TaxTMI 
TaxTMI 
2024 (12) TMI 855
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.... liable to tax at the rate prescribed in the India-Italy DTAA. Consequently, the refund of excess tax (DDT) paid by the Appellant be granted. The Appellant craves leave to add, alter, amend modify or withdraw any or all the above grounds of appeal herein above and to submit such statements, documents and papers as may be considered necessary either at or before the being of this appeal as per the law." 3. Briefly stated, the assessee is a domestic company and is engaged in manufacture and sale of three and four wheeler motor vehicles for the transportation of goods and passengers. It is also engaged in the manufacture of two wheeler vehicles by the brand name 'Vespa' as well as sale of spare parts of two wheelers, three wheelers and four wheelers and manufacture of petrol and diesel engines. It e-filed its return of income for AY 2016-17 on 30.11.2016 declaring total income of Rs. 2,44,62,64,850/- which was subsequently revised by filing the revised return on 08.03.2018 declaring total income of Rs. 2,44,75,01,310/-. The case was selected for scrutiny through CASS. Statutory notices u/s 143(2) and 142(1) of the Income Tax Act, 1961 (the "Act") were issued and served upo....
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.... : "5.1. Background : The Appellant distributed dividend of INR 1,04,81,10,000 to its shareholders during AY 2016-17. As per Section 115-O of the Act, dividend declared, distributed or paid by an Indian company is subject to tax @ 20.36 percent (grossed up) (referred to as 'Dividend Distribution Tax' or 'DDT') in the hands of the dividend declaring company. Accordingly, the Company paid DDT of INR 21,33,70,540 on the aforesaid dividend. The break-up of the dividend paid to the shareholders and DDT thereon (as duly disclosed in the Schedule DDT of Form ITR-6) is as under : Shareholders Country of Shareholder % of equity share held Dividend paid (INR) DDT paid (INR) Piaggio & C.S.p.A ('P&C') Italy 99.9999 1,04,81,08,952 21,33,70,327 Vespa B.V. Netherlands 0.00001 1,048 213 5.2 As per Article 11 of the India-Italy Tax Treaty ('the Tax Treaty') dividend paid by an Italian tax resident may be taxed in Italy. Further, such dividend may also be taxed in India, according to the domestic tax law of India, but tax so charged shall not exceed 15 percent of the gross dividend (where at least 10% of capital of the ....
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....ellant in relation to the same. A. Observation no. 1 of the Hon'ble SB : The Hon'ble Supreme Court ('SC') in case of Tata Tea Co. Ltd. [(2017) 398 ITR 260 (SC)] (Tata Tea decision') was not dealing with the nature of DOT as to whether it is tax on the company or a tax on the shareholder. Thus, the Tata Tea decision does not support the cause of assesses, having regard to the well settled principle 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". [Refer Para 70 of the order of Hon'ble SB). Appellant's rebuttals The Appellant's rebuttals to observation no. 1 are as follows: a. As per Section 3 read with Section 4 of the Act, tax under the Act can be only levied on 'income'. While Section 115-0 of the Act is a notwithstanding section, it cannot create a charge other than on 'income'. b. In the aforesaid decision passed by the Hon'ble SC in case of Tata Tea Co. Ud (supra), the constitutional validity of Section 115-0 of the Act was challenged by the assessee (which was in the b....
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....T is not a tax paid 'on behalf of shareholders', as per the decision of the Hon'ble Bombay High Court ('HC') in case of Godrej & Boyce Mfg. Co. Ltd. (328 ITR 81) ('G&B HC decision'), since the Hon'ble HC held that the company paying DOT does not act as an agent of the shareholder under S. 115-0 of the Income tax Act, 1961 ('the Act'). [Refer Para 72 of the order of Hon'ble SB]. The observations of the Hon'ble Bombay HC in G&B HC decision regarding the legal characteristics of DOT, that it is tax on a company paying the dividend and "is chargeable to tax on its profits as a distinct taxable entity and that the domestic company paying DOT does not do so on behalf of the shareholder nor does it act as an agent of the shareholder in paying the tax under S. 115-0, cannot be said to have been diluted or overruled by the Hon'ble SC in Godrej & Boyce Mfg. Co. Ltd. (394 ITR 449) ('G&B SC decision'). It can be said that the Hon'ble SC has taken a different basis to reach the same conclusion but without diluting the reasoning of the Hon'ble Bombay HC that DOT is not a tax paid by the domestic company on behalf o....
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....down the principle that DOT is a tax on the domestic company (which is undisputed). The said principle has also been upheld by in the G&B SC decision. However, the said decisions cannot be regarded as concluding that 'DOT is not a tax on dividend', since those cases pertained to the issue concerning disallowance of expenditure under Section 14A of the Act. These decisions, therefore, limited their observations to the applicability of Section 14A of the Act on dividend income. Also, the G&B HC decision and the G&B SC decision have not laid down any principle contrary to those laid down by the Hon'ble SC in Tata Tea decision and both the decisions operate in different fields. As discussed above, since the Tata Tea decision of Hon'ble SC specifically discusses regarding the characterization and validity of 00 T under Section 115-0 of the Act, the said ruling is a binding in the present context. C. Observation no. 3 of the Hon'ble SB The additional income tax under S. 115-0 of the Act 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 "di....
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....iple laid down in the SIDBI ruling i.e. 'charge under Section 115-0 of the Act is on the company's profits', with due respect, is contradictory to the ruling of SC in the Tata Tea decision. Hence, the decision of Hon'ble HC in SIOBI ruling ought to be regarded as 'per incuriam' to such extent. d. Also, the Hon'ble Bombay HC in deciding the matter in SIDBI ruling, relied on the ruling in G&B HC decision. However, as discussed in detail at Para (B) above, the ruling in G&B HC case itself was not in the context of characterization of DOT under Section 115-0, but was on applicability of Section 14A. Consequentially, the reliance placed by the Hon'ble HC in SIDBI ruling on the ruling in G&B HC decision is inappropriate, especially considering that the Hon'ble SC has taken a principally different view on characterization of DOT in the Tata Tea decision. D. Observation no. 4 of the Hon'ble SB DDT is paid by the domestic company resident in India. It is a tax on its income and not tax paid on behalf of the shareholder. In such circumstances, the domestic company under S. 115-0 does not enter the domain of DTAA at all. [Refe....
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.... whose behalf the tax is paid, are irrelevant considerations for its application. f. The only pre-requisite for the applicability of Article 11 is that the tax levied according to the laws of India should be a tax 'on dividends'. Since the language of Section 115-0 categorically provides that 00 T is an additional tax on dividends, as is also upheld by the Hon'ble SC in Tata Tea decision (as discussed in detail in preceding paragraphs), Article 11 should consequently apply to DOT as well. There is nothing in the language of the Tax Treaty that limits the applicability of Article 10 to taxes that are levied on the shareholders. g. Having regard to the above, the Appellant submits that the applicability of the Tax Treaty rate to dividends ought not to be excluded on account of the fact that the tax on dividends levied under Indian law is on the domestic company (being a resident in India) rather than the non-resident shareholder. E. Observation no. 5 of the Hon'ble SB If domestic company has to enter the domain of DTAA, the countries should have agreed specifically in the DTAA to that effect, as in case of Treaty between India and H....
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.... CIT(A) after considering the facts of the case, remand report and submission filed by the assessee, observed in para 6.5 of his order that he has decided the identical issue of refund of excess taxes paid on the dividend distributed in AY 2015-16 in assessee's own case in favour of the Revenue relying on the decision of Special Bench of Mumbai Tribunal in the case of DCIT Vs. Total Oil India (P.) Ltd. (2023) 104 ITR (T) 1 (Mumbai-Trib.) (SB). The relevant findings and observations of the Ld. CIT(A) is reproduced below for ready reference : "6.5 I have carefully considered the facts of the case, remand report and submission filed by the appellant. It is seen that I have decided the identical issue of refund of excess taxes paid on the dividend distributed in AY 2015- 16 in appellant's own case also. The relevant findings of the same is extract below for reference: "QUOTE 8.6 Briefly, the appellant company distributed dividend of Rs. 79,50,61,309 to its shareholder during the relevant financial year. The appellant company deducted TDS on this as per section 115-0 of the Act amounting to Rs. 14,55,98,543. The appellant has claimed that instead of Tax de....
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....TR (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 the hands of resident....
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.... of law is correct and we agree with the same. Therefore, the 0 T AA does not get triggered at all when domestic company pays DOT u/s. 1150 of the Act. 83. For the reasons give above, we hold that 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 Sec. 115-0 of the Act, such additional income tax payable by the domestic company shall be at the rate mentioned in Section 115 0 of the Act and not at the rate of tax applicable to (he non-resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. Nevertheless, we are conscious of the sovereign's prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAs. Thus, wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Thus, the question before the Special Bench is answered, accordingly. UNQUOTE" In view of the ab....
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....1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of June, 1997, whether out of current or accumulated profits shall be charged to additional income- tax (hereafter referred to as tax on distributed profits) at the rate of ten per cent. (1A) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on distributed profits under sub-section (1) shall be payable by such company. (2) The principal 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 dist....
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....r sub-section (1) of Section 115 O or the tax thereon. This scheme of Sec.115-O was abolished by the Finance Act of 2002. Section 115-O was reintroduced by Finance Act, 2003 reverting to the simplistic system. Ultimately, DDT was abolished by the Finance Act, 2020 and the Government reverted to the classical system of taxation of dividend. 70. On behalf of the assessee, it was argued that Supreme Court has laid down the principle that DDT u/s. 115-O is nothing but a tax in the hands of the shareholder because they have gone by the nature of income in the hands of the shareholder and not in the hands of the Domestic Company paying dividend. This argument in our view is devoid of any merit. As was submitted by the learned DR, the Supreme Court while dealing with the constitutional validity of Sec.115 O of the Act has held that under 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 ....
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.... 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 Finance Act of 2002; reintroduced again by the Finance Act, 2003), it was the assessee who was liable to pay tax on such dividend income. In such a situation the assessee was entitled under Section 57 of the Act to claim the benefit of exemption of expenditure incurred to earn such income. Once Section 10(33) and 115-O was reintroduced the position was reversed. The above, actually fortifies the situation that Section 14A of the Act would operate to disallow deduction of all expenditure incurred in earning the dividend income under Section 115-O which is not includible in the total income of the assessee. 31. So far as the provisions of Section 115-O of the Act are concerned, even if it is assumed that the additional income tax under the ....
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....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 appeal has to be answered against the appellant-assessee by holding that Section 14A of the Act would apply to dividend income on which tax is payable under Section 115-O of the Act." [Emphasized by us] The aspect which weighed with the Hon'ble Supreme Court was the fact that the payment of DDT was not a payment on behalf of the shareholder. Leaving aside the question whether it is a tax on company or shareholder, the position that remains undisturbed is the conclusion that "DDT is not a payment on behalf of the shareholder" by the domestic company. The observations of the Hon'ble Bombay High Court regarding the legal characteristics of DDT that it is tax on a company paying the dividend and "is chargeable to ....
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....BI 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. 115O of the Act. If Dividend was to be regarded as, "(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........" tax u/s. 115-O was not payable. The assessee relied on the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. (supra) and contended that the court in Godrej and Boyce case (supra) held that the charge under sub-section (1) of Section 115-O of the said Act is on the profits of the domestic company and more specifically on that part of the profits which is decl....
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....er 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 Supreme Court of India in the case of Godrej & Boyce (supra). We have already expressed the view that the decision of the Hon'ble Supreme Court in the case of Godrej & Boyce (Supra) does not dilute the principle laid down by the Hon'ble Bombay High Court in the case of Godrej & Boyce (supra). The decision in the case of SIDBI (supra) reiterates this position. 78. Another argument that 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 re....
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....e shareholder. 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, 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 funct....
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....ends 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 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 s....