INCOME TAX ACT, 1961

Section 90

Double taxation relief - Agreement between India and France - Assessee, an Indian company, seeking treaty projection as regards dividend distribution tax paid on dividend income of French shareholders -

Assessee company had some non-resident tax holders fiscally domiciled in France. It paid dividend distribution tax under section 115-O and case of assessee was that since shareholders were entitled to the benefits of Indo-French DTAA, dividend distribution tax paid by assessee, which was nothing but a tax on dividend income of shareholders, could not exceed the rate at which, under the Indo-French tax treaty, such dividends could be taxed in the hands of the non-resident shareholders in question. Held: A tax treaty protects taxation of income in the hands of residents of treaty partner jurisdictions in the other treaty partner jurisdiction. Therefore, in order to seek treaty protection of an income in India under Indo-French DTAA, 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, company incorporated in India, i.e., assessee could not seek treaty protection in India, except for the purpose of, in deserving cases, where 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 other non-discrimination provisions. No such extension of scope of treaty protection was envisaged, or demonstrated, in the instant case. Dividend distribution tax, not being a tax paid by or on behalf of a resident of treaty partner jurisdiction, could not thus be curtailed by a tax treaty provision. For all these reasons independently, as also taken together, it was a fit case for constitution of a Special Bench, consisting of three or more Members, so that all aspects relating to this issue could be considered in a holistic and comprehensive manner.

REFERRED :

FAVOUR : Matter remanded.

A.Y. : 2016-17

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