providing for rate of tax on dividend or providing withholding tax on dividend. When the incident of taxation on dividend income was shifted from the shareholders to the company, there arose a need to exempt income from dividend referred to in section 115-O in the hands of the shareholder. Consequently, there was need to exclude dividend income referred to in section 115-O. A conjoint reading of the statute as a whole establishes that the tax referred to in section 115-O of the Act is on dividend income of the sharehold....
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....ise of SEZ but on divided income of the shareholder of such SEZ developer/enterprise. The ld. Counsel referring to the provisions of section 10(33) and 10(34) of the Act, submits that section 10(33) of the Act, as introduced by the Finance Act, 1997 refers to "income by way of dividends referred to in section 115-O". The said section was subsequently repealed with the exit of section 115-O from the statute in 2002. The same section was subsequently reintroduced as section 10(34) by the Finance Act, 2003. When section 115-O was reintroduced the language of section 10(33) as it stood from 01/06/1997 till 31/03/2002 and section 10(34) with effect from 01/04/2003 till 31/03/2020 shows that subject matter of section 115-O is "income by way of dividends". This is a clinching and decisive position to substantiate that subject matter of section 115-O is the dividend income of the shareholder. Similarly, amendments were made to section 115AC along with introduction of section 115-O. The said section also refers to "income by way of dividend". The language of exclusion in section 115AC also shows that subject matter of section 115-O is dividend income of shareholder. The proviso of section 1....
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....forward on behalf of the assessee in respect of section 115-O are rejected the dividend is taxable at the rate of 10% in terms of sub-section(3). He again reiterated that provisions of section 115-O are not to be read in isolation on general interpretation of statute, he referred to the decision in the case of M.K. Ranganathan vs. Government of Madras and others, AIR 1955 SC 604 para 23 and the decision in the case of Chairman, Railway Board and others vs. Chandrima Das and others (2000) 2 SSC 465 para 25. 28. The ld. Counsel further referred to India-Hungary DTAA that provides complete protection to the non-resident shareholders from provisions of the Act and submitted that such protection should also be extended to the domestic company paying dividend to non-resident shareholders of other countries as well. 29. The ld. Counsel further refers to the decision rendered in the case of Godrej and Boyce Manufacturing Co. Ltd. (supra) by Hon'ble Bombay High Court and to distinguish the decision in the case of Volkswagen of South Africa (PTY) Ltd. (supra). 30. The other submissions made by Sh. V Sridharan were similar to the submissions made by Sh. Ajay Arora and hence, they are....
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....s dividend by such company would be fully liable to tax in the hands of the shareholder. He further placed reliance on the decision of Hon'ble Jurisdictional High Court in the Case of Small Industries Development Bank of India (SIDBI) vs. CBDT 133 taxmann.com 158 to contend that the Hon'ble High Court has categorically held that charge u/s 115-O(1) of the Act is on the company's profits, more specifically on that part of the profits which is declared, distributed or paid by way of dividend. The charge u/s 115-O(1) of the Act is not on income by way of dividend in the shareholders hands. He further pointed that the Hon'ble Apex Court in the case of Godrej and Boyce Mfg. Co. ltd. vs. DCIT has not found fault with the observations of the Hon'ble Bombay High Court. The Hon'ble Apex Court has merely decided the writ petition on different facet without reversing the findings of the Hon'ble Jurisdictional High Court. Thus, the observations of the Hon'ble Bombay High Court in the Case of Godrej and Boyce Mfg. Co. ltd. are still relevant and hold good. 35. Explaining the nature of levy, the ld.DR submitted that a levy is explicitly on the company and so is the incidence. Further, referri....
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.... the company. Hence, in respect of tax paid on distributed profits u/s 115-O of the Act, the assessee can have no claim against Revenue for refund as the liability was that of the assessee company. 38. The ld. DR further submitted that section 115-O of the Act levies tax on the amount declared, distributed or paid by a domestic company by way of dividends. The tax levied u/s 115-O of the Act both in law and in time precedes the actual accrual as it gets crystallized at earlier stage of declaration on dividends. The ld. DR submitted that when the interim dividend is declared all the shareholders entitled to receive dividend are not identifiable. The shareholders will keep on changing between the date of declaration and distribution. Thus, identity of shareholder is not defined on the date of payment. Whereas, tax liability crystallizes as soon as the dividend is declared. The ld. DR placed reliance on the decision in the case of Pfizer Corpn vs. CIT, 129 Taxman 459 (Bombay), for the proposition that accrual of dividend income in the hands of the non-resident is governed by section 9 and not by section 8. Section 8 is merely a procedural law. He pointed that words "declared or dis....
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....dent of this tax has been shifted to the company is legally untenable. On the proposition that once a particular tax levy has crystallized, the future events cannot effect or change the tax place or taxable person, reliance is placed on the decision in the case of Kishinchand Chellaram vs. CIT, 46 ITR 640 (SC). 41. With respect to grossing up, the ld. DR submits that section 115-O(1B) of the Act with effect from 01/10/2014 provides for grossing up of net distributed profits, so that after reduction of tax levied u/s 115-O of the Act on the increased amount at the rates specified in sub-section (1) of section 115-O of the Act. The same is equal to the net distributed profits. Such grossing up is mathematically equal to the grossing up of the tax rate specified in section 115-O(1) of the Act. 42. The ld. DR submits that an argument has been raised from assessees' side that it is for the sake of administrative convenience, that the incidence of tax u/s 115-O of the Act has been shifted to the payer company. This proposition has been supported by Tribunal order in the case of Giesecke & Devirent (supra) and Indian Petronas (P.) ltd. (supra). The concept of administrative convenie....
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.... dispute to the proposition set out in the aforesaid judgment, however, the said judgment is of no relevance to the present controversy in view of the specific language of section 115-O(2) of the Act, which provides for levy of tax under such section on dividend declared, distributed, paid by the company notwithstanding that the distributing company has no taxable income. He further asserted that in the case of Godrej & Boyce Mfg. Co. Ltd.(supra), the Hon'ble Apex Court did not finally pronounce on the nature of levy u/s. 115-O of the Act but held the same could not be regarded as tax paid by the shareholder. Referring to the observations of the Hon'ble Court in para 31 of the said judgment the ld. Counsel for the assessee submitted that there is no conflict between the decision in the case of Tata Tea Ltd.(supra) and the decision in the case Godrej & Boyce Mfg. Co. Ltd.(supra). The Tribunal in the case Indian Oil Petrona Pvt. Ltd. (supra) has analysed both the judgments and held that the same are not contradictory to each other. 46. The ld. Counsel for the assessee further submitted that the decision rendered by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mf....
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....smatch. 49. The learned counsel for assessee, to counter the submissions of the Revenue on the other issues viz. economic double taxation covered under the Treaty; split rate company tax; the decision rendered in the case of Volkswagen of South Africa (Pty) Ltd. (supra)by South African High Court and Doctrine of Pith and Substance, filed written submissions. The same are noted. DECISION: 50. Before we proceed to answer the question that has been referred for consideration of the Special Bench, it would be necessary to set out certain fundamental aspects of taxation of dividend so as to appreciate and understand the rival contentions put forth by the parties. Meaning of the word "Dividend": 51. The word "Dividend" has its origin from the Latin word "Dividendum". It means a thing to be divided. Dividend means the portion of the profit received by the shareholders from the company's net profit, which is legally available for distribution among the members. Therefore, dividend is a return on the share capital subscribed for and paid to its shareholders by a company. Dividend defined under section 2(35) of the Companies Act, 2013, includes any interim dividend. 52. Und....
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....company possesses accumulated profits. In clause (c) to Sec.2(22) of the Act, any distribution to a shareholders by a company in liquidation, to the extent it possesses accumulated profits, it is treated as dividend. In clause (d) of Sec.2(22) of the Act, any payment distributed to a shareholder by way of reduction in share capital to the extent it possesses accumulated profits, is treated as dividend. In clause (e) of Sec.2(22) of the Act, loan or advance to a shareholder is treated as dividend, to the extent the company possesses accumulated profits. 54. The point of time at which Dividend income is taxed is laid down u/s.8 of the Act, and it says that what the company declares and pays as real dividend is taxed when it is declared. Dividend u/s.2(22)(a) to (d) is taxed when it is distributed. Dividend u/s.2(22)(e) is taxed when it is paid. Dividend is taxed under the head "Income from other sources" as laid down in Sec.56(2)(i) of the Act. 55. Though dividend is income in the hands of the shareholder, its taxability need not necessarily be in the hands of the shareholder. The sovereign has the prerogative to tax dividend, either in the hands of the recipient of the dividen....
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....incipal officer of the domestic company and the company shall be liable to pay the tax on distributed profits to the credit of the Central Government within fourteen days from the date of- (a) declaration of any dividend; or (b) distribution of any dividend; or (c) payment of any dividend, whichever is earliest. (3) The tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid. (4) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon." 57. Section 115-P provided for levy of interest where the DDT is not paid within the time specified by Sec.115-O. Sec.115-Q provided that the Principal Officer of the domestic company and the company shall be deemed to be an Assessee in default in respect of the amount of tax payable and all the other provisions of the Act for collectio....
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....4 was by insertion of sub-section (1B) to Sec.115-O w.e.f. 1.10.2014. The amendment was significant, as it provided for grossing up of rate at which the sum paid was taxed in order to ensure that Dividend Distribution Tax (DDT) is levied on a proper base. Sec.(1B) to Sec.115-O so introduced read as follows: "(1B) For the purposes of determining the tax on distributed profits payable in accordance with this section, any amount by way of dividends referred to in sub-section (1) as reduced by the amount referred to in sub-section (1A) [hereafter referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1), be equal to the net distributed profits:" 60. In Circular No.1/2015 dated 21.1.2015, the CBDT has explained the purpose of introduction of these provisions, as follows: "35.3 Prior to introduction of dividend distribution tax (DDT), the dividends were taxable in the hands of the shareholder. The gross amount of dividend representing the distributable surplus was taxable, and the tax on this amount was paid by the shareholder at the applicable rate....
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....re tax resident of a country with whom India has Treaty for Avoidance of Double Taxation (DTAA), it would be the lower rate of tax, if so provided in the relevant DTAA. It appears that it was only in October, 2020 that such a point came up in the case of Giesecke & Devrient India Pvt. Ltd. Vs. ACIT (supra) before the Tribunal, where the tax payer company sought to raise the plea for adopting lower rate of tax on dividend payout based on corresponding Treaty provisions; this is indicative of the fact that, perhaps the trigger for debate on adopting the lower rate of taxation on dividend as provided in the DTAAs in preference to the rate prescribed u/s. 115-O of the Act was the amendment of grossing up made by the Finance Act, 2014 w.e.f. 01/10/2014. Be that as it may, we do not delve much on this aspect. Double taxation of Dividends and DTAA: 61. Certain fundamental aspects of taxation of income should be recapitulated. Sovereign Power to tax income can be either be source based or based on residential status of the person sought to be taxed. A source based right to tax is the right of the state to tax all income that is generated within its territory. A source or territorial ....
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....come from its taxes. Generally, source jurisdictions retain their right to tax active (business) income, except for short-term activities, but give up some of their right to tax passive (investment) incomes. 65. Shorn of other aspect of Section 90 of the Act, clause (b) of its sub-section (1) enables the Central Government to enter into an agreement with the Government of any nation outside India or specified territory outside India for the avoidance of double taxation of income under the Act and under the corresponding law in force in that other nation or specified territory, as the case may be. 66. Often, double taxation is conceivable when one nation is utilizing residence rule to tax and the other nation is utilizing source rule to tax the very same income. Section 90(2) of the Act specifically provides that where the Central Government has entered into an agreement with the Government of any country outside India under sub- section (1) of Sec.90 of the Act for granting relief of tax, or as the case may be, for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more be....
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....The relevant clause of model OECD if read together will clarify the position and it reads thus: "ARTICLE 10 DIVIDENDS 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, dividends paid by a company which is a resident of a Contracting State may also be taxed in that State according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed: a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 per cent of the capital of the company paying the dividends throughout a 365 day period that includes the day of the payment of the dividend (for the purpose of computing that period, no account shall be taken of changes of ownership that would directly result from a corporate reorganisation, such as a merger or divisive reorganisation, of the company that holds the shares or that pays the dividend); b) 15 per cent of the gross amount of the dividends in all other cases. The compet....
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....00 as dividend, the dividend so received in the hand of the shareholder is fully taxable. It was the case of the assessee in the aforesaid cases that since 60% of Rs.100 is agricultural income, the provisions of Sec.115 O to the extent it obliges the domestic company to pay DDT at 15% on Rs.100/- is unconstitutional, as by way of the said provision income from agriculture of Rs.60 is also taxed, which is beyond the legislative competence of the Parliament to tax Agricultural income, being a State subject. The Hon'ble High Court accepted the view of petitioners i.e. only 40% of the income is liable to additional tax u/s.115-O and rejected the contentions challenging the vires of section 115-O of the Act. In other words, constitutional validity of Section 115-O was upheld but the applicability of section as confined to the component of non-agricultural income. The Revenue challenged the order of Hon'ble Calcutta High Court before the Hon'ble Supreme Court of India qua the restriction of charging of additional income tax u/s115-O of the Act on 40% of income which was taxable under the Act, in the case of Tata Tea Co. Ltd. (supra). The Hon'ble Apex Court, upheld the constitutional vali....
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....r section 2(24)(ii) dividend is included in 'income' and is thus covered by Entry 82 of List I to Seventh Schedule, "taxes on income, other than agricultural income". The argument on behalf of the assessee was that in "pith and substance" DDT was a tax on Agricultural income, which was rejected by the Hon'ble Supreme Court. The law is well settled that a judicial precedent is only "an authority for what it actually decides and not what may come to follow from some observations which find place therein". The Hon'ble Supreme Court was not dealing with the nature of DDT as to whether it is tax on the company or a tax on the shareholder. Thus, in our considered view the decision rendered in the case of Tata Tea Co. Ltd. (supra) does not support the cause of assesses. 71. The Hon'ble Bombay High Court in Godrej & Boyce (supra), had an occasion to deal with the nature of DDT in the context of the provisions of Sec.14A of the Act. Sec.14A of the Act, lays down that any expenditure incurred in any income which does not form part of the total income under chapter III of the Act, cannot be allowed as deduction in computing total income. Dividend earned by companies were not charged to tax....
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....person who is the recipient. This is defined to include all income, from whatsoever sources derived, which is received or deemed to be received or which accrues or is deemed to have accrued in India or which accrues or arises outside India during the previous year. Section 10 defines those categories of income which shall not be included in computing the total income of the previous year of any person. Income tax is a tax on income in the hands of the assessee. Hence, when Section 14A disallows expenditure incurred by the assessee in relation to income which does not form part of the total income, it would include categories 12 CIT vs. Indian Bank Limited, AIR 1965 SC 1473 at paragraph19 page 1476 of income such as dividend from shares and income from mutual fund which under Section 10 are not to be included in the total income. Since dividend income and income from mutual funds are not included in the total income of the assessee, no deduction of expenditure is permissible under Section 14A(1). Sub-section (5) of Section 115-O stipulates that no deduction under any other provisions of the Act shall be allowed to the Company or to a shareholder in respect of the amount which has be....
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....se to levy additional income-tax on the amount of profits declared, distributed or paid as dividend by the domestic companies. Thus, by inserting Section 115-O, additional income-tax is levied on the amount of profits declared, distributed or paid as dividend and by inserting Section 10(33) it is made clear that the dividends referred to in Section 115-O would be exempt from tax. 36. In Purushottamdas Thakurdas Vs. CIT 48 ITR 206 (SC) the Supreme Court construed the provisions of Section 16(2) and Section 49B of the Indian Income Tax Act, 1922. Sub-section (2) of Section 16 provided that any dividend shall be deemed to be income of the year in which it is paid regardless of the question as to when the profits out of which the dividend is paid were earned. By a deeming fiction introduced by Section 49B, when a dividend was paid to a shareholder by a Company which was assessed to tax, the income tax in respect of such dividend was deemed to have been paid by the shareholder himself. The Supreme Court observed that the position as a matter of general law was as follows: "In general law, the Company is chargeable to tax on its profits as a distinct taxable entity and ....
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....ould tantamount to double taxation, once in the hands of the Company and again in the hands of the shareholders. The Circular states that the Finance Act of 1997, therefore, introduced a new system of collecting tax on profits distributed by the Company by way of dividend, which was to be in addition to the income tax chargeable in respect of the total income of the Company. 39. The circular issued by the CBDT as a matter of fact clearly establishes that prior to the introduction of Section 115-O of the Finance Act of 1997, corporate dividends were taxed in the hands of shareholders as income from other sources. This provision was abolished by the introduction of Section 115-O. Under sub-section (1) of Section 115-O, an additional income tax was imposed on profits distributed by a Company by way of dividend and a new clause, clause 33 was inserted in Section 10 to exempt dividend income in the hands of the shareholder. 40. We have also been fortified in the conclusion which we have drawn, by the judgment of the Supreme Court in Walfort (supra). The Supreme Court has in the following observation expressly held that since dividend income does not form part of the to....
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....ing two questions in the main which have been summarized by the appellant, and we may say accurately, as follows : (a) Irrespective of the factual position and findings in the case of the Appellant, whether the phrase "income which does not form part of total income under this Act" appearing in Section 14A includes within its scope dividend income on shares in respect of which tax is payable under Section 115-O of the Act and income on units of mutual funds on which tax is payable under Section 115-R. (b) Whatever be the view on the legal aspects, whether on the facts and in the circumstances of the Appellant's case and bearing in mind the unanimous findings of the lower authorities over a considerable period of time (which were accepted by the Revenue) there could at all be any question of the provisions of Section 14A in the appellant's case." 74. Dealing with the first question, the Hon'ble Supreme Court made the following observations: "30. While it is correct that Section 10(33) exempts only dividend income under Section 115-O of the Act and there are other species of dividend income on which tax is levied under the Act, we do not see how ....
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.... has been treated differently by the Act making the same non-includible in the total income of the recipient assessee as tax thereon had already been paid by the dividend distributing company. The other species of dividend income which attracts levy of income tax at the hands of the recipient assessee has been treated differently and made liable to tax under the aforesaid provisions of the Act. In fact, if the argument is that tax paid by the dividend paying company under Section 115-O is to be understood to be on behalf of the recipient assessee, the provisions of Section 57 should enable the assessee to claim deduction of expenditure incurred to earn the income on which such tax is paid. Such a position in law would be wholly incongruous in view of Section 10(33) of the Act. 32. A brief reference to the decision of this Court in Commissioner of Income-Tax vs. Walfort Share and Stock Brokers P. Ltd. (supra) may now be made, if only, to make the discussion complete. In Walfort Share and Stock Brokers P. Ltd.(supra) the issue involved was: "whether in a dividend stripping transaction the loss on sale of units could be considered as expenditure in relation to earning of divi....
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....oning in the Hon'ble Bombay High Court's judgment is the conclusion that it is a tax on domestic company on its profits/amount payable on declaration, distribution or payment, as the case may be, of amount as dividend out of accumulated profits. Therefore the argument that DDT is paid on behalf of the shareholder and has to be regarded as payment of liability of the shareholder, discharged by the domestic company paying DDT, is neither correct nor does it flow from the ratio laid down in the decision by the Hon'ble Apex Court in the case of Godrej & Boyce (supra). 75. In the case of Small Industries Development Bank of India Vs Central Board of Direct Taxes (supra) the Hon'ble Bombay High Court had an occasion to consider the question whether charge u/s.115 O of the Act is on the company's profits and not income in the hands of the shareholder. The Assessee in this case was a statutory corporation that came into existence by virtue of the Small Industries Developments Bank of India Act, 1989 (hereinafter referred to as the SIDBI Act). Sec.50 of the said Act, exempts, the Assessee from payment of income tax on any income, profits or gains derived or any amount received by it. Sec....
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.... and be any income profits or gains derived or any amount received by the Small Industries Bank". The following were the relevant observations by the Hon'ble High Court: "14. Dividend is defined in Section 2(22) of the IT Act to, inter alia, include any distribution by a company of accumulated profits, which entails releasing any assets by the company to its shareholders. In terms of Explanation 2 to Section 2(22) of the said Act, the expression accumulated profits includes all company profits up to the date of distribution or payment thereof. It appears that the transfer of profits of Petitioner to IDBI in terms of Section 29(2) of SIDBI Act entails payment by Petitioner to IDBI. This payment or distribution of Petitioner's liquid assets constitutes dividend distributed by Petitioner out of its accumulated profits as envisaged under Section 2(22)(a) of the IT Act. It needs to be noted that the charge under sub-section (1) of Section 115-O of the said Act is on the company's profits, more specifically on that part of the profits which is declared, distributed or paid by way of dividend. The charge under sub-section (1) of Section 115-O of the said Act is not on income by w....
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....s due to the payee. In the event the payer pays excess over and above what he has to pay the payee, he gets a right to recover the TDS or TCS and gets rights of subrogation. Such provisions are absent in the entire scheme of Chapter XII D of the Act. These features are again an indication that DDT is a charge to tax on the 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. Further, it is also seen from the provisions of Sec.115-O (3) and (4) the tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid and no deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon. These provisions also show that shareholder does not enter the domain of DDT at all. 78. Another argument that was advanced was that the incidence of tax in the form of D....
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....se of Balaji Vs. ITO 1962 AIR 123 (SC). These decisions again point to the fact that DDT is a tax on the distributed profits of a domestic company and is a tax on profits of the domestic company and not on the shareholder. Applicability of DTAA: 79. As we have discussed earlier, the purpose of DTAA is to avoid double taxation/allocation of taxing rights between two Sovereign nations. When we hold that DDT is a tax not on the shareholder but on the amount declared, distributed, paid as the case may be, by way of dividend and being a tax on income of the company, there is no double taxation of the same income. DTAAs seek to reduce the impact of double taxation which has harmful effects on the international exchange of goods and services and cross-border movements of capital, technology and persons. Bilateral tax treaties address instances of double taxation by allocating taxing rights to the contracting states. Most existing bilateral tax treaties are concluded on the basis of a model, such as the OECD Model Tax Convention or the United Nations Model, which are direct descendants of the first Model of bilateral tax treaty drafted in 1928 by the League of Nations. As a result, w....
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....eement [(2005) 274 ITR (Stat) 74; Indo Hungarian tax treaty, in short], it is specifically provided, In the protocol to the Indo Hungarian tax treaty it is specifically stated that "When the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend". That is a provision in the protocol, which is essentially an integral part of the treaty, and the protocol to a treaty is as binding as the provisions in the main treaty itself. In the absence of such a provision in other tax treaties, it cannot be inferred as such because a protocol does not explain, but rather lays down, a treaty provision. No matter how desirable be such provisions in the other tax treaties, these provisions cannot be inferred on the basis of a rather aggressively creative process of interpretation of tax treaties. The tax treaties are agreements between the treaty partner jurisdictions, and agreements are to be interpreted as they exist and not on the basis of what ideally these agreements should have been. (g) A tax treaty protects taxation of income in ....