Supreme Court To Finally Clarify Tax Character Of Dividend Distribution Tax Under India-UK DTAA

The Supreme Court of India, in JCIT Vs Colorcon Asia Pvt. Ltd., is poised to deliver an authoritative ruling on the true nature of Dividend Distribution Tax (DDT) levied under Section 115-O of the Income Tax Act 1961 and its interaction with the India-UK Double Taxation Avoidance Agreement (DTAA). The dispute has significant implications for cross-border dividend payments, treaty benefits, and the manner in which DDT is to be characterised for non-resident shareholders.

The controversy centres around whether DDT is:

  • A tax on the company’s distributed profits, or
  • A tax on the shareholder’s dividend income, merely collected at the company level for convenience.

The answer to this question will determine whether treaty protection under the India-UK DTAA, specifically Article 11 relating to dividends, can be invoked to limit the rate of DDT on dividends paid to UK-resident shareholders.

Background Of The Dispute

Facts Of The Case Before Bombay High Court

The assessee in this matter is an Indian company, a wholly-owned subsidiary of a UK-resident parent company. During the assessment years 2016-17 to 2019-20, the assessee declared and distributed dividends to its UK holding company and discharged DDT at the rates specified in Section 115-O of the Income Tax Act 1961.

To resolve the treaty-related issues in advance, the assessee approached the Board for Advance Rulings (BFAR). The BFAR concluded that DDT lies outside the purview of the India-UK DTAA and, therefore, the beneficial rate of 10% under Article 11 of the treaty (dividends article) would not apply.

Challenging this conclusion, the assessee approached the Bombay High Court and contended that DDT is in substance a tax on the shareholder’s dividend income, thus falling squarely within the scope of the treaty.

The litigation has given rise to fundamental questions on the nature and treaty treatment of DDT. These questions have now reached the Supreme Court through a special leave petition (SLP) against the Bombay High Court decision in Colorcon Asia Pvt. Ltd. Vs JCIT.

The Supreme Court has formally framed the following substantial questions of law for adjudication:

  1. Nature of DDT under Section 115-O
    Whether tax under Section 115-O on any amount declared, distributed or paid by a company by way of dividend, chargeable to additional income tax, is to be regarded as a tax on distributed profits of the company or a tax on dividend.

  2. Treaty rate cap under India-UK DTAA
    Whether DDT paid by the assessee on dividends (as understood under the India-UK DTAA and the Income Tax Act 1961) remitted to a resident of the UK can be imposed at a rate higher than that allowed under the India-UK DTAA.