BFAR Ruling on DDT Erroneous: Bombay HC Holds Colorcon Asia Entitled to 10% Cap on Dividend Tax to UK Parent under India-UK DTAA [Read Judgment]

The Bombay High Court at Goa, in a recent ruling delivered, set aside the order of the Board for Advance Rulings (BFAR) and held that Colorcon Asia Pvt. Ltd. is entitled to restrict the tax rate on dividends distributed to its UK parent company to 10% under Article 11 of the India–UK Double Taxation Avoidance Agreement (DTAA).

Colorcon Asia, a wholly owned subsidiary of Colorcon Limited, UK, had distributed substantial dividends to its parent between assessment years 2016-17 and 2019-20. On these distributions, the company paid DDT at effective rates exceeding 20% as mandated by Section 115‑O.

Seeking relief, Colorcon approached the BFAR in 2019, contending that DDT was essentially a tax on shareholder income and therefore covered under Article 2 of the India–UK DTAA.

Since its UK parent was the beneficial owner of dividends, the company argued that Article 11 capped India’s taxing rights at 10%.

The BFAR rejected this plea, holding that DDT was outside the scope of the treaty and relying heavily on the ITAT Special Bench ruling in DCIT v. Total Oil India Pvt. Ltd. (2023) where after the analysis of the relevant statutory provisions, and treaties has concluded that the tax paid under Section 115-O is an additional tax on the Domestic Company and it is not a tax in respect of non residence income in India and, therefore, the provisions of DTAA are not attracted.

On appeal, senior counsel Porus Kaka argued that DDT, though levied on the distributing company, is substantively a tax on dividend income of shareholders.

He highlighted that Section 115‑O merely shifted the incidence of tax from shareholder to company for administrative convenience, without altering the essential character of the levy. He relied on Supreme Court precedents, including Union of India v. Azadi Bachao Andolan (2003), which held that treaty provisions override domestic law, and Engineering Analysis Centre of Excellence v. CIT (2021), which clarified that unilateral changes in domestic law cannot negate treaty benefits.

He also cited Sanofi Pasteur Holding SA v. Dept. of Revenue (2013) 354 ITR 316 (AP HC), which applied Vienna Convention principles to treaty interpretation, and Ram Jethmalani v. Union of India (2011) 9 SCC 751, affirming that treaties must be construed in line with customary international law.

The Revenue, represented by Amira Razaq, defended the BFAR ruling. It argued that DDT is an additional tax on the domestic company, not on shareholder income, and therefore falls outside the DTAA.

Reliance was placed on Godrej & Boyce Mfg. Co. Ltd. v. DCIT (2010) , where the Court had observed that DDT is a tax on the company’s profits declared as dividends, not a tax paid on behalf of shareholders.

The Revenue also invoked Orissa State Warehousing Corp. v. CIT (1999) 237 ITR 589 (SC), which held that fiscal statutes must be interpreted strictly by their language, contending that Section 115‑O clearly imposes liability on the company.

The division bench of Justice Bharati Dangre with Justice Nivedita P. Mehta, however, disagreed with the BFAR and Revenue’s stance. It noted that Section 115‑O was introduced by the Finance Act, 1997, to shift the collection mechanism of dividend tax from shareholders to companies, but the substantive nature of the levy remained unchanged.

The Court observed that DDT is an “additional income tax” on distributed profits, which are shareholder income, and therefore falls within the ambit of “income tax, including surcharge” under Article 2 of the DTAA.

It was observed that Article 11 of the treaty specifically governs dividends, and all conditions were satisfied: Colorcon Asia, a resident of India, paid dividends to Colorcon UK, a resident of the UK, which was the beneficial owner. Accordingly, India’s taxing rights were restricted to 10% under Article 11(2)(b).

The Court further held that Section 90(2) of the Income Tax Act mandates that treaty provisions prevail when more beneficial to the assessee.

It was also observed that In Tata Tea Company (supra), while pronouncing upon the constitutional validity of Section 115-O of the Act of 1961, which is a provision for declaration, distribution or payment of dividend by domestic company and imposition of additional tax on dividend, it is held by the Apex Court that the source of the income may be agriculture, but when dividend is declared to be distributed and paid to shareholder of a company, its source is not relevant, as it remains dividend income.

Citing Azadi Bachao Andolan and Engineering Analysis, it reiterated that unilateral domestic law changes cannot override treaty obligations. Denying treaty benefit, the Court warned, would result in double taxation, once through DDT in India and again when dividends are taxed in the UK—defeating the very object of the DTAA.

The BFAR’s reliance on Total Oil India Pvt. Ltd. was found misplaced, as it ignored binding Supreme Court precedents and failed to address distinctions raised by Colorcon.

In its concluding paragraphs, the Court declared that excess DDT collected beyond the 10% treaty cap was contrary to law and retention of such tax violated Article 265 of the Constitution of India, which prohibits the collection of tax without authority of law.

It therefore allowed the appeal, set aside the BFAR ruling, and held that Colorcon Asia Pvt. Ltd. is entitled to restrict the tax rate on dividends distributed to its UK parent to 10% under Article 11 of the India-UK DTAA.

Support our journalism by subscribing to Taxscanpremium. Follow us on Telegram for quick updates