The Income Tax Appellate Tribunal (ITAT), Mumbai Special Bench, has recently, in an appeal filed before it, held that non-resident shareholders are not entitled to lower tax rates provided by DTAAs for dividend taxation, where DDT is applicable.
The aforesaid observation was made by the Mumbai ITAT, when an appeal was filed before it by the assessee, with the question involved being as to 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 115O of the Income Tax Act,1961,whether such additional income-tax payable by the domestic company shall be at the rate mentioned in Section 115O of the Income Tax Act or the rate of tax applicable to the non-resident shareholder with reference to such dividend income.
The facts of the case were that the assessee declared/paid a dividend, wherein, one of the shareholders to whom dividend was to be paid was a non-resident (a tax resident of France).
Since one of the shareholders of the assessee was a non-resident, the assessee sought to raise the plea that the rate at which tax under Section 115O of the Income Tax Act has to be paid, cannot be more than the rate at which dividends can be taxed in the hands of the no non-resident shareholder in India under the DTAA between India and France.
This plea was taken up by the assessee for the reason that the rate of tax prescribed in the DTAA, is generally less than the rate prescribed in Section 115O.
With the assessee via his representative Shri Niraj Sheth, having contended that the legislative competence to enact Section 115O as part of the Income Tax 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, Shri Vinod Tanwani, the CIT-DR, strongly supported the Revenue.
Hearing the opposing contentions of either side, the Tribunal observed:
“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 shareholders as specified in the relevant DTAA with reference to such dividend income.”
“Nevertheless, 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.”, the ITAT bench of G. S. Pannu (President), N.V. Vasudevan (Vice President), and Vikas Awasthy (Judicial Member) added.
Thus, the ITAT finally concluded:
“We are of the view that the above exposition of law is correct and we agree with the same. Therefore, the DTAA does not get triggered at all when a domestic company pays DDT u/s.115O of the Act. We wish to place on record our appreciation for the assistance provided by the ld. counsels for the parties and the interveners and the ld. DR for the assistance provided to the Bench in deciding the issue referred to the Special Bench. These appeals/COs are restored to the respective Division Benches for deciding the issues raised in the respective appeals, accordingly.”
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