TMI Blog2023 (4) TMI 988X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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? - Scope of benefit of DTAA - Whether DTAA does get triggered at all when a domestic company pays DDT u/s.115O? - HELD 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. 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. - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayable by the assessee under section 115-O of the Income Tax Act, 1961 ( the Act ) at the rate prescribed in the DTAA between India and France in respect of dividend paid by the assessee to the non-resident shareholders i.e., Total Marketing Services and Total Holdings Asie, a tax resident of France. 3. 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 Non-resident (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 Non-resident shareholder in India under the DTAA between India and France. The rate of tax prescribed in the DTAA i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income tax on the total income of every person. 46. Section 2(24) defines Income which includes: a) profits and gains; and b) dividend. Xxxxxx 47. Tax has been defined in section 2(43) as under: Tax in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income- tax chargeable under the provisions of this Act, and in relation to any other assessment year income- tax and super- tax chargeable under the provisions of this Act prior to the aforesaid date;] and in relation to the A.Y commencing on the 1st day of April 2006, and any subsequent A.Y includes the fringe benefit tax payable u/s 115WA . 48. A perusal of the above shows that the term Tax would cover additional Income Tax levied u/s 115-0 of the Act. 49. The first critical issue, which needs to be decided, is as to whether the DDT is tax on the company or the shareholder since the admissible surplus stands reduced to the extent of DDT. We are aware of the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited 328 ITR 81 though the same was rendered in the context of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Thereafter, the Tribunal went on to examine the reasons for introduction of Sec.115-O of the Act and observed that it was purely for administrative convenience of collection of tax on dividends. The Tribunal went on to hold that fact that the liability to DDT under the Act, falls on the company distributing dividend, is not relevant as it is a tax on dividend earned by the shareholders, and therefore the applicable rate of dividend tax set out in the tax treaties would be applicable in the cases of non-resident recipients of dividend. The following were the observations of the Tribunal in this regard: 65. 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 recipient is otherwise taxed. 66. To recapitulate, the DDT is levy 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 subje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the provisions of the Act, dividend distribution tax (DDT) is a tax on dividend income and not on undistributed profits of the company. Undistributed profits of a company are still the profits of the company. They constitute the income of the company. Until the company declares dividend, no portion of these profits can become the income of the shareholders. 8.4. As per the aforesaid principle, the dividend income would constitute income in the hands of the shareholders and would be chargeable to tax under Section 4 of the Act. The Finance Ministry, in the memorandum explaining the provisions of the Finance Bill, 1997 to 2020 , has stated that for administrative convenience, the incidence of tax on dividend income is shifted to the resident company paying such dividend income. 8.5. Thus, it may be appreciated that once the dividend constitutes income in the hands of the shareholders, the same should be chargeable to tax as per the provisions of Section 4 of the Act. As per the provisions of Section 4 of the Act, the income tax including the additional income tax should be charged at the rate specified in the Act or DTAA, whichever is more beneficial to the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Union of India Vs Tata Tea Co Ltd [(2017) 398 ITR 260 (SC)], one has to proceed on the basis that dividends received by the shareholders are taxed as income in the hands of the shareholders, is simply incorrect. The question which fell for consideration before Hon ble Supreme Court was whether levy of tax under section 115 O was constitutionally valid or not, and Hon ble Supreme Court has held that under section 2(24)(ii) dividend is included in income and is thus covered by Entry 82 of List I to Seventh Schedule, taxes on income, other than agricultural income in the legislative competence of the Parliament. It deals with the constitutionality, not the interpretation, of Section 115 O . It does not overrule, or even remotely deal with, the specific decision of Hon ble Supreme Court holding that the argument is that tax paid by the dividend paying company under section 115-O is to be understood to be in behalf of the recipient assessee cannot be accepted in law. It is only elementary, as was held by Hon ble jurisdictional High Court in the case of in the case of CIT v. Sudhir Jayantilal Mulji [(1995) 214 ITR 154 (Bom)], a judicial precedent is only an authority for w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company paying dividends, in respect of dividend tax distribution tax, appears to be a solitary decision of its kind, to the best of our knowledge, anywhere in the world. Quite to the contrary, in the case of Volkswagen of South Africa (Pty) Ltd Vs Commissioner of South AfricanRevenue Service (Case no. 24201/2007; www.ibfd.org database) Hon ble South African High Court has observed that a similar dividend distribution tax, known as Secondary Tax on Companies (STC) paid on the distribution of dividends, is a tax on a company declaring the dividends and not on dividends . Hon ble South African High Court has observed, inter alia, as follows: In the case of STC, the entity liable for the dividend is the company declaring the dividend and the dividend declared is net of tax on the other hand, a withholding tax such as non-resident shareholder s tax was a tax on the shareholder s dividend income. As far as STC is concerned, same is levied on all South African resident companies when they declare dividends. On the other hand, withholding tax such as non-resident shareholder s tax is applicable only to certain type of shareholders, for example a non-resident shareholder. Furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process of interpretation of tax treaties. The tax treaties are agreements between the treaty partner jurisdictions, and agreements are to be interpreted as they exist and not on the basis of what ideally these agreements should have been. (g) A tax treaty protects taxation of income in the hands of residents of the treaty partner jurisdictions in the other treaty partner jurisdiction. Therefore, in order to seek treaty protection of an income in India under the Indo-French tax treaty, the person seeking such treaty protection has to be a resident of France. The expression resident is defined, under article 4(1) of the Indo-French tax treaty, as any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature . Obviously, the company incorporated in India, i.e. the assessee before us, cannot seek treaty protection in India- except for the purpose of, in deserving cases, where the cases are covered by the nationality non-discrimination under article 26(1), deductibility non-discrimination under article 26(4), and ownership non-discrimination under article 24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87% aggregating to Rs.28 crores (approximately). The assessee /appellant had raised Additional Grounds before the Tribunal claiming, that the rate of DDT on the dividend distributed/paid to the non-resident shareholders(Residents of Treaty Countries) should be restricted to the rate of taxation of dividend provided in the respective tax treaty(as applicable to the non-resident shareholders) instead of the rate provided in section 115-O of the Act. The ld. Counsel for the assessee referring to the provisions of section 90(2) of the Act submits that DTAA would override the provisions of section 115-O of the Act. Therefore, the rate of tax contained in section 115-O would apply either to residents or non-residents, where there is no treaty. 11. The ld. Counsel for the assessee referred to the definition of Tax u/s. 2(43) of the Act to contend that DDT is a tax as defined u/s.2(43) of the Act . He submits that DDT is a tax on distributable profits of the company and not a tax on company. Therefore, there is no co-relation to the tax on company. The provisions of section 115O were inserted by the Finance Act, 1997 w.e.f. 01/06/1997. Referring to Memorandum explaining the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome by way of dividend referred to section 115-O of the Act . Further, referring to section 57(i) as it stood prior to amendment by the Finance Act, 2020 w.e.f. 01/04/2021, the ld. Counsel for the assessee submits that from the combined reading of section 115-O, section 10(34) and section 57(i) it is evident that legislature itself unequivocally construed the levy of tax u/s. 115-O of the Act as a charge on income by way of dividend declared, distributed and paid by the company. From the reading of Section 115-O of the Act it is clear that it is not a tax on corporate profits, but a tax levied on amount declared, distributed/paid by a company by way of dividend whether interim or otherwise. This is further reinforced from the provisions of sub-section(2) to section 115-O which requires a company distributing dividend to pay tax under the said section notwithstanding that the company may not have taxable income, on account of loss or claim of exemptions, etc. From the reading of provisions of section 115-O it can be safely deduced that income by way of dividend is the income of the shareholder, section 115-O of the Act only seeks to shift the incidence of payment of tax thereon to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee further referred to Article-10 of India-Japan DTAA. He points that the term dividend is defined in clause (3) of Article-10. Referring to OECD Commentary on Article-10 the ld. Counsel for the assessee submits that the dividend income may be exempt in Indian Tax Laws but in the country of residence dividend income may be taxable. Further, referring to the decision in the case of CIT vs. Clive Insurance Co. Ltd., 113 ITR 636 (SC), he submits that mere collection of tax does not determine as to who has the liability to pay tax. In the case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT,432 ITR 471 the Hon ble Apex Court while dealing with dispute related to taxation of royalty, referred to and relied upon the OECD Commentary on the OECD Model Tax Convention. The ld. Counsel for the assessee submits that where section 115-O of the Act provides for levy of tax on dividend declared/distributed/paid at a rate higher than the rate of tax on dividend provided in treaty applicable to the non-resident shareholder, then, the provisions of said section override the provisions of the applicable treaty. Therefore, provisions of section 115-O of the Act have to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w on the issue in hand. Therefore, no reliance can be placed on the aforesaid judgement to disregard the decision of Division Bench in the case of Giesecke Devrient India Pvt. Ltd (supra). (ii) The next reason given by the Division Bench is that the Delhi Bench has erred in holding that the taxability is tax neutral vis- -vis foreign resident share holders. It is submitted that the said observation is an economic determent as prejudice is caused to the assessees. (iii) The Division Bench has placed reliance on the decision of South African High Court in the case of Volkswagen of South Africa (PTY) Ltd. vs. Commissioner South African Revenue Services (supra). It is submitted that the facts are distinguishable, more so, there is different tax regime in South Africa, therefore, the same cannot be compared with India Tax Laws. (iv) The Division Bench has made reference to India-Hungary DTAA. The Ld.Counsel submits that the Protocol is unique to Hungarian tax treaty and hence, cannot be applied in a blanket manner. (v) With reference to the provisions of section 90(2), the ld. Counsel for the assessee submits that provisions of treaty applies where it is more beneficial to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 248(2) enumerate that such power shall include the power of making any law imposing a tax not mentioned in either of those lists. Prior to abrogation of Article 370 on 06/08/2019, the taxing statutes enacted by the Parliament referable to Article 248 read with Entry 97 could not apply to the state of Jammu and Kashmir (except for three minor taxes) i.e. (1) taxes on Foreign Travel by Air or Sea; (2) taxes on England Air Travel; (3) On postal articles including money order, phonographs and telegrams. However, the provisions of section 115-O of the Act, applied to the state of Jammu Kashmir even prior to abrogation of Article 370. Thus, section 115-O of the Act is not referable to Entry 97. Consequently, it falls in Entry 82 as laid down in Union of India vs. Tata Tea Co. Ltd. 398 ITR 260 (SC). 21. The ld. Counsel asserted that a perusal of explanatory memorandum of Finance Bills, 1997 whereby provisions of section 115-O were introduced for the first time, (thereafter withdrawn in 2002 and reintroduced in 2003 and again withdrawn in 2020) would conclusively show that tax levied u/s 115-O is on the dividend income of shareholder albeit levied, assessed and collected only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. Counsel argued that if it is a liability of company on its own income there was no need to separately insert sub-section (3), because such liability is already provided for in section 191 of the Act. Section 115-O(3) of the Act, is to the effect that the Principal Officer of the domestic company and company shall be liable to pay tax on distributed profits to the credit of the Central Government. If levy u/s. 115-O is an additional tax on distributed profits of the company, the company would have been liable to pay such tax by virtue of mandate u/s 191 of the Act, no separate provision was required to be made the company liable to pay the tax vide section 115-O(3). The above analysis would make it clear that separate and distinct enactment of section 115-O(3) is the liability of the company but on dividend income of the shareholders. The ld. Counsel further argued that if the tax levied u/s 115-O of the Act is taxed on income of a company then the provisions of sub-section (1B) would be meaningless. Section 115-O(1B) deals with grossing up, similar grossing up provisions also exist in section 195A of the Act that deals with TDS liability when payment to a payee is on net of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The mutual funds are merely made to pay tax, not on their own income but on the dividend income of the unit holder. Thus, u/s. 115R(2) of the Act, the subject matter of tax is the income of the unit holder on which the Mutual Fund is liable to pay tax. Shifting of tax incidence to pay tax does not change the subject matter of tax. Tax is all along on the income of respective shareholder/unit holder only, but to be levied, assessed and collected from the company/mutual funds. Thus, it is evident that the provisions of section 115R are akin to section 115-O of the Act. 26. The ld. Counsel submitted that in India-Japan and India-France DTAA, the definition of dividend is autonomous and is not linked to definition in the Income Tax Act. He referred to the definition of dividend in Article 10(3) of India-Japan DTAA and Article 11(3) of India-France DTAA. To further strengthen his arguments, he referred to the commentary by Klaus Vogel on Double Tax Conventions - 3rd Edition at page no. 649. He further submitted that Article 10(2) of India-Japan and Article 11(2) of India-France DTAA provides that such dividend may be taxed in the contracting states of which the company paying the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 115-O of the Act under the domestic law and its application and understanding in the context of the provisions of the international tax laws. The ld. DR submits that a bare perusal of section 115-O of the Act would show that it over rides the charging provisions of section 4 of the Act. He pointed that section 115-O of the Act is a separate charging section and hence, it takes no support from section 4 of the Act. The ld. DR asserted that the observations of the Tribunal in Giesecke Devirent (India) Pvt Ltd. (supra) and Indian Petronas (P.) Ltd. (supra) that the genesis of charge u/s 115-O of the Act lies in section 4 of the Act is erroneous. He 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, it deals with undistributed profits and not accumulated profits. 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. 34. On constitutional validity of section 115-O of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been reiterated by the Apex Court in the case of Gobind Saran Ganga Saran vs. CST, AIR 1985 SC 1041. 36. The ld. DR submits that measure of tax levy or taxable event do not decide nature of levy. For this proposition, he placed reliance on the decision in the case of Smith Kline French (India) Ltd. vs. CIT 85 Taxman 683 (SC). He argued that word profit preceding the expression tax on distributed profits and tax on undistributed profits is derived from the tax event/measure of the tax and the same does not modify the subject of levy, which is profits of the company. 37. The ld. DR further argued that statutory incidence of tax levy, once complete, leaves no scope of intendment. 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. The perceived split between the economic incident on shareholders and statutory levy on companies as made out in the decision in the case of Giesecke Devirent (India) Pvt. Ltd. (supra) and Indian Petronas (P.) Ltd. (supra) is un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany for any purpose other than payment of dividend. At this stage, the distributed profits are an obligation due to the company but this obligation is still owed to shareholders as a class and not to a particular shareholder per se. The levy of tax u/s 115-O of the Act is completed at this stage itself. He referred to the provisions of section 115-O(3) of the Act which specifies the time of levy to pay the tax on distributed profits to the Government Exchequer that is within 14 days from the date of a) declaration of dividend; b) distribution of dividend; c) payment of dividend, whichever is earlier. The ld. DR pointed that from shareholder s point of view, the dividend becomes a debt due only when it is distributed and the individual shareholder account is credited with the amount due to them. It is at this stage that the income for non-resident shareholders gets accrued in terms of section 9(1)(iv) of the Act. From the point of view of tax treaty, definition of dividend in DTAA also used the word paid . 40. The ld. DR submits that at the declaration stage when charge u/s 115-O of the Act crystalizes, the key elements for the crystallization of levy u/s 4 are missing. From ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der. Section 10(34) of the Act does not distinguish on the basis of the residential status of the person in receipt of income. In the absence of any intelligible differentia based on residential status of shareholders there can be no basis to segregate the case of non-resident 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 treaty has to be interpreted as a whole and no clause of it should be read and/or interpreted in isolation. The DR concluded by stating that under the scheme of section 115O, the provisions of international tax laws are not attracted. REBUTTAL BY THE ASSESEE: 44. Rebutting the submissions made by ld. Departmental Representative, Shri Ajay Vora submitted that charge of Income-tax u/s. 4 of the Act evenly applies to levy of additional Income-tax u/s. 115-O of the Act. The provisions of section 115-O of the Act cannot be seen in an isolation. In case section 115-O of the Act was to stand o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stante clause in section 50 of the SIDBI Act, which has an overriding effect over the provisions of the Act and it was held that SIDBI is exempted from paying DDT on dividends u/s.115-O of the Act and thus, was not liable to pay DDT on dividends, thus, SIDBI is outside the purview of section 115-O of the Act. Without prejudice to the above primary contention, the ld. Counsel for the assessee argued that the findings of the Hon ble High Court run counter to the ratio laid down in Tata Tea Ltd. (supra). Hence, the decision rendered in the case of SIDBI does not support the case of Revenue. 48. The ld. Counsel for the assessee further argued that in the case of Union of India vs. Azadi Bachao Andolan, 263 ITR 706(SC), the Hon ble Apex Court has observed that the principles adopted in interpretation of treaties are not the same as those in interpretation of statutory legislation and must be to the context and the intention of the contracting parties in entering the Treaty. Further, the provisions of the Treaty, are to be given a literal interpretation to implement the treaty intentions of the parties i.e. the two sovereign nations. The word paid is not defined under the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia shall be computed as if it were an income derived from business, and forty per cent of such income shall be deemed to be income liable to tax. It involves composite activity of (i) growing tea, which involves carrying on Agricultural operations, and (ii) manufacturing tea which involves processing tea leaves fit for use by ultimate consumers, which is a non-agricultural activity. If Rs.100 is income derived by the company from the composite activity, only Rs.40 is taxed as income attributable to non-agricultural activity and the remaining Rs.60 is not taxed as it involves agricultural activity. But when the company distributes profit of Rs.100 as dividend, the dividend so received in the hand of the shareholder is fully taxable. The shareholder cannot be heard to say that the dividend it receives is partly income from agriculture and to that extent it is not taxable. 53. As already stated definition of Dividend is an inclusive definition. Apart from what company declares and distributes money to its shareholders by the name dividends (which we may call as real dividend, which also is paid only out of accumulated profits of the company) certain other instances are also includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... introduced simplistic system by introduction of Chapter XII-D to the Act, comprising of Sec.115-O, 115-P and 115Q. The tax so paid was treated as the final tax on dividends and the dividends were exempt from any further incidence of tax in India in the hands of the shareholders. The Memorandum to the Finance Act, 1997, explaining the reasons for introduction of Sec.115O specifies two fold objectives (i) procedure for tax collection in the form of Tax Deduction at Source (TDS) was cumbersome and involves a lot of paper work and collection from the company would be much easier. (ii) Since there was no tax incidence in the hands of the shareholder that would encourage investment in the shares of domestic companies. Sec.115O so introduced in Chapter XII-D of the Act reads thus: 115-O. (1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of June, 1997, whether out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) distribution of any dividend; or (c) payment of any dividend, whichever is earliest. 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 non-obstante clause in Sec. 115O notwithstanding anything contained in this Act but subject to the provisions of this section (i.e., Sec.115O) is an indication that the charge under the said section is independent and divorced from the concept of total income under the Act. 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. No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) of Section 115 O or the tax thereon. This scheme of Sec.115-O was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be grossed up for the purpose of computing the additional tax. 35.6 Accordingly, section 115-O has been amended so as to provide that for the purposes of determining the tax on distributed profits payable in accordance with the provisions of section 115-O, any amount by way of dividends referred to in subsection (1) of the said section, as reduced by the amount referred to in sub-section (1A) [referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1), be equal to the net distributed profits. Thus, where the amount of dividend paid or distributed by a company is Rs.85, then DDT under the amended provision would be calculated as follows: Dividend amount distributed = Rs. 85 Increase by Rs. 15 [i.e. (85*0.15)/(1-0.15)] Increased amount = Rs. 100 DDT @ 15% of Rs. 100 = Rs. 15 Tax payable u/s 115-O is Rs. 15 Dividend distributed to shareholders = Rs. 85 Hitherto, the domestic companies did not raise any dispute with regard to the rate of tax applicable for DDT and were paying DDT at the rate prescribed under the Act. After t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es for source based taxation on the basis of characterization of income, for example, Income from business connection or property or assets in India or from the transfer of capital asset situated in India is deemed to have their source in India. Likewise, another genre of income e.g. dividend paid by an Indian company is always treated as having source in India; similarly, interest payments received by a non-resident will have its source in India if it relates to a debt incurred in connection with payer s business or profession in India; royalty and fees for technical services, is also treated as having Indian source as long as underlying right, information, property or service is used in connection with the payer s business or profession carried on in India. 64. Income or profits which result from international activities such as cross border investment may be taxed where the income is earned ( i.e.source country) or where the person who receives it is normally based ( i.e. Country of residence). Same income could be taxed twice, once by the source country, based on source rule and the country of residence, based on residence rule. To prevent this double taxation, countries ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned by Government of India with other countries in order to obviate double taxation which arises from the same income being taxed in both the countries. The bargain between the countries in a DTAA is limited and is generally specified in taxes covered clause. For example, Article 2 of the Organization for Economic Cooperation and Development (OECD s) Model Double Taxation Convention (OECD DTC) states that it shall apply to taxes on income and on capital , besides specifying special provision in respect of certain species of income. Article 10 of the OECD DTC provides that dividends paid by a company which is a resident of a contracting State to a resident of the other contracting State may be taxed in that other States . If DTAA between India and another country, say country X provides for taxation of dividend income based on Article 10 of OECD model, then that would mean that dividend paid by an Indian company to a shareholder who is resident of Country X may be taxed in Country X. Simultaneously, Article 10 permits that dividends paid by a company which is a resident of a contracting State may also be taxed in that State according to the laws of that State. This would mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 69. The first aspect that we need to decide is as to whether DDT is a tax on the company or the shareholder. Can one say it is a tax payable by the shareholder, whose liability is discharged by the domestic company in the form of payment of DDT? The nature of DDT first came for consideration before the Hon ble Calcutta High Court in the case of Jayshree Tea and Industries Ltd. v. Union of India, (supra) and in the case of George Williamson (Assam) Ltd. v. Union of India, 292 ITR 322 (Gauhati). The assessee in these cases were companies engaged in the business of growing and manufacturing tea. The petitioners challenged the constitutional validity of Section 115-O introduced by the Finance Bill 1997. In terms of Rule 8(1) of the Rules income derived from the sale of tea grown by the assessee and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent of such income shall be deemed to be income liable to tax. It involves composite activity of, (i) growing tea, which involves carrying on Agricultural operations; and (ii) manufacturing tea which involves processing tea leaves fit for use by ultimate consumers, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s earlier decision in the case of Mrs. Bacha F. Guzdar, Bombay Vs. CIT AIR 1955 SC 74 wherein identical contention was raised by an assessee shareholder in a tea manufacturing company to the effect that only 40% of dividend received should be taxed as the remaining 60% was Agricultural income. The argument was rejected by the Hon ble Supreme Court by observing that when such company decides to distribute its profits to the shareholders and declare dividends to be allocated to them, such dividends in the hands of the shareholders do not partake the character of revenue derived from land which is used for agricultural purposes. The Hon ble Supreme Court also referred to its earlier decision in the case of CIT Vs. Nalin Behari Lal, 1969 (2) SCC 310, wherein it was held that dividend distributed by a company being a share of its profits declared as distributable among the shareholders, is not impressed with the character of profits from which it reaches the hands of the shareholder. 70. On behalf of the assessee, it was argued that Supreme Court has laid down the principle that DDT u/s.115-O is nothing but a tax in the hands of the shareholder because they have gone by the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly evinces parliamentary intent that incomes from dividend (and from mutual funds) are not includible in the total income . Thus, the Hon ble Bombay High Court held that DDT was not a tax on income of the shareholder but was instead a tax on the company. The following were the relevant observations of the Court: 30. The submission which has been urged on behalf of the assessee is that the expression income which does not form part of the total income under the Act should be interpreted to mean income which is exempt from tax, On this hypothesis, it has been urged that Section 14A will not apply to dividend income because the Revenue has already received its share of tax. 31. The submission cannot be accepted. The expression income which does not form part of the total income under the Act must receive its plain and grammatical construction. Such income is income which is not includible in computing the total income of the assessee under the provisions of the Act for a previous year. Now it is trite law that under the Act, it is income that is taxed but it is not taxed in vacuum. It is taxed in the hands of a person. 12 Section 2(45) defines the expression total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a domestic company under Section 115-O is not a tax on dividend 33. Section 115-O provides that a domestic company which declares, distributes or pays dividend out of current or accumulated profits, shall, apart from paying tax on its total income, pay additional income-tax on the amount of profits declared, distributed or paid as dividend or after 1 April 2003. 34. To illustrate, if Rs.1,000/- is the total income of a domestic company and out of the total income of Rs.1,000/-, Rs.300/- is declared, distributed or paid as dividend, then that domestic company is liable to pay income tax on the total income of Rs.1,000/- at the rate specified under the relevant Finance Act and is further liable to pay additional income-tax at the rate prescribed under Section 115-O on the amount of profits declared, distributed or paid as dividend. 35. Section 115-O has been enacted with a view to exempt dividend income. Prior to the insertion of Section 115-O, domestic companies were liable to pay tax on the total income (including profits distributed as dividends) and shareholders were liable to pay tax on dividend income received. Domestic companies distributing profits as divide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the perspective of Section 115-O as well as Section 14A, it is evident that the tax on distributed profits is a charge on the Company. The Company is chargeable to tax on its profits as a distinct taxable entity. It does not do so on behalf of the shareholder. The Company does not act as an agent of the shareholder in paying the tax under Section 115-O. In the hands of the recipient shareholder dividend does not form part of the total income. On the contrary, Section 10(33) clearly evinces parliamentary intent that incomes from dividend (and from mutual funds) are not includible in the total income. 38. Counsel appearing on behalf of the Assessee sought to place reliance on a circular issued by the CBDT on 18 February 1998, explaining the provisions of the Finance Act of 1997, which introduced the provisions of Section 115-O. The circular notes that according to the existing provisions of the Act, corporate dividends were taxed in the hands of shareholders under the head of income from other sources. Companies while paying dividend deducted tax at source at the rate in force and issued certificates of tax deduction to their shareholders. The shareholders, in turn, showed div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be disallowed. Income from mutual fund stands on the same footing. 72. On appeal against the decision of the Hon ble Bombay High Court, the Hon ble Supreme Court, in the judgment reported as Godrej Boyce Mfg Co Ltd Vs DCIT (supra), has observed that the fact that section 10(33) and section 115 O of the Act were brought in together; deleted and reintroduced in a composite manner, also, does not assist the assessee and that if the argument is that tax paid by the dividend paying company under section 115-O is to be understood to be on behalf of the recipient assessee, the provisions of Section 57 should enable the assessee to claim deduction of expenditure incurred to earn the income on which such tax is paid which is wholly incongruous in view of the provisions of Section 10(33). The payment of dividend distribution tax under section 115 O does not discharge the tax liability of the shareholders. It is a liability of the company and discharged by the company. Whatever be the conceptual foundation of such a tax, it is not a tax paid by, or on behalf of, the shareholder. 73. It was canvassed on behalf of the assessee that the Hon ble Supreme Court has reversed the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t assessee. At such point of time when the said position was reversed (by the Finance Act of 2002; reintroduced again by the Finance Act, 2003), it was the assessee who was liable to pay tax on such dividend income. In such a situation the assessee was entitled under Section 57 of the Act to claim the benefit of exemption of expenditure incurred to earn such income. Once Section 10(33) and 115-O was reintroduced the position was reversed. The above, actually fortifies the situation that Section 14A of the Act would operate to disallow deduction of all expenditure incurred in earning the dividend income under Section 115-O which is not includible in the total income of the assessee. 31. So far as the provisions of Section 115-O of the Act are concerned, even if it is assumed that the additional income tax under the aforesaid provision is on the dividend and not on the distributed profits of the dividend paying company, no material difference to the applicability of Section 14A would arise. Sub-sections (4) and (5) of Section 115-O of the Act makes it very clear that the further benefit of such payments cannot be claimed either by the dividend paying company or by the recipient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee. 34. For the aforesaid reasons, the first question formulated in the appeal has to be answered against the appellant-assessee by holding that Section 14A of the Act would apply to dividend income on which tax is payable under Section 115-O of the Act. [Emphasized by us] The aspect which weighed with the Hon ble Supreme Court was the fact that the payment of DDT was not a payment on behalf of the shareholder. Leaving aside the question whether it is a tax on company or shareholder, the position that remains undisturbed is the conclusion that DDT is not a payment on behalf of the shareholder by the domestic company. The observations of the Hon ble Bombay High Court regarding the legal characteristics of DDT that it is tax on a company paying the dividend and is chargeable to tax on its profits as a distinct taxable entity and that the domestic company paying DDT does not do so on behalf of the shareholder nor does it act as an agent of the shareholder in paying the tax under Section 115-O, cannot therefore be said to have been diluted or overruled by the Hon ble Supreme Court. It can be said that the Hon ble Supreme Court has taken a different basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee paid dividend to it s shareholders. The question before the Court was whether it has to pay DDT u/s.115O of the Act. If Dividend was to be regarded as, (a) any income, profits or gains accruing or arising to the Small Industries Development Assistance and or any amount received in that Fund, and b) any income, profits or gains derived or any amount received by the Small Industries Bank........ tax u/s. 115-O was not payable. The assessee relied on the decision of the Hon ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. (supra) and contended that the court in Godrej and Boyce case (supra) held that the charge under sub-section(1) of Section 115-O of the said Act is on the profits of the domestic company and more specifically on that part of the profits which is declared and distributed by way of dividend. Therefore, it was submitted that the Bank was entitled to refund of the tax amount paid under protest by it. The Court after discussing the effect of the non-obstante clause in Sec.50 of SIDBI Act, and holding that those provisions will override Sec.115O of the Act, further went on to hold that dividend is distributed from and out of the accumulated profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. 76. The aforesaid decision by Hon ble Jurisdictional High Court has also taken note of the decision of Hon ble Supreme Court of India in the case of Godrej Boyce (supra). We have already expressed the view that the decision of the Hon ble Supreme Court in the case of Godrej Boyce (Supra) does not dilute the principle laid down by the Hon ble Bombay High Court in the case of Godrej Boyce (supra). The decision in the case of SIDBI (supra) reiterates this position. 77. The charge u/s.115O is on the amount declared, distributed or paid as dividend out of accumulated profits. Intrinsic evidence is available in the form of the structure of the section. The section starts with a non-obstante clause overriding the other provisions of the Act, including Sec.4. The provisions of Secc.115 O are subject to the other provisions of the Section. Section 115 O fixes responsibility for compliance on the domestic company and its Principal Officer. Sec.115 P and 115 Q provide for machinery provisions for recovery. The chapter XII D is a complete code in itself on DDT. The provisions of TDS and TCS specifically provide that tax deducted at source and tax collected at source are payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion of the income of wife or minor child of an individual in the income of the individual. It was challenged on the ground that it was beyond the legislative powers of the Central Legislature conferred on it by entry 54 of List 1 of the Seventh Schedule of the Government of India Act, 1935. The Hon ble Madras High Court held that the incidence of the tax whether it is the immediate and apparent incidence, or whether it is the ultimate or real economic incidence, does not, limit the taxing power given to the Central Legislature by entry 54 of list 1. All that entry 54 requires is that the tax must be a tax on Income other than agricultural income. The impugned provision in Section 16(3) (a) (ii), Income-tax Act, 1922 provides only for a tax on income. It does not cease to be a tax on income either in form or in substance, though it provides for the incidence of the tax not on the person whose income is assessed to tax, but on another. In this case that incidence of the tax on the minor child's income falls under the statute on a parent of that minor. The Hon ble Court went on to hold that there is nothing in the fundamental concepts of income-tax even to prevent the imposition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed shall not exceed specified percent. The first condition is that the non-resident in France should be taxed in India. We have to look at the DTAA from the receipients taxability perspective. DDT is paid by the domestic company resident in India. It is a tax on its income and not tax paid on behalf of the shareholder. In such circumstances, the domestic company u/s.115O does not enter the domain of DTAA at all. 81. If domestic company has to enter the domain of DTAA, the countries should have agreed specifically in the DTAA to that effect. In the Treaty between India and Hungary, the Contracting States have extended the Treaty protection to the dividend distribution tax. It has been specifically provided in the protocol to the Indo Hungarian Tax Treaty 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. While making Reference in the case of Total Oil (supra), the ld. Division Bench has made the following observations on this aspect: (f) Wherever the Contracting States to a tax treaty intended to exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State . The same is the position with respect of the other non-discrimination provisions. No such extension of the scope of treaty protection is envisaged, or demonstrated, in the present case. When the taxes are paid by the resident of India, in respect of its own liability in India, such taxation in India, in our considered view, cannot be protected or influenced by a tax treaty provision, unless a specific provision exists in the related tax treaty enabling extension of the treaty protection. (h) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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