ITAT Mumbai on Dividend Distribution Tax

 In a significant ruling, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has addressed the complex issue of Dividend Distribution Tax (DDT) in the case of Polycab India Ltd. v. ACIT (2025). The matter revolved around dividends paid by Polycab India to the International Finance Corporation (IFC), an entity that enjoys complete immunity from Indian taxes under the IFC Act, 1958. The key question was whether DDT, though levied on the distributing company, could apply in situations where the shareholder itself is internationally tax-immune.

Tribunal’s Findings

The ITAT held in favor of Polycab India, ruling that DDT could not be levied in this context. Its reasoning rested on three pillars:

1. Comprehensive immunity of IFC – The IFC Act protects not only IFC’s income but also its transactions and operations in India.

2. Respect for sovereign obligations – Imposing DDT would amount to indirect taxation of IFC, violating India’s commitments under international agreements.

3. Purposive interpretation of Section 115-O – Just as dividends to certain exempt entities (e.g., pension funds) are excluded from DDT, dividends to IFC must also be excluded.

Reconciling with Total Oil Ruling

This judgment appears to diverge from the Special Bench decision in Total Oil India Pvt. Ltd. (2023), which had firmly held that DDT is a tax on the distributing company, independent of shareholder taxation. However, the ITAT clarified that Polycab does not overturn Total Oil; instead, it carves out a narrow exception in cases where international immunity overrides domestic law. Thus, while Total Oil remains the baseline, Polycab adds a nuanced layer recognizing exemptions for entities like IFC.

Broader Implications

The ruling sparks debate on whether similar logic could extend to dividends paid to other tax-immune entities, such as the Government of India. Moreover, with multiple appeals on DDT pending before High Courts—including Exide Industries and Pernod Ricard India Ltd.—judicial clarity is awaited.

Conclusion

The Polycab ruling marks an important development in balancing India’s domestic tax regime with international treaty obligations. While it does not dismantle the principle in Total Oil, it refines its application in cases involving international organizations with statutory immunity. The upcoming High Court deliberations will be critical in shaping the future of DDT jurisprudence in cross-border contexts.