Colorcon Asia Pvt. Ltd. Vs JCIT (Bombay High Court)
In appeal against the BFAR ruling, the Bombay High Court examined whether Dividend Distribution Tax (DDT) paid by an Indian company on dividends distributed to its UK parent is governed by Section 115-O alone or is subject to the 10% limitation under Article 11 of the India–UK DTAA. The Court held that BFAR had fundamentally erred in treating dividend as income of the company merely because DDT is collected from it, emphasizing that the character of dividend as shareholder income remains unchanged under Sections 2(22) and 2(24) and as confirmed by the Supreme Court in Tata Tea (2017). Article 11’s conditions were fully satisfied since dividend was paid by an Indian resident company to a UK resident beneficial owner holding a valid TRC, and treaty applicability does not depend on whether tax is actually levied in the shareholder’s hands. The Court concluded that DDT qualifies as “additional income tax” and therefore falls squarely within “taxes covered” under Article 2 of the DTAA. Relying on Azadi Bachao Andolan and Engineering Analysis, the Court reaffirmed that treaty provisions override domestic law where more beneficial and cannot be nullified by unilateral legislative characterization. BFAR’s reliance on the ITAT Special Bench ruling in Total Oil India was held misplaced for ignoring binding Supreme Court jurisprudence and treaty text. Having established that India cannot tax such dividend income at a rate exceeding 10%, the Court set aside the BFAR ruling and held that dividends paid to the UK parent must be taxed at the treaty-mandated 10% rate, with necessary grossing-up.
