The Income Tax Appellate Tribunal (ITAT), Mumbai Bench while doubting Delhi Bench ruling in the case of Giesecke & Devrient Vs ACIT, referred the question of Applicability of Double Taxation Avoidance Agreement (DTAA) Rate to Special Bench subject to the approval of President.
The assessee company, Total Oil India Pvt Ltd has some non-resident tax holders fiscally domiciled in France. The assessee has paid dividend distribution tax under section 115 ‘O’ and the short case of the assessee is that since the shareholders of the assessee company are entitled to the benefits of the India France Double Taxation Avoidance Agreement, the dividend distribution tax paid by the assessee, which is nothing but a tax on dividend income of the shareholders, cannot exceed the rate at which, under the Indo French tax treaty, such dividends can be taxed in the hands of the non-resident shareholders in question.
In support of this line of reasoning, the assessee relies on a decision of the coordinate bench in the case of Giesecke & Devrient India Pvt Ltd Vs ACIT which has also been subsequently followed by several other coordinate benches as well.
In the case of Giesecke & Devrient India Pvt Ltd Vs ACIT it was held that Memorandum to Finance Bill 1997 and 2003 clearly establish that levy of tax on the company was driven by administrative considerations rather than legal necessity and emphasises the fact that the levy is for all intents and purposes, a charge on dividends. DDT levied on the dividend distributed by the payer company, being an additional tax is covered by the definition of ‘Tax’ as defined u/s. 2(43) of the Act which is covered by the charging section 4 of the Act and charging section itself is subject to the provisions of the Act which include section 90 of the Act. A conjoint reading of the Memorandum to Finance Bill 1997, 2003 and 2020 would show that levy of DDT was merely for administrative conveniences and withdrawal of DDT is keeping in mind that revenue was across-the-board, irrespective of marginal rate, at which the recipient is otherwise taxed. The Delhi ITAT held that tax rates specified in DTAA in respect of dividend must prevail over DDT.
Mr. Niraj Seth, the counsel for the assessee made a reference to another decision of the coordinate bench in the case of DCIT vs Indian Oil Petronas Pvt Ltd, which takes the same stand and rationalises the decision in the case Giesecke & Devrient India Pvt Ltd on the basis of more elaborate reasons for coming to the same conclusion. As for the issue of making a reference for the constitution of a special bench in case we have any reservations on the correctness of the decisions of the coordinate benches, learned counsel submitted that “the issue under consideration need not be referred to a special bench as the same is squarely covered by the aforesaid decisions and no contrary view has been taken to the best of our (his) knowledge” and that “following the principles of consistency, the issue does not require a reference to special bench”. He thus urges us to follow the coordinate benches and remit the matter to the file of the Assessing Officer for reconsideration in the light of the same.
On the other hand, Sanjay Singh, Departmental Representative, vehemently opposes the submissions of the assessee on merits as well and contends that the tax u/s. 115O is tax on distributed taxes of the domestic companies. The section 115O sub clause 4 specifies that no further credit can be claimed by the company or by any other person in respect of the amount of tax so paid. Sub section 1a and 1b of section 115O supports the view that section 115O is tax on the distributed profit of the company and is not a tax on the income of the shareholder. Sub section 5 of the section 115O provides that no deduction vide any other provision of the act should be allowed to the company or a shareholder in respect of the amount which has been charged to tax u/s. 115O. Further, section 115O begins with a “not obstante clause” and therefore, the applicability of other sections including section 90 cannot be claimed.
Mr. Singh further contended that the apex court upheld the decision of the Hon’ble Bombay High Court in Godrej &Boyce Manufacturing Co. Ltd. by categorically dealing with sec.115O and holding that the tax is not paid by the company on behalf of the shareholder. It is categorically held that the deduction of income tax u/s. 115O is a tax on profit of the company and not a tax on dividend.
Mr. Singh added that before invoking the DTAA the question to be answered is who is presently claiming the benefit of the DTAA . The assessee in this case is a resident company and cannot claim the benefit of any DTAA against taxes as per domestic tax statute. As regards the shareholder, details are not available on records. Further, the shareholder cannot claim credit of any taxes from its Tax authority since no tax has been paid by it in India. Under various DTAAs that India has entered, the credit of the tax can be allowed by the countries whose residence is the assessee. Under the India France DTAA, France will allow credit to its French resident for taxes paid by it in India and vice versa. There cannot be a situation where either in the Tax Treaty or the Indian domestic tax law, India will be required to give the credit to a resident of France of the taxes paid by an Indian resident.
The coram headed by the Vice President, Pramod Kumar and Amarjit Singh, Judicial Member clarified that wherever the Contracting States to a tax treaty intended to extend the treaty protection to the dividend distribution tax, it has been so specifically provided in the tax treaty itself. For example, in India Hungry Double Taxation Avoidance Agreement [ (2005) 274 ITR (Stat) 74; Indo Hungarian tax treaty, in short], it is specifically provided, In the protocol to the Indo Hungarian tax treaty it is specifically stated 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.
“Taxation is a sovereign power of the State- collection and imposition of taxes are sovereign functions. Double Taxation Avoidance Agreement is in the nature of self-imposed limitations of a State’s inherent right to tax, and these DTAAs divide tax sources, taxable objects amongst themselves. Inherent in the self-imposed restrictions imposed by the DTAA is the fact that outside of the limitations imposed by the DTAA, the State is free to levy taxes as per its own policy choices. 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,” the ITAT said.
The ITAT opined that it is a fit case for the constitution of a special bench, consisting of three or more Members, so that all the aspects relating to this issue can be considered in a holistic and comprehensive manner. In any case, it is a macro issue that touches upon the tax liability of virtually every company which has residents of a tax treaty partner jurisdiction as shareholders, and has substantial revenue implications. The question which may be referred for the consideration of special bench consisting of three or more Members, subject to the approval of, and modifications by, Hon’ble President, is “Whether the protection granted by the tax treaties, under section 90 of the Income Tax Act, 1961, in respect of taxation of dividend in the source jurisdiction, can be extended, even in the absence of a specific treaty provision to that effect, to the dividend distribution tax under section 115 ‘O’ in the hands of a domestic company?”
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