A special bench of Income Tax Appellate Tribunal (ITAT) on Thursday held that a domestic company being a resident cannot invoke provisions of DTAA (Double Taxation Avoidance Agreement) while discharging it’s liability towards Dividend Distribution Tax (DDT).

This ruling was given after bunching various petitions having Maruti Suzuki, Total Gas and Gujarat Gas as appellants, and GE Power, Tech Mahindra, Sennheiser Electronics, and Astra Zeneca Pharma India beside others as interveners.

“We hold 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,” the bench said.

Section 115O of the Income Tax Act prescribes the rate at which 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. The rate is 15 per cent.

The bench further said that it is 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,” it said.

What the experts say

Explaining the judgement, Ved Jain, former President of Institute of Chartered Accountants of India (ICA) said the DTAA can be invoked by a non resident who is a resident of the other contracting state with whom DTAA has been entered—not by domestic company. It is India-Hungary Treaty which has a specific clause allowing such benefit to a domestic company.

Accordingly, 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, the ruling mentioned.

According to Amit Maheshwari, Tax Partner, AKM Global, It is important to note that the payment of dividend distribution tax under section 115O of the income-tax act does not discharge the tax liability of the shareholders. It effectively means that it is a liability of the company and discharged by the company. “The DDT was abolished in 2020 and in a current scenario, the dividend is taxed in the hands of the shareholders and a tax treaty lower rate can be availed by such a non-resident shareholder,” he said