Tribunal's Special Bench Ruling on DDT Rate Dispute

DDT Rate vs The Treaty Rate

(Total Oil India Private Limited)

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The law relating to tax on distribution of dividends has undergone changes several times over the last two decades. It has also been an area of big concern both for the shareholders as well as the India Inc.

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Prior to the introduction of section 115-O by the Finance Act, 1997 the dividend was taxable in the hands of shareholders. However, with the introduction of section 15-O, the liability to pay tax on dividend shifted from shareholder to the Company distributing the dividend and the rate of Dividend Distribution Tax (DDT) was pegged at 10%. The dual objective of introduction of DDT was to provide ease in collection of tax on one hand and reduce compliance burden of shareholders on the other. Subsequently, an amendment was made in 2014, which provided for grossing-up of the DDT rate and this significantly increased the net tax paid as DDT. The DDT rate of 10% introduced in 1997 doubled to 20.56% over the years. In the year 2017 Section 115BBDA was introduced to provide that the taxpayers earning dividend income in excess of Rs.10 lakh are required to pay additional tax at the rate of 10% on dividend received, over and above the DDT paid by the companies.

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One of the controversies that caught the attention of taxpayers, and the taxman has been relating to rate of tax on dividend paid to the non-residents. In other words, the question was whether the dividends distributed to non-residents should be subjected to the rate of tax on dividends as specified in tax treaties. The Delhi Bench of Income Tax Appellate Tribunal (Tribunal) decided the issue in favor of the taxpayers in the case of Giesecke & Devrient India Private Limited, wherein it was held that the beneficial rate provided in DTAA for taxation of dividend shall prevail over DDT rate for DDT is a 'tax' as defined under Section 2(43) of the Income Tax Act, 1961 (Act), which is subject to the charging Section 4 and the charging Section itself is subject to other provisions of the Act, thereby bringing it within the purview of which Section 90 of the Act. The Tribunal also held that payment of DDT by a Domestic Company was for and on behalf of the shareholder and in the discharge of shareholders liability to pay tax on dividend income. The Calcutta Bench of Tribunal followed this ruling in the case of Indian Oil Petronas Private Limited.

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However, in the case of Total Oil India Private Limited, the Mumbai Bench of Tribunal dissented from the view taken by Delhi Bench of Tribunal on the ground that DDT was not paid by or on behalf of the shareholder, hence benefit of tax-treaty cannot be availed. The Mumbai Bench relied on the ruling of the Supreme Court in the case of Godrej & Boyce Mfg Co. Ltd, wherein Court held that the payment of DDT under Section 115-O does not discharge the shareholder’s tax liability. It is a liability of the company and discharged by the company. It is not a tax paid by, or on behalf of, the shareholder. Therefore, DDT cannot be treated as a tax on behalf of the shareholders.

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The Mumbai Bench was also of the view that if the DDT paid is to be considered as paid behalf of the shareholders, the provisions of Section 57 would trigger and allow the shareholder to claim a deduction of appropriate expenditure, which seems wholly inconsistent with the provisions of Section 10(33) of the Act. Also, as per the tax-treaty the tax credits is not available to the shareholders in respect of DDT paid by the company. The Mumbai Bench also referred to the ruling of South African High Court ruling in the case of Volkswagen of South Africa (PTY) Ltd, wherein it was held that secondary tax (which is similar to DDT) on companies paying the dividend is a tax on the company and not on shareholders and thus, the benefit of the lower rate of tax on dividend mentioned in the tax-treaty is not available.

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Since the view of Mumbai Bench of Tribunal was in stark contradiction to that of the Delhi Bench, the matter was referred to a Special Bench for consideration of following question:

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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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The Special Bench after hearing the litigants and considering the evolution of law on dividend taxation as well as the tax-treaty provisions held as under:

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1.????DDT is a tax on the distributing company and not on the shareholder. While holding so the Special Bench relied on the ruling of Bombay High Court in the case of Godrej & Boyce Mfg Co. Limited, which was affirmed by the Supreme Court.

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2.????Section 115-O of the Act is a code in itself as it starts with a non-obstante clause overriding other provisions of the Act, including Section 4. The provisions of TDS and TCS specifically provide that tax deducted at source and tax collected at source are payments on behalf of the payee, i.e., the person liable to pay income tax on the sum paid. If the payer pays excess TDS, the payee gets a right to recover the TDS or TCS and gets subrogation rights. Such provisions are absent in the entire scheme of DDT. Hence, the DDT is a tax on the company and not on the shareholder and cannot be said to be tax paid on behalf of the shareholder.

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3.????The provisions of Section 115-O state that the tax on distributed profits paid by the company shall be treated as the final payment of tax 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 and no deduction under any other provision of this Act shall be allowed to the company or a shareholder. These provisions clearly show that a shareholder does not enter the domain of DDT at all.

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4.????Basis the above, the Special Bench held that DDT is an additional tax on the company.

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5.????As regards the availability of beneficial rate prescribed under the tax-treaty, the Special Bench held that the purpose of tax-treaty is to avoid double taxation/allocation of taxing rights between two sovereign nations. In the present case, there is no double taxation of income as DDT is a tax on the profits of the domestic company and not on the shareholder.

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6.????The tax-treaty is to be looked at from recipient's taxability perspective whose income suffers double taxation. Since DDT is a charge on the domestic company and not on behalf of the shareholder, the domestic company does not enter the tax-treaty domain.

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7.????Wherever the parties to the tax-treaty intended to extend the treaty protection to the domestic company, it was specifically agreed to in the DTAA.

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The Special Bench has upturned rulings of Delhi and Calcutta benches primarily for following two reasons:

A. These rulings didn’t consider the ruling of Bombay High Court (affirmed by Supreme Court) in the case of Godrej & Boyce Mfg Co. Limited on the point that DDT is a tax on the distributing company and not on the shareholder;

B. Since DDT is a tax liability of the distributing company, the shareholder is not eligible to claim the treaty benefit in respect of the same.

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The above conclusions of the Special Bench are in line with the scheme of taxation and the general understanding of tax-treaties. The matters pending before the Tribunal and authorities below will henceforth be decided in line with this ruling. Accordingly, the litigants will have to plan their strategy for the existing litigation as well as for the future tax positions.

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