India–UK Tax Treaty Applies to Dividend Distribution Tax: Bombay High Court

The Bombay High Court at Goa has held that Dividend Distribution Tax (DDT) is effectively a tax on dividend income of shareholders and therefore falls within the scope of the India–UK Double Taxation Avoidance Agreement (DTAA). The bench of Justice Bharati Dangre and Justice Nivedita P. Mehta set aside the adverse ruling of the Board for Advance Rulings (BFAR), which had denied treaty relief to the Indian company on the ground that DDT lay outside the treaty framework. The case arose from an appeal filed by an Indian pharmaceutical excipients manufacturer, a wholly owned subsidiary of a UK-based parent company. Over multiple financial years between 2015–16 and 2018–19, the Indian subsidiary declared and paid substantial dividends to its UK parent and discharged DDT at the rates prescribed under Section 115-O of the Income-tax Act, 1961. The cumulative dividend payout exceeded ₹100 crore, with DDT paid running into tens of crores. Seeking clarity on its tax position, the company approached the BFAR under Section 245Q of the Act, asking whether it could restrict the tax rate on dividends to 10% in terms of Article 11 of the India–UK DTAA, and whether such rate required grossing up. The BFAR ruled against the company, holding that DDT was an additional tax on the domestic company and was outside the scope of the DTAA. The core question before the High Court was whether DDT, though collected from the Indian company, was in substance a tax on dividend income of the shareholder and therefore subject to the limitations prescribed in the tax treaty. The department argued that DDT was a domestic levy on the company’s distributed profits and that treaty provisions governing dividend taxation had no application. The taxpayer contended that DDT merely shifted the incidence of tax for administrative convenience and did not alter the character of the levy as a tax on dividend income. The court undertook an extensive analysis of the evolution of Section 115-O and the shifting policy choices of Parliament. It traced how, over time, the incidence of tax on dividends moved from shareholders to companies and back, before finally being placed again on companies purely for ease of collection. The Court noted that despite these shifts, dividend remained income in the hands of shareholders, and DDT continued to be a tax on such income, albeit collected at the company level. The Bench emphasised that even in years where a company had no taxable profits, DDT was payable upon declaration of dividends, reinforcing that the levy was not a tax on corporate profits but on dividend distribution. It also relied on explanatory memoranda to Finance Acts and budget speeches to underline that DDT was intended as a substitute mechanism for taxing dividend income. Turning to the India–UK DTAA, the Court held that Article 11 clearly governed dividends paid by a company resident in one contracting state to a resident of the other. Once the payment qualified as “dividend” under the treaty, India’s right to tax was capped at 10% of the gross amount, subject to treaty conditions. The High Court rejected the Revenue’s argument that DDT was excluded from the treaty merely because it was not expressly mentioned. It observed that unilateral changes in domestic law, including shifting the point of tax collection, could not defeat or dilute treaty obligations. Relying on settled Supreme Court jurisprudence, the Court reiterated that where a DTAA exists, its provisions override domestic law to the extent they are more beneficial to the taxpayer. The court found that the BFAR had erred in mechanically relying on the ITAT Special Bench decision in Total Oil India Pvt. Ltd. without appreciating the broader legislative and treaty context. It held that DDT could not be treated as falling outside the “taxes covered” under the DTAA when, in substance, it was a tax on dividend income. The High Court ruled that the Indian subsidiary was entitled to claim the benefit of Article 11 of the India–UK DTAA and restrict the effective tax rate on dividends to 10%. The BFAR’s ruling denying treaty relief was set aside. Case Details Case Title: M/s. Colorcon Asia Pvt. Ltd. Versus The Joint Commissioner of Income Tax Case No.: Tax Appeal No.5 Of 2024 Date: 28/11/2025 Counsel For Petitioner: Porus Kaka, Senior Advocate Counsel For Respondent: Amira Razaq Click Here To Read Order Read More: GST Refund Can’t Be Denied by Treating Export Services as ‘Intermediary’: Karnataka High Court

India–UK Tax Treaty Applies to Dividend Distribution Tax: Bombay High Court

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