ITAT Allows DTAA Benefit on Dividend Distribution Tax as DDT is Tax on Shareholder Income

Metal One Corporation India Private Limited Vs DCIT (ITAT Delhi)

DDT Cannot Exceed Treaty Rate Because Tax Treaty Prevails Over Domestic Law; ITAT Grants Refund Claim on Excess DDT Because Treaty Rate of 10% Applied to Foreign Shareholders; Corporate Club Membership Fees Allowed as Business Expenditure Because Used for Business Purposes; ITAT Rejects Revenue Stand on DDT Because Treaty Protection Applies to Dividend Payments; DTAA Benefit Available on Dividend Distribution Tax Because DDT Covered Within Income Tax.

In , the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) dealt with appeals filed by Metal One Corporation India Private Limited for Assessment Years (AYs) 2017-18 and 2018-19 against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi.

The assessee, engaged in import, export, and trading of steel and allied products, had originally claimed depreciation on goodwill arising from acquisition of the metal division of Mitsubishi Corporation India Limited. The Assessing Officer (AO) disallowed the depreciation claim on the ground that the assessee had not submitted a valuation report and that the additional payment may have related to fair value of assets, non-compete arrangements, or business connections rather than goodwill. The CIT(A), however, allowed the depreciation claim.

During appellate proceedings, the assessee also raised additional grounds concerning Dividend Distribution Tax (DDT) paid under Section 115-O of the Income-tax Act on dividends distributed to non-resident shareholders resident in Japan and Thailand. The assessee argued that under Article 10 of the India-Japan and India-Thailand Double Taxation Avoidance Agreements (DTAAs), tax on dividend income could not exceed 10%, whereas DDT had been paid at an effective rate of 17.304%. Accordingly, the assessee sought refund of the excess amount paid.

Before the CIT(A), the assessee contended that DDT was effectively a tax on shareholder dividend income and therefore treaty rates should apply under Section 90(2) of the Income-tax Act. Reliance was placed on judicial precedents including Tata Tea Co. Ltd., Giesecke & Devrient India Pvt. Ltd., and SGS India Pvt. Ltd. The assessee also argued that domestic law amendments could not override treaty obligations.

The CIT(A) rejected the assessee’s claim. It held that DDT under Section 115-O was a tax levied on the domestic company and not on shareholders. Relying on decisions including Godrej & Boyce Manufacturing Co. Ltd., Infosys BPO Ltd., Reliance Industries Ltd., Torrent Pharmaceuticals Ltd., and Indian Oil Petronas Pvt. Ltd., the CIT(A) concluded that treaty provisions applicable to shareholders could not restrict DDT liability imposed on the company. The CIT(A) also rejected the refund claim under Section 237, observing that DDT was a separate statutory levy on distribution of profits and not tax on the company’s own income.

Before the ITAT, the assessee relied heavily on the Bombay High Court decision in Colorcon Asia Private Ltd., which examined whether DDT paid on dividends distributed to a UK resident shareholder could be restricted to the treaty rate under the India-UK DTAA. The Bombay High Court had held that DDT was, in substance, a tax on dividend income of shareholders, although collected from the distributing company for administrative convenience. The High Court further held that treaty benefits under the DTAA could not be denied merely because the tax was collected from the company. It also observed that Section 90(2) allowed the assessee to apply the more beneficial treaty rate.

The ITAT reproduced substantial portions of the Bombay High Court judgment. The High Court had distinguished the Supreme Court ruling in Godrej & Boyce, stating that the context there related to Section 14A disallowance and not treaty applicability. It further held that DDT was covered within the meaning of “income tax” and fell within the scope of the DTAA. Accordingly, the Bombay High Court concluded that tax on dividends distributed to the UK shareholder could not exceed 10% under the treaty.

Relying on the Bombay High Court decision and subsequent Delhi ITAT rulings in Mitsui Kinzoku Components India Pvt. Ltd. and Intertek India Private Limited, the ITAT allowed the assessee’s grounds relating to DDT for AY 2017-18. Since the facts for AY 2018-19 were identical, the Tribunal applied the same reasoning and allowed the DDT-related ground for that year as well.

For AY 2018-19, the Tribunal also examined disallowance of club membership fees amounting to Rs.15,52,608/-. The AO had treated the expenditure as personal in nature and disallowed it under Section 37. The CIT(A) upheld the addition.

The assessee argued before the ITAT that the issue was covered by several decisions including United Glass Manufacturing Co. Ltd., Nestle India Ltd., Samtel Color Ltd., and other Tribunal rulings. The ITAT referred particularly to the Delhi High Court judgment in Samtel Color Ltd., where expenditure on corporate club membership was held to be incurred wholly and exclusively for business purposes and not capital in nature.

The Tribunal observed that the club memberships were corporate memberships intended for business purposes and did not create any capital asset or enduring profit-making apparatus. It distinguished the decisions relied upon by the Revenue, including Eicher Ltd. and Sayaji Iron & Engineering Co., on factual grounds. Following the Delhi High Court decision in Samtel Color Ltd., the ITAT allowed the assessee’s claim regarding club membership expenditure.

As a result, both appeals filed by the assessee for AYs 2017-18 and 2018-19 were allowed.

FULL TEXT OF THE ORDER OF ITAT DELHI

These appeals are filed by the assessee against the order of Learned Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi[“Ld. CIT(A)”, for short] dated 14.05.2025 for the Assessment Years 2017-18 and 2018-19.

2. Since the issues are common and the appeals are connected, hence the same are heard together and being disposed off by this common order. For the sake of brevity, we are taking the appeal for the Assessment Year 2017-18 as lead case.

3. Brief facts of the case are, assessee is a private limited company engaged in the business of import, export and trading of steel and allied products. Assessee filed is return of income for AY 2017-18 on 29.11.2017 declaring total income of Rs.12,19,83,430/-. The case was selected for scrutiny and statutory notices under section 143(2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) were issued and served on the assessee. In response, assessee filed various details as asked for.

4. After considering the submissions of the assessee, the AO observed that assessee has claimed depreciation on goodwill to the extent of Rs.36,12,964/-. In response, assessee submitted the details of tangible and intangible assets and submitted details of determining goodwill and heavily relied on the decision of CIT vs. Smifs Services Limited 348 ITR 302. The issue under consideration is similar to the issues raised in AYs 2011-12, 2012-13 and 2013-14 and in those assessment years, the claim of the assessee was allowed. After considering the submissions of the assessee, the AO rejected the same and observed that the goodwill is intangible asset but it has to be valued for the purpose of accounting. Assessee has not submitted any valuation report of asset of metal division of Mitsubishi Corporation India Limited, therefore, the above additional payment has not been made on account of goodwill. He further observed that the additional payment could have made on account of fair value of assets or on account of non-compete clause or on account of close connection between the assessee and the selling company. With the above observation, he disallowed the claim made by the assessee.

5. Aggrieved with the above order, assessee preferred an appeal before the NFAC, Delhi. After considering the detailed submissions of the assessee, ld. CIT (A) allowed the claim of the assessee. Before ld. CIT (A) assessee has raised additional grounds of appeal on the issue of benefit applicable under Double Taxation Avoidance Agreement between India and Japan qua the rate of tax on payments of dividends to the shareholders. This issue was elaborately dealt by ld. CIT (A) at pages 33 to 37 of the appellate order and he dismissed the additional grounds raised by the assessee as per above discussion.

6. Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal :-

“Ground 1: That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not allowing claim of the Appellant and not appreciating that Dividend Distribution Tax (“DDT”) is a tax on the dividend income of the shareholders and hence, the tax rate on the dividend distributed by the Appellant to its shareholders (residents of Japan and Thailand) should be governed by Article 10 of the India-Japan DTAA and India-Thailand OTAA.

Ground 1.2: That the Ld. CIT(A) has erred in not appreciating that in terms of section 90(2) of the Act, the dividends distributed by the Appellant to the non­resident shareholders are taxable at 10% as per the rate prescribed under the relevant DTAA as against effective tax rate of 20.36% provided under section 115-0 of the Act and the Appellant is entitled to a refund of the differential amount paid in excess i.e. INR 79,78,182.

Ground 1.3: That the Ld. CIT(A) has erred in not adjudicating as per the provisions of Section 237 of the Act read with Article 265 of the Constitution of India which states that only legitimate tax should have been retained.”

7. At the time of hearing, ld. AR of the assessee brought to our notice the issue raised by the assessee before ld. CIT (A) at page 3 of the appellate order and further he brought to our notice page 18 of the appellate order and brought to our notice detailed submissions made by the assessee. Further he brought to our notice findings of the ld. CIT (A) at page 33 of the appellate order. For the sake of brevity, we reproduce the same :-

“6. Adjudication: I carefully considered the submission of the appellant in view of the relevant provisions of the Income Tax Act, Double Tax Avoidance Agreements between India and Japan, and India and Thailand. Also perused and considered carefully the judicial precedence referred by the appellant.

6.1.1. The appellant is a company incorporated under the Companies Act, 1956, and is a wholly owned subsidiary of Metal One Corporation, Japan (MOC Japan). The appellant began operations on June 1, 2008. During FY 2016-17 relevant to the assessment under reference, the appellant distributed a total dividend of Rs.8,62,82,925/- to its two non-resident shareholders i.e. MOC Japan (Rs.8,62,81,199) and Metal One (Thailand) Co. Ltd. (Rs.1,726/-). On the total dividend distributed, the appellant paid Dividend Distribution Tax (DDT) amounting to Rs.1,75,65,173/- at the effective rate of 17.304% (including surcharge and cess) as required under section 115-0 of the Income Tax Act, 1961. Supporting documents such as financial statements, the return of income, and Form 26AS evidencing the payment of DDT have been submitted by the appellant.

6.1.2. The appellant has further submitted that both shareholders are non­resident companies and are tax residents of Japan and Thailand respectively. They are beneficial owners of the dividend income and are eligible for benefits under the India-Japan DTAA and India-Thailand DTAA. The appellant argues that DOT paid exceeds the maximum tax rate of 10% allowed under Article 10(2) of both India-Japan and India-Thailand DTAAs. Therefore, the excess DDT paid should be refunded. Accordingly, the appellant has claimed refund of Rs.79,78,182/-. The key argument is that by virtue of section 90(2) of the Act, DTAA provisions prevail where they are more beneficial than domestic law. Thus, the maximum DDT payable should be capped at 10% under the relevant treaties, not the 17.304% charged under the Act.

6.1.3. The appellant has argued that as per section 2(43) and the judicial pronouncement by the Hon’ble Supreme Court in the case of Tata Tea Co. Ltd (398 ITR 260), DOT is a form of “income-tax”. The appellant further argues, relying on Godrej & Boyce (328 ITR 81) and CSDT Circulars, that DOT is effectively a tax on shareholders’ income, merely collected from the distributing company. The appellant relies on the judgement of Hon’ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan (263 ITR 706) and CSDT Circular No. 333 (dated 2.4.1982) to assert that where a DTAA provides a beneficial rate of tax at 10% on dividends under Article 10(2), it will override the domestic provision i.e., section 115-0 levying 17.304%. The appellant has contended that the India-Japan DTAA was signed in 1990, whereas section 115-0 was introduced in 1997. Domestic laws cannot override treaty obligations. Citing the case law New Skies Satellites (382 ITR 114) (Delhi HC), the appellant argued that a treaty’s provisions cannot be unilaterally altered by amendments in the Act. The appellant relies on the Delhi ITAT decision in the case of Giesecke & Devrient India Pvt. Ltd. (2020) 120 taxmann.com 338 which accepted similar claims of refund on excess DOT paid on dividends to a non-resident shareholder, citing treaty benefits. It also relies on Hon’ble ITAT, Mumbai in the case of SGS India Pvt. Ltd. (83 taxmann.com 163),wherein it has been held that the benefit of Article 10 of the DTAA between India and Switzerland must be examined even where DOT is paid by the Indian company.

6.1.4. The appellant also contends that Section 115-0(1) clearly states that DDT is payable on dividends declared, distributed, or paid by domestic companies. Section 115-0(4) specifies that this tax is final in respect of such dividend and not further creditable. The appellant submits that this tax, although paid by the company, is fundamentally a tax on dividend income of the shareholder, not the distributing company’s own income. The Hon’ble SC observed in Tata Tea Case(supra) that dividend is a part of “income” within the meaning of Entry 82, List I of the Constitution and hence DOT falls within “tax on income”. The judgment also reinforces that the income tax character remains attached to the dividend in the hands of the shareholder despite DOT being paid by the company.

6.1.5. Regarding Implication of the Treaty the appellant has stated that as per Article 10(2) of the DTAAs with Japan and Thailand, India’s right to tax dividend income of non-residents is capped at 10%. Levying DDT at 17.304%,is a breach of treaty obligation. Section 90(2) mandates application of the more beneficial DTAA rate, making the higher DOT collected ultra vires. In view of the above the appellant has requested that excess DDT paid, it is entitled to a refund of Rs.79,78,182/- for AY 2017-18.

6.2.1. The appellant has challenged the levy of Dividend Distribution Tax (DDT) under section 115-0 of the Income-tax Act, 1961 at an effective rate of 17.304%, claiming that such levy is contrary to Article 10(2) of the India-Japan and India-Thailand Double Taxation Avoidance Agreements, which caps tax on dividend income at 10%. It is the contention of the appellant that since the shareholders are tax residents of Japan and Thailand, the tax rate applicable to dividend income should not exceed the rate prescribed under the respective DT AAs. Consequently, the appellant has sought refund of the excess DDT paid.

6.2.2. After careful consideration of the submissions made by the appellant and the relevant legal provisions, I do not find merit in the appellant’s claim for the reasons that DDT under section 115-0 is a tax levied on the company and not on the shareholders. This position has been affirmed by the Hon’ble Supreme Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT [(2017) 394 ITR 449 (SC)], where the Court held that:

“The tax under section 115-0 is a tax on the company and not on the recipient shareholder. Hence, it cannot be considered as tax paid on behalf of the shareholder.”

This principle was reaffirmed by the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. v. DCIT [(2010) 328 ITR 81 (Born.)], wherein the Court clearly distinguished DDT as a tax levied on the distribution of profits by the company and not on the receipt of income by the shareholder. Thus, Article 10 of the DT AA, which seeks to limit taxation in the hands of the shareholder, cannot be applied to a tax liability that arises exclusively in the hands of the company under domestic law.

6.2.3. Section 90(2) of the Act allows an assessee to opt for the provisions of the DTAA only “in relation to the assessee” and “in respect of income”. In the present case, the DDT is levied on the appellant company, and not on its shareholders. The appellant has misinterpreted the fact that the DDT has been levied on the dividend income of its non-resident shareholders. The shareholders being non­residents are not being directly taxed on the dividend income in India, as such income is exempt in their hands under section 10(34) of the Act, as applicable during the relevant assessment year. This position was upheld by the Hon’ble Karnataka High Court in the case of Infosys BPO Ltd. v. DCIT [(2020) 429 ITR 346 (Kar)], where the Court observed:

“Section 115-0 imposes tax liability on the domestic company paying the dividend. Therefore, provisions of DTAA between India and the country of residence of the shareholder are not attracted for determining the DOT liability of the Indian company.”

Similarly, the Mumbai ITAT in the case of Reliance Industries Ltd. v. DCIT [(2018) 96 taxmann.com 586] held that:

“Tax under section 115-0 is not covered under the DTAA as it is a tax levied on the company and not on the shareholder.”

6.2.4. The appellant’s contention that DDT should be subject to DTAA restrictions on the ground that it represents tax on shareholder’s income is misconceived. Even assuming that DDT is economically borne on account of shareholder income, the legal incidence lies solely on the domestic company. The Supreme Court in the case of CIT v. Clariant India Ltd. [(2009) 319 ITR 587 (SC)] held that tax treaties cannot be applied to taxes not levied on the non-resident person. Further, the Delhi High Court in the case of New Skies Satellite BV v. ADIT [(2016) 382 ITR 114 (Del.)] clarified that treaties cannot be interpreted to apply to domestic levies that are not within the scope of the treaty terms. Reliance is placed on the decisions of ITAT, Ahmedabad in the case of Torrent Pharmaceuticals Ltd. v. DCIT (2023) 152 taxmann.com 161 wherein it is held that DOT is not tax on income of non-resident shareholder and, hence, Article 10 of DTAA is not applicable. Relying his also on the decision of ITAT, Mumbai in the case of Indian Oil Petronas Pvt. Ltd. v. ITO (2023) 151 taxmann.com 238 wherein Hon’ble bench upheld the Revenue’s stand that DDT is a domestic tax on company and DTAA provisions cannot be invoked.

6.2.5. The appellant’s claim for refund under section 237 is also not accepted. The provision contemplates refund is allowed only when an assessee has paid excess tax on its own income. Since DDT is levied on the company as a separate statutory charge on distribution of profits, and not on its own income, there is no question of any excess payment vis-a-vis the appellant’s own assessed income.

6.2.6. In view of the above factual and legal discussion, I am of the considered opinion that the claim of credit under the provision of DT AA with Japan-Thailand on account of Dividend Distribution Tax paid by the appellant is not justified. Therefore, the additional grounds (i.e. ground no. 5, 5.1, 5.2, 5.3. and 5.4.) raised by the appellant during the appellate proceedings is dismissed and not allowed.”

8. Further ld. AR brought to our notice page 242 of the case law paper book which is the order of Hon’ble Bombay High Court in the case of M/s. Colorcon Asia Private Ltd. in Tax Appeal No.5/2024 dated 28.11.2025. He brought to our notice pages 256 to 258 of the case law paper book wherein ld. DR has made elaborate submissions before the Hon’ble High Court. Further he brought to our notice page 263 of the case laws paper book wherein Hon’ble High Court has reproduced detailed submissions made by the assessee on the issue of Dividend Distribution Tax u/s 115-0 and whether the assessee can take the benefit under Double Taxation Avoidance Agreement with regard to rate of tax applicable on Dividend Distribution Tax. He further brought to our notice discussion of the issue under consideration in para 26 of the above order wherein similar issue was discussed. Finally, he brought to our notice page 302 of the case laws paper book wherein Hon’ble High Court gave a detailed findings from paras 55 to 61 and they finally held that assessee is entitled to restrict the tax rate on Dividend Distribution by it to M/s. Colorcon Asia Private Ltd. UK at 10% under Article 11 of the Indo UK Tax Treaty and they specially held that Dividend Distribution Tax is a tax on shareholder. He further submitted that Hon’ble High Court has elaborately considered and discussed Special Bench decision of ITAT in the case of DCIT vs. Total Oil India (P.) Ltd. (2025) 176 taxmann.com 186. Further, he heavily relied on the decision of coordinate Bench in the case of Mitsui Kinzoku Components India Pvt. Ltd. in ITA Nos.3910/Del/2024 & Ors. dated 31.12.2025 (Delhi ITAT) and Intertek India Private Limited in ITA Nos.2903/De1/2025 and 2904/De1/2025 dated 7^th January 2026 (Delhi ITAT).

9. On the other hand, ld. DR for the Revenue submitted that the issue of Dividend Distribution Tax was not informed by the assessee before AO and the AO has only dealt the issue of accounting of goodwill and depreciation claimed by the assessee. In this regard, he heavily relied on the findings of ld. CIT (A) at pages 34 to 37 of the appellate order.

10. Considered the rival submissions and material placed on record. We observed that assessee has raised the issue of Dividend Distribution Tax under Income-tax Act and Double Taxation Avoidance Agreement between India and Japan, assessee has distributed total dividend of Rs.8,62,82,925/-to its two non-residential shareholders. On the total dividend distributed, the assessee has paid Dividend Distribution Tax amounting to Rs.1,75,65,173/-at the effective rate of 17.304% as required under section 115-0 of the Act. Further assessee submitted that both the shareholders are non-resident and are taxpayers of Japan and Thailand. They are beneficial owner of dividend income and eligible for benefit under DTAA under India Japan Treaty and India Thailand Treaty. We noticed that exact claim of the assessee in the present appeal is considered by Hon’ble Bombay High Court in the case of M/s. Colorcon Asia Private Ltd. (supra) and the detailed findings of Hon’ble High Court is reproduced below :-

“55 We find ourself fortified by the observation of Delhi Tribunal in Giesecke & Devrient Ltd. (supra), where with reference to the legislative history of Section 115-0, it emerges with clarity, that DDT, is a levy on the dividend distributed by payer company, being an additional tax is covered within ‘Tax’ as defined in Section 2(43) of Act and, hence, is chargeable as per Section 4, which is subject to other provisions, which include Section 90 and sub-clause (2) thereof, then specially in case of Avoidance of Double Tax, the provisions more beneficial to assessee must be preferred. Considering that the international treaties involve extensive negotiations between two nations, and definitely being conscious of the respective Nation’s power to tax, the benefits and detriments of a treaty and particularly a double tax treaty and its avoidance, can only be reciprocal when the low of trade and investment between treaty partners rests on balance and it is not allowed for one treaty partner to secure benefit to detriment of other. When a treaty is entered into, it is expected to have considered its impact on trade and investment and since it is mutual arrangement, it must be given full effect to and merely because there are unilateral amendments made on domestic front, the treaty cannot be made ineffective by construing the same in light of domestic law. The Parliament, is not within its power to change the terms of a bilateral treaty, which is a result of negotiated economic bargain between India and UK. A party may not follow the treaty, it may choose to renege from its obligations thereunder, but it cannot amend the treaty on the guise of its domestic law, having undergone change. Amendments to domestic law, cannot be read into treaty provisions, without amending Treaty itself. Since it is necessary for the contracting party to fulfill their obligations under a Treaty in good faith and this includes its accountability under it and act in a manner, not to defeat its purpose and object, we find that the benefit accruing under the DTAA, and Article 11 thereof, cannot be denied as Revenue is of the opinion that the Treaty do not cover ‘Dividend’ or it is not applicable to a domestic company.

56 In Tata Tea Company (supra), while pronouncing upon the constitutional validity of Section 115-0 of the Act of 1961, which is a provision for declaration, distribution or payment of dividend by domestic company and imposition of additional tax on dividend, it is held by the Apex Court that the source of the income may be agriculture, but when dividend is declared to be distributed and paid to shareholder of a company, its source is not relevant, as it remains dividend income. Nor does the fact that it is share of the company’s profit, is held to be interfere with character of profit, from which it reaches hands of shareholder.

57 BFAR has based its decision on the definitional and conceptual framework of DDT holding that if it paid by the petitioner to its shareholder, it falls outside scope of DTAA as, (a) Dividend is an amount declared, distributed or paid by the Domestic Company out of the current or accumulated profits; (b) Dividend is additional income tax payable over and above the income tax chargeable in respect in total income of such company. BFAR has concluded that incidence of tax under Section 115-0 is only upon domestic company and not shareholder i.e. Colorcon U.K. and DTAA is not triggered and, therefore, there is no question of its being taxed @ 10% as per DTAA. It also render a fmding that Article 11(2) is not triggered at all, as there is no mutual agreement settling the mode of application of tax rates.

On perusal of the impugned Ruling by BFAR and on its detail analysis, according to us BFAR has failed to appreciate that section 4 of the Act of 1961 levies income-tax, including additional income tax, in respect of the ‘total income’ of the previous year of every person. Thus, it is the earning of the ‘income’ that attracts the charge. ‘Income’ has been denied under Section 2(24) of the Act to include ‘dividend’. Therefore, the Authority has erred in not appreciating that Section 115-0 levies additional tax on the company on the “amounts declared, distributed or paid by way of dividends “. According to us, the declaration, distribution or payment of dividend by company cannot in any manner be regarded as ‘income ‘ of the company distributing the dividend. Even Section 2(24) has not been amended by the Legislature inasmuch as regarding the “amounts declared, distributed or paid by way of dividends” as “income” of the company distributing dividends. Moreover, the Hon’ble Supreme Court in UOI v. Tata Tea Co. Ltd. (supra), has, in no uncertain words, held that “income as denied in Section 2(24) of the 1961, Act is the inclusive definition including specifically ‘dividend’ and that “section 115-0 pertain to declaration, distribution or payment of dividend by company and imposition of additional tax on dividend is thus clearly covered by subject as embraced by Entry 82 ” . Once the Hon’ble Supreme Court has held that dividend connotes ‘ income ‘, the natural corollary is that as per section 4, the said income should be chargeable to tax in the hands of the person earning such income. However, from a combined reading of Section 115-0 and 10(34), alongwith the legislative history narrated earlier, it is evident that DDT is a tax on the dividend income of the shareholder, though the incidence of tax has shifted from the shareholder to the company paying the dividend. Any other interpretation of the provisions will render the section 115-0 of the Act unconstitutional as it will fall foul of Entry 82, since what is sought to be taxed by the Respondent is not ‘income’ of the company.

58 The Board of Advanced Ruling has further failed to appreciate that in view of the statutory provisions and legislative background of Section 115-0 of the Act, DDT paid by a company distributing dividend is not an income tax on profits or income of the company, but, is a tax on the dividend, which is income of the shareholder of the company. Hence, DDT is tax on the dividend income of the shareholder, which is merely, for administrative convenience, charged in the hands of, and recovered from the company distributing dividend. There is no denying that dividend income is not chargeable to tax and is exempt in the hands of the shareholders in light of the provisions of Section 10(34) of the Act, since the burden of taxation has been shifted to the company distributing the dividend, from the shareholder. While the DDT is a tax payable by the company, and not the shareholders, in pith and substance, it is a tax on dividends that is income of the shareholders.

59 We must also note that BFAR has grossly erred in rejecting the distinction and has failed to consider the binding dictum of the Apex Court in Tata Tea (supra) and on the other hand its reliance upon Godrej and Boyce (supra) is misplaced. The decision in Godrej & Boyce was rendered on an issue as to whether expenses incurred in relation to earning an exempt income by way of dividend was to be disallowed under Section 14A of the Act. The Assessee argued that dividend income could not be treated as ‘exempt’ as the income suffered tax under Section 115-0 in hands of the company distributing dividend. It was argued that DDT under Section 115-0 was nothing but tax paid on behalf of the shareholder and such income which had attracted tax could not be said to be `exempt’. The conclusion was therefore arrived that Section 14-A of the Act would apply to dividend income on which tax is payable under Section 115-0 of the Act. The decision in Godrej & Boyce is, therefore, in a completely different context as the issue before the Court was whether the dividend income not forming part of shareholders income attract Section 14-A qua the shareholder, but the issue before the BFAR was as to what could be taxed under Section 115-0 and the answer is to be found in Tata Tea Company Ltd. (supra), where it is held that DDT is a tax on dividend income of shareholder and it would fall in Entry 82 of the Union List.

Further reliance on decision by special bench in Tata Oil is also not well founded as the Apex Court in Godrej & Boyce observed that even if it assumed that the additional income tax under the aforesaid provision is on the dividend and not on the distributed profits of the dividend paying company, it would not have made any material difference to the applicability of Section 14-A.

The BFAR also erred in not appreciating that as per Section 90(2) of the Income Tax , the provision of DTAA would prevail over the domestic law to the extent they are more beneficial to the assessee who is subjected to tax in India and as per Article 1 of the DTAA, it shall apply to the persons who are residents of one or both of the Contracting States. Further, Article 2 of the Treaty apply in respect of income tax and also to any identical or substantially similar taxes which are imposed after DTAA is brought into force.

Since DDT is an ‘Income Tax’ as per the provisions of the Act, it definitely fall within ambit of Article 2 of DTAA as income tax includes surcharge and dividend and Article 2 (2) clearly apply to any identical or substantially similar tax in addition to or in place of tax. DDT is squarely covered under Article 11 of the DTAA. On its plain reading the payment being covered under definition of dividend under Article 11(3) which is paid by the Company, resident of India to a resident of UK and therefore, in our view, Article 11(1) is automatically triggered, consequently triggering the restriction in rate of tax under Article 11(2).

60. Thus, the BFAR erred in not appreciating that the tax under Section 115-0 is an additional tax under its sub section (4) which in turn is a part of the Income tax statute and legislation subject to section 90 read with the relevant DTAA. Therefore, levy of tax on dividend paid/distributed by the Appellant in excess of 10% would squarely be contrary to the provision of India- UK DTAA.

The BFAR therefore erred in overlooking the settled legal principle that with respect to taxability of dividend income tax under India-UK DTAA, Article 11 allocates the taxing rights between the two contracting states. Para 1 thereof gives the primary right to tax dividend income to the state of residence. However, para 2 entitles the source state to tax the dividend paid in accordance with its domestic laws, but imposes a fetter viz. the tax so charged cannot exceed the rate of 10% under Article 11(2)(b) if the resident of UK is the beneficial owner of the dividend in all cases other than the case falling under Article 11(2)(a) where dividend is being paid out of income derived directly or indirectly from immovable properties, subject to such income from immovable property being exempt from tax. Article 11 therefore, restricts the right of India, as a source State, to levy tax in accordance with its domestic laws, that is, Section 115-0, but instead of the rate prescribed for therein, the tax has to be levied at the minimum rate of 10% to the extent the dividend is paid to a resident of UK. The BFAR erred in holding the respondent’s submission by merely following the special bench’s ruling stating that in order to invoke Article 11, the shareholder has to be taxed in India on the dividend earned from India. 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 a 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 entire legislative history of Section 115-0 corroborates this. More importantly, the Apex Court in the case of Tata Tea (supra) too has confirmed the nature of income being dividend income, which is subject to DDT and under Section 115-0 the dividend income is sought to be taxed at a rate of 20.36%.

Section 90(2) of the Act of 1961 allow the appellant to apply the lower rate under the DTAA and Article 11(2) restrict tax rate of such dividend income to 10% and there is no embargo in Article 11 of the DTAA on the Appellant to apply the lower tax rate stipulated in Article 11(2).

61 In the wake of the above, the Authority has erred in not appreciating that DDT erroneously collected in excess of 10% as provided by India-UK DTAA is erroneous and contrary to law and retention of excess tax would be contrary to Article 265 of the Constitution of India.

As a result of the above, the Appeal is allowed by setting aside the Ruling dated 27/06/2024 passed by the Board For Advanced Rulings, New Delhi, by declaring that, on the facts and circumstances of the case and in law, Colorcon Asia Pvt. Ltd (“Colorcon India” or “the Applicant” or “Company”) is entitled to restrict the tax rate on dividends distributed by it to Colorcon Ltd, United Kingdom (UK), at 10% under Article 11 of the India UK Tax Treaty.

11. Further we observed that coordinate Bench in the case of Mitsui Kinzoku Components India Pvt. Ltd. (supra) had relied on the decision of Hon’ble Bombay High Court and decided in favour of the assessee. Respectfully following the above detailed findings of Hon’ble Bombay High Court, we are inclined to allow the grounds raised by the assessee in the present appeal.

12. In the result, the appeal filed by the assessee for AY 2017-18 is allowed.

13. In AY 2018-19, the assessee has raised two grounds. First ground is with regard to Dividend Distribution Tax (DDT ). Since the facts relating to this ground in AY 2017-18 are exactly similar to Assessment Year 2018-19, our above findings in AY 2017-18 are applicable mutatis mutandis in Assessment Year 2018-19. Accordingly, ground no.1 raised by the assessee in AY 2018-19 is allowed.

14. With regard to another ground related to disallowance of club membership fees, during assessment proceedings, the AO observed that as per the audit report, assessee has taken various club membership for Rs.15,52,608/- and according to him, which are of personal nature. Assessee was asked to explain why the above expenditure should not be disallowed as personal expenses. In response, assessee has filed detailed submissions which is reproduced at para 6 of the assessment order. After considering the above submissions, the AO rejected the same and proceeded to make the addition u/s 37 of the Act.

15. Aggrieved with the above order, assessee preferred an appeal before the NFAC, Delhi and filed detailed submissions before ld. CIT (A) and the same is reproduced at pages 17 to 21 of the appellate order. After considering the above submissions, ld. CIT (A) sustained the addition by relying on certain decisions which are discussed at pages 21 to 22 of the appellate order.

16. Aggrieved with the above order, assessee is in appeal before us.

17. At the time of hearing, ld. AR of the assessee submitted that the issue under consideration is squarely covered in the following decisions :-

“1. United Glass Mfg. Co. Ltd. (CA NOS. 6447 TO 6449 OF 2012) dated 12 September 2012 (Hon. Supreme Court)

2. Nestle India Ltd. (ITA NO. 1488 OF 2006) dated 25 April 2007 (Delhi High Court)

3. Samtel Color Ltd (IT A NO. 1152 OF 2008) dated 30 January, 2009 (Delhi High Court)

4. Nijhawan Travel Services (P.) Ltd (ITA NO. 4296 (Delhi) of 2019) dated 25 April 2025 (Delhi ITAT)

5. Punjab National Bank (ITA No. 49631De112024) dated 1 May 2025 (Delhi ITAT)

6. Cherry Hill Interiors Pvt. Ltd. (ITA No. 17791De1/20 19) dated 28 June 2023 (Delhi ITA T)

7. WSP Consultants India (P.) Ltd. (ITA Nos. 2939 AND 2940 (Delhi) of 2018) dated 22 February 2022 (Delhi ITAT)

8. IL & FS Transportation Networks (ITA Nos.2927 & 2928/Mum/2018) dated 28 January 2021 (Mumbai ITAT)

18. On the other hand, ld. DR of the Revenue brought to our attention para 5 of the ld. CIT (A) order and also relied on the decision of Hon’ble Delhi High Court in CIT vs. Eicher Ltd. 294 ITR 310 (Del.) and Hon’ble Gujarat High Court in Sayaji Iron & Engg. Co. Vs. CIT 253 ITR 749 (Gujarat High Court)

19. Considered the rival submissions and material placed on record. We observed that Assessing Officer had disallowed the club membership expenses treating the same as personal expenses. However, in the case of CTI vs. Samtel Color Ltd (supra), the Hon’ble Delhi High Court decided the above issue in favour of the assessee and held as under :-

5. Having heard the learned counsel for the revenue as well as the assessee we are of the view that the impugned judgment of the Tribunal deserves to be upheld for the following reasons:-

“5.1 The expenditure incurred towards admission fee, admittedly, was towards corporate membership. As correctly held by the Tribunal, the nature of the expenditure was one for the benefit of the assessee. The ‘business purpose’ basis adopted for eligibility of expenditure under section 37 of the Act was the correct approach. This is more so in view of the Tribunal’s findings that it was the assessee which nominated the employee who would avail the benefit of the corporate membership given to the assessee.

5.2 The other hurdle for qualification of the expenditure under section 37 of the Act is that expenditure incurred should not be on capital account. The Assessing Officer came to the conclusion that the expenditure was of a capital nature based on a fallacious reasoning that the expenditure was of an enduring nature and hence on a capital account. It is well-settled that an expenditure which gives enduring benefit is by itself not conclusive as regards the nature of the expenditure. We may add that even lump sum payment, which was the case in the instant matter, is not decisive as regards the nature of the payment. See observations in Empire Jute Co Ltd. v. CIT [1980] 124 ITR 1 (SC) as also the judgment of the Division Bench of this Court in CIT v. J.K. Synthetics Ltd. [2009] 176 Taxman 355. The true test for qualification of expenditure under section 37 of the Act is that it should be incurred wholly and exclusively for the purposes of business and the expenditure should not be towards capital account. In the instant case, as discussed above, the admission fee paid towards corporate membership is an expenditure incurred wholly and exclusively for the purposes of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprise.

5.3 To support the revenue’s contention that the impugned expenditure is on capital account the learned counsel, Ms. Prem Lata Bansal has cited the judgment of the Framatone Connector OEN Ltd. v. Dy. CIT [2006] 157 Taxman 116 (Ker.). The said judgment is based on the Supreme Court judgment in the case of Punjab State Industrial Development Corpn. Ltd. v. CIT [1997] 225 ITR 792. The judgment of the Supreme Court on which the Kerala High Court has relied heavily dealt with the issue with regard to fee paid to the Registrar of Companies for increase of authorised capital, that is, whether such an expense was in the nature of revenue or capital expenditure. The Supreme Court came to the conclusion that since the fee was paid to – the Registrar of Companies for increase in the capital base of the assessee it was in the nature of capital expenditure. According to us the ratio of the afore-mentioned Supreme Court judgment is not applicable to the expenses incurred on an admission fee for corporate membership. We respectfully disagree with the ratio of the judgment of the Kerala High Court. In turn, we respectfully follow the ratio of the judgment of the Division Bench of this Court in CIT v. Nestle India Ltd. [2008] 296 ITR 682 and that of the Bombay High Court in the case of Otis Elevator Co. (India) Ltd. v. CIT [1992] 195 ITR 682.

6. In view of the above, in the aforesaid circumstances we are of the opinion that the impugned judgment as indicated above, deserves to be upheld. In the result, the appeal is dismissed.”

20. With regard to case laws relied by the ld. DR of the Revenue, we observed that the facts in the Eicher Ltd. (supra) are distinguishable to the facts in the present case. With regard to the decision in the case of Sayaji Iron & Engg. Co. (supra), we observed that the issue involved relating to vehicle maintenance expenses, which were given to its employees. In our view, there is direct decision from the Hon’ble High Court on the exact same issue, the same has to be followed. Respectfully following the decision of Hon’ble Delhi High Court, we are inclined to decide the issue under consideration in favour of the assessee. Accordingly, ground raised by the assessee is allowed.

21. In the result, both the appeals filed by the assessee are allowed.

Order pronounced in the open court on this 8^th day of May, 2026.