Cleavage of opinion emerges on applicability of India-UK DTAA to Dividend Distribution Tax, necessitating clarification.
In a significant development, the Bombay High Court has referred critical questions related to the applicability of the India-UK Double Taxation Avoidance Agreement (DTAA) to Dividend Distribution Tax (DDT) for consideration by a Larger Bench. This decision comes amidst conflicting judicial interpretations regarding whether DDT constitutes a tax on a company's profits or on the shareholders' dividend income.
The judgment, delivered by Justices G.S. Kulkarni and Aarti Sathe, addressed a series of appeals filed by Foseco India Ltd. challenging orders from the Income Tax Appellate Tribunal. The Tribunal had dismissed Foseco’s claims for a refund of DDT paid at a rate higher than that prescribed under the India-UK DTAA. The key contention revolved around whether DDT, levied under Section 115-O of the Income Tax Act, is indeed a tax on the income of shareholders, thus entitling them to the treaty benefits under the DTAA.
The crux of the matter lies in the interpretation of Section 115-O, which imposes an additional income tax on profits declared as dividends by domestic companies. Foseco India Ltd argued that this tax should be aligned with the lower tax rates stipulated in the DTAA, as it impacts the dividend income of UK-based shareholders. However, the Tribunal and prior judgments have upheld that DDT is a tax on the company’s profits and not on the shareholders’ income, placing it outside the purview of Article 11 of the India-UK DTAA.
This issue gained complexity with divergent judicial opinions. The Bombay High Court's Division Bench in M/s. Colorcon Asia Pvt. Ltd. had previously ruled in favor of considering DDT as a tax on shareholders' dividend income, advocating for DTAA benefits. Conversely, decisions such as the Supreme Court’s ruling in Godrej & Boyce Manufacturing Co. Ltd. have affirmed DDT as a tax on the company’s profits.
The current judgment emphasizes the "cleavage of opinion" and the necessity for a Larger Bench to deliberate on two pivotal questions: whether M/s. Colorcon Asia Pvt. Ltd. correctly interpreted DDT as a tax on shareholders’ income, allowing DTAA benefits, and whether this interpretation stands in conflict with Supreme Court precedent, thereby being per incuriam.
The decision to seek a Larger Bench underscores the importance of resolving these inconsistencies to ensure clarity and uniformity in the application of tax laws concerning international treaties. The outcome will have significant implications for companies with cross-border dividend distributions and their respective tax liabilities.
The registry has been directed to present the proceedings to the Chief Justice for the constitution of the Larger Bench, marking a crucial step in clarifying the legal stance on DDT and its interaction with international tax agreements.
Bottom line:-
Dividend Distribution Tax (DDT) under Section 115-O of the Income Tax Act is an additional income tax imposed on the profits of the domestic company declaring dividends, not a tax on shareholders' dividend income. Applicability of India-UK DTAA to DDT requires clarification by a Larger Bench.
Statutory provision(s): Section 115-O of the Income Tax Act, India-UK DTAA Article 11.
