Direct Tax Quarterly Milestones (October-December 2025)

The Assessee is an Indian private limited company and a wholly owned subsidiary of Colorcon Limited, United Kingdom (Colorcon UK), a tax resident of the UK. For assessment years (AY) 2016-17 to 2018-19, the Assessee paid dividends to Colorcon UK and paid DDT thereon at the specified rates under the ITA (effective DDT rates ranging between 20.36% and 20.56% for these AYs). DDT was introduced through section 115-O of the ITA and was a tax levied on domestic companies on the amount of dividends declared, distributed, or paid to shareholders, effectively making the dividend income tax-exempt in the hands of the recipient shareholders.

The Assessee applied for an advance ruling before the Board for Advance Rulings (BFAR) on the basis that DDT paid by it was in excess of the dividend tax rate of 10% available under the India-UK tax treaty (Treaty). The fundamental question posed was whether DDT paid by the Assessee on dividends distributed to its parent, Colorcon UK should be restricted to the beneficial 10% tax rate under the Treaty, instead of the higher DDT rate prescribed under the ITA. The BFAR ruled against the Assessee on the basis that DDT was levied on the domestic company paying dividend, and not the shareholder entitled to Treaty benefits. Aggrieved, the Assessee appealed before the Court.

The Assessee argued that DDT is essentially a tax on the dividend income of the shareholder and that the legislative history of section 115-O of the ITA indicates that the incidence of tax was shifted from the shareholder to the distributing company for administrative convenience.

The Assessee also contended that the Assessee and its parent, Colorcon UK were residents of India and the UK, respectively, and thus, were covered by Article 1 of the Treaty. Further, DDT, being an income tax, falls within the scope of ‘covered taxes’ as provided in Article 2 of the Treaty. This demonstrated that all conditions under Article 11 of the Treaty were met, i.e., the payment was a dividend, paid by an Indian resident company to the UK resident shareholder who was also the beneficial owner of the dividend income. Therefore, the tax rate could not exceed 10% as per the Treaty.

The tax department contested the Assessee’s claims by reiterating that DDT is a tax on the domestic company distributing the profits and not a tax on the dividend income of the non-resident shareholder. Further, DDT does not qualify as ‘covered taxes’ under the Treaty.

The tax department heavily relied on the Mumbai Tribunal’s decision in the case of Total Oil India Private Ltd.,² and the Court’s decision in the case of Godrej and Boyce Manufacturing Company Limited,³ Where it was held that DDT is a tax on the distributing company, and not the shareholder. The tax department argued that fiscal statutes must be interpreted strictly based on their language, and international treaties should not be interpreted beyond their express terms.

The Court conducted a thorough analysis and systematically dismantled the tax department’s arguments.

• The true nature of DDT

  The Court delved into the legislative history of section 115-O and concluded that, in pith and substance, DDT is a tax on the dividend income of the shareholder. The Court noted that DDT was the tax liability of the shareholder that was shifted to the company purely for administrative convenience. The Court emphasised that the act of declaring or distributing a dividend cannot be considered the income of the company making the payment. In this regard, it relied on the Supreme Court’s decision in the case of Tata Tea Company Limited ⁴ which affirmed that DDT is an additional tax on dividends.

• Primacy of tax treaties over domestic law

  The Court reaffirmed the well-settled legal principle⁵ that tax treaties, to the extent more beneficial, override the provisions of the ITA.

• Interpretation of the Treaty

  The Court found that DDT, being an additional income tax, squarely falls within the scope of taxes covered under Article 2 of the Treaty. It then examined Article 11 governing dividend income and concluded that all its conditions were met in the present case.

• Overruling precedent

  The Court distinguished its previous ruling in Godrej and Boyce Manufacturing Company Limited, clarifying that the said case was decided in the specific context of disallowance of expenses under section 14A of the ITA and did not determine the nature of DDT in relation to a tax treaty. In contrast, the Court noted that the decision in the case of Tata Tea Company Limited, where it was ruled that DDT is a tax on dividend income, was ignored by the tax department.

This decision brings clarity to the contentious issue of DDT applicability, resolving the ambiguity created by earlier, conflicting rulings pronounced by the Mumbai Tribunal, in the case of Total Oil India Private Ltd. and subsequently, in the case of Polycab India Ltd.⁶ The Tribunal in Total Oil India Private Ltd. had established that DDT, being a tax on the distributing company’s profits rather than the shareholder’s dividend income, fell outside the scope of tax treaties, a position that became the settled law at the Tribunal level. The ruling in the case of Polycab India Ltd. distinguished the Total Oil India Private Ltd. ruling on its specific facts and unsettled the legal position by suggesting that the status of the recipient shareholder could, in certain circumstances, override the levy on the company.

The Court in the Assessee’s case cuts through this confusion by addressing the fundamental nature of the tax itself. This judgment reinforces the supremacy of tax treaties and provides much-needed certainty, ensuring that the tax burden on dividends remains consistent with the negotiated intent of tax treaties. Notably, the jurisprudence established by this decision is already being followed by other forums, as seen in the recent case of Mitsui Kinzoku Components India Pvt. Ltd.⁷ In the said case, the Delhi Tribunal, citing the Assessee’s case, directed the tax authorities to apply the beneficial 10% tax rate under the India-Japan tax treaty for dividends distributed to its Japanese parent company.

However, the Assessee’s case has been appealed by the tax department before the Supreme Court,⁸ and the appeal is pending adjudication. Therefore, the final position on the issue will be subject to the outcome of the Supreme Court’s decision.