Bombay High Court Rules DTAA Supremacy Over Dividend Distribution Tax

 In a landmark development that could have far-reaching implications for multinational groups operating in India, the Hon’ble Bombay High Court has recently delivered a transformative ruling in Colorcon Asia Pvt. Ltd. v. JCIT. For nearly two decades, companies paying dividends to foreign shareholders were required to bear a significant tax cost in the form of Dividend Distribution Tax (DDT) at an effective rate of around 20%. This was so even though India’s tax treaties with many countries such as the UK, USA, Singapore, Netherlands, Germany, etc. which capped India’s right to tax dividends at 10% or 15%. This mismatch created a long-standing dispute: Can a domestic tax collection mechanism (DDT) override the lower tax rates promised under a tax treaty? The Colorcon ruling has now brought unprecedented clarity by holding that treaty benefits cannot be denied simply because India chooses to collect the tax from the company instead of the shareholder. In doing so, the Hon’ble Bombay High Court has reaffirmed a fundamental principle - India’s treaty commitments prevail over domestic machinery provisions when they are more beneficial to the taxpayer.

In the present case, the assessee, an Indian company and a wholly-owned subsidiary of a UK-based entity, distributed dividends to its holding entity and paid DDT at the applicable domestic rate (approx. 20%). The assessee approached the Board for Advance Rulings (BFAR) seeking a ruling that the tax on such dividends should be restricted to 10% as per Article 11 of the India-UK DTAA. The BFAR rejected this plea, relying on the Total Oil ITAT Special Bench decision, which held that DDT is a tax on the company rather than the shareholder, and therefore, the DTAA benefits applicable to shareholders could not be invoked.

The assessee contended that the legislative history of DDT (Section 115-O) clearly indicated that the incidence of tax was shifted from the shareholder to the company solely for "administrative convenience", without altering the fundamental nature of the levy as a tax on dividend income. The assessee argued that the beneficial provisions of the DTAA must override the charging sections of the domestic law. The assessee also argued that under Article 11 of the India–UK DTAA, once a dividend is paid by an Indian resident to a UK resident, the treaty clearly limits the tax to 10%, and this cap applies regardless of whether the tax is collected from the company or the shareholder.

The Hon’ble Bombay High court delivered a clear, far-reaching ruling in favour of the assessee holding that:

· DDT is, in essence, a tax on the shareholder's income, even if collected from the company.
· The tax treaty limits the total tax India can extract from dividend income, regardless of who formally pays it.
· Therefore, revenue authorities cannot charge more than the 10% treaty rate on dividends paid to Colorcon UK.
· Any tax collected beyond the treaty limit violates Section 90(2) and even Article 265 of the Constitution, which prohibits unauthorized tax collection.

This ruling marks a major shift in India’s international tax landscape. By recognizing that DDT is effectively a tax on dividend income and therefore restricted by treaty limits, the Hon’ble Bombay High Court has restored confidence in the sanctity of India’s tax treaties. The judgment sends a strong message that India’s treaty commitments cannot be neutralized by altering the tax collection mechanism. For multinational groups that paid DDT in earlier years, this ruling may unlock substantial refund opportunities and reshape the way historical dividend distributions are viewed. The decision is also expected to influence similar disputes pending across various courts and may ultimately require the Supreme Court’s final affirmation.