The Hon’ble Mumbai ITAT in the matter of Deputy CIT vs. Total Oil India Pvt. Ltd. has expressed doubts on the correctness of the decisions of the coordinate benches on the dividend distribution tax (DDT) rate being restricted by the treaty provision dealing with taxation of dividends in the hands of the shareholders. In those decisions, Delhi ITAT (in the case of Giesecke & Devrient India Pvt Ltd Vs ACIT) held that tax rates specified in DTAA in respect of dividend must prevail over DDT and the similar stand was adopted by Kolkata Tribunal in the case of DCIT vs Indian Oil Petronas Pvt Ltd. In this regard, Mumbai Tribunal listed out numerous of reasons for doubting correctness of the decisions and directed for the constitution of a special bench so that all the aspects relating to this issue can be considered.

Tribunal’s Findings

Hon’ble Tribunal gave the following reasons for doubting the correctness of the aforesaid decisions of the coordinate benches-

Dividend distribution tax (DDT) cannot be treated as a tax on behalf of the recipient of dividends

Hon’ble supreme court in the matter of Godrej & Boyce Mfg Co Ltd Vs DCIT observed that 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.

No tax credit in DDT paid in the hands of shareholder

Under Tax treaties, no tax credits are envisaged in the hands of the shareholder in respect of the DDT paid by the company. Thus DDT cannot be equated with a tax paid by, or on behalf of, a shareholder in receipt of a such dividend.

DDT is a tax on “a company declaring the dividends not on the dividends”

In the case of Volkswagen of South Africa (Pty) Ltd Vs Commissioner of South African Revenue Service (Case no. 24201/2007) 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” and Hon’ble South African High Court noted as follows-

• STC is a taxation of the company declaring a dividend and is not a taxation of the recipient of the dividend, and consequently as stated earlier Article 7 of the DTA does not apply to STC.
• The above conclusion is further supported by a proper reading and analysis of Article 7(2)(a) which refers to a recipient of dividends and not to a company declaring the dividend. The benefits conferred by the said Article are to be enjoyed by the recipients of the dividends and not the company declaring the dividends.

The Tribunal observed that while the views so expressed by a foreign judicial body do not bind any judicial body in India, these views at least suggest that this school of thought reflected in the said decision deserves to examined in a fair, judicious and open-minded manner.

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

Tribunal observed 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 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”. That is a provision in the protocol, which is essentially an integral part of the treaty, and the protocol to a treaty is as binding as the provisions in the main treaty itself.

In the absence of such a provision in other tax treaties, it cannot be inferred as such because a protocol does not explain, but rather lays down, a treaty provision.

And for all these reasons, tribunal referred the issue to special bench, consisting of three or more Members, for consideration in comprehensive manner and the question referred by the Tribunal before special bench is as follows-

   “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?”

About special Bench

Whenever there are contradictory decisions on the same issue by different benches of a tribunal, then the issue is generally referred to special bench for adjudication.

And the Hon’ble tribunal mentioned that in the case of Union of India Vs Paras Laminates Pvt Ltd that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings being to light what is perceived by them as an erroneous decision in the earlier case” and that “in such circumstances, it is but natural and reasonable and indeed efficacious that the case is referred to a larger bench”.