Case Note & Summary
The Bombay High Court dismissed a batch of seven appeals filed by Foseco India Ltd. under Section 260A of the Income Tax Act, 1961, challenging a common order of the Income Tax Appellate Tribunal (ITAT) dated 11 November 2024. The appeals pertained to assessment years 2014-15 to 2020-21. The core issue was whether Dividend Distribution Tax (DDT) under Section 115-O of the Act is in substance a tax on dividend income of non-resident shareholders, and whether the more beneficial rate of 15% under Article 11 of the Double Taxation Avoidance Agreement (DTAA) between India and the United Kingdom should apply instead of the rate under Section 115-O (16.994% inclusive of surcharge and cess). The assessee, a company engaged in manufacturing and trading foundry chemicals, had distributed dividends to its shareholders, including foreign shareholders resident in the UK, and paid DDT at the prescribed rate. The assessee claimed that DDT is effectively a tax on dividend income of shareholders and thus the DTAA rate should apply. The Revenue contended that DDT is a tax on the company, not on shareholders, and therefore the DTAA does not apply. The ITAT had dismissed the assessee's appeals, following the Special Bench decision in Deputy Commissioner of Income Tax v. Total Oil India Pvt. Ltd. The High Court framed three questions of law: (i) whether DDT is in substance a tax on dividend income of non-resident shareholders; (ii) whether the Special Bench decision in Total Oil India lays down the correct law; and (iii) whether the Tribunal erred in not applying Article 24(1)(b) of the DTAA. The Court analyzed the nature of DDT, noting that it is levied on the company distributing dividends, not on the shareholder, and is a separate tax under Chapter XIID of the Act. The Court held that Article 11 of the DTAA, which deals with taxation of dividends in the hands of the recipient, does not apply to DDT. The Court also rejected the argument based on the non-discrimination clause, holding that DDT is not discriminatory as it applies uniformly to all companies. The Court affirmed the Special Bench decision in Total Oil India Pvt. Ltd. and dismissed all appeals, upholding the ITAT order.
Headnote
A) Income Tax - Dividend Distribution Tax - Section 115-O, Article 11 of India-UK DTAA - Whether DDT is a tax on dividend income of shareholders - The assessee argued that DDT is in substance a tax on dividend income of non-resident shareholders and thus the lower rate of 15% under Article 11 of the DTAA should apply. The Court held that DDT under Section 115-O is a tax on the company distributing dividends, not on the shareholder, and therefore Article 11 of the DTAA, which deals with taxation of dividends in the hands of the recipient, does not apply. The Special Bench decision in Total Oil India Pvt. Ltd. was affirmed. (Paras 1-10) B) Income Tax - Double Taxation Avoidance Agreement - Section 90(2) of IT Act - Whether DTAA overrides domestic law for DDT - The assessee contended that Section 90(2) allows application of the more beneficial DTAA provisions. The Court held that Section 90(2) applies only to taxes covered by the DTAA, and since DDT is not a tax on dividend income of shareholders, Article 11 does not apply. The rate under Section 115-O remains applicable. (Paras 11-20) C) Income Tax - Non-Discrimination Clause - Article 24(1)(b) of India-UK DTAA - Whether levy of DDT is discriminatory - The assessee argued that Article 24(1)(b) covers DDT within Article 3(1)(c). The Court rejected this, holding that DDT is not a tax on dividends paid to non-residents but a tax on the company, and thus no discrimination arises. (Paras 21-25)
Issue of Consideration
Whether Dividend Distribution Tax (DDT) under Section 115-O of the Income Tax Act, 1961 is in substance a tax on dividend income of non-resident shareholders, and whether the more beneficial rate of 15% under Article 11 of the India-UK DTAA applies instead of the rate under Section 115-O.
Final Decision
The Bombay High Court dismissed all seven appeals, upholding the order of the Income Tax Appellate Tribunal. The Court held that Dividend Distribution Tax under Section 115-O is a tax on the company, not on the shareholder, and therefore Article 11 of the India-UK DTAA does not apply. The Special Bench decision in Total Oil India Pvt. Ltd. was affirmed as laying down the correct law. The Court also rejected the argument based on the non-discrimination clause.
Law Points
- Dividend Distribution Tax under Section 115-O is a tax on the company distributing dividends
- not on the shareholder
- Article 11 of India-UK DTAA applies to dividends paid to shareholders
- not to DDT
- Section 90(2) of IT Act does not override Section 115-O as DDT is not a tax on dividend income of shareholders
- Special Bench decision in Total Oil India Pvt. Ltd. is correct law
