Tax treaty rate cannot override dividend distribution tax rate: I-T tribunal

April 20, 2023

A special bench of the Income Tax Appellate Tribunal, Mumbai, has held that a tax treaty rate cannot override the dividend distribution tax rate (DDT) prescribed under the Income-tax (I-T) Act.

This is primarily because a domestic company, which is paying the dividend is a resident of India and cannot invoke the provisions of the tax treaty while discharging its liability under section 115-O to pay tax on dividend distributed by it.

Up to March 31, 2020, dividend income was exempt in the hands of shareholders (including non-resident shareholders). The Indian resident company paying the dividend had to bear a DDT at 15% (plus applicable surcharge and cess), without having any recourse to the tax treaty rate applicable to its non-resident shareholders. The objective of introducing DDT was administrative convenience as it was a single point of tax.

In 2019, the Mumbai bench of the ITAT in the case of Total Oil India pertaining to the assessment year 2016-17 reasoned that DDT should be considered as a tax liability of the dividend paying company. The Delhi and Kolkata benches of the ITAT had differed in this view. The Mumbai bench of the ITAT placed reliance on the Supreme Court’s order in the case of Godrej & Boyce Manufacturing Company.

It then referred the issue for the consideration of a special bench. The special bench composed of GS Pannu, president; NV Vasudevan, vice-president and Vikas Awasthy, judicial member, on Thursday concurred with the earlier order of the Mumbai ITAT.

[The Times of India]