In continuation of our earlier write up in the December, 2020 edition of ‘What’s Up in Tax!’ analysing the decision of the Tribunal, Delhi Bench in the case of Giesecke & Devrient [India] Pvt. Ltd. v. ACIT^[1], (the ‘G&D Case’) wherein it was held that as regards taxation of dividends, the beneficial rate prescribed under the India-Germany Double Tax Avoidance Agreement (‘DTAA’) would override the rate prescribed under Section 115-O of the IT Act.

Whilst opining so, the Tribunal categorically held that tax paid by companies on distributed profits under Section 115-O of the IT Act was essentially a tax paid on behalf of the non-resident shareholders on the dividends and hence, the benefit of lower rate of tax as prescribed under DTAA was to be applied in the case of non-resident shareholders. However, this decision of the Delhi Bench was doubted by the Mumbai Bench of the Tribunal in the case of Total Oil India Pvt. Ltd. v. DCIT^[2], and the issue of applicability of beneficial rate of tax on dividends as provided under DTAA was referred to the Special Bench for providing certainty to the non-resident shareholders.

Recently, the Special Bench (‘SB’) of the Tribunal whilst overruling the view taken in the G&D Case has held that the provisions and tax rates as provided for under Section 115-O of the Act would prevail over the rates prescribed under the DTAA.^[3] The Hon’ble SB whilst relying on the decision of the Hon’ble High Court of Bombay in the case of Godrej & Boyce Mfg. Co. Limited v. DCIT,^[4] categorically held that in terms of Section 115-O of the IT Act, Dividend Distribution Tax (‘DDT’) is a levy on the “distributed profits of the company” and not on the “dividend income” of the non-resident shareholder. Further, it was observed that Section 115-O is a complete code in itself and it is a separate charge on the distributed profit of the company which is completely independent and divorced from the concept of “total income” under the IT Act. Whilst holding so, the Hon’ble SB referred to the India-Hungary DTAA, wherein the beneficial rate for DDT is specifically provided for. In view thereof, the SB observed that wherever the benefit was intended to be granted, the countries have specifically agreed in the DTAA to that effect. Therefore, it was held that domestic companies are not entitled to take/claim benefits on the DDT paid under Section 115-O of the Act unless the DTAA specifically provides such benefit.

In our opinion, the decision of the SB completely miscues on expounding the real nature of the income taxed under Section 115-O of the IT Act. A tax on distributed profits of the company under Section 115-O is an additional income tax levied on any amount declared, distributed or paid by way of dividends by the domestic company to its shareholders. By no stretch of imagination, any sum being distributable profits declared by way of dividends can be characterized as “income” of the domestic company itself and not dividend income in the hands of the shareholders.^[5]

Besides, what is surprising is that the SB holds that Section 115-O is a complete code independent from the concept “total income” as envisaged under the statute. It is worthwhile to mention that in terms of entry 82 of List I of Schedule VII of the Constitution of India and as per the conjoint reading of the Preamble, Sections 4 & 5 of the IT Act, a tax under the IT Act can only be levied on the income of the person assessable under the statute^[6] and if such distributed profits are not part of “total income”, then such levy is not in accordance with law.

At this juncture, it is also of seminal importance to highlight that in terms of the memorandum to the Finance Bill, 2020,^[7] the legislature in its wisdom has restricted the operation of Section 115-O of the IT Act till March 31, 2020, whilst categorically noting that dividend was the income of the shareholder and Section 115-O of the IT Act was introduced for easement of tax collection. This, in itself, fortifies the view that tax levied under Section 115-O was nothing but a tax on dividend income of the shareholder. Further, the law as it stands today also provides that dividend income of the non-resident shareholder suffers withholding tax under Section 195 of the IT Act subject to benefits available under the DTAA.^[8]

Additionally, the SB completely overlooked the cardinal principle of law that unless a DTAA is amended jointly by the sovereigns, the benefits granted thereunder cannot be altered unilaterally by way of an amendment in the domestic law.^[9] In sum and substance, the SB ought to have considered that a unliteral amendment being a shift in the incidence of tax on dividend income of the shareholder in the hands of the company under Section 115-O of the IT Act cannot restrict the benefits as provided under the DTAA.

Further, it would also be relevant to highlight that the above-mentioned issue is pending adjudication before the Hon’ble High Court of Delhi and the issues as stated above would be tested before the Hon’ble High Court.^[10] However, till such time, the ruling rendered by SB restricts the advantage of beneficial rate of tax on dividends as prescribed under respective DTAA’s to non-resident shareholders and disentitles domestic companies to seek any refund of the excess DDT paid to the Government exchequer.

[1] Giesecke & Devrient [India] Pvt. Ltd. v. ACIT, [2020] 120 taxmann.com 338 (Delhi – Trib.).

[2] DCIT v. Total Oil India Pvt. Ltd., [2021] 127 taxmann.com 774 (Mumbai – Trib.).

[3] DCIT v. Total Oil India Pvt. Ltd., [2023] 149 taxmann.com 332 (Mumbai – Trib.) (SB).

[4] Godrej & Boyce Mfg. Co. Limited v. DCIT, [2010] 328 ITR 81 (Bom. HC) subsequently confirmed in Godrej & Boyce Mfg. Co. Limited v. DCIT, [2017] 394 ITR 449 (SC).

[5] CIT v. Nalin Behari Lal Singha, (1969) 2 SCC 310 (SC). see more:  Mrs. Bacha F Guzdar v. ITO, [1955] 27 ITR 1 (SC); Kanitlal Manilal v. CIT, [1961] 41 ITR 275 (SC).

[6] Chelmsford Club v. CIT, (2000) 3 SCC 214 (SC); Nalini Ambalal Mody v. CIT, (1966) 61 ITR 428 (SC).

[7] Memorandum to Finance Bill, 2020.

[8] GE India Technology Centre (P) Ltd. v. CIT, (2010) 10 SCC 29 (SC).

[9] DIT v. New Skies Satellite BV, [2016] 382 ITR 114 (Del. HC) affirmed by the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT, [2021] 125 taxmann.com 42 (SC).

[10] Coperion Ideal Pvt. Ltd. v. PCIT, W.P. (C) No. 7253-2023 (Del. HC).