Income Tax Act | Bombay High Court Allows Treaty-Based Cap Of 10% On DDT For Foreign Shareholder; Sets Aside BFAR Ruling
The Bombay High Court (Goa Bench) has held that Dividend Distribution Tax (DDT) paid by an Indian subsidiary to its foreign shareholder must be restricted to the treaty rate of 10% under Article 11 of the India-UK India Double Taxation Avoidance Agreement (DTAA) A Division Bench of Justice Bharati Dangre and Justice Nivedita P. Mehta allowed the appeal filed by the assessee,...
The Bombay High Court (Goa Bench) has held that Dividend Distribution Tax (DDT) paid by an Indian subsidiary to its foreign shareholder must be restricted to the treaty rate of 10% under Article 11 of the India-UK India Double Taxation Avoidance Agreement (DTAA)
A Division Bench of Justice Bharati Dangre and Justice Nivedita P. Mehta allowed the appeal filed by the assessee, M/s Colorcon Asia Pvt. Ltd., and set aside the advance ruling passed by the Board for Advance Rulings, (BFAR) New Delhi. The Bench stated that On a plain reading of the said Article, it is evident that the person on whom the tax on dividend is levied is an irrelevant and extraneous consideration for its application. There is nothing in the Article which suggests that the income has to be taxed in India in the hands of the shareholders. It merely deals with the nature of income, viz. dividend, which cannot be taxed in India at the rate exceeding 10%, if other stipulated conditions are met. The nature of income is a apropos element to invoke the said Article, and not the person who is subjected to tax, in whose hands the tax is levied, is not relevant for application of Article 11, as DDT is a 'tax on dividend income of the shareholder'.
The assessee, Colorcon Asia, a wholly-owned subsidiary of Colorcon UK, paid dividends between FY 2015-16 and FY 2018-19 and discharged DDT under Section 115-O of the Income-Tax Act, 1961. It sought a ruling that DDT be limited to the DTAA prescribed withholding rate applicable to dividends.
BFAR rejected the request, holding that DDT fell outside the treaty and remained governed by domestic provisions.
The High Court held that excess DDT collected beyond 10% is contrary to Article 11 of the DTAA and contrary to Article 265 of the Constitution, which prohibits tax collection without authority of law. The Bench observed:
“DDT erroneously collected in excess of 10% as provided by India-UK DTAA is erroneous and contrary to law.”
The Court held that Dividend Distribution Tax (DDT) paid by Colorcon Asia, an Indian subsidiary, on dividends to its 100% UK shareholder must be capped at 10% under Article 11(2)(b) of the India–UK DTAA, by virtue of section 90(2) of the Income-tax Act.
The Bench observed that the Supreme Court in the Union of India Vs. Tata Tea and Anr [2017] 398 ITR 260 case confirmed that DDT is a tax on dividend income. Section 115-O allows the Government to tax dividend income at around 20.36% when a company distributes dividends. However, Section 90(2) of the Income Tax Act says that where a tax treaty applies, the assessee can use whichever provision is more beneficial.
The Bench held that since Article 11(2) of the India-UK DTAA caps tax on dividends at 10%, the company can restrict DDT to 10%. There is nothing in Article 11 that prevents applying this lower treaty rate.
Case Title: M/s Colorcon Asia pvt. Ltd. Vs. The Joint Commissioner of Income Tax & Ors.
Case No.: Tax Appeal No. 5 of 2024
Appearance for Appellant: Mr.Porus Kaka, Senior Advocate a/w Manish Kanth and T.
Sequira
Appearance for Respondent: Ms.Amira Razaq