The taxation of dividends underwent a change when in Finance Act 2020, dividends were made taxable in the hands of shareholders. Prior to this, since 1997, the dividend-paying company had to pay the Dividend Distribution tax (DDT). A question arose where dividends were distributed to non-residents whether the DDT rate had to be restricted to the rate of tax on dividends as specified in tax treaties. This has been widely litigated, and with contrary views emanating at the Tribunal level, the matter was referred to a Special Bench. Last week, the Mumbai Income Tax Appellate Tribunal's (ITAT) Special Bench in the case of Total Oil India Pvt. Ltd1. pronounced its decision in favor of the Revenue and held that the DDT rate could not be substituted with the rate of tax for dividends as mentioned in tax treaties.

Section 115-O was introduced in Finance Act 1997, where the companies distributing dividends were required to pay Dividend Distribution tax. The reasoning given to introduce DDT was twofold: ease of collecting taxes and encouraging investment in domestic companies as dividend income would now be exempt in the hands of the shareholders. An amendment was introduced in Finance Act 2014 to gross up the DDT rate, which resulted in increased tax costs.

In the current facts, the assessee company had one shareholder who was a tax resident of France. The assessee distributed dividends and sought to raise a plea that the DDT rate cannot be more than the rate at which the dividend was taxable under the India - France Double Taxation Avoidance Agreement (DTAA). In support of its tax position, the assessee relied on a decision of the Delhi ITAT in the case of Giesecke & Devrient India Pvt Ltd2. In the said case, the Tribunal took the view that the rate of tax prescribed in the DTAA has to be applied in preference to the higher rate of tax prescribed in Section 115-O. It was held that DDT is a 'tax' as defined under Section 2(43) of the Act, which is subject to the charging Section 4 of the Act and the charging Section itself is subject to other provisions of the Act, thereby bringing it within the sweep of which Section 90 of the Act. Secondly, the Tribunal held that payment of DDT by the Domestic Company was for and on behalf of the shareholder and in the discharge of shareholders liability to pay tax on dividend income . Kolkata Tribunal passed a similar decision in the case of Indian Oil Petronas Pvt Ltd3.

The Mumbai Tribunal's Division Bench differed from the above decisions and believed that DDT was not paid by or on behalf of the shareholder; hence DTAA benefit cannot be availed. The Tribunal observed as follows:

  • In Giesecke & Devrient India Pvt Ltd's case, Delhi Tribunal did not have any occasion to deal with the ruling of the Hon'ble Supreme Court in the case of Godrej & Boyce Mfg Co. Ltd4. In this case, the Hon'ble Supreme Court held that the payment of DDT under Section 115-O does not discharge the shareholders' tax liability. It is a liability of the company and discharged by the company. It is not a tax paid by, or on behalf of, the shareholder. Therefore, DDT cannot be treated as a tax on behalf of the recipient of dividends, i.e., the shareholders.
  • If the DDT paid is to be understood as on behalf of the shareholder, the provisions of Section 57 should enable such a shareholder to claim a deduction of expenditure incurred to earn the income on which such tax is paid, which is wholly incongruous considering the provisions of Section 10(33).
  • Furthermore, under the DTAA, no credits are envisaged for the shareholders for DDT paid by the company, and the benefit sought by the assessee, in the present case, is beyond the purpose of the DTAA.
  • The Tribunal further relied on the South African High Court's ruling for Volkswagen of South Africa (PTY) Ltd, wherein it was held that secondary tax (akin to DDT) on companies paying the dividend is a tax on the company and not on shareholders and thus, the benefit of the lower rate of tax on dividend mentioned in the tax treaty is not available.

Given the aforesaid contrary conclusion, the question of the DTAA rate's applicability for taxation of dividends instead of DDT was referred to the Special Bench.

After carefully examining the contentions of both the assessee and the department, the history of dividend taxation, the concept of double taxation, and the DTAA, the Mumbai ITAT - Special Bench observed the following:

Nature of DDT - Is it a tax on the distributing company or the shareholder?

  • The Special Bench relied on the findings of the Bombay High Court in the case of Godrej & Boyce Mfg Co. Ltd5, which were in the context of the applicability of Section 14A. The High Court held that DDT was not a tax on the shareholder's income but a tax on the company.
  • These findings were subsequently challenged in the Supreme Court, and the Hon'ble Supreme Court held that based on the legal characteristics of DDT, it is a tax on a company paying the dividend.
  • Section 115-O is a code in itself as it starts with a non-obstante clause overriding other provisions of the Act, including Section 4. The provisions of TDS and TCS specifically provide that tax deducted at source and tax collected at source are payments on behalf of the payee, i.e., the person liable to pay income tax on the sum paid. If the payer pays excess TDS, the payee gets a right to recover the TDS or TCS and gets subrogation rights. Such provisions are absent in the entire scheme of DDT. These features again indicate that DDT is a charge to tax the company's profits and not a charge in the hands of the shareholder or tax paid on behalf of the shareholder by the domestic company.
  • Furthermore, it is also seen from the provisions of Section 115-O (3) and (4) the tax on distributed profits so paid by the company shall be treated as the final payment of tax and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid. Furthermore, no deduction under any other provision of this Act shall be allowed to the company or a shareholder. These provisions also show that shareholder does not enter the domain of DDT at all.
  • Thus, the Special Bench concluded that DDT is an additional tax charge on the company.

Applicability of DTAA

  • The purpose of DTAA is to avoid double taxation/allocation of taxing rights between two sovereign nations. In the present case, there is no double taxation of income as DDT is a tax on the profits of the domestic company and not on the shareholder.
  • DTAA is to be looked at from recipient's taxability perspective whose income has suffered double tax. As mentioned above, since DDT is a charge on the domestic company and not on behalf of the shareholder, the domestic company does not enter the DTAA domain.
  • Furthermore, referring to the provisions of the protocol to the tax treaty between India and Hungary, the Special Bench held that wherever the parties to the tax treaty intended to extend the treaty protection to the domestic company, it was specifically agreed to in the DTAA.


1. ITA NO.6997/MUM/2019

2. ITA No. 7075/DEL/2017

3. I.T.A. Nos. 1884 & 1885/Kol/2019

4. (2017) 394 ITR 449 (SC)

5. 328 ITR 81

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