Non-Resident Shareholders Can’t Take Benefit Of Lower Tax Rate Prescribed In DTAAs For Taxation Of Dividend Where DDT Is Applicable: ITAT

The Mumbai Special Bench of the Income Tax Appellate Tribunal (ITAT) has held that non-resident shareholders cannot take advantage of the lower tax rate prescribed in Double Tax Avoidance Agreements (DTAAs) for taxation of dividends where Dividend Distribution Tax (DDT) is applicable.

The bench of G. S. Pannu (President), N.V. Vasudevan (Vice President), and Vikas Awasthy (Judicial Member) has observed that the DDT rate shall prevail on dividends paid by Indian companies to non-resident shareholders.

The assessee declared/paid a dividend. One of the shareholders to whom a dividend was to be paid was a non-resident (a tax resident of France).

Under Section 115-O of the Income Tax Act, 1961, if 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 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 under Section 115-O has to be paid cannot be more than the rate at which dividends can be taxed in the hands of the non-resident 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 dividends, took a stand that the DTAA rate ought to apply and not the rate of tax prescribed under Section 115-O.

The Tribunal held that the fact that the liability for DDT under the Act falls on the company distributing dividends is not relevant as it is a tax on dividends earned by the shareholders. Therefore, the applicable rate of dividend tax set out in the tax treaties would be applicable in the cases of non-resident recipients of dividends.

The assessee contended 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 a tax on income by way of a dividend; otherwise, the levy would be unconstitutional, failing the test of legislative competence.

The tribunal held 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, or paid, as the case may be, by way of dividend and is a tax on the income of the company, there is no double taxation of the same income. DTAAs seek to reduce the impact of double taxation, which has harmful effects on the international exchange of goods and services and cross-border movements of capital, technology, and persons. Bilateral tax treaties address instances of double taxation by allocating taxing rights to the contracting states.

The ITAT concluded that where a dividend is declared, distributed, or paid by a domestic company to a non-resident shareholder(s), which attracts additional income tax, such additional income tax payable by the domestic company shall be at the rate mentioned in Section 115 O and not at the rate of tax applicable to the non-resident shareholder as specified in the DTAA with reference to such dividend income.

Case Title: Deputy Commissioner of Income Tax Versus Total Oil India Pvt. Ltd.

Case No.: ITA NO.6997/MUM/2019 (A.Y.2016-17)

Date: 20/04/2023

Counsel For Appellant: Ajay Vohra

Counsel For Respondent: Vinod Tanwani

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