Authors:
A recent ruling by the Mumbai Tribunal in the case of Polycab India Limited, which has in a manner of speaking, reignited the debate on not viewing Dividend Distribution Tax (DDT) de hors the recipient. The controversy was on dividends paid by Poylcab to the International Finance Corporation (IFC).
Summary of the ruling:
- Polycab India Limited (“Polycab”) distributed dividends to its shareholders, including the International Finance Corporation (“IFC”). In doing so, Polycab discharged DDT under section 115-O of the Income-tax Act, 1961 (“the IT Act”)
- Any income in the hands of IFC is exempt from tax in India by virtue of the International Finance Corporation (Status, Immunities and Privileges) Act, 1958 (“the IFC Act”)
- The Tribunal held that the provisions of the IFC Act override those of the IT Act. Consequently, the DDT levied on dividends paid to IFC ought to be refunded to Polycab. Emphasising India’s obligation to honour its international commitments, the Tribunal observed:
“..when there is an agreement between the sovereign countries and diplomatic understanding which are codified as Act of the parliament that income of such institutions are exempted from tax then, there need not be any specific provisions in the Income Tax Act, 1961..”
- The Tribunal drew an analogy with the exemption accorded to the New Pension System Trust (NPS Trust), where dividend income paid for or on behalf of NPS Trust is specifically excluded from the taxable base. Applying the principle of parity and equitable construction, the Tribunal reasoned that even if the IT Act does not explicitly mandate a reduction in respect of dividend income received by IFC, such income must nonetheless be treated as exempt, given the overriding effect of the IFC Act
- While acknowledging the Special Bench ruling in Total Oil India Pvt Ltd, which held that DDT is a tax on the company rather than the shareholder, the Tribunal adopted a purposive interpretation. It emphasised that DDT paid on dividends distributed to IFC would be exempt from tax in light of the legislative intent behind the IFC Act
This ruling reinforces the principle of purposive interpretation and legislative intent, particularly in the context of international obligations and immunities.