2023 (4) TMI 988 - AT - Income Tax

Taxability of dividend as declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts additional income-tax (tax on distributed profits) u/s 115-O - Special Bench decision - 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(s) with reference to such dividend income? - Scope of benefit of DTAA - Whether DTAA does get triggered at all when a domestic company pays DDT u/s.115O? - HELD THAT - Where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts Additional Income Tax (Tax on Distributed Profits) referred to in Sec.115-O of the Act, such additional income tax payable by the domestic company shall be at the rate mentioned in Section 115 O of the Act and not at the rate of tax applicable to the non-resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. We are conscious of the sovereign s prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of 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.

Summary

Issues Involved:
1. Nature of Dividend Distribution Tax (DDT)
2. Applicability of Double Taxation Avoidance Agreement (DTAA) to DDT

Summary:

1. Nature of Dividend Distribution Tax (DDT):
The primary issue was whether DDT is a tax on the company or the shareholder. The judgment clarified that DDT is a tax on the company's profits and not on the shareholder. The judgment referenced several cases, including the Hon'ble Supreme Court's decision in Tata Tea Co. Ltd., which upheld the constitutional validity of Section 115-O of the Income Tax Act, 1961, establishing that DDT is within the legislative competence of the Parliament as a tax on income. The Hon'ble Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. further clarified that DDT is not a tax paid on behalf of the shareholder but is a tax on the company's distributed profits. The judgment emphasized that the provisions of Chapter XII-D, including Sections 115-O, 115-P, and 115-Q, form a complete code for DDT, indicating that the tax is on the company and not on the shareholder.

2. Applicability of Double Taxation Avoidance Agreement (DTAA) to DDT:
The judgment examined whether the rate of DDT should be aligned with the tax rate specified in DTAA for dividends paid to non-resident shareholders. It concluded that DTAA provisions do not apply to DDT because DDT is a tax on the company's profits and not on the shareholder's income. The judgment referenced the Indo-Hungarian DTAA, which explicitly includes a provision for DDT, contrasting it with other DTAAs that do not extend similar protections. The judgment emphasized that unless a DTAA specifically provides for the application of its provisions to DDT, the domestic company must pay DDT at the rate specified in Section 115-O of the Income Tax Act, 1961, and not at the rate applicable to the non-resident shareholder under the DTAA.

Conclusion:
The Special Bench concluded that the additional income tax payable by a domestic company on dividends declared, distributed, or paid to non-resident shareholders should be at the rate mentioned in Section 115-O of the Income Tax Act, 1961, and not at the rate specified in the relevant DTAA. The judgment acknowledged the sovereign prerogative to extend treaty protection to domestic companies paying DDT through specific provisions in DTAAs.