Income Tax Appellate Tribunal (ITAT): A two-Member Bench of Pramod Kumar, Vice President and Amarjit Singh, Judicial Member, referred a seminal question to be decided by a larger Bench of three or more Members of the Income Tax Appellate Tribunal (“ITAT”). The two-Member Bench dubbed it as:
“[A] macro issue that touches upon the tax liability of virtually every company which has residents of a tax treaty partner jurisdiction as shareholders, and has substantial revenue implications.”
The present appeal (filed by the Income Tax Department) and cross-objection (filed by the assessee) called into question the correctness of the order passed by the Commissioner of Income Tax (Appeals) in the matter of assessment under Section 143(3) of the Income Tax Act, 1961, for the assessment year 2016-17. One of the issues raised in the present matter (by way of one of the grounds taken by the assessee in cross-objection) was that:
“The Assessing Officer be directed to compute the tax payable by the assessee under Section 115-O of the Income Tax Act, 1961 at the rate prescribed in the Double Taxation Avoidance Agreement between India and France in respect of dividend paid by the assessee to the non-resident shareholders i.e., Total Marketing Services and Total Holdings Asie, a tax resident of France.”
Material Facts and Assessee’s Contention
The assessee company has some non-resident tax holders fiscally domiciled in France. The assessee has paid dividend distribution tax under Section 115-O of the Income Tax Act. The short case of the assessee is that since the shareholders of the assessee company are entitled to the benefits of the India France Double Taxation Avoidance Agreement (“Indo French Tax Treaty”), the dividend distribution tax paid by the assessee, which is nothing but a tax on dividend income of the shareholders, cannot exceed the rate at which, under the Indo French Tax Treaty, such dividends can be taxed in the hands of the non-resident shareholders in question
Preliminary Objections by Income Tax Department
The appellant−Income Tax Department raised various preliminary objections to the cross-objection filed by the respondent−assessee, which were rejected by the ITAT. The first objection was that the cross-objection filed by the assessee was time-barred. Perusing the material on record, the ITAT was satisfied that the memorandum of cross-objection was filed within the time limit.
Another objection was about the assessee’s claim of treaty protection. It was contended that the claim so far as the rate of dividend distribution tax is concerned, was never raised before any of the authorities below, and no fresh issue can be raised by way of a cross-objection filed under Section 253(4) of the Income Tax Act. Negating this, the ITAT opined that there is a legal parity in the appeal and the cross-objection inasmuch as the issues which can be raised in an appeal can also be raised in a cross-objection. There cannot be any justification in restricting the scope of issues which can be raised in a cross-objection. Whatever issues, therefore, can be raised by way of an appeal are the issues that can be raised by way of a cross-objection.
Reference to Larger Bench
On the main issue (as noted above), the assessee contended that the matter is covered by the decisions of other Coordinate Benches. The assessee submitted that following the principles of consistency, the issue does not require a reference to Special Bench. The ITAT was urged to follow the Coordinate Benches and remit the matter to the file of the Assessing Officer for reconsideration in the light of the same.
For rejecting this submission, the ITAT found force in the Supreme Court decision in Union of India v. Paras Laminates (P) Ltd., (1990) 4 SCC 453. It was observed by ITAT that the assessee’s submission that the ITAT President cannot constitute a Special Bench in the absence of conflict of opinions by the Division Benches is incorrect and untenable in law. Of course, it is for the President to take a considered call on whether or not it is a fit case for constitution of a Special Bench, but, in the event of his holding the view that it is indeed a fit case to constitute a Special Bench, he is not denuded of the powers to do so on account of lack of conflict in the views of the Division Benches.
Thereafter, the ITAT set out its reasons for doubting the correctness of the decisions of the Coordinate Benches, on the dividend distribution tax rate being restricted by the treaty provision dealing with taxation of dividends in the hands of the shareholders (i.e. Article 11 of the Indo French Tax Treaty, as in the present case):
- The payment of dividend distribution tax under Section 115-O does not discharge the tax liability of the shareholders. It is a liability of the company and discharged by the company. Whatever be the conceptual foundation of such a tax, it is not a tax paid by, or on behalf of, the shareholder. Therefore, dividend distribution tax cannot be treated as a tax on behalf of the recipient of dividends, i.e. the shareholders.
- Under the scheme of the tax treaties, no tax credits are envisaged in the hands of the shareholders in respect of dividend distribution tax paid by the company in which shares are held. The dividend distribution tax thus cannot be equated with a tax paid by, or on behalf of, a shareholder in receipt of such a dividend. In fact, the payment of dividend distribution tax does not, in any manner, prejudice the foreign shareholder, and any reduction in the dividend distribution tax does not, in any manner, act to the benefit of the foreign shareholder resident in the treaty partner jurisdiction. This taxability is wholly tax-neutral vis-à-vis foreign resident shareholder and the treaty protection, when given in respect of dividend distribution tax, can only benefit the domestic company concerned. The treaty protection thus sought goes well beyond the purpose of the tax treaties.
- It is to stretch things a bit too far to say that even when tax burden is shifted from a resident of the tax treaty partner jurisdiction to resident of another jurisdiction, the tax burden on another person, who is not eligible for tax treaty benefits anyway, will nevertheless be subjected to the same level of tax treaty protection. . Such a proposition does not even find mention in any tax treaty literature, and therefore the present decision, extending the tax treaty protection to the company paying dividends, in respect of dividend tax distribution tax, appears to be a solitary decision of its kind.
- Wherever the Contracting States to a tax treaty intended to extend the treaty protection to the dividend distribution tax, it has been so specifically provided in the tax treaty itself. In the absence of such a provision, it cannot be inferred as such.
- A tax treaty protects taxation of income in the hands of residents of the treaty partner jurisdictions in the other treaty partner jurisdiction. Therefore, in order to seek treaty protection of an income in India under the Indo French Tax Treaty, the person seeking such treaty protection has to be a resident of France. The expression ‘resident’ is defined, under Article 4(1) of the Indo French Tax Treaty, as “any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature”. Obviously, the company incorporated in India, i.e. the assessee in the present case, cannot seek treaty protection in India ─ except for the purpose of, in deserving cases, where the cases are covered by the nationality non-discrimination under Article 26(1), deductibility non-discrimination under Article 26(4), and ownership non-discrimination under Article 24(5). as, for example, Article 26(5) specifically extends the scope of tax treaty protection to the “enterprises of one of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State”. The same is the position with respect of the other non-discrimination provisions. No such extension of the scope of treaty protection is envisaged, or demonstrated, in the present case. When the taxes are paid by the resident of India, in respect of its own liability in India, such taxation in India, cannot be protected or influenced by a tax treaty provision, unless a specific provision exists in the related tax treaty enabling extension of the treaty protection.
- Taxation is a sovereign power of the State ─ collection and imposition of taxes are sovereign functions. Double Taxation Avoidance Agreement is in the nature of self-imposed limitations of a State’s inherent right to tax, and these DTAAs divide tax sources, taxable objects amongst themselves. Inherent in the self-imposed restrictions imposed by the DTAA is the fact that outside of the limitations imposed by the DTAA, the State is free to levy taxes as per its own policy choices. The dividend distribution tax, not being a tax paid by or on behalf of a resident of treaty partner jurisdiction, cannot thus be curtailed by a tax treaty provision.
For all these reasons independently, as also taken together, the ITAT was of the considered view that it is a fit case for the constitution of a Special Bench, consisting of three or more Members, so that all the aspects relating to this issue can be considered in a holistic and comprehensive manner. The question which may be referred for the consideration of Special Bench consisting of three or more Members, subject to the approval of, and modifications by, the ITAT President, is as follows:
“Whether the protection granted by the tax treaties, under Section 90 of the Income Tax Act, 1961, in respect of taxation of dividend in the source jurisdiction, can be extended, even in the absence of a specific treaty provision to that effect, to the dividend distribution tax under Section 115-O in the hands of a domestic company?”
The Registry was directed to place the matter before the ITAT President for appropriate orders. [CIT v. Total Oil (India) (P) Ltd., 2021 SCC OnLine ITAT 367, dated 23-6-2021]