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Facts
The assessee, a subsidiary of a UK company, paid Dividend Distribution Tax (DDT) at 20.56% on dividends distributed. The assessee claimed a refund of the excess DDT paid over the 10% rate prescribed by the India-UK DTAA, citing judicial precedents. The Assessing Officer rejected the claim, and this was upheld by the CIT(A).
Held
The Tribunal held that DDT is a tax on the domestic company's income and not on the shareholder, and therefore, the India-UK DTAA is not triggered. The Tribunal relied on the decision of the Special Bench in DCIT vs. Total Oil India Pvt. Ltd. and dismissed the assessee's appeal.
Key Issues
Whether the Dividend Distribution Tax (DDT) paid by a domestic company is a tax on the company or the shareholder, and if it is a tax on the company, whether the India-UK DTAA can be invoked to reduce the DDT rate.
Sections Cited
115-O, 237
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Income Tax Appellate Tribunal, DELHI ‘D’ BENCH,
Before: SHRI VIKAS AWASTHY & SHRI NAVEEN CHANDRA
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order of the ld. CIT(A)/NFAC, Delhi dated 08.08.2024 pertaining to A.Y 2019-20.
Page 1 of 12 assessee pertains to the rejection of refund of excess Dividend Distribution Tax [DDT] payment made by the assessee.
Brief facts of the case is that the assessee is a private limited company incorporated in India and is a subsidiary of Intertek Holdings Ltd., UK, (hereinafter called the 'Payee Company'), a limited liability company incorporated under the laws of UK. For the year under consideration, the assessee filed its revised ITR declaring Total Income of Rs. 93,15,62,910/-. During the year, it declared dividend of Rs. 72,69,63,050/- and paid DDT of Rs. 14,94,29,436/- at the rate of 20.56% on the aforesaid dividend, in accordance with provisions of section 115- O of the Act.
The assessee filed an application dated 30.03.2020 u/s 237 of the Act, with the Jurisdictional Assessing Officer (JAO) claiming refund of DDT paid by it in excess of the rate of 10% as prescribed under India-UK DTAA with respect to dividend paid to the payee company. The assessee relied on (i) Hon. ITAT, Delhi, in the case of Giesecke & Devrient (India) Pvt. Ltd. Vs The Addl. CIT [ITA 7075/DEL/2017] (Delhi ITAT).
(ii) Hon. ITAT, Kolkata, in the case of Indian Oil Petronas Pvt. Ltd [TS- 324-ITAT-2021 (Kol)].
The AO rejected the claim of DDT refund made by the Appellant u/s 237 of the Act, vide his Order dated 05.08.2022, and the same was upheld by the CIT(A).
Aggrieved, the assessee is before us.
It is the say of the ld. counsel for the assessee that the rate of DDT on dividends paid by assessee to Intertek Holdings Limited, UK, ought to be restricted to 10% of gross amount of dividend in accordance with Article 11 of India-UK DTAA, instead of 20.56% charged in terms of section 115-O of the Act.
The ld. counsel for the assessee further contended that the ld. CIT(A) erred in not dealing with several new grounds in support of refund claim on pretext following decision of Special Bench of this Hon'ble Tribunal in DCIT vs Total Oil India Pvt. Ltd., [2023] 104 ITR(T) 1 (Mumbai-Trib.) (SB). The Ld. CIT(A) erred in concluding that DDT is not can be levied under the Act only on income and that dividend is income of shareholder.
The ld. counsel for the assessee submitted written submissions raising several grounds on the issue of taxability of DDT on dividend which read as under:
a) Sovereign has the prerogative to tax dividend either in the hands of recipient or otherwise and there is nothing in the fundamental concepts of income-tax to prevent the imposition of immediate and apparent incidence of the tax on a person other than the person whose income is to be assessed (Para No. 55 & 78). b) The objective of Memorandum was not confined to shifting the charge for administrative convenience, but also to encourage shareholders investments in domestic company (Para No. 56) c) Sec. 115-O is a code by itself in so far as levy and collection of tax on distributed profits are concerned. Non-obstante clause of Sec. 115-O indicates that this section is independent and divorced from the concept of 'total income' (Para No. 58) d) The law is well settled that a judicial precedent is only 'an authority for what it actually decides and not what may come to follow from some observations which find place therein'. The Hon'ble Supreme Court was not dealing with the nature of DDT as to whether it is tax on the company or a tax on the shareholder. Thus, decision rendered in case of Tata Tea (supra) does not support the cause of assessee.
[A.Y 2019-20] Intertek India [P] Ltd Vs. The A.C.I.T e) Hon'ble Bombay High Court in case of Godrej & Boyce has held that DDT was not a tax on income of the shareholder but was instead a tax on Company. Also, Hon'ble SC while did not conclude on whether it is a tax on Company or shareholder, it did not disturb the conclusion that 'DDT is not a payment on behalf of the shareholder' (Para No. 71 to 74) f) Hon'ble Bombay High Court in case of Small Industries Development Bank of India -vs.- Central Board of Direct Taxes 133 taxmann.com 158 has held that charge under section 115-0 is on the Company's profits and not income in the hands of the shareholder. (Para No. 75) g) Section 115-O(3) and 115-O(4) clarifies that the taxes paid are final payment of tax and no credit shall be claimed by the Company or any other person (Para No. 77) h) DDT is a tax not on the shareholder but on the income of the company and thus, there is no double taxation and thus, DTAA does not apply (Para No. 79 & 80) i) If domestic company has to enter the domain of DTAA, the countries should specifically extend the treaty protection to DDT (Para No. 81)
The ld AR, in essence argued that the basis of the above provisions and judicial precedents is that DDT is a tax on dividend income of recipient shareholder and therefore benefit of Article 11 of India-UK tax treaty should be allowed to the Appellant. The ld AR added that the correct rate of Dividend distribution tax i.e., rate under DTAA vs Section jurisdiction from 8.12.2021.
Per contra, the ld DR heavily relied on the orders of the CIT(A).
We have heard the rival submissions and have carefully perused the materials on record. We find that the ld. CIT(A), relying on the Special Bench of ITAT, Mumbai in the case of DCIT vs Total Oil India Pvt. Ltd.,(supra) held as under:
“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 must look at the DTAA from the recipient's taxability perspective. DDT is paid by the domestic company resident in India. It is a tax on the domestic company's income and not tax paid on behalf of the shareholder. In such circumstances, the domestic company paying DDT under Section 115-O of the Act does not enter the domain of DTAA at all. If domestic company has to enter the domain of DTAA, the countries should have agreed specifically in the DTAA to that effect. In the treaty between India and Hungary, the Contracting [A.Y 2019-20] Intertek India [P] Ltd Vs. The A.C.I.T States have extended the treaty protection to profits distributed by the Indian company by deeming the DDT paid by the Indian company as tax paid by shareholder and restricting the DDT rate to 10%. In the absence of similar deeming provision under other DTAAs, treaty benefit cannot be granted to the Indian company paying the DDT in such other DTAAs. On the basis of reasoning given above, it has been concluded that where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder, which attracts DDT referred to in Section 115-O of the Act, such DDT 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 the non-resident shareholder as specified in the relevant DTAA with reference to such dividend income. Wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying DDT, only then, the domestic company can claim benefit of the DTAA, if any.
At this juncture it would be relevant to quote the Special Bench at ITAT, Mumbai in the case of Total Oil India Pvt Ltd IA No. 6997/Mum/2019 on the issue of taxation of DDT which held as under:
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 [A.Y 2019-20] Intertek India [P] Ltd Vs. The A.C.I.T 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 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.
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 look at the DTAA from the recipients taxability perspective. 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 u/s.115O does not enter the domain of DTAA at all.
If domestic company has to enter the domain of DTAA, the countries should have agreed specifically in the DTAA to that effect. In the Treaty between India and Hungary, the Contracting States have extended the Treaty protection to the dividend distribution tax. It has been specifically provided in the protocol to the Indo Hungarian Tax Treaty that, when the company paying the dividends is a resident of India the tax on distributed profits shall [A.Y 2019-20] Intertek India [P] Ltd Vs. The A.C.I.T 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. While making Reference in the case of Total Oil (supra), the ld. Division Bench has made the following observations on this aspect:
"(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 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 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 [A.Y 2019-20] Intertek India [P] Ltd Vs. The A.C.I.T 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 of the other Contracting State". The same is the position with respect of the other non-discrimination provisions. No such extension of the scope of treaty protection is envisaged, or demonstrated, in the present case. When the taxes are paid by the resident of India, in respect of its own liability in India, such taxation in India, in our considered view, cannot be protected or influenced by a tax treaty provision, unless a specific provision exists in the related tax treaty enabling extension of the treaty protection.
(h) Taxation is a sovereign power of the State- collection and imposition of taxes are sovereign functions. Double Taxation Avoidance Agreement is in the nature of self-imposed limitations of a State's inherent right to tax, and these DTAAs divide tax sources, taxable objects amongst themselves. Inherent in the self- imposed restrictions imposed by the DTAA is the fact that outside of the limitations imposed by the DTAA, the State is free to levy taxes as per its own policy choices. The dividend distribution tax, not being a tax paid by or on behalf of a resident of treaty partner jurisdiction, cannot thus be curtailed by a tax treaty provision."
We are of the view that the above exposition of law is correct and we agree with the same. Therefore, the DTAA does not get triggered at all when a domestic company pays DDT u/s.115O of the Act.”
We are further informed that the correct rate of Dividend distribution tax i.e., rate under DTAA vs Section 115-O is under consideration of Hon'ble Delhi High court. We are therefore of the considered view that till such time the Hon'ble High Court decides the the Special Bench decision. Respectfully following the decision in the case of Total Oil India Pvt Limited, (supra), we find no reason to interfere with the decision of the CIT(A). Accordingly, we sustain the decision of CIT(A). The grounds of appeal 1 to 5 are dismissed. is dismissed.
The order is pronounced in the open court on 04.06.2025.