On April 20, 2023, the Special Bench (SB) of Mumbai ITAT in case of Total Oil India Pvt. Ltd.[1], Maruti Suzuki India Limited, Gujarat Gas Ltd. and others, held that dividend distribution tax (DDT) on dividend declared, distributed or paid by a domestic company to non-resident shall be at rate mentioned u/s 115-O of the Income-tax Act and not at the rate applicable to the non-resident shareholder in the relevant DTAA on dividend income.
Facts
The common facts in the cases before the ITAT(SB) were that a domestic company declared, distributed or paid dividend to inter alia its non-resident shareholder(s), on which the company was liable to pay DDT u/s 115-O. The DTAA relevant to the shareholder provides a lower tax rate on dividend income as compared to the DDT rate prescribed u/s 115-O.
Issue for consideration before Special Bench
Where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder, whether DDT shall be at the rate prescribed u/s 115-O or the rate in the DTAA applicable to non-resident shareholders on dividend income?
The moot question for deliberation before the ITAT(SB) was as to whether DDT is a tax on company’s profits or on shareholder’s income.
Assessee’s Contention
∞ DDT is a tax on distributable profits of the company and not a tax on company. Thus, there is no co-relation to the tax on company.
∞ The legislative history indicates that S. 115-O was introduced to mitigate cumbersome procedure for tax collection which involves lot of paperwork.
∞ DDT is payable, even if no income-tax is payable by the domestic company on total income (S. 115-O(2)). This signifies that DDT has no connection whatsoever with the primary income-tax liability in respect of profits of the company declared in the dividend.
∞ S. 115-O only seeks to shift the incidence of payment of tax on dividend to the company, to facilitate collection of tax. The machinery provision for tax collection does not change the nature of tax.
∞ Dividend forms part of the income of the shareholder, it is immaterial as to who pays the tax to determine the nature of income.
∞ If DDT is a levy on the company’s own income, there was no need to separately insert sub-section (3), because such liability is already provided for in S. 191 of the Income-tax Act.
∞ The provisions of S. 115-O should not be read in isolation. A conjoint reading of the statute as a whole establishes that DDT is on dividend income earned by the shareholder. When incident of taxation of dividend was shifted from shareholder to company by introduction of S. 115-O, the dividend income was exempted in the hands of the shareholder and vice versa.
∞ In light of S. 90(2), DTAA would override the provisions of S. 115-O.
∞ Charging a higher tax on dividend than that provided under DTAA would be contrary to the principle of treaty override as enshrined in Article 26 and 27 of Vienna Convention.
∞ The charge of income-tax u/s 4 even applies to levy of DDT u/s 115-O. In case S. 115-O of the Act was to stand on its own without reference to its genesis in section 4, then DDT would not be constitutionally valid.
∞ It is incorrect to say that the liability for DDT is discharged prior to accrual of income in the hands of the shareholders. Accrual of income in the hands of shareholder is simultaneous with the declaration of dividend.
Department’s Contention
∞ S. 115-O is a separate charging section, and it overrides the provisions of S. 4 of the Act. The charge u/s 115-O is on distributable profits of the company and not on dividend.
∞ Placing reliance on Bombay High Court decisions in SIDBI[2] and Godrej and Boyce[3] , the department contended that DDT is not on income by way of dividend in the shareholders hand.
∞ Levy u/s 115-O is explicitly on the company and so is the incidence.
∞ The measure of tax levy or taxable event do not modify the subject of levy, which is profits of the company.
∞ Statutory incidence of tax levy, once complete, leaves no scope of intendment. Once the tax is levied on a particular species 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.
∞ DDT both in law and in time precedes the actual accrual as it gets crystallized at earlier stage of declaration on dividends. From a shareholder’s point of view, the dividend accrues only when it is distributed, and the individual shareholder account is credited with the amount due to them.
∞ 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.
∞ The concept of administrative convenience is beyond the scope of statutory interpretation especially when language used in statute is clear and unambiguous.
∞ Under the scheme of S. 115-O, the provisions of international tax laws are not attracted. DDT is a tax on the company and not on the shareholder. Hence, its levy does not give any rise to double taxation.
Special Bench Ruling/Observations:
∞ Though dividend is income in hands of the shareholder, its taxability may not necessarily be in the hands of the shareholders.
∞ There are two modes of taxing
dividend – (i) Classical/ Progressive
system; (ii) Simplistic system.
- As per Classical system, dividend
would be taxable in hands of
recipient at rates applicable to
them.
- Under Simplistic system, the
company which distributes the
dividend, discharges the tax
liability on the sum distributed by
way of additional income tax on
the company itself and
consequently, dividend is exempt
in the hands of the shareholders.
∞ DDT u/s S. 115-O is a tax on
‘distributed profits’ and not a tax on
‘dividend distributed’.
∞ S. 115-O is a code in itself, insofar as levy and collection of tax on distributed profits is concerned. The non-obstante clause is an indication that the charge u/s 115-O is independent and divorced from the concept of “total income” under the Income-tax Act.
∞ Tata Tea’s case does not support the assessee, as the SC was not dealing with the nature of DDT as to whether it is tax on the company or a tax on the shareholder. 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.
∞ Applying the ratio laid down in Godrej Boyce (supra) and Apex Court’s decision[4] , the SB rejected the argument of the Assessee 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.
∞ Placing reliance on SIDBI (supra), SB held that charge u/s 115-O of the Act is on the company’s profits and not on income in the hands of the shareholder.
∞ Since S. 115-O starts with a nonobstante clause, it overrides the other provisions of the Act, including S. 4.
∞ SB analysed the entire scheme of Chapter XII-D that contains S. 115-O and commented that it is a complete code in itself on DDT.
∞ SB further referred to the TDS and TCS provisions and sub-sections (3) and (4) to S. 115-O and remarked that these provisions show that shareholder does not enter the domain of DDT at all.
∞ Placing reliance on Madras HC’s 1954 ruling in B.M. Amina Umma which was approved by SC in 1961 in Balaji, SC observed 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.
∞ 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 115-O does not enter the domain of DTAA at all.
∞ 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. To enter the domain of DTAA, the countries should specifically agree in the DTAA to that effect as in case of India-Hungary DTAA.
The decision of the ITAT Special Bench is likely to be challenged before the High Court. However, considering that Special Bench is binding on ITAT, additional grounds filed before Tribunal would be dismissed and thus, entail appeal before the High Court.
The above document is contributed by – Ronak Doshi and Jinal Jain, Partners
[1] ITA No. 6997/Mum/2019
[2] Small Industries Development Bank of India (SIDBI) vs. CBDT [2021] 133 taxmann.com 158 (Bom HC)
[3] Godrej and Boyce vs. DCIT [2010] 328 ITR 81
[4] Godrej & Boyce Manufacturing Company Ltd. vs. DCIT [2017] 394 ITR 449 (SC)
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