DDT – Tax On Shareholder – DTAA Applicable!!

This update is in furtherance to the earlier edition of 'What's Up in Tax!', March, 2023¹ analysing the decision of the Income Tax Appellate Tribunal ('ITAT'), Special Bench in the case of Total Oil India Pvt. Ltd.². The present update focuses on the recent development on this issue i.e., whether the beneficial rate of tax as prescribed under the Double Tax Avoidance Agreement ('DTAA') would override the higher rate of tax ('DDT') stipulated under Section 115-O of the Income-tax Act, 1961 ('IT Act'), on distribution of dividends by an Indian company to non-resident shareholders.

To recapitulate, the Special Bench of the ITAT held that since DDT is a tax on the 'distributed profits of the company' being taxable in the hands of the Indian company, the beneficial rate of tax prescribed under Article 11 of the India-France DTAA³ (dividends) could not be applied on such distribution of profits by an Indian company.