115-O vs DTAA rate on DDT: An interesting question framed by the Hon’ble SC in Colorcon
Out of the three questions of law framed by the Hon’ble SC, the first reads:
Whether tax under Section 115-O on any amount declared, distributed or paid by a company by way of dividend chargeable to additional income tax is in the nature of "tax on distributed profits" or "tax on dividend" ?
Some thoughts:
A. Section 115-O says: “… any amount declared, distributed or paid by such company by way of dividends … shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of 15%".
So, “tax on distributed profits” is a “label” put by the legislature for making a reference to additional income tax on amount declared, distributed or paid by way of "dividend". Can a reference label result in a recharacterization of what it refers to? And if DDT is actually a tax on “distributed profits”, why is it charged even on “declaration” of dividend, when distribution has not even happened?
B. Article 11 of the India-UK DTAA doesn’t say “dividend received by a shareholder”, it says “dividend paid by an Indian company” to a UK shareholder may be taxed in India but the rate should not exceed 10%.
Dividend, at the end of the day, is a distribution of profits by the company, which is precisely what section 2(22) also recognises. So technically, “dividend” paid is as good as “distributed profit”. In such a case, even if a distinction is to be made between the two, would it have any impact on Article 11?
C. Even assuming there’s a difference between the two, the second proviso to section 10(34) categorically answers the question, where the legislature itself treats DDT under section 115-O as a tax paid on “dividend”. The proviso says:
Provided further that nothing contained in this clause shall apply to any income by way of dividend … other than the “dividend” “on which” “tax under section 115-O" … "has been paid”;
That be the case, Article 11 of the DTAA squarely applies.
And yes, if revenue implication of thousands of crores is pressed as an argument (which was highlighted in an earlier hearing also in this matter), with due respect, it cuts both ways. The issue is not merely how much the Revenue stands to refund, but how much it should never have collected in the first place, in violation of Article 265 of the Constitution.