MARUTI SUZUKI INDIA LIMITED,NEW DELHI vs. ACIT, SPL. RANGE-6, NEW DELHI

आदेश/ ORDER

5 Special Bench - Total Oil India Pvt. Ltd.

Backdrop for constitution of Special Bench: 2. One of the issue in Cross Objection No.57/Mum/2021 arising out of for Assessment Year 2016-17 in the case of M/s. Total Oil India Private Limited was:

The learned Assessing Officer be directed to compute the tax payable by the assessee under section 115-O of the Income Tax Act, 1961 (‘the Act’) at the rate prescribed in the DTAA between India and France in respect of dividend paid by the assessee to the non-resident shareholders i.e., Total Marketing Services and Total Holdings Asie, a tax resident of France.

Giesecke & Devrient India Pvt Ltd vs. ACIT 120 taxmann.com 338 (Del). In the said case, the Delhi Bench of the Tribunal took a view that the rate of tax prescribed in the DTAA has to be applied in preference to the higher rate of tax prescribed in Sec.115-O. The line of reasoning taken by the Ld. Delhi Bench in the case of Giesecke & Devrient India Pvt.Ltd. (supra) firstly, was that DDT is a levy on the dividend distributed by the payer company, being an additional tax, falls within the definition of 'Tax' as defined u/s 2(43) of the Act, which is subject to the charging section 4 of the Act and charging section itself is subject to the provisions of the Act thereby bringing it within the sweep of which section 90 of the Act. Secondly, the Bench held that payment of dividend distribution tax u/s 115-O by the Domestic Company was for and on behalf of the shareholder and in discharge of shareholders liability to pay tax on dividend distributed. Reliance was also placed on the decision of Kolkata Bench in the case of DCIT vs. Indian Oil Petronas Pvt. Ltd., 127 taxmann.com 389, wherein similar view was taken.

“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 at that rate or those rates shall be charged for that year in accordance with, and 2 subject to the provisions (including provisions for the levy of additional income- tax) of, this Act] in respect of the total income of the previous year] of every person."

45. It can be seen from the above that this section provides for charge of tax, including additional Income tax on the total income of every person.

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46. Section 2(24) defines "Income" which includes: a) profits and gains; and b) dividend. Xxxxxx

47. Tax has been defined in section 2(43) as under: " Tax" in relation to the assessment year commencing on the 1st day of April, 1965 , and any subsequent assessment year means income- tax chargeable under the provisions of this Act, and in relation to any other assessment year income- tax and super- tax chargeable under the provisions of this Act prior to the aforesaid date;] and in relation to the A.Y commencing on the 1st day of April 2006, and any subsequent A.Y includes the fringe benefit tax payable u/s 115WA".

48. A perusal of the above shows that the term "Tax" would cover additional Income Tax levied u/s 115-0 of the Act.

49. The first critical issue, which needs to be decided, is as to whether the DDT is tax on the company or the shareholder since the admissible surplus stands reduced to the extent of DDT. We are aware of the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited 328 ITR 81 though the same was rendered in the context of section 14A r.w.s 115O of the Act. The relevant findings of the Hon'ble Bombay High Court read as under: "35. Section 115-O has been enacted with a view to exempt dividend income. Prior to the insertion of Section 115-O, domestic companies were liable to pay tax on the total income (including profits distributed as dividends) and shareholders were liable to pay tax on dividend income received. Domestic companies distributing profits as dividends were liable to deduct tax at source and shareholders receiving the dividend were entitled to take credit of such tax deducted at source. As this method was found to be cumbersome, Parliament chose to exempt dividend income in the hands of the shareholder and chose to levy additional income-tax on the amount of profits declared, distributed or paid as dividend by the domestic companies. Thus, by inserting Section 115-O, additional income- tax is levied on the amount of profits declared, distributed or paid as dividend and by inserting Section 10(33) it is made clear that the dividends referred to in Section 115-O would be exempt from tax."

50. Thus, it can be stated that the Hon'ble Bombay High Court has unequivocally held that DDT is tax 'on the company' and not 'on the shareholder'.

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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 place to mention that the Act does not provide for a separate adjudication/passing of separate order with regard to adjudication of liability of DDT. Section 115-Q merely provides for the consequences of non-payment of DDT, but there is no separate/specific provision in the Act for collection and recovery of DDT in default.”

“65. A conjoint reading of the Memorandum to Finance Bill 1997, 2003 and 2020 would show that levy of DDT was merely for administrative conveniences and withdrawal of DDT is keeping in mind that revenue was across-the-board, irrespective of marginal rate, at which recipient is otherwise taxed.

66. To recapitulate, the DDT is levy on the dividend distributed by the payer company, being an additional tax is covered by the definition of 'Tax' as defined u/s 2(43) of the Act which is covered by the charging section 4 of the Act and charging section itself is subject to the provisions of the Act which would include section 90 of the Act.

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67. In our humble opinion, the liability to DDT under the Act which falls on the company may not be relevant when considering applicability of rates of dividend tax set out in the tax treaties. The generally accepted principles relating to interpretation of treaties in the light of object of eliminating double taxation, in our view does not bar the application of tax treaties to DDT.”

“71. In light of the aforesaid decision, we are of the considered view that tax rates specified in DTAA in respect of dividend must prevail over DDT.

72. Article 10.4 above specifies that clause 1 and 2 will not be applicable if beneficial owner of dividend carries on business in other contracting state of which the company paying dividend is a resident through PE situated therein. Though supporting documents have been filed before us, but these documents need verification from primary officer, that is, the Assessing Officer. We, therefore, deem it fit to restore this issue for limited purpose of verification in the light of the aforesaid Articles of DTAA.

73. Considering the above in totality, in our considered opinion, the DDT levied by the appellant should not exceed the rate specified in Article 10 in India Germany DTAA.

74. The additional ground is, accordingly, allowed on principle, though subject to verification as directed hereinabove.”

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8.3. As per the provisions of the Act, dividend distribution tax (DDT) is a tax on dividend income and not on undistributed profits of the company. Undistributed profits of a company are still the profits of the company. They constitute the income of the company. Until the company declares dividend, no portion of these profits can become the income of the shareholders. 8.4. As per the aforesaid principle, the dividend income would constitute income in the hands of the shareholders and would be chargeable to tax under Section 4 of the Act. The Finance Ministry, in the ‘memorandum explaining the provisions of the Finance Bill, 1997 to 2020’, has stated that for administrative convenience, the incidence of tax on dividend income is shifted to the resident company paying such dividend income. 8.5. Thus, it may be appreciated that once the dividend constitutes income in the hands of the shareholders, the same should be chargeable to tax as per the provisions of Section 4 of the Act. As per the provisions of Section 4 of the Act, the income tax including the additional income tax should be charged at the rate specified in the Act or DTAA, whichever is more beneficial to the assessee. 8.6. In the instant case, the dividend, being an income in the hands of non- resident shareholders in respect of which the incidence of tax is borne by the resident company paying dividend. The rate of tax as specified in the DTAA, being more beneficial to the assessee, would be applicable over the rate specified in Section 115-O of the Act.”

“10. The reasons for our doubting the correctness of the decisions of the coordinate bences, on the dividend distribution tax rate being restricted by the treaty provisions dealing with taxation of dividends in the hands of the shareholders (i.e. Article 11 of the Indo French tax treaty, as in this case), are as set out below: (a) Hon’ble Supreme Court, in the judgment reported as Godrej & Boyce Mfg Co Ltd Vs DCIT *(2017) 394 ITR 449 (SC)+, has observed that “the fact that section 11 Special Bench - Total Oil India Pvt. Ltd.

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 shareholders. In Giesecke & Devrient India Pvt Ltd’s case, the division bench did not have any occasion to deal with this judicial precedent from Hon’ble Supreme Court. (b) The stand of the assessee that in the light of the subsequent judgment of Hon’ble Supreme Court in the case of Union of India Vs Tata Tea Co Ltd [(2017) 398 ITR 260 (SC)], one has to proceed on the basis that dividends received by the shareholders are taxed as income in the hands of the shareholders, is simply incorrect. The question which fell for consideration before Hon’ble Supreme Court was whether levy of tax under section 115 O was constitutionally valid or not, and Hon’ble Supreme Court 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” in the legislative competence of the Parliament. It deals with the constitutionality, not the interpretation, of Section 115 ‘O’. It does not overrule, or even remotely deal with, the specific decision of Hon’ble Supreme Court holding that 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” cannot be accepted in law. It is only elementary, as was held by Hon’ble jurisdictional High Court in the case of in the case of CIT v. Sudhir Jayantilal Mulji [(1995) 214 ITR 154 (Bom)], 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 propositions which are assumed by the Court to be correct for the purpose of deciding the same are, according to this judgment of the Hon'ble jurisdictional High Court, lack precedence value and are not binding in nature. The assessee is not relying upon what has been decided in Tata Tea case, but on what logically follows from the said precedent. The inferences drawn on the basis of Tata Tea decision (supra) are thus, in our considered view, misplaced. (c) Under the scheme of the tax treaties, no tax credits are envisaged in the hands of the shareholders in respect of dividend distribution tax paid by the 12 Special Bench - Total Oil India Pvt. Ltd. company in which shares are held. The dividend distribution tax thus cannot be equated with a tax paid by, or on behalf of, a shareholder in receipt of such a dividend. Infact, the payment of dividend distribution tax does not, in any manner, prejudice the foreign shareholder, and any reduction in the dividend distribution tax does not, in any manner, act to the benefit of the foreign shareholder resident in the treaty partner jurisdiction. This taxability is wholly tax-neutral vis-à-vis foreign resident shareholder and the treaty protection, when given in respect of dividend distribution tax, can only benefit the domestic company concerned. The treaty protection thus sought goes well beyond the purpose of the tax treaties. (d) Hon’ble Delhi High Court’s judgment in the case of DIT v. New Skies Satellite BV [(2016) 382 ITR 114 (Del)] does lay down the principle that an amendment in the domestic law will not influence the interpretation of that expression in the 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 to the same level of tax treaty protection. That is stretching things a bit too far. Such a proposition does not even find mention in any tax treaty literature, and we are, therefore, not really surprised that the present decision, extending the tax treaty protection to the company paying dividends, in respect of dividend tax distribution tax, appears to be a solitary decision of its kind, to the best of our knowledge, anywhere in the world. Quite to the contrary, in the case of Volkswagen of South Africa (Pty) Ltd Vs Commissioner of South AfricanRevenue Service (Case no. 24201/2007; www.ibfd.org database) Hon’ble South African High Court has observed that a similar dividend distribution tax, known as Secondary Tax on Companies (STC) paid on the distribution of dividends, is a tax on “a company declaring the dividends and not on dividends”. Hon’ble South African High Court has observed, inter alia, as follows: In the case of STC, the entity liable for the dividend is the company declaring the dividend and the dividend declared is net of tax – on the other hand, a withholding tax such as non-resident shareholder’s tax was a tax on the shareholder’s dividend income. As far as STC is concerned, same is levied on all South African resident companies when they declare dividends. On the other hand, withholding tax such as non-resident shareholder’s tax is applicable only to certain type of shareholders, for example a non-resident shareholder. Furthermore, STC is a tax levied with reference to the net amount of a company’s total dividends during a particular period, and on the other hand, non-resident shareholder’s tax

13 Special Bench - Total Oil India Pvt. Ltd. was levied on the amount of the dividend declared to theaffected shareholder. The above-mentioned differences between STC and a withholding tax negate the submission that STC is substantially similar to a withholding tax such as non-resident shareholder’s tax. STC is a taxation of the company declaring a dividend and is not a taxation of the recipient of the dividend, and consequently as stated earlier Article 7 of the DTA does not apply to STC. The above conclusion is further supported by a proper reading and analysis of Article 7(2)(a) which refers to a recipient of dividends and not to a company declaring the dividend. The benefits conferred by the said Article are to be enjoyed by the recipients of the dividends and not the company declaring the dividends (e) While the views so expressed by a foreign judicial body do not bind us, or, for that purpose, any judicial body in India, these views at least suggest that this school of thought reflected in the said decision deserves to examined in a fair, judicious and open-minded manner. (f) Wherever the Contracting States to a tax treaty intended to extend the treaty protection to the dividend distribution tax, it has been so specifically provided in the tax treaty itself. For example, in India Hungry Double Taxation Avoidance Agreement [(2005) 274 ITR (Stat) 74; Indo Hungarian tax treaty, in short], it is specifically provided, In the protocol to the Indo Hungarian tax treaty it is specifically stated that “When the 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 14 Special Bench - Total Oil India Pvt. Ltd. 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 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”.

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 Corporation, Japan, which holds 56.21% equity shares in the assessee company. During the period relevant to assessment year 2011-12, the assessee distributed dividend amounting to Rs.173 crores to its shareholders, on which DDT was paid @ 16.6087% aggregating to Rs.28 crores (approximately). The assessee /appellant had raised Additional Grounds before the Tribunal claiming, that the rate of DDT on the dividend distributed / paid to the non-resident shareholders(Residents of Treaty Countries) should be restricted to the rate of taxation of dividend provided in the respective tax treaty(as applicable to the non-resident shareholders) instead of the rate provided in section 115-O of the Act. The ld. Counsel for the assessee referring to the provisions of section 90(2) of the Act submits that DTAA would override the provisions of section 115-O of the Act. Therefore, the rate of tax contained in section 115-O would apply either to residents or non-residents, where there is no treaty.

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01/06/1997. Referring to Memorandum explaining the provision in Finance Act, 1997, the ld. Counsel submits that the provision of section 115-O were introduced to mitigate the cumbersome procedure for tax collection which involves lot of paper work. He further contended that Circular No.763 dated 18/02/1998 clarifies that DDT is a tax on the shareholders and not on the company. The provisions of section 115-O are to facilitate collection of tax. Further, the Finance Act, 2016 introduced new section i.e. section 115BBDA, which levies additional tax @10% on dividends received by certain category of tax payers. Such tax was brought to cover the disparity of effective DDT rate of20% approximately on dividend income as compared to headline tax rate of 30% on income other than dividend earned by tax payers. In Finance Bill 2020, the regime of DDT on dividend declared by Indian Companies have been done way with w.e.f. 01/4/2020. Henceforth, dividend to shareholders would not be subject to DDT u/s. 115-O of the Act, but would be taxable in the hands of the resident shareholders at the applicable rates.

17 Special Bench - Total Oil India Pvt. Ltd. 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.

dividend is the income of the shareholder, section 115-O of the Act only seeks to shift the incidence of payment of tax thereon to the company. The income by way of dividend forms part of the income of the shareholder, it is immaterial as to who pays the tax to determine the nature of income. The ld. Counsel for the assessee referred to CBDT Circular No.763 dated 18/02/1998, Notes to the Finance Act, 1977 to show that tax u/s. 115-O of the Act is a tax payable by the domestic company, even if, there is no income tax liability on the company. The ld. Counsel for the assessee pointed that new corresponding clause i.e. clause-33 was inserted in section-10 to exempt the dividend income in the hands of shareholders.

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 part of the Act could only be upheld if the same is construed to be in the nature of tax on income by way of dividend, otherwise the levy would be unconstitutional, failing the test of legislative competence.

15. The ld. Counsel for the assessee further referred to Article-10 of India- Japan DTAA. He points that the term dividend is defined in clause (3) of Article-10. Referring to OECD Commentary on Article-10 the ld. Counsel for the assessee submits that the dividend income may be exempt in Indian Tax Laws but in the country of residence dividend income may be taxable. Further, referring to the decision in the case of CIT vs. Clive Insurance Co. Ltd., 113 ITR 636 (SC), he submits that mere collection of tax does not determine as to who has the liability to pay tax. In the case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT,432 ITR 471 the Hon’ble Apex Court while dealing with dispute related to taxation of royalty, referred to and relied upon the OECD Commentary on the OECD Model Tax Convention. The ld. Counsel for the assessee submits that where section 115-O of the Act provides for levy of tax on dividend declared/distributed/paid at a rate higher than the rate of tax on dividend

20 Special Bench - Total Oil India Pvt. Ltd. provided in treaty applicable to the non-resident shareholder, then, the provisions of said section override the provisions of the applicable treaty. Therefore, provisions of section 115-O of the Act have to be read subject to Article-10 of the applicable treaty with regard to the rates at which DDT is payable, qua dividend paid to the non-resident shareholders. The Hon’ble Apex Court has observed that DTAA is an agreement between two sovereign states and it is not permissible for any nation to unilaterally amend the treaty by making amendment in the domestic tax laws. As per DTAA, two countries have agreed for taxation of dividend income in the source State @10%, and charge of a higher tax by way of introducing a different mechanism for collecting tax on such dividend income would be contrary to the principle of treaty override as enshrined in Article 26 and 27 of Vienna Convention. Such an approach cannot be countenanced and was held to be unacceptable in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT (supra).

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.

(i) The first reason for doubting the correctness of decision of the Co- ordinate Bench is based on the judgment of Hon'ble Apex Court in the case of Godrej & Boyce Mfg. Co. Ltd vs. DCIT, 394 ITR 449. The ld. Counsel for the assessee submits that the said judgment does not lay down any law on the issue in hand. Therefore, no reliance can be placed on the aforesaid judgement to disregard the decision of Division Bench in the case of Giesecke & Devrient India Pvt. Ltd (supra). (ii) The next reason given by the Division Bench is that the Delhi Bench has erred in holding that the taxability is tax neutral vis-à-vis foreign resident share holders. It is submitted that the said observation is an economic determent as prejudice is caused to the assessees. (iii) The Division Bench has placed reliance on the decision of South African High Court in the case of Volkswagen of South Africa (PTY) Ltd. vs. Commissioner South African Revenue Services (supra). It is submitted that the facts are distinguishable, more so, there is different tax regime

22 Special Bench - Total Oil India Pvt. Ltd. in South Africa, therefore, the same cannot be compared with India Tax Laws. (iv) The Division Bench has made reference to India-Hungary DTAA. The Ld.Counsel submits that the Protocol is unique to Hungarian tax treaty and hence, cannot be applied in a blanket manner. (v) With reference to the provisions of section 90(2), the ld. Counsel for the assessee submits that provisions of treaty applies where it is more beneficial to the tax payer. The Division Bench only refers to Article -26 ignoring all together the other Articles such as Article-19 and Article-23. The ld. Counsel for the assessee placed reliance on the decision in the case of DCIT vs. Turquoise Investments & Finance Ltd, 300 ITR 1, wherein the assessee an Indian resident company had received dividend income from a Malaysian Company, the Hon’ble Apex Court held that the dividend income received from Malaysian Company was not liable to tax in India in view of Article –XI of India Malaysia Tax treaty, according to which dividend was taxable only in Malaysia. In principle Hon’ble Supreme Court accepted that a resident of India could avail the benefits under a distributive role of tax treaty vis-à-vis taxation of income in India.

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.

24 Special Bench - Total Oil India Pvt. Ltd. articles including money order, phonographs and telegrams. However, the provisions of section 115-O of the Act, applied to the state of Jammu & Kashmir even prior to abrogation of Article 370. Thus, section 115-O of the Act is not referable to Entry 97. Consequently, it falls in Entry 82 as laid down in Union of India vs. Tata Tea Co. Ltd. 398 ITR 260 (SC).

25 Special Bench - Total Oil India Pvt. Ltd. were made in other relevant sections of the Act and some of the sections were simultaneous introduced.

Principal Officer of the domestic company and company shall be liable to pay tax on distributed profits to the credit of the Central Government. If levy u/s. 115-O is an additional tax on distributed profits of the company, the company would have been liable to pay such tax by virtue of mandate u/s 191 of the Act, no separate provision was required to be made the company liable to pay the tax vide section 115-O(3). The above analysis would make it clear that separate and distinct enactment of section 115-O(3) is the liability of the company but on dividend income of the shareholders. The ld. Counsel further argued that if the tax levied u/s 115-O of the Act is taxed on income of a company then the provisions of sub- section (1B) would be meaningless. Section 115-O(1B) deals with grossing up, similar grossing up provisions also exist in section 195A of the Act that deals with TDS liability when payment to a payee is on net of tax basis.

subsequently reintroduced as section 10(34) by the Finance Act, 2003. When section 115-O was reintroduced the language of section 10(33) as it stood from 01/06/1997 till 31/03/2002 and section 10(34) with effect from 01/04/2003 till 31/03/2020 shows that subject matter of section 115-O is “income by way of dividends”. This is a clinching and decisive position to substantiate that subject matter of section 115-O is the dividend income of the shareholder. Similarly, amendments were made to section 115AC along with introduction of section 115-O. The said section also refers to “income by way of dividend”. The language of exclusion in section 115AC also shows that subject matter of section 115-O is dividend income of shareholder. The proviso of section 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.

28 Special Bench - Total Oil India Pvt. Ltd. does not change the subject matter of tax. Tax is all along on the income of respective shareholder/unit holder only, but to be levied, assessed and collected from the company/mutual funds. Thus, it is evident that the provisions of section 115R are akin to section 115-O of the Act.

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23 and the decision in the case of Chairman, Railway Board and others vs. Chandrima Das and others (2000) 2 SSC 465 para 25.

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 reiterating the submissions already recorded above.

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SUBMISSIONS ON BEHALF OF THE DEPARTMENT:

33. Shri Vinod Tanwani representing the Department made exhaustive arguments interpreting the provisions of section 115-O of the Act under the domestic law and its application and understanding in the context of the provisions of the international tax laws. The ld. DR submits that a bare perusal of section 115-O of the Act would show that it over rides the charging provisions of section 4 of the Act. He pointed that section 115-O of the Act is a separate charging section and hence, it takes no support from section 4 of the Act. The ld. DR asserted that the observations of the Tribunal in Giesecke & Devirent (India) Pvt Ltd. (supra) and Indian Petronas (P.) Ltd. (supra) that the genesis of charge u/s 115-O of the Act lies in section 4 of the Act is erroneous. He submitted that the charge u/s 115-O of the Act is on distributable profits of the company and not on dividend. Section 115-O of the Act is not a procedural section but a charging section, it deals with undistributed profits and not accumulated profits. Referring to the decision rendered in the case of CIT vs. Elphistone Spg. &Wvg. Mills Co. Ltd. 40 ITR 142 (SC), the ld. DR submits that the additional tax levied under the section is on the distributable profits of the company.

34. On constitutional validity of section 115-O of the Act, the ld. DR placed reliance on the decision in the case of Tea Estate India (P.) ltd. vs. CIT 103 ITR 785 (SC) and submitted that the Hon’ble Apex Court in the aforesaid decision held that only 40% of profit made by a company engaged in growing and manufacturing tea is liable to be taxed as income but in the hands of the company those profits would retain the character of accumulated profits and such 31 Special Bench - Total Oil India Pvt. Ltd.

accumulated profits when distributed as dividend by such company would be fully liable to tax in the hands of the shareholder. He further placed reliance on the decision of Hon’ble Jurisdictional High Court in the Case of Small Industries Development Bank of India (SIDBI) vs. CBDT 133 taxmann.com 158 to contend that the Hon’ble High Court has categorically held that charge u/s 115-O(1) of the Act is on the company’s profits, more specifically on that part of the profits which is declared, distributed or paid by way of dividend. The charge u/s 115-O(1) of the Act is not on income by way of dividend in the shareholders hands. He further pointed that the Hon’ble Apex Court in the case of Godrej and Boyce Mfg. Co. ltd. vs. DCIT has not found fault with the observations of the Hon’ble Bombay High Court. The Hon’ble Apex Court has merely decided the writ petition on different facet without reversing the findings of the Hon’ble Jurisdictional High Court. Thus, the observations of the Hon’ble Bombay High Court in the Case of Godrej and Boyce Mfg. Co. ltd. are still relevant and hold good.

35. Explaining the nature of levy, the ld.DR submitted that a levy is explicitly on the company and so is the incidence. Further, 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:

32 Special Bench - Total Oil India Pvt. Ltd.

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 company declaring, distributing or paying an amount by way of dividends. 3) The rate of tax – specified in section 115-O(1) of the Act.

The ld. DR pointed that above parameters have been reiterated by the Apex Court in the case of Gobind Saran Ganga Saran vs. CST, AIR 1985 SC 1041.

36. The ld. DR submits that measure of tax levy or taxable event do not decide nature of levy. For this proposition, he placed reliance on the decision in the case of Smith Kline & French (India) Ltd. vs. CIT 85 Taxman 683 (SC). He argued that word ‘profit’ preceding the expression ‘tax on distributed profits’ and ‘tax on undistributed profits’ is derived from the tax event/measure of the tax and the same does not modify the subject of levy, which is profits of the company.

37. The ld. DR further argued that statutory incidence of tax levy, once complete, leaves no scope of intendment. Once the tax is levied on a particular specie of profits of the company, then, no scope is left for an argument that the tax so levied is in fact paid by the company either on behalf of the shareholders or has in fact being paid on the dividend income of shareholders. The perceived split between the economic incident on shareholders and statutory levy on companies as made out in the decision in the case of Giesecke & Devirent (India) Pvt. Ltd. (supra) and Indian Petronas (P.) Ltd. (supra) is unknown to tax jurisprudence, both in domestic law as well as in the international law. The ld. DR placed reliance on the decision in the case of Turner Morrison and Co. Ltd. vs. Hungerford

33 Special Bench - Total Oil India Pvt. Ltd.

Investment Trust Ltd. 85 ITR 607 (SC) to support his contentions that tax u/s 115-O of the Act is a tax that is statutorily levied on the company on its profits wherein both the statutory levy and the statutory incident is on the company. Hence, in respect of tax paid on distributed profits u/s 115-O of the Act, the assessee can have no claim against Revenue for refund as the liability was that of the assessee company.

38. The ld. DR further submitted that section 115-O of the Act levies tax on the amount declared, distributed or paid by a domestic company by way of dividends. The tax levied u/s 115-O of the Act both in law and in time precedes the actual accrual as it gets crystallized at earlier stage of declaration on dividends. The ld. DR submitted that when the interim dividend is declared all the shareholders entitled to receive dividend are not identifiable. The shareholders will keep on changing between the date of declaration and distribution. Thus, identity of shareholder is not defined on the date of payment. Whereas, tax liability crystallizes as soon as the dividend is declared. The ld. DR placed reliance on the decision in the case of Pfizer Corpn vs. CIT, 129 Taxman 459 (Bombay), for the proposition that accrual of dividend income in the hands of the non-resident is governed by section 9 and not by section 8. Section 8 is merely a procedural law. He pointed that words “declared or 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.

34 Special Bench - Total Oil India Pvt. Ltd.

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 (including interim dividend) the amount of profits to be distributed go out of the lien of the company into a separate bank account and then these funds cannot be used by the company for any purpose other than payment of dividend. At this stage, the distributed profits are an obligation due to the company but this obligation is still owed to shareholders as a class and not to a particular shareholder per se. The levy of tax u/s 115-O of the Act is completed at this stage itself. He referred to the provisions of section 115- O(3) of the Act which specifies the time of levy to pay the tax on distributed profits to the Government Exchequer that is within 14 days from the date of – a) declaration of dividend; b) distribution of dividend; c) payment of dividend, whichever is earlier. The ld. DR pointed that from shareholder’s point of view, the dividend becomes a debt due only when it is distributed and the individual shareholder account is credited with the amount due to them. It is at this stage that the income for non-resident shareholders gets accrued in terms of section 9(1)(iv) of the Act. From the point of view of tax treaty, definition of dividend in DTAA also used the word “paid”.

40. The ld. DR submits that at the declaration stage when charge u/s 115-O of the Act crystalizes, the key elements for the crystallization of levy u/s 4 are missing. From perusal of section 4, it is evident that for charge to crystalize, first,

35 Special Bench - Total Oil India Pvt. Ltd. there has to be deemed approval of dividend income. Secondly, the charge is with respect to an identified person. Both these elements are missing at the declaration stage u/s 115-O of the Act. Thus, the assertions made on behalf of the assessees that the tax u/s 115-O of the Act is on the dividend income of the shareholders and only incident of this tax has been shifted to the company is legally untenable. On the proposition that once a particular tax levy has crystallized, the future events cannot effect or change the tax place or taxable person, reliance is placed on the decision in the case of Kishinchand Chellaram vs. CIT, 46 ITR 640 (SC).

36 Special Bench - Total Oil India Pvt. Ltd. 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.

REBUTTAL BY THE ASSESEE:

37 Special Bench - Total Oil India Pvt. Ltd. to levy of additional Income-tax u/s. 115-O of the Act. The provisions of section 115-O of the Act cannot be seen in an isolation. In case section 115-O of the Act was to stand on its own without reference to its genesis in section 4, then the levy of tax under former section would not be constitutionally valid. Section 4 of the Act provides for levy of additional Income-tax, including tax u/s.115-O of the Act.

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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.

provisions of the Treaty, are to be given a literal interpretation to implement the treaty intentions of the parties i.e. the two sovereign nations. The word “paid” is not defined under the provisions of the Treaty, hence, the definition of “paid” as in section 43(2) of the Act has to be adopted (Re. Article 3(2) of the Treaty). Thus, in view of the above, it is incorrect to say that the liability for DDT is discharged prior to accrual of income in the hands of the shareholders. The accrual in the hands of the shareholders is simultaneous with the declaration of dividend and in view of the above there is no mismatch.

DECISION:

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 40 Special Bench - Total Oil India Pvt. Ltd. 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.

41 Special Bench - Total Oil India Pvt. Ltd. of Rs.100 as dividend, the dividend so received in the hand of the shareholder is fully taxable. The shareholder cannot be heard to say that the dividend it receives is partly income from agriculture and to that extent it is not taxable.

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.

Section115-O of the Act:

involves a lot of paper work and collection from the company would be much easier. (ii) Since there was no tax incidence in the hands of the shareholder that would encourage investment in the shares of domestic companies. Sec.115O so introduced in Chapter XII-D of the Act reads thus: “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 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 distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid.

(4) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon.”

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.

45 Special Bench - Total Oil India Pvt. Ltd. declared, distributed or paid as dividends and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid. No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) 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.

(1B) For the purposes of determining the tax on distributed profits payable in accordance with this section, any amount by way of dividends referred to in sub- section (1) as reduced by the amount referred to in sub-section (1A) [hereafter referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub- section (1), be equal to the net distributed profits:

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“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 or shareholders of the domestic company, as the case may be, were required to be grossed up for the purpose of computing the additional tax.

35.6 Accordingly, section 115-O has been amended so as to provide that for the purposes of determining the tax on distributed profits payable in accordance with the provisions of section 115-O, any amount by way of dividends referred to in subsection (1) of the said section, as reduced by the amount referred to in sub-section (1A) [referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub- section (1), be equal to the net distributed profits. Thus, where the amount of dividend paid or distributed by a company is Rs.85, then DDT under the amended provision would be calculated as follows:

Dividend amount distributed = Rs. 85 Increase by Rs. 15 [i.e. (85*0.15)/(1-0.15)] Increased amount = Rs. 100 DDT @ 15% of Rs. 100 = Rs. 15 Tax payable u/s 115-O is Rs. 15 Dividend distributed to shareholders = Rs. 85” Hitherto, the domestic companies did not raise any dispute with regard to the rate of tax applicable for DDT and were paying DDT at the rate prescribed under 47 Special Bench - Total Oil India Pvt. Ltd. the Act. After the 2014 Amendment, domestic companies paying DDT took a stand that since dividend was ultimately taxable in the hands of the shareholder and since Sec.115-O merely shifts the burden on the domestic company distributing dividend, the rate at which tax has to be deducted, wherever dividend is paid to non-resident shareholders who are tax resident of a country with whom India has Treaty for Avoidance of Double Taxation (DTAA), it would be the lower rate of tax, if so provided in the relevant DTAA. It appears that it was only in October, 2020 that such a point came up in the case of Giesecke & Devrient India Pvt. Ltd. Vs. ACIT (supra) before the Tribunal, where the tax payer company sought to raise the plea for adopting lower rate of tax on dividend payout based on corresponding Treaty provisions; this is indicative of the fact that, perhaps the trigger for debate on adopting the lower rate of taxation on dividend as provided in the DTAAs in preference to the rate prescribed u/s. 115-O of the Act was the amendment of grossing up made by the Finance Act, 2014 w.e.f. 01/10/2014. Be that as it may, we do not delve much on this aspect.

Double taxation of Dividends and DTAA:

48 Special Bench - Total Oil India Pvt. Ltd. regardless of his/its source of income. Each country has its own rules of determining residential status of the person sought to be taxed.

49 Special Bench - Total Oil India Pvt. Ltd. rule and the country of residence, based on residence rule. To prevent this double taxation, countries enter into bilateral double taxation avoidance treaties. Fundamentally, the treaties strike a compromise between source and residence taxation. Some rights to tax are given to the source, and the residence country is required to relieve double taxation either by giving a credit for such source taxes paid, or by exempting the relevant income from its taxes. Generally, source jurisdictions retain their right to tax active (business) income, except for short- term activities, but give up some of their right to tax passive (investment) incomes.

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India and another country, Section 91 allows relief from double taxation, in the form of foreign tax credit.

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.

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State to a resident of the other contracting State may be taxed in that other States”. If DTAA between India and another country, say country X provides for taxation of dividend income based on Article 10 of OECD model, then that would mean that dividend paid by an Indian company to a shareholder who is resident of Country X – may be taxed in Country X. Simultaneously, Article 10 permits that “dividends paid by a company which is a resident of a contracting State may also be taxed in that State according to the laws of that State. This would mean that dividend paid by an Indian company may be taxed in India based on source rule and again taxed in country X based on residence rule. In such a scenario Article 10 of the OECD DTAA stipulates a limit upon the rate of tax in the source state by restricting the rate of tax to a specified percentage of tax. The relevant clause of model OECD if read together will clarify the position and it reads thus: “ARTICLE 10 DIVIDENDS 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 per cent of the capital of the company paying the dividends throughout a 365 day period that includes the day of the payment of the dividend (for the purpose of computing that period, no account shall be taken of changes of ownership that would directly result from a corporate reorganisation, such as a merger or divisive reorganisation, of the company that holds the shares or that pays the dividend); b) 15 per cent of the gross amount of the dividends in all other cases. The competent authorities of the Contracting States shall by mutual agreement

52 Special Bench - Total Oil India Pvt. Ltd. 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?

manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent of such income shall be deemed to be income liable to tax. It involves composite activity of, (i) growing tea, which involves carrying on Agricultural operations; and (ii) manufacturing tea which involves processing tea leaves fit for use by ultimate consumers, which is a non agricultural activity. If Rs.100 is income derived by the company from the composite activity, only Rs.40 is taxed as income attributable to non agricultural activity and the remaining Rs.60 is not taxed as it involves agricultural activity. But when the company distributes profit of Rs.100 as dividend, the dividend so received in the hand of the shareholder is fully taxable. It was the case of the assessee in the aforesaid cases that since 60% of Rs.100 is agricultural income, the provisions of Sec.115 O to the extent it obliges the domestic company to pay DDT at 15% on Rs.100/- is unconstitutional, as by way of the said provision income from agriculture of Rs.60 is also taxed, which is beyond the legislative competence of the Parliament to tax Agricultural income, being a State subject. The Hon’ble High Court accepted the view of petitioners i.e. only 40% of the income is liable to additional tax u/s.115-O and rejected the contentions challenging the vires of section 115-O of the Act. In other words, constitutional validity of Section 115-O was upheld but the applicability of section as confined to the component of non-agricultural income. The Revenue challenged the order of Hon’ble Calcutta High Court before the Hon’ble Supreme Court of India qua the restriction of charging of additional income tax u/s115-O of the Act on 40% of income which was taxable under the Act, in the case of Tata Tea Co. Ltd. (supra). The Hon’ble Apex Court, upheld the constitutional validity of section 115 O of the 54 Special Bench - Total Oil India Pvt. Ltd.

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 decision in the case of Mrs. Bacha F. Guzdar, Bombay Vs. CIT AIR 1955 SC 74 wherein identical contention was raised by an assessee shareholder in a tea manufacturing company to the effect that only 40% of dividend received should be taxed as the remaining 60% was Agricultural income. The argument was rejected by the Hon’ble Supreme Court by observing that when such company decides to distribute its profits to the shareholders and declare dividends to be allocated to them, such dividends in the hands of the shareholders do not partake the character of revenue derived from land which is used for agricultural purposes. The Hon’ble Supreme Court also referred to its earlier decision in the case of CIT Vs. Nalin Behari Lal, 1969 (2) SCC 310, wherein it was held that dividend distributed by a company being a share of its profits declared as distributable among the shareholders, is not impressed with 55 Special Bench - Total Oil India Pvt. Ltd. the character of profits from which it reaches the hands of the shareholder.

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 parliamentary intent that incomes from dividend (and from mutual funds) are not includible in the total income”. Thus, the Hon’ble Bombay High Court held that DDT was not a tax on income of the shareholder but was instead a tax on the company. The following were the relevant observations of the Court:

“30. The submission which has been urged on behalf of the assessee is that the expression "income which does not form part of the total income" under the Act should be interpreted to mean income which is exempt from tax, On this hypothesis, it has been urged that Section 14A will not apply to dividend income because the Revenue has already received its share of tax.

31. The submission cannot be accepted. The expression "income which does not form part of the total income" under the Act must receive its plain and grammatical construction. Such income is income which is not includible in computing the total income of the assessee under the provisions of the Act for a previous year. Now it is trite law that under the Act, "it is income that is taxed but it is not taxed in vacuum. It is taxed in the hands of a person."12 Section 2(45) defines the expression "total income" to mean

57 Special Bench - Total Oil India Pvt. Ltd. the total amount of income referred to in Section 5, computed in the manner laid down in the Act. Section 4 charges the total income "of the previous year" of every person to income tax. Section 5 makes a reference to the scope of the total income of any previous year of a person who is the recipient. This is defined to include all income, from whatsoever sources derived, which is received or deemed to be received or which accrues or is deemed to have accrued in India or which accrues or arises outside India during the previous year. Section 10 defines those categories of income which shall not be included in computing the total income of the previous year of any person. Income tax is a tax on income in the hands of the assessee. Hence, when Section 14A disallows expenditure incurred by the assessee in relation to income which does not form part of the total income, it would include categories 12 CIT vs. Indian Bank Limited, AIR 1965 SC 1473 at paragraph19 page 1476 of income such as dividend from shares and income from mutual fund which under Section 10 are not to be included in the total income. Since dividend income and income from mutual funds are not included in the total income of the assessee, no deduction of expenditure is permissible under Section 14A(1). Sub- section (5) of Section 115-O stipulates that no deduction under any other provisions of the Act shall be allowed to the Company or to a shareholder in respect of the amount which has 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 under Section 115-O is not a tax on dividend

33. Section 115-O provides that a domestic company which declares, distributes or pays dividend out of current or accumulated profits, shall, apart from paying tax on its total income, pay additional income-tax on the amount of profits declared, distributed or paid as dividend or after 1 April 2003.

34. To illustrate, if Rs.1,000/- is the total income of a domestic company and out of the total income of Rs.1,000/-, Rs.300/- is declared, distributed or paid as dividend, then that domestic company is liable to pay income tax on the total income of Rs.1,000/- at the 58 Special Bench - Total Oil India Pvt. Ltd.

rate specified under the relevant Finance Act and is further liable to pay additional income-tax at the rate prescribed under Section 115-O on the amount of profits declared, distributed or paid as dividend.

"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.

59 Special Bench - Total Oil India Pvt. Ltd. viewed from the perspective of Section 115-O as well as Section 14A, it is evident that the tax on distributed profits is a charge on the Company. The Company is chargeable to tax on its profits as a distinct taxable entity. It 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 parliamentary intent that incomes from dividend (and from mutual funds) are not includible in the total income.

"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

60 Special Bench - Total Oil India Pvt. Ltd. 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 same footing.”

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“9. Aggrieved, the instant appeal has been filed raising two questions in the main which have been summarized by the appellant, and we may say accurately, as follows :

(a) Irrespective of the factual position and findings in the case of the Appellant, whether the phrase “income which does not form part of total income under this Act” appearing in Section 14A includes within its scope dividend income on shares in respect of which tax is payable under Section 115-O of the Act and income on units of mutual funds on which tax is payable under Section 115-R.

(b) Whatever be the view on the legal aspects, whether on the facts and in the circumstances of the Appellant's case and bearing in mind the unanimous findings of the lower authorities over a considerable period of time (which were accepted by the Revenue) there could at all be any question of the provisions of Section 14A in the appellant's case.”

62 Special Bench - Total Oil India Pvt. Ltd. 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.

63 Special Bench - Total Oil India Pvt. Ltd. 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.

64 Special Bench - Total Oil India Pvt. Ltd. the argument that DDT is paid on behalf of the shareholder and has to be regarded as payment of liability of the shareholder, discharged by the domestic company paying DDT, is neither correct nor does it flow from the ratio laid down in the decision by the Hon’ble Apex Court in the case of Godrej & Boyce (supra).

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.

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 65 Special Bench - Total Oil India Pvt. Ltd. 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 declared and distributed by way of dividend. Therefore, it was submitted that the Bank was entitled to refund of the tax amount paid under protest by it. The Court after discussing the effect of the non-obstante clause in Sec.50 of SIDBI Act, and holding that those provisions will override Sec.115O of the Act, further went on to hold that dividend is distributed from and out of the accumulated profits and therefore would fall within the ambit of the expression “income, profits or gains accruing or arising to the Small Industries Development Assistance and or any amount received in that fund, and be any income profits or gains derived or any amount received by the Small Industries Bank”. The following were the relevant observations by the Hon’ble High Court: “14. Dividend is defined in Section 2(22) of the IT Act to, inter alia, include any distribution by a company of accumulated profits, which entails releasing any assets by the company to its shareholders. In terms of Explanation 2 to Section 2(22) of the said Act, the expression accumulated profits includes all company profits up to the date of distribution or payment thereof. It appears that the transfer of profits of Petitioner to IDBI in terms of Section 29(2) of SIDBI Act entails payment by Petitioner to IDBI. This payment or distribution of Petitioner’s liquid assets constitutes dividend distributed by Petitioner out of its accumulated profits as envisaged under Section 2(22)(a) of the IT Act. It needs to be noted that the charge under sub-section (1) of Section 115-O of the said Act is on the company’s profits, more specifically on that part of the profits which 66 Special Bench - Total Oil India Pvt. Ltd. is declared, distributed or paid by way of dividend. The charge under sub-section (1) of Section 115-O of the said Act is not on income by 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.

67 Special Bench - Total Oil India Pvt. Ltd.

Sec.115 P and 115 Q provide for machinery provisions for recovery. The chapter XII D is a complete code in itself on DDT. The provisions of TDS and TCS specifically provide that tax deducted at source and tax collected at source are payments on behalf of the payee i.e., the person liable to pay income tax on the sum paid. It provides for discharge for the payer on payment to the credit of central government of the amounts due to the payee. In the event the payer pays excess over and above what he has to pay the payee, he gets a right to recover the TDS or TCS and gets rights of subrogation. Such provisions are absent in the entire scheme of Chapter XII D of the Act. These features are again an indication that DDT is a charge to tax on the profits of the company and not a charge in the hands of the shareholder or tax paid on behalf of the shareholder by the domestic company. Further, it is also seen from the provisions of Sec.115-O (3) and (4) the tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid and no deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon. These provisions also show that shareholder does not enter the domain of DDT at all.

68 Special Bench - Total Oil India Pvt. Ltd. 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 that it was beyond the legislative powers of the Central Legislature conferred on it by entry 54 of List 1 of the Seventh Schedule of the Government of India Act, 1935. The Hon’ble Madras High Court held that the incidence of the tax whether it is the immediate and apparent incidence, or whether it is the ultimate or real economic incidence, does not, limit the taxing power given to the Central Legislature by entry 54 of list 1. All that entry 54 requires is that the tax must be a tax on Income other than agricultural income. The impugned provision in Section 16(3) (a) (ii), Income-tax Act, 1922 provides only for a tax on income. It does not cease to be a tax on income either in form or in substance, though it provides for the incidence of the tax not on the person whose income is assessed to tax, but on another. In this case that incidence of the tax on the minor child's income falls under the statute

69 Special Bench - Total Oil India Pvt. Ltd. on a parent of that minor. The Hon’ble Court went on to hold that there is nothing in the fundamental concepts of income-tax even to prevent the imposition of the immediate and apparent incidence of the tax on a person other than the person whose income is to be assessed. This decision was approved by the Hon’ble Supreme Court in the case of Balaji Vs. ITO 1962 AIR 123 (SC). These decisions again point to the fact that DDT is a tax on the distributed profits of a domestic company and is a tax on profits of the domestic company and not on the shareholder.

Applicability of DTAA:

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.

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 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 72 Special Bench - Total Oil India Pvt. Ltd. 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.”

CONCLUSION:

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.

84. We wish to place on record our appreciation for the assistance provided by the ld. counsels for the parties and the interveners and the ld. DR for the assistance provided to the Bench in deciding the issue referred to the Special Bench.

Order pronounced in the open court on Thursday the 20th day of April, 2023.