TaxTMI 
TaxTMI 
2025 (12) TMI 677
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....7/06/2024 (impugned ruling) passed by the Board for Advanced Rulings-I, New Delhi (in short "BFAR") in Unique No. of the case : AAACC2281Q/2019/0020/0306 (Old No. L AAR/446/2019). The impugned ruling according to the Appellant has erroneously decided against the questions raised by it seeking an advance ruling to restrict the rate of Dividend Distribution Tax (DDT) to the extent of withholding tax rate on Dividend Income as prescribed under Article 11 of India - UK Tax Treary (DTAA). A: THE CHALLENGE IN THE APPEAL 2. The brief background in which the challenge is raised is set out in the Appeal and is also presented before us by the learned Senior Advocate Mr. Porus Kaka, assisted by Mr. Manish Kanth, and in a brief manner, we would refer to the same. a) Colorcon UK is a foreign company formed and registered under the laws of United Kingdom, having its registered office at Flagship House, Victory Way Crossways, Dartford Kent, DA2 6QD, United Kingdom and it is not an Indian company within the meaning of section 2(26) of the Act. It is a tax resident of United Kingdom with a valid Tax Residency Certificate issued by the Government of United Kingdom. b) During ....
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....pellant complied with the said direction. Similarly, the Respondent also filed its report under Section 245 R (4) of the Act on 16/01/2020, wherein it specifically pleaded that the Appellant did not satisfy the conditions of Paragraph 1 and 2 of Article 11 of India - UK DTAA and, therefore, it is not eligible to apply the rate of 10% to DDT on the amount of dividends paid to Colorcon, UK. The Appellant clarified that the dividend as provided in application is on the basis of the financial year for which the dividend was declared irrespective of the time when such dividend was declared by the Appellant and it also furnished the updated data of dividend declared and DDT paid basis as against the financial year in which the dividend was declared to align the amounts of dividends declared and paid with the Income Tax Returns (ITRS). The following details were furnished by the Appellant:- FY in which Dividend is declared/paid Amount of dividend (in INR) Amount of DDT (in INR) 2015-16 73,22,33,600 15,11,05,614 2016-17 75,18,47,000 15,30,58,358 2017-18 1,03,95,10,200 21,16,19,818 2018-19 1,48,89,83,950 30,60,65,031 Total 4,01,25,74,750....
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....submitting that the term 'Dividend' is defined under Section 2(22) to include any distribution by a Company of accumulated profits to its shareholders Mr. Kaka has taken us through the legislative history of dividend under the Act when Section 115-O was first time introduced by the Finance Act, 1997, which shifted the incidence of collection of tax on dividend from shareholders to dividend declaring company. Taking us through various changes effected therein with the purpose and object, when the provision underwent amendment from time to time, it is the submission advanced before us that the incidence of tax shifted hands, but there is no change in the substantial provision. We will be dealing with various amendments to the provision as we proceed to analysis the arguments, but at present we deem it appropriate to turn our attention to the India UK Treaty, a bilateral arrangement to encourage cross border business. The tax treaty between India and UK for avoidance of double taxation and prevention of physical evasion with respect to taxes of income and capital gains was entered into on 26/10/1993 on completion of the procedure required by the respective laws, and as requir....
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.... indirectly from immovable property within the meaning of Article 6 by an investment vehicle which distributes most of this income annually and whose income from such immovable property is exempted from tax; (b) 10 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. The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term "dividends" as used in this Article means income from shares, or other rights, not being debt-claims, participating in profits, as well as any other item which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident. 4. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment....
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....is income of the shareholders and being an 'Additional tax' covered by the definition of 'tax' as defined in Section 2(43) of the Act, which fall within the ambit of charging Section 4 of the Act, it is covered by provisions of the Act including Section 90. 10. Mr. Kaka would submit that Section 90 of the Act empower the Central Government to enter into any 'Double Tax Avoidance Agreement' with another country and sub-section (2) thereof provide that where such an Agreement has been entered into, 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 the Assessee. In support of this provision, he would place reliance upon the decision of the Apex Court in case of Union of India vs. Azadi Bachao Andolan 2003 [263 ITR 706 (SC), and in specific observation to the following effect : "28. A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a Double Taxation Avoidance Agreement. When that happens, the pr....
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....whereby the payment is made to the resident of another contracting State. He would also submit that Article 2 of the DTAA has enlisted the taxes covered and it covers 'Income Tax' including any surcharge thereon under the definition of 'Tax for the purpose of 'Taxes covered in India'". In light of Article 11, he would submit that there are four elements to trigger its application viz ; i) the payment must be the dividend as defined under Article 11(3); ii) such dividend shall be by the resident of another State; iii) such dividend shall be paid to a resident of other State; and iv) such dividend, if beneficiary own by the resident of other State (UK) the rate of tax in accordance with Article 11 (2)(b) cannot exceed 10%. The submission advanced on behalf of the Appellant is that all four criteria are fully made out in the present case, as Dividend has been paid by resident of India "the Appellant" to a resident of other contracting State (Colorcon UK), which satisfy the definition of term 'Dividend' both under DTAA and under the domestic law and Colorcon UK admittedly being beneficiary owner of dividend, India is obliged not to tax this cat....
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....ax depending upon the rate mentioned in the DTAA. It is thus the submission of the learned senior counsel, that if India is permitted to charge a rate of tax in excess of the rate permitted under the Treaty on items of income, such as dividend as defined under the Treaty, it would not be in accordance with Article 24 and the credit would not be available, resulting in double taxation, which would defeat the object and purpose of the DTAA and will be contrary to the object and purpose of Dividend Distribution Tax. 13. The Respondent being represented by Ms. Amira Razaq supported the Ruling dated 27/06/2024 by the BFAR.-New Delhi, as she would submit that Colorcon Asia paid dividend to Colorcon UK and also paid Dividend Distribution Tax (DDT) thereon at the rate specified in Section 115-O of the Income Tax Act 1961 for FY 2015-16, 2016-17, 2017-18 and interim dividend for 2018-19. She would submit that as far as India's Double Taxation Avoidance Agreement (DTAA) is concerned, the dividend distribution tax is explicitly excluded from the scope of taxes covered under the agreement and in the wake of this being urged before us at the outset, she would submit that since DDT is ....
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.... Razaq would submit that DTAA between India and UK is not triggered, as admittedly DDT is a tax on domestic company and not on just shareholder and since the interpretation of international treaties between signatory nations is confined to its express terms and cannot be super-added to or interpreted in the manner governing statues, and the terms of one treaty cannot be used to interpret another treaty unless discussed, deliberated and documented in express terms in a manner known to law. According to her, even assuming for a moment that dividend is covered under the treaty, it will be triggered the moment, the dividend is declared, distributed or paid, whether out of the current or accumulative profits to be charged to the additional income tax at the rate of 50%. She has placed heavy reliance on the decision in case of Godrej and Boyce Manufacturing Company Limited vs. DCIT [2010] 194 Taxman 203 (Bombay), where the Bombay High Court had an opportunity to deal with the nature of DDT, and held that 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, and she rely on the following....
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.... "The competent authorities of the contracting States shall by mutual agreement settle the mode of application of these limitations. The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which dividends are paid". Submitting that, there are no further terms or mutual agreement settling the mode of application of the limitations imposed in Article 11 by the DTAA itself, she would submit that the contention of the appellant that the rate of tax provided under Article 11(2)(b) of DTAA will supersede that provided by Section 115-O of the 1961 Act, is misconceived. Reliance upon the Vienna Convention, according to her is also not of any relevance because India is not signatory to it, though India follows and subscribes the inherent principles of international law, it has been noted by the Apex Court in case of Assessing Officer, Circle (International Taxation) 2(2)(2), New Delhi vs. Nestle SA (2024)14 SCC 703. 16. Ms. Razaq would also disagree with the reliance placed by the appellant on the decisions of the Hon'ble Delhi Bench of ITAT in case of Giesecke & Devrient (India) (P.) Ltd. V. Additional Commissioner of Income T....
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....verned by tax rate contemplated in Article 11 is completely misconceived. 17. Ms. Razaq has also advanced her arguments upon the interpretation of international treaties between the signatory nations, and submitted that it must be confined to expressed terms of the treaty, and unless discussed, deliberated, and documented in expressed terms, nothing is permitted to be inferred therein. Thus according to her, the findings rendered by the BFAR is just and proper based on settled principle of interpretation of international treaties and as per the settled law by the Supreme Court. The gist of her submission is DDT is a tax on domestic resident company in India/ the appellant and not on the shareholder/resident of UK, and its levy does not give rise to any "Juridical double taxation" (C) ANALYSIS OF COUNTER SUBMISSIONS 18. The Appellant/the Assessee who has filed the Appeal has raised the following points for determination : Whether in the facts and circumstances of the case and in law : (a) BFAR has erred in not restricting tax rate to 10% as prescribed under Article 11(2) of the India-UK DTAA, on dividends paid/distributed by the Appellant ? (b)....
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.... as any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by Company to its shareholders of all or any part of the assets of the Company, but it shall not include distribution made in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in surplus assets and also when such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders. Chapter XII - D comprise of special provisions relating to 'Tax on distributed profits of Domestic Companies' and relevant provision in term of Section 115-O reads thus: Tax on distributed profits of domestic companies. "115-O (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 April, ....
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....ompanies on or after 1st June, 1997. Consequently, deduction under Sections 80L and 80M in respect of corporate dividends have been discontinued. The provisions relating to tax deduction at source from dividends have also been suitably modified. The bill also proposed to introduce new provisions for levying a moderate tax on distributed profits. Under the new provisions, the amounts declared, distributed or paid on or after 1st June, 1997, by a domestic company by way of dividends shall be charged to additional income tax at a lat rate of 10%, in addition to the normal income tax chargeable on the income of the company." The above provision was proposed, on the amounts declared, distributed or paid as dividends, on or after 01/06/1997 where a new system of collection of taxes was introduced which shifted point of collection from shareholders to domestic company. However, vide Finance Act, 2002, the tax on distributed profits, introduced by Finance Act, 1997 was abolished and the point of collection of tax was shifted back to the shareholders and the explanatory memorandum to the Finance Bill 2002, stated thus : "WIDENING OF TAX BASE Taxation of Dividen....
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....deduct tax at the rates in force. These rates are specified in part II of the first schedule to the Finance Act. Since provisions of Section 115-O would now be inoperative, it is also proposed to omit references to "other than dividends referred to in Section 115-O". In Sections 10 (23FA), 10(23G), 115-A, 115AC, 115-ACA, 115AD, 115C. It is further proposed to omit the provisions to Sections 196-C and 196-D, so that the tax shall be deducted at source with respect of incomes referred to in Sections 115-AC and 115AD, where the income is received in the form of dividends referred to in Section 115-O also. By the aforesaid memorandum, the dividend which was considered to be income of shareholders, the incidence of tax was shifted back to the shareholders. 23. By Finance Act, 2003, the incidence of tax on dividend was once again shifted to the company and the explanatory memorandum to Finance Bill 2003, stipulated thus : "It has been argued that it is easier to collect tax at a single point i.e. from the company rather than compel the company to compute the tax deductible in the hands of shareholders. It is, therefore, proposed to substitute sub-section (1) of se....
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....to be grossed up for the purpose of computing the additional tax. " [Emphasis supplied] 24. The Appellant has also relied upon the Speech of the then Finance Minister in Budged 2014-15, where it was mentioned thus:- "In the year 2003 the tax liability on income by way of dividends was shifted from the shareholder to the Company. The shareholder was required to pay tax on gross dividends, but now the company pays the tax on the dividend amount net of taxes. Similarly, in case of mutual fund income distribution tax is paid on the income distributed net of taxes. I propose to remove this anomaly, both in case of company and mutual fund." 25. The amendment introduced by Finance Act of 2016 also make it apparent that the additional income tax in form of DDT is nothing but a tax on dividend income of shareholder and the explanatory memorandum to the Finance Bill of 2016, clearly noted as below :- "Under Section 115-O dividends are taxed only at the rate of 15% at the time of distribution in the hands of company declaring dividends. This creates a vertical inequity amongst tax payers as those who have high dividend income are subject to tax only at the rat....
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....dministrative convenience though there is no change in the substantive Rule or concept of 'Dividend'. Since under the Income Tax Act, DDT is levied on Dividend distributed company, which amounts to income in the hands of shareholder and being "additional tax" it covered within the definition of Tax as defined in Section 2 (43) of the Act and since it is covered by Charging Section 4, it must be necessarily subservient to the provisions of the Act which include Section 90. (C) (2) LEGAL EFFECT OF AN INTERNATIONAL TREATY IN TERMS OF AVOIDANCE OF DOUBLE TAXATION TREATY, AS PER SECTION 90 OF INCOME TAX ACT, 1961 27. In terms of Section 90 of the Income Tax Act, 1961, the Central Government is authorized to enter into an Agreement with the Government of any country outside India (or specified territory) :- "(a) for the granting of relief in respect of _ (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual e....
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....s which are to be subject of the Convention. It is in this Treaty, Article 11 under the caption "Dividends", contemplate that the dividends paid by a company, resident of a Contracting State to a resident of other Contracting State may be taxed in that other State and taking benefit of the provision in form of clause (2) of Article 11, it is the claim of the Appellant, a resident of Contracting State that it is entitled for the benefit of 10% of the gross amount of dividends as contemplated in clause (b). 29. In order to ascertain the effect of this Convention in form of a Treaty, at the outset, it is necessary to understand the purport of such a Treaty. Section 90 of the Income Tax, 1961 is intended to enable and empower the Central Government to issue a Notification for implementation of the terms of a Double Taxation Avoidance Agreement (DTAA). With a specific provision in form of Sub-Section (2) of Section 90, it is made clear that once such a Treaty exist in form of an Agreement, then provisions of such an Agreement with respect to cases to which they apply would operate even if inconsistent with the provision of Income Tax Act. 30. In Azadi Bachao Andolan (supra), wh....
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....991 explains its purpose as follows: "43. Taxation of foreign companies and other non-resident taxpayers. Tax treaties generally contain a provision to the effect that the laws of the two contracting States will govern the taxation of income in the respective State except when express provision to the contrary is made in the treaty. It may so happen that the tax treaty with a foreign country may contain a provision giving concessional treatment to any income as compared to the position under the Indian law existing at that point of time. However, the Indian law may subsequently be amended, reducing the incidence of tax to a level lower than what has been provided in the tax treaty. 43.1. Since the tax treaties are intended to grant tax relief and not put residents of a contracting country at a disadvantage vis-à-vis other taxpayers, Section 90 of the Income Tax Act has been amended to clarify that any beneficial provision in the law will not be denied to a resident of a contracting country merely because the corresponding provision in the tax treaty is less beneficial." 21. The provisions of Sections 4 and 5 of the Act are expressly made "subject t....
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....and 5 of the Income Tax Act, 1961, and take away the power of the Indian Government to levy tax on the income in respect of certain categories referred to in certain articles of the Agreement. Focusing upon the effect of such an 'Agreement' entered by virtue of Section 90 of the Act, the High Court had summed up the situation in the following words :- "The effect of an 'agreement' entered into by virtue of Section 90 of the Act would be: (i) if no tax liability is imposed under this Act, the question of resorting to the agreement would not arise. No provision of the agreement can possibly fasten a tax liability where the liability is not imposed by this Act; (ii) if a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it; (iii) in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the Appellate Authorities and the court." 33. Azadi Bachao Andolan (supra) underline the importance of Section 90, when it observed thus :- "28. A survey of the aforesaid cases makes it cl....
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....n in the context of aiding commercial relations between treaty partners as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions. David R. Davis in Principles of International Double Taxation Relief was quoted with approval:- "The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the low of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighed more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the low of trade and investment is largely one-way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides. And, fi....
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..... The efficacy of a treaty over domestic law turns upon either State-specific conventions operating to govern the sovereign practices, or where there is a written Constitution provisions of that Charter. 8. Double taxation treaty rules do not "authorize" or "allocate" jurisdiction to tax to the Contracting State nor attribute the "right to tax". As is recognized by public international law and constitutional law, States have the original jurisdiction to tax, as an attribute of sovereignty. What double taxation treaties do is to establish an independent mechanism to avoid double taxation through restriction of tax claims in areas where overlapping tax claims are expected, or at least theoretically possible. Essentially therefore, through the mechanism of a treaty, the Contracting States mutually bind themselves not to levy taxes, or to tax only to a limited extent, in cases where the treaty reserves taxation for the other Contracting States, either wholly or in part. The Contracting States thus and qua treaty provisions, waive tax claims or divide tax sources and/or the taxable object." 36. With reference to Article 253 of the Constitution of India, which conferred Parli....
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....e Petitioners and Revenue in relation to acquisition by M/s. Sanofi Pasteur Holding SA France of the entire share capital of M/s. ShanH SAS, France a Joint Venture Company from its constituents M/s. Marieux Alliance, France (for short "MA") and one more company M/s. Groupe Industrial Marcel Dassault (for short "GIMD"). The subject matter of challenge was an order passed by the Revenue which determined the Petitioner to be an "Assessee in default", in respect of the payments made by it to MA and GIMD for acquisition of the majority control stake in Shanta Biotechnics Ltd (SBL) through transfer of ShanH shares, determining the long term capital gains and consequent tax liability. The order also determined the liability to interest, on the default of tax deduction under Section 201 (1A). The other set of Petition, GIMD and MA, challenged the ruling of Authority of Advance Tax, which had ruled that the capital gain arising from the sale of ShanH shares (a French incorporated entity) by the Petitioners( also French incorporated entities), to Sanofi (French incorporated entity as well) is taxable in India in terms of Article 14(5) of DTAA. 38. The Hon'ble Andhra Pradesh High Court ....
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....cial branch; and when the organic charter accommodates no participatory role, for either the judicial branch or the executors of the Act." 39. The argument of the Revenue was noted as below :- "There is no conflict between the provisions of the Act pursuant to the retrospective amendments carried out by the Finance Act, 2012, and the DTAA. The provisions of the Act, on the facts of the case are squarely applicable to the transaction in terms of the provisions of the DTAA itself, as the right to tax the transaction is allocated to India in terms of article 14(5). Inferences from SPA, ShanH and SBL's amended AOA (i) ShanH is a company of no substance; (ii) is neither the legal nor beneficial owner of SBL shares (iii) is not an assignee of MA in respect of SBL shares; (iv) ShanH made no payments for acquisition of SBL shares; subsequent accounting of the purchase consideration as a loan from MA, at a later date is of no consequence; (v) ShanH had no control over SBL management nor enjoyed any rights and privileges in SBL as a shareholder; The Double Taxation Avoidance Agreements allocate taxing rig....
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....ms of DTAA and when it is read with Section 4 and 5, the DTAA shall automatically override the provisions of the Income Tax Act when it comes to the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of DTAC. 42. Article 31 of the Vienna Convention on Law of Treaties (1969) (VCLT) also require that the treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of treaty in their context and in the light of its object and purpose. Article 31 of the General Rule of interpretation of VCLT when made applicable, to the case before us, when the question arises as to how the treaty shall be interpreted we get a clear answer in favour of the Appellant. General Rule of interpretation in form of Article 31 reads thus :- "INTERPRETATION OF TREATIES" Article 31 General rule of interpretation 1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 2. The context for the purpose of the ....
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....tic law, it must act as subservient to the treaty between India-UK (DTAA). This issue is already focussed upon in the past and we refer to some of the rulings in that regard. In ITA Delhi Bench in Giesecke & Devrient (India) (P.) Ltd. (supra), a pure legal issue was adjudicated being whether Dividend Distribution Tax (DDT) in terms of Section 115-O should be restricted to the rate of tax on dividend as provided in applicable DTAA governing non-resident shareholders. What was examined was the interplay between Section 115-O of the Income Tax Act and Article 10 of the DTAA governing taxation on dividend on the other. With reference to the genesis of the charge for levy of additional income tax under Section 115-O on the profits declared/distributed and paid by the Corporate Assessee by way of dividend which was traced to the charging provision of Section 4 of the Act, it was held that the Section provides for charge of tax including additional income tax on the total income of every person and the definition of the term 'Income' under Section 2(24) include A) Profits and gains and B) Dividend. 45. By taking into consideration definition of the term 'Tax' in Section 2(43) ....
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....provides that total income of resident includes all income which is: (a) received or is deemed to be received in India. (b) accrues or arises or is deemed to accrue or arise in India. (c) accrues or arises outside India during the previous year. 57. In the case of non-resident, total income includes all income from whatever source derived, (a) received or is deemed to be received or (b) accrues or arises or is deemed to accrue or arise in lndia during such year. 58. The provisions of section 4 and 5 of the Act are expressly made "subject to the provisions of this Act" which would include section 90 of the Act. Section 90(2) of the Act provides "Where the central government has entered into an agreement with the government of any country outside India or specified territory outside India" as the case maybe, under sub-section (1) for granting relief of tax or as the case maybe, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, provisions of this Act shall apply to the extent they are more beneficial to the assessee." The observations of the Supreme Court in Azadi Bachao And....
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....he 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." 47. In Union of India vs. Tata Tea Company Limited (2017) 398 ITR 260, when the constitutional validity of Section 115-O of the Act came before the Court, as the Calcutta High Court upheld the validity, but a rider was put that additional income tax to be charged under Section 115-O can be only 40% of the income which is taxable under the Income Tax Act. By referring to the Petition filed by a Tea Company, cultivating tea in gardens and processing it in its factory/plants for marketing the same, the argument was put forth that cultivation of tea is an agricultural process although the processing in the factory is an industrial process and agricultural income is within legislative competence of the State and not within the legislative competence of Parliament. Section 115-O imposed tax on dividend distributed by company which is nothing but imposing tax on agricultural income of the Petitioner and it is in this background, the virus of Section 115-O was challenged. The Division Bench held Section 115-O to be constitution....
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....d Section 115-O pertains to declaration, distribution or payment of dividend by domestic company and imposition of additional tax on dividend and was found to be covered by Entry 82 and the provision of Section 115-O was held not to be directly included in the field of tax on agricultural income. It was, therefore, held that even assuming for the sake of argument, it was held that even if the provision tranches on the field covered by List Ii Entry 46. it is only incidental and in "pith and substance" the legislation in form of Section 115-O is clearly covered by List 1 Entry 82. The concluding observation in the said decision reads thus : "34. This Court, however, while considering the nature of dividend in the above case held that although when the initial source which has produced the revenue is land used for agricultural purposes but to give to the words "revenue derived from land", apart from its direct association or relation with the land, an unrestricted meaning shall be unwarranted. Again as noted above, in Nalin Behari Lal Singha observation was made that shares of its profits declared as distributable among the shareholders is not impressed with the character....
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....id by a company which is a resident of India to a company which is a resident of the United Kingdom and which controls directly or indirectly at least 10% of the voting power in the company paying the dividend, the credit shall take into account in [addition to any Indian tax for which credit may be allowed under the provisions of sub-paragraph (a) of this paragraph] the Indian tax payable by the company in respect of the profits out of which such dividend is paid. The relevant provision is Article 11 which pertain to 'Dividend' and cover dividend paid by a company which is resident of a Contracting State to a resident of the other Contracting State may be taxed in other State. The Article contains four elements to trigger its application, (a) the payment must be the dividend as defined in Article 11(3), (b) such dividend shall be paid by a resident of one state (India), (c) such dividend shall be paid to a resident of other state (UK), (d) such dividend, if beneficially owned by the resident of the of the other state (UK), the rate of tax in accordance with Article 11(2)(b) cannot exceed 10 per cent. Admittedly, on a plain reading of th....
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.... The unilateral change made in the domestic law over the years changing the incidence of tax, therefore, cannot, alter or override the beneficial provisions of the treaty. The courts are under an obligation within the legitimate limits to so interpret the municipal law as so to avoid confrontation with the treaties as well. In the judgment of Engineering Analysis (supra) dealing dealing with the similar situation wherein substantial unilateral changes made to the definition of 'royalty' under the Income Tax Act was sought to be applied to negate the treaty benefit to the tax fair under various treaties whereby royalty was already defined in the manner favourable to the tax payer, the Supreme Court accepted the plea of resident tax payers, who were obliged to deduct taxes at an appropriate rate on payment of such royalty to their counterparts outside India and the absurdity in denying the tax rate capped under the 'treaty', it was held thus:- "68. The absurd consequence that the residents in India after making the deduction/payment, would not then get any excess payment made by way of refund, when the regular assessment tax place, as the non-resident assessee alone wil....
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....be done to the non-residents outside India, who are residents of treaty countries and in the case before us,in the wake of a plain reading of Article 1 of India-UK DTAA, which clearly state that the treaty is applicable to the residents one or both of contracting states, we do not find any reason to read it otherwise. 52. Heavy reliance is placed by the Revenue on Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT (supra) which is also followed by the Special Bench of Tribunal in DCIT Vs. Total Oil India (P) Ltd. (supra). The issue revolve around the admissibility or otherwise of deduction of expenditure incurred in earning dividend income, which is not included in the total income of the assessee by virtue of Section 10(33) of the Income Tax Act 1961, which was in force at the relevant Assessment Year 2002-03. It is in this context, in para 30 of the decision, with reference to Section 10(33) exempting dividend income under Section 115-O of the Act with being conscious of the fact that there are other species of dividend income on which tax is levied, the Court held thus:- "We do not see how the said position in law would assist the assessee in understanding the provisi....
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....rence to the dividend, it was held thus:- "8.13 Thus, in conclusion, it may be stated that the rate of tax payable on dividend distributed to non-resident shareholders would depend upon the relevant Article of the DTAA entered into between India and the country to which the non-resident belongs, subject to the fulfillment of the conditions stated hereinbelow: (I) Dividend should be paid to the non-resident shareholder. (ii) Dividend constitutes income in the hands of the non-resident shareholder. (iii) The non-resident shareholder is the beneficial owner of the dividend. (iv) The non-resident shareholder should not have a 'Permanent Establishment' in India. 8.14 The Hon'ble Delhi High Court in the case of Pr. CIT v. Maruti Suzuki Ltd [W.P.(C) No. 13241 of 2019 dated 16-12-2019] held that the Hon'ble Tribunal is within its power to admit the additional ground in respect of claim of refund of tax paid in excess, by following provision of section 115-O of the Act instead of the relevant Article of the applicable DTAA. 8.15 The Delhi ITAT in the case of Giesecke & Devrient (India) (P.) Ltd. v. Addl. CIT [2020] 120 taxma....
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....ithin 'Tax' as defined in Section 2(43) of Act and, hence, is chargeable as per Section 4, which is subject to other provisions, which include Section 90 and sub-clause (2) thereof, then specially in case of Avoidance of Double Tax, the provisions more beneficial to assessee must be preferred. Considering that the international treaties involve extensive negotiations between two nations, and definitely being conscious of the respective Nation's power to tax, the benefits and detriments of a treaty and particularly a double tax treaty and its avoidance, can only be reciprocal when the low of trade and investment between treaty partners rests on balance and it is not allowed for one treaty partner to secure benefit to detriment of other. When a treaty is entered into, it is expected to have considered its impact on trade and investment and since it is mutual arrangement, it must be given full effect to and merely because there are unilateral amendments made on domestic front, the treaty cannot be made ineffective by construing the same in light of domestic law. The Parliament, is not within its power to change the terms of a bilateral treaty, which is a a result of negotiated economi....
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.... respect of the 'total income' of the previous year of every person. Thus, it is the earning of the 'income' that attracts the charge. 'Income' has been defined under Section 2(24) of the Act to include 'dividend'. Therefore, the Authority has erred in not appreciating that Section 115-O levies additional tax on the company on the "amounts declared, distributed or paid by way of dividends ". According to us, the declaration, distribution or payment of dividend by company cannot in any manner be regarded as 'income ' of the company distributing the dividend. Even Section 2(24) has not been amended by the Legislature inasmuch as regarding the "amounts declared, distributed or paid by way of dividends" as "income" of the company distributing dividends. Moreover, the Hon'ble Supreme Court in UOI v. Tata Tea Co. Ltd. (supra), has, in no uncertain words, held that "income as defined in Section 2(24) of the 1961, Act is the inclusive definition including specifically 'dividend' and that "section 115-O pertain to declaration, distribution or payment of dividend by company and imposition of additional tax on dividend is thus clearly covered by subject as embraced by Entry 82 " . Onc....
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.... of the shareholder and such income which had attracted tax could not be said to be 'exempt'. The conclusion was therefore arrived that Section 14-A of the Act would apply to dividend income on which tax is payable under Section 115-O of the Act. The decision in Godrej & Boyce is, therefore, in a completely different context as the issue before the Court was whether the dividend income not forming part of shareholders income attract Section 14-A qua the shareholder, but the issue before the BFAR was as to what could be taxed under Section 115-O and the answer is to be found in Tata Tea Company Ltd. (supra), where it is held that DDT is a tax on dividend income of shareholder and it would fall in Entry 82 of the Union List. Further reliance on decision by special bench in Tata Oil is also not well founded as the Apex Court in Godrej & Boyce observed that even if it assumed that the additional income tax under the aforesaid provision is on the dividend and not on the distributed profits of the dividend paying company, it would not have made any material difference to the applicability of Section 14-A. The BFAR also erred in not appreciating that as per Section 90(2) of the Inco....
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....domestic laws, that is, Section 115-O, but instead of the rate prescribed for therein, the tax has to be levied at the minimum rate of 10% to the extent the dividend is paid to a resident of UK. The BFAR erred in holding the respondent's submission by merely following the special bench's ruling stating that in order to invoke Article 11, the shareholder has to be taxed in India on the dividend earned from India. On a plain reading of the said Article, it is evident that the person on whom the tax on dividend is levied is an irrelevant and extraneous consideration for its application. There is nothing in the Article which suggests that the income has to be taxed in India in the hands of the shareholders. It merely deals with the nature of income, viz. dividend, which cannot be taxed in India at a rate exceeding 10%, if other stipulated conditions are met. The nature of income is a apropos element to invoke the said Article, and not the person who is subjected to tax, in whose hands the tax is levied, is not relevant for application of Article 11, as DDT is a 'tax on dividend income of the shareholder'. The entire legislative history of Section 115-O corroborates this. More important....