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DTAA to prevent tax on dividend from foreign cos
February, 28th 2008

In a setback to the income tax department, the Supreme Court has upheld that dividend income received from a foreign company is not liable for taxation when there is a Double Taxation Avoidance Agreement (DTAA) with the country the firm is based in. The court has endorsed the finding that the provisions of the DTAA will override the provisions of the Income Tax Act if they are at variance.

A bench comprising justice Ashok Bhan and justice Dalveer Bhandari dismissed several appeals on similar issues filed by the revenue department.

In one case, Turquoise Investment & Finance filed its return of income for the assessment year 1992-1993 declaring income of Rs 4,30,06,580. The assessee claimed a tax refund of Rs 29,16,660 on the basis of credit of deemed tax deducted at source on dividend received from a foreign company, Pan Century Edible Oils Sdn Bhd, Malaysia.

The assessing officer demanded Rs 1,07,370 after rejecting the credit claimed by the assessee on the basis of deemed credit on dividend received from the Malaysian firm.

The assessee filed an appeal before the CIT (appeals) which was accepted. The income tax department, however, appealed before the Income Tax Appellate Tribunal. It ruled that the DTAA entered into by the government of India with the government of Malaysia would override the provisions of the act if they are at variance with the provisions of the act.

It was held that from a plain reading of Article XI of the DTAA, it was clear that dividend income would be taxed only in the contracting states where such income accrued.

The department then appealed to the Indore bench of the Madhya Pradesh High Court. The court, however, dismissed its plea and said the tribunal was justified in holding that dividend income derived by the assessee from a company in Malaysia was not liable to be taxed in the hands of the assessee in India under any of the provisions of the act. The department then filed an appeal in the Supreme Court.

Justice Bhan, writing the verdict on behalf of the Supreme Court bench said, We are satisfied that the point involved in these appeals stands concluded in favour of the assessee and against the revenue.

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