Supreme Court to Review Whether Dividend Distribution Tax on UK Residents Can Exceed Rate Under India-UK DTAA
The Income Tax Department approached the Supreme Court against an order by the High Court of Bombay at Goa.
The Supreme Court of India is set to examine whether Dividend Distribution Tax (DDT) paid by an Indian company on dividends distributed to a United Kingdom resident can be levied at a rate higher than that which is permitted under the India-UK DoubleTaxation Avoidance Agreement (DTAA).
The present petition filed by the The Joint Commissioner Of Income Tax, Panji & Ors impugns an earlier judgment of the Bombay High Court at Goa in a Tax Appeal filed by the respondent herein - M/s. Colorcon Asia Pvt. Ltd.
Colorcon Asia Pvt. Ltd. is a Goa-based, wholly owned subsidiary of the UK company Colorcon Limited (Colorcon UK). Colorcon Asia distributed dividends to its UK parent company during the Assessment Years 2016-17 to 2019-20 and paid DDT as per Section 115-O of the Income Tax Act, 1961. The entire cumulative dividend pay out was in excess of ₹100 Crore.
Colorcon Asia subsequently approached the Board for Advance Rulings - I, New Delhi (BFAR) seeking a declaration that the DDT rate be restricted to 10%, citing Article 11 of the India-UK DTAA which governs taxation of dividends.
The BFAR ruled against Colorcon Asia and held that DDT paid under Section 115-O falls outside the scope of the India-UK DTAA since it is an additional income tax payable by the domestic company on distributed profits and not a tax on dividend income of the foreign shareholder. The BFAR accordingly concluded that Colorcon Asia could not restrict the rate of DDT payable to 10% by seeking the protection of Article 11 of the DTAA.
However, the Bombay High Court reversed the decision holding that although the incidence of taxation had shifted from shareholders to the distributing company for “administrative convenience”, the substantive character of the levy continued to remain a tax on dividend income of shareholders.
The Division Bench of Justice Bharati Dangre and Justice Nivedita P. Mehta held that dividend remained income in the hands of shareholders and that DDT, being an “additional income tax” that fell within the meaning of Section 2(43), read with Section 4 of the Income Tax Act, was necessarily subject to Section 90 under which the treaty provisions would override domestic law to the extent that they may be more beneficial to the assessee.
The bench then referred to Article 11 of the India-UK DTAA and held that where dividends are paid by an Indian resident company to a UK resident beneficial owner, India could not tax such dividend income beyond the treaty-prescribed rate of 10%, thereby extending DTAA protection to DDT paid on such cross-border dividend distributions.
The Revenue has thus taken the matter before the Supreme Court. Additional Solicitor General N. Venkataraman appeared for the Income Tax Department, while Senior Advocates Porus Kaka, V. Sridharan and Rajiv Shakdher appeared for Colorcon and several other parties that had filed intervention applications.
The Supreme Court Bench of Justice Manoj Misra and Justice Manmohan heard the counsel and framed three questions of law - among which the substantial question whether DDT paid by the respondent company on dividends distributed to a UK resident can be levied at a rate higher than permitted under the treaty was to be addressed.
The Apex Court also took note of the Bombay High Court ruling in Foseco India Ltd. Company vs. Assistant Commissioner of Income Tax (2025) where a coordinate bench doubted the correctness of the earlier Colorcon Asia judgment and referred the issue to a larger bench.
Observing that similar issues may be pending before other High Courts, the Supreme Court directed circulation of this order to all High Courts across the country, and stated that High Courts may consider staying further proceedings in cases that have similar disputes.
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