TaxTMI 
TaxTMI 
2023 (4) TMI 988
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..... 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 short 'the Act'), whether such additional income-tax payable by the domestic company shall be at the rate mentioned in Section 115-O of the Act or the rate of tax ....
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....ditional 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 the Act which provides as under: "4. Charge of income- tax (1) Where any Central Act enacts that income- tax shall be charged for any assessment year at any rate or rates, income- tax ....
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....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, relevant details regarding payment of DDT have to be provided in the Income Tax return form and have to be disclosed in the Tax Audit Return [Form 3CD]. Further, the Income tax assessment order read with the Income-tax computation form quantifies DDT liability. It would not be out of pl....
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.... 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 under: "8.2. In the instant case, the dividend income should be chargeable to tax in the hands of the shareholders as per the provisions of Section 4 of the Act. However, for administrative convenience, the incidence of tax is shifted to the resident company paying dividend income and as such, the company being the person responsible for....
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....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 section 115 'O' doers not discharge the tax liability of the shareholders. It is a liability of the company and discharged by the company. Whatever be the conceptual foundation of such a tax, it is not a tax paid by, or on behalf of, the shareholder. In our considered view, therefore, dividend distribution tax cannot be treated as a tax on behalf of the recipient of dividends, i.e. the sharehol....
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....d 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 tax treaty, and there is absolutely no doubt on that proposition, but that proposition cannot support the interpretation, as is canvassed by the coordinate benches, that even when tax burden is shifted from a resident of the tax treaty partner jurisdiction to resident of another jurisdiction, the tax burden on the another person, who is not eligible for tax treaty benefits anyway, will nevertheless be subjected....
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....ring 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 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 canno....
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....elf- 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. Similar request was made in the case of Gujarat Gas Co. Ltd. in ITA No. 123/Ahd/2012 for Assessment Year 2007-08. Hence, in the backdrop of above, a Special Bench was constituted by the Hon'ble President for considering the question, which has been set out in the first paragraph of this order. SUBMISSIONS ON BEHALF OF THE ASSESSEES: 10. Shri Ajay Vora appearing on behalf of the assessee (Maruti Suzuki) submitted that Maruti Suzuki is a subsidiary of Suzuki Motor Corpora....
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....t 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 the Act provides that tax on distributed profits i.e. dividend shall be payable, notwithstanding that no income tax is payable by the domestic company on the total income. In other words, the tax paid on dividend declared has no connection whatsoever with the primary income tax liability in respect of profits of the company declared in the dividend. 13. The ld. Counsel for the assessee submits that the charge of additional tax u/s. 115-O, referred to as tax on distributed....
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.... 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 under the said section to 40% of the dividend distributed. The Hon'ble Apex Court after considering the Finance Act, 1997, Article 246 of the Constitution of India, the concurrent list and the state list and various decisions held that DDT is on the shareholder and not on the company. For convenience of collection the charge has been shifted to the company. Thus, in the light of the aforesaid decision it can be concluded that the Legislative competence to enact section 115-O as pa....
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....he 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 income would be governed by the tax rate specified in DTAA, being more beneficial. 17. While summing up his submissions the ld. Counsel for the assessee argued that the Division Bench has made reference to the Special Bench by observing following issues, however the said observations are contrary to facts and settled law. Commenting on observations of the Division Bench in Total Oil, the ld. Counsel stated as under: (i) The first reason for doubting the correctness of decision of the....
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....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 u/s 115-O of the Act, is tax on distributed profits is in fact tax on dividend-income of the shareholders. It is not tax on the income of the company. The machinery adopted for collection of tax or shifting incidents of tax from shareholders to company cannot be determinative of the nature of tax. Levy of tax u/s 115-O of the Act, "on any amount declared distributed or paid by such company by way of dividend", such tax collected from domestic company distributing the dividend does not lead to the conclusion that it is ....
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.... 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 shareholder. When section 115-O was deleted by the Finance Act, 2002, the relevant sections amended/made at the time of introducing section 115-O were again amended to include all types of dividend, but in the reverse manner. When section 115-O was reintroduced by the Finance Act, 2003, all the corresponding sections wherein there was impact were again amended accordingly. 23. The ld. Counsel argued that as per section 115-O (2) of the Act, tax is to be paid even when no income tax is payable by a domestic company on its total income....
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....introduced 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 10(34) relating to section 115 BBDA also shows that subject matter of section 115-O is dividend income of shareholder. The second proviso to Section 10(34) also proves that subject matter of section 115-O is divided income of shareholder. 25. The ld. Counsel submits that the scheme of section 115-O is analogus to section 115-R. The income from mutual funds is exempt from tax u/s 10(23D) of the Act. Section 115R(2) of the Act cast a liability on the mutual funds to pay tax in respect of income distributed to its unit holders. It w....
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....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 not reiterated again. 31. Shri Neeraj Seth appearing on behalf of Total Oil India Pvt Ltd relied on the submissions made by Senior Counsel Shri Ajay Arora and Shri V. Sridharan. He filed written submissions reiterating the contentions earlier raised by Senior Advocates. 32. The Counsels appearing on behalf of the Interveners, Shri J. D. Mishra, Senior Advocate, Shri Rajan Vora, Ms. Fereshte Sethna and Shri Anup Sinha supported the submissions made by Shri Ajay Arora and by the Shri V. Sridharan. They have filed written submissions reitera....
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.... 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, referring to the decision in the case of Mathuram Agrawal vs. State of Madhya Pradesh, (1999) 8 SSC 667, the ld. DR submits that the Court recognized three essential elements of taxation: 1) the subject of the tax; 2) the person who is liable to pay the tax; 3) the rate at which the tax is to be paid. In the context of section 115-O of the Act, if the above three parameters are to be answered, the same would be: 1) The subject of tax - amount declared, distributed or paid by such company by way of dividends. 2) Who is liable to pay tax - domestic co....
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....ed 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 distributed" in section 8 do not find place in section 9(1)(iv) of the Act. Therefore, dividend income paid to a non-resident is deemed to accrue in India only on payment and not on declaration. The ld. DR further referred to the decision in the case of Punjab Distilling Industries Ltd. vs. CIT, 57 ITR 1 (SC) to strengthen his argument that declaration is a stage, both in law and in time, which precedes accrual of income. 39. The ld. DR submits that the Companies Amendment Act, 2000 defines dividend in section 214A of the Act to mean "dividends includes interim dividend". Once the dividend is declared (inc....
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....n 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 convenience is beyond the scope of statutory interpretation especially when the language used in the statute is clear and unambiguous. Even otherwise these findings are based on selective reading of the aids to the interpretation of the statute. In this regard, the ld. DR referred to para 101 of the speech by the Finance Minister made while presenting the Finance Bill, 1997. He thus contended that the concept of mere administrative convenience for shifting the incidents on payer company for collection of tax u/s 115-O of the Act is wrong. 43. The ld. DR submitted that insofar as interplay of section 115-O of the Act wi....
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....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 Mfg. Co. Ltd., 394 ITR 449 has not been reversed by the Hon'ble Apex Court. The view taken by the Hon'ble Apex Court is in line with the ultimate conclusion arrived at by Hon'ble Bombay High Court. The reasoning of Hon'ble Bombay High Court did not receive the imprimatur of the Hon'ble Apex Court. Hence, the observations made by Hon'ble Bombay High Court still hold good. 47. The ld. Counsel for the assessee further asserted that the decision rendered by Hon'ble Bombay High Court in the case of Small Industries Development Bank of India (supra) on which the ld. Departmental Representative has placed heavy re....
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....ontentions 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. Under the Act, dividend is defined in Sec.2(22) of the Act. The definition is an inclusive definition. Therefore dividend would mean the natural meaning of the term Dividend, meaning portion of profits received by the shareholder out of the company's profits as return on the share capital subscribed by the shareholder. If one says Dividend is share of profits declared as distributable among the shareholders, it does not mean that the character of the profits distributed by the company as dividend retain the same character when it reaches the hands of the shareholders. For example, a company grows and manufactures tea. In terms of Rule 8(1) ....
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....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 dividend or otherwise. This takes us to the mode in which Dividend is taxed. Modes of taxing dividend income are (i) classical/ Progressive system; (ii) Simplistic system. Under the Act, upto the year 1997, the classical system of taxing dividend income prevailed. Under the classical system, the dividend would be taxed in the hands of the recipients at rates applicable to them. Simplistic system would mean a system by which the company which distributes the dividend is required to discharge the tax liability on the sum distributed by way of dividend as an additional income tax on the company itself and consequently such dividend income was exempt in ....
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.... 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 collection and recovery of income tax shall apply. 58. A plain reading of the provisions of Sec.115O shows that it creates a charge to additional income tax on any amount declared, distributed or paid by domestic company by way of dividend for any assessment year. The tax so charged is "in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year". The additional income tax is referred to as "tax on distributed profits" commonly referred to as "Dividend Distribution Tax". It is a tax on "distributed profits" and not a tax on "dividend distributed". The point of time at which the additional income tax is payable by the domestic company is laid down in Sec.1....
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....o 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 which varied from 0 to 30%. However, after the introduction of the DDT, a lower rate of 15% was applicable but this rate was being applied on the amount paid as dividend after reduction of distribution tax by the company. 35.4 Therefore, the tax was computed by the company with reference to the net amount. Similar was the case when income was distributed by mutual funds. Due to difference in the base of the income distributed or dividend on which the distribution tax is calculated, the effective tax rate was lower than the rate provided in the respective sections. 35.5 In order to ensure that tax is levied on proper base, the amount of distributable income, and the dividends which are actually received by the unit holder of the mutual fund o....
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....e 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 based taxation system therefore seeks to compensate the source country for its contribution to sustenance of the economic activity. Residence based taxation is the power to tax a person resident in a country, regardless of his/its source of income. Each country has its own rules of determining residential status of the person sought to be taxed. 62. The provisions of sections 5, 6 and 9 of the Act enumerate the residence based and source based taxation principles. To put it in simple terms, Section 5 provides that Residents are taxed on their worldwide income; Non- Residents are taxed on India - sourced income ( i.e. income received or deemed to be received in India and income accrued or deemed to have accrued in India). 63. Residential Status of a person is determined in terms of the provisions of section 6 of ....
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.... 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 beneficial to that assessee. If there is no DTAA between India and another country, Section 91 allows relief from double taxation, in the form of foreign tax credit. 67. Following Model forms of DTAA exist viz., I. OECD Model Tax Convention - Based on Residence principle. II. UN Model Double Taxation Convention - Based on combination of Residence and Source. Principle with key emphasis on the latter. III. US Model Income Tax Convention - Followed for entering into DTAAs with the US IV. Andean Community Income and Capital Tax Convention - Adopted by Member State, namely, Bolivia, Chile, Ecuador, Columbia, Peru and Venezuela. It is for the two Sovereign nations entering into a DTAA to decide which model(s) or hybrid of the model(s) has to be adopted for a particular character of income. 68. As we have already seen, D....
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....count 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 competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. .........." This limit of tax rate depends upon the individual DTAA which India has signed with other countries. In most Indian DTAAs, this limit is of 10% and by implication it means that the levy of tax by India on dividend paid by Indian companies to shareholders resident in those DTAA countries cannot exceed 10%. The DDT tax rate is 15% + grossing up u/s.115O and this is the reason, perhaps, why domestic company paying DDT to Non-Resident shareholders claim that the rate of DDT in such cases has to be only at 10% based on the lower limit tax rate on dividends under the DTAA. Nature of DDT: Is it tax on the company or the shareholder? 69.....
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.... 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 validity of section 115 O of the Act and held that the power to levy DDT on domestic company was well within the scope of List I Entry 82 "tax on income". The Hon'ble Court observed that what is excluded is only tax on agricultural income which is contained in List II Entry 46. "Income" as defined in Section 2(24) of the 1961 Act is the inclusive definition including specifically "dividend". Dividend is statutorily regulated and under the Articles of Association of companies, it is required to be paid as per the rules of the companies to the shareholders. Section 115-O pertains to declaration, distribution or payment of dividend by domestic company and imposition of additional tax on dividend is thus clearly covered by subject as embraced by Entry 82. The provisions of Section 115-O cannot be said to be directly included in the field of tax on agricultural income. The Hon'ble Court referred to its earlier....
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....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 in the hands of the shareholders but the domestic company distributing dividend paid tax on amounts declared, distributed or paid, as dividends out of the accumulated profits, u/s.115 O of the Act. The Assessee argued that dividend income cannot be said to be not charged to tax because dividend income suffered DDT u/s.115-O, albeit in the hands of the domestic company distributing dividend. The Hon'ble Bombay High Court rejected the argument and held that the legal characteristics of DDT is tax on a company paying the dividend and "is chargeable to tax on its profits as a distinct taxable entity. The domestic company paying DDT does not do so on behalf of the shareholder. The company does not act as an agent of the shareholder in paying the tax under Section 115-O. In the hands of the recipient shareholder dividend does not form part of the total income. On the contrary, Section 10(33) clearly evinces pa....
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....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 been charged to tax under sub-section (1) or the tax thereon. 32. The tax which is paid by the Company on profits declared, distributed or paid by way of dividend is not a tax which is paid on behalf of the shareholder. The company is liable to pay income tax in respect of its total income. In addition to the income tax chargeable in respect of its total income, a domestic Company is charged with the payment of additional income tax, called a tax on distributed profits on any amount declared, distributed or paid by the Company by way of dividend. The charge under sub-section (1) of Section 115-O is on the profits of the Company; 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 is not on income by way of dividend in the hands of the shareholder. The additional income-tax payable on profits of a domestic company un....
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....id 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 it paid tax in discharge of its own liabilities and not on behalf of or as an agent for its shareholders". This principle of general law was overridden by the deeming fiction that was created by Section 49B in the Act of 1922. 37. Significantly, in the Income Tax Act, 1961, Parliament has not made such a deeming provision as was enacted in Section 49B of the act of 1922. On the contrary, sub-section (4) of Section 115-O has the effect of providing that the shareholder cannot claim any credit for the amount paid by the Company under Section 115-O(1). There is, therefore, merit in the submission of the Additional Solicitor General that dividend received by the shareholder is not tax paid. Similarly, as noted earlier, under sub-section (5), a shareholder is not entitled to claim any deduction in respect of the amount which has been charged to tax under sub-section (1) of Section 115-O or the tax thereon. Hence, viewed from the perspective of Section 115-O as well as....
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....rawn, 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 total income, the expenditure that is incurred in the earning of such income cannot be allowed even though it is of a nature specified in Sections 15 to 59: "If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in Sections 15 to 59 but related to the income not forming part of the total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax." Having observed thus, the Supreme Court held that the theory apportioning expenditure between taxable and non-taxable income has now, in principle, been widened under Section 14A. Hence, for the reasons that we have indicated earlier, we hold that income from dividend on shares is, in the hands of the recipient shareholder, income which does not form part of the total income. Hence, Section 14A would apply and the expenditure incurred in earning such income would have to be disallowed. Income from mutual fund stands on the sa....
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....e 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 the said position in law would assist the assessee in understanding the provisions of Section 14A in the manner indicated. What is required to be construed is the provisions of Section 10(33) read in the light of Section 115-O of the Act. So far as the species of dividend income on which tax is payable under Section 115-O of the Act is concerned, the earning of the said dividend is tax free in the hands of the assessee and not includible in the total income of the said assessee. If that is so, we do not see how the operation of Section 14A of the Act to such dividend income can be foreclosed. The fact that Section 10(33) and Section 115-O of the Act were brought in together; deleted and reintroduced later in a composite manner, also, does not assist the assessee. Rather, the aforesaid facts would countenance a situation that so long as the dividend income is taxable in the hands of the dividend paying company, the same is not includible in the total income of the recipient assessee. At such point of time when the said position was reversed (by the ....
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....dividend stripping transaction the loss on sale of units could be considered as expenditure in relation to earning of dividend income exempt under Section 10(33), disallowable under Section 14A of the Act?" 33. While answering the said question this Court considered the object of insertion of Section 14A in the Income Tax Act by Finance Act, 2001, details of which have already been noticed. Noticing the objects and reasons behind introduction of Section 14A of the Act this Court held that: "Expenses allowed can only be in respect of earning of taxable income." In paragraph 17, this Court went on to observe that: "Therefore, one needs to read the words "expenditure incurred" in section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditure incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax." The views expressed in Walfort Share and Stock Brokers P. Ltd. (supra), in our considered opinion, yet again militate against the plea urged on behalf of the Assessee. 34. For the aforesaid reasons, the first question formulated in the ap....
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....m payment of income tax on any income, profits or gains derived or any amount received by it. Section 50 of the SIDBI Act reads as under: "Notwithstanding anything to the contrary contained in the Income-tax Act, 1961 or in any other enactment for the time being in force relating to income-tax or any other tax on income, profits or gains, the Small Industries Bank shall not be liable to pay income-tax or any other tax in respect of:- (a) any income, profits or gains accruing or arising to the Small Industries Development Assistance and or any amount received in that Fund, and b) any income, profits or gains derived or any amount received by the Small Industries Bank." 10. Section 50 of the SIDBI Act contains non-obstante clause giving overriding effect over provisions of Income Tax Act in respect of any income, profits, gains derived or any amount received by the company. It is well settled that a provision beginning with non-obstante clause must be enforced and implemented by giving effect to the provisions of the Act and by limiting the provisions of other laws." The assessee paid dividend to it's shareholders. The question before the Court was whether it has to pay DDT u/s.11....
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....arge under sub-section (1) of Section 115-O of the said Act is not on income by way of dividend in the shareholder's hands. Therefore, the additional income-tax payable on profits of a domestic company under Section 115-O of the said Act is not a tax on dividend. In our considered opinion, the amount distributed or paid by way of dividend falls in the category of income, profit or gains derived. 15. Once it is held that the amount distributed or paid by Petitioner by way of dividend falls in the category of profits under Section 50 of the SIDBI Act, on any income, profits, gains derived or any amount received, Petitioner shall not be liable to pay income tax or any other tax in the relevant years. Therefore Petitioner was not liable to pay additional income tax under Section 115-O of the said Act. In the circumstances, Petitioner's payments under protest need to be refunded to the Petitioner." [Emphasized by us] It is thus clear from the aforesaid decision that charge u/s.115 O of the Act is on the company's profits and not income in the hands of the shareholder. 76. The aforesaid decision by Hon'ble Jurisdictional High Court has also taken note of the decision of Hon'ble Sup....
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....was advanced was that the incidence of tax in the form of DDT is on the domestic company but in effect it is a tax paid on behalf of the shareholder and it is income of the shareholder that is sought to be taxed albeit in the hands of the domestic company. In this regard, the proposition advanced by the learned DR was that in fundamental concept of income-tax there is nothing which prevents imposition of immediate and apparent incidence of tax on a person other than person whose income is to be assessed, i.e., the legislature has power to enact provisions imposing tax liability on domestic company on income of shareholder (even if it is construed as income of shareholder without conceding that it was tax on income of the domestic company). In this regard he relied on decision of Hon'ble Madras High Court in the case of B.M. Amin Umma Vs. ITO 26 ITR 137 (Mad). In the aforesaid case the constitutional validity of the provisions of Section 16(3)(a)(ii), of Income Tax Act, 1922 (equivalent to Sec.64 of the Act), was challenged. The said provision provided for inclusion of the income of wife or minor child of an individual in the income of the individual. It was challenged on the ground....
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....rafted in 1928 by the League of Nations. As a result, while there can be substantial variations between one tax treaty and another, double tax treaties generally follow a relatively uniform structure, which can be viewed as a list of provisions performing separate and distinct functions: (i) Articles dealing with the scope and application of the tax treaty, (ii) Articles addressing the conflict of taxing jurisdiction, (iii) Articles providing for double taxation relief, (iv) Articles concerned with the prevention of tax avoidance and fiscal evasion, and (v) Articles addressing miscellaneous matters (e.g. administrative assistance). Article 23A and 23B of the OECD model convention give methods to eliminate double taxation. 80. A reading of Article 10 of the model OECD DTAA shows that Dividends paid by a company which is a resident of a Contracting State, say India to a resident of the other Contracting State (say France) may be taxed in that other State (France). However, if the beneficial owner of the Dividend is a resident in France, the tax so charged shall not exceed specified percent. The first condition is that the non-resident in France should be taxed in India. We have to l....
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....reaty 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 expression 'resident' is defined, under article 4(1) of the Indo French tax treaty, as "any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature". Obviously, the company incorporated in India, i.e. the assessee before us, cannot seek treaty protection in India- except for the purpose of, in deserving cases, where the cases are covered by the nationality non-discrimination under article 26(1), deductibility non-discrimination under article 26(4), and ownership non-discrimination under article 24(5) as, for example, article 26(5) specifically extends the scope of tax treaty protection to the "enterprises of one of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents ....