Landmark Decision by Mumbai ITAT – Special Bench in case of Total Oil India Pvt. Ltd. & Others Issue under Consideration: Dividend Distribution Tax (DDT) vs. Treaty Tax Rate on Dividend paid by the domestic company to Non-Resident (NR) Shareholders

Key findings of the ITAT Special Bench Decision are summarized as under:

1. In case the dividend is declared, distributed or paid by a domestic company to NR shareholders, which attracts DDT [Additional Income Tax referred to u/s 115-0 of the Income Tax Act, 1961 (the Act)], then such DDT payable by domestic company shall be at the rate mentioned u/s 115-0 and not at the rate of tax applicable to the NR shareholders as specified in the relevant treaty with reference to such dividend income.

2. NR shareholders cannot take benefit of lower tax rate prescribed in treaty for taxation of dividend where DDT is applicable.

3. DTAA does not get triggered at all when a domestic company pays DDT u/s 115-0 of the Act.

Current Provisions for Dividend Taxation: DDT has been abolished by the Finance Act, 2020. India has now shifted to the Classical System of Taxation, wherein the dividends are taxed in the hands of the investors. Therefore, if the dividend is distributed on or after 1 April 2020, the provisions of section 115-0 will not apply.

“India Embraces Classical System of Taxation: Abolishment of DDT and New Provisions for Dividend Taxation”.