Where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder, which attracts additional Income-tax (tax on distributed profits) u/s. 115-O of the Income-tax Act, 1961, such additional Income-tax payable by the domestic company shall be at the rate mentioned in Section 115-O of the Act and not at the rate of tax applicable to the non-resident shareholder as specified in the relevant Double Taxation Avoidance Agreement with reference to such dividend income. Nevertheless, the sovereign has the prerogative, through mechanism of Double Taxation Avoidance Agreements, to extend protection to domestic companies paying dividend distribution tax.  Thus, only where the contracting states to a Double Taxation Avoidance Agreement intend to extend protection to the domestic company paying dividend distribution tax, can the domestic company claim benefit of the Double Taxation Avoidance Agreement, if any.

Sections 115-O, 115P and 115Q an additional Income-tax was levied on the company itself on the sum distributed by way of dividend. The tax paid thereunder was treated as the final tax on dividends and dividends were exempt from any further incidence of tax in India in the hands of shareholders. The additional Income-tax u/s. 115-O is referred to as “tax on distributed profits” commonly referred to as “dividend distribution tax”. It is not a tax on “dividend distributed”. The point of time at which the additional Income-tax is payable by the domestic company is laid down in section 115-O, viz., within fourteen days from the date of (a) declaration of any dividend; or (b) distribution of any dividend; or (c) payment of any dividend, whichever is earliest. The person liable for payment of such additional tax is the “principal officer of the domestic company and the company”. The payment has to be made to the credit of the Central Government.

The dividend distribution tax is neither paid on behalf of the shareholder nor is it a payment of liability of the shareholder, discharged by the domestic company paying dividend distribution tax. The charge u/s. 115-O of the Act of dividend distribution tax is a tax on the distributed profits of a domestic company and is a tax.

Sections 115P and 115Q provide for machinery provisions for recovery. Chapter XII-D is a complete code in itself on dividend distribution tax. They provide for discharge for the payer on payment to the credit of Central Government of the amounts due to the payee. In the event the payer pays excess over and above what he has to pay the payee, he gets a right to recover the tax deducted or collected at source and gets rights of subrogation. Such provisions are absent in the entire scheme of Chapter XII-D of the Act. These features are again an indication that dividend distribution tax is a charge to tax on the profits of the company and not a charge in the hands of the shareholder or tax paid on behalf of the shareholder by the domestic company. These provisions also show that shareholder does not enter the domain of dividend distribution tax at all.(

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