The above judgement has been pronounced by Hon’ble Mumbai ITAT in case of Deputy Commissioner of Income Tax Circle 11(3)(1), Mumbai V. Total Oil India Pvt. Ltd. [ITA NO.6997/MUM/2019 (A.Y.2016-17)] on 20.04.2023.
Facts of the case:
The assessee declared/paid dividend during the previous year relevant to AY 2016-17. One of the shareholder to whom dividend was to be paid was a Nonresident (Tax resident of France). Under Section 115-O of the Income Tax Act, 1961 (in short ‘the Act’), if a domestic company (the assessee is a domestic company), is required to pay additional income tax on any amount declared, distributed or paid by way of dividend for any Assessment Year section 115-O of the Act prescribes the rate at which tax on distributed profit has to be paid.
Since, one of the shareholders of the assessee was a Non- resident, the assessee sought to raise a plea that the rate at which tax u/s.115-O has to be paid cannot be more than the rate at which dividend can be taxed in the hands of the Nonresident shareholder in India under the DTAA between India and France.
The rate of tax prescribed in the DTAA is generally less than the rate prescribed in Section 115-O and this is the reason why the Assessee which is the Domestic company distributing dividend took a stand that DTAA rate ought to apply and not the rate of tax prescribed u/s.115-O.
In support of this argument, the assessee placed reliance on the decision rendered by Delhi Bench of the Tribunal in the case of 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.
Question before the Special bench of Hon’ble Mumbai Tribunal was as under:
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 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(s) with reference to such dividend income”
Contention of assessee:
Assessee contended that tax on dividend paid to non-resident should be restricted to the tax rate prescribed under DTAA.
Further, the tax paid on dividend is an additional tax paid by company and it has no connection with the tax on primary income of company and thus it is not a tax paid or borne by company on it’s income.
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.
He referred to the decision in the case of M.K. Ranganathan vs. Government of Madras and others, AIR 1955 SC 604 para 23 and the decision in the case of Chairman, Railway Board and others vs. Chandrima Das and others (2000) 2 SSC 465 para 25.
Ld. DR (Department representative) 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.
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.
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.
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.
With reference to application of DTAA, the ld. DR submits that tax u/s 115-O of the Act is a tax on the company and not on the shareholder. Hence, its levy does not give any rise to double taxation. The ld. DR submits that invariably in all the DTAAs the words used are “dividends paid by a company”.
The ld. Counsel for the assessee further asserted that the decision rendered by Hon’ble Bombay High Court in the case of Small Industries Development Bank of India (supra) on which the ld. Departmental Representative has placed heavy reliance is distinguishable on facts and, hence, reliance on the said case is misplaced.
Observation and Decision by Hon’ble ITAT:
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 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.
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. This takes us to the mode in which Dividend is taxed.
A plain reading of the provisions of Sec.115O shows that it 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”. It is a tax on “distributed profits” and not a tax on “dividend distributed”.
The person liable for payment of such additional tax is “principal officer of the domestic company and the company”. The payment has to be made to the credit of the Central Government. Sec.115O is thus, a code by itself, in so far as levy and collection of tax on distributed profits.
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.
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.
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.
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. Therefore, the DTAA does not get triggered at all when a
domestic company pays DDT u/s.115O of the Act.
For the reasons give above, we hold 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.
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Observations on the above judgement:
- Double tax avoidance agreement is applicable which is taxed twice. In case of dividend although dividend income is exempt in the hands of assessee/ recipient, however tax is being paid on such income by the company from the funds which belongs to the recipient and the recipient is paying tax on such income in his resident country. Hence, in our humble opinion, such income is being charged to double taxation and accordingly eligible for DTAA relief.
- DTAA is applicable on income earned by non-resident which getting doubly taxed and in this case the recipient is indirectly paying tax in India as well as resident country and not getting any credit for same.
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