ITAT: DTAA is Not Triggered when Domestic Company Pays DDT under Section 115O of the Income Tax Act, 1961

ITAT: DTAA is Not Triggered when Domestic Company Pays DDT under Section 115O of the Income Tax Act, 1961

The Income Tax Appellate Tribunal by its special bench comprising of GS Pannu (President), NV Vasudevan (Vice-President) and Vikas Awasthy (Judicial Member) has ruled that Double Taxation Avoidance Agreement (DTAA) does not get triggered at all when a domestic company pays dividend distribution tax (DDT) under Section 115O of the Income Tax Act, 1961.

The special bench observed, 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.

In the present case the special bench was hearing an appeal filed against the order passed by the division bench of ITAT Mumbai in the case of Total Oil India (2019), pertaining to the assessment year 2016-17 wherein it was held that DDT should be considered as a tax liability of the dividend paying company.

The Delhi and Kolkata benches of the ITAT had differed in this view. The Mumbai bench of the ITAT had placed reliance on the Supreme Court’s order in the case of Godrej & Boyce Manufacturing Company.

It then referred the issue for the consideration of a special bench.

The issue that came for consideration before the special bench was where dividend is declared, distributed, or paid by a domestic company to a non-resident shareholder, which attracts additional income-tax (tax on distributed profits) referred to in Section 115-O of the Income Tax Act, 1961 (in short ‘the Act'), whether such additional income-tax payable by the domestic company shall be at the rate mentioned in Section 115-O of the Act or the rate of tax applicable to the non-resident shareholder with reference to such dividend income?

The bench elaborately discussed the definition of dividend and stated that though dividend is income in the hands of the shareholder, its taxability need not necessarily be in the hands of the shareholder. The sovereign has the prerogative to tax dividend, either in the hands of the recipient of the dividend or otherwise.

Further on perusal of Section 1150 of the Act, the bench was of the view that the provision creates a charge to additional income tax on any amount declared, distributed, or paid by domestic company by way of dividend for any assessment year. The tax so charged is ‘in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year.’ The additional income tax is referred to as ‘tax on distributed profits’ commonly referred to as ‘Dividend Distribution Tax’ (DDT).

The bench clarified, that charge under Section 115O of the Act is on the company’s profits and not income in the hands of the shareholder and that the charge under Section 115O is on the amount declared, distributed or paid as dividend out of accumulated profits.

The bench pertinently noted 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, the bench perused Section 115-O (3) and (4) which states that 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.

The ITAT was of the view that these provisions also showed that shareholder does not enter the domain of DDT at all.

On the applicability aspect of DTAA, the ITAT emphasized that the purpose of DTAA is to avoid double taxation/allocation of taxing rights between two Sovereign nations.

“When we hold that DDT is a tax not on the shareholder but on the amount declared, distributed, paid as the case may be, by way of dividend and being a tax on income of the company, there is no double taxation of the same income,” the bench stated.

The ITAT further opined that one has to look at the DTAA from the recipient’s taxability perspective.

Hence, the bench held, DDT is paid by the domestic company resident in India. It is a tax on its income and not tax paid on behalf of the shareholder. In such circumstances, the domestic company under Section 115O does not enter the domain of DTAA at all.

Therefore, the bench was of the considered view 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.

While concluding the special bench upheld the exposition of law passed by the Mumbai ITAT and observed that that “where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder, which attracts Additional Income Tax (Tax on Distributed Profits) referred to in Section 115-O of the Income Tax Act, 1961, such additional income tax payable by the domestic company shall be at the rate mentioned in Section 115O of the Act and not at the rate of tax applicable to the non-resident shareholder(s) as specified in the DTAA with reference to such dividend income.”