Dividends, DDT and DTAA: An analysis on first principles

Article originally published on Taxsutra.
Co-authored by Mr. Ronak Doshi (Partner, Bansi S. Mehta & Co.) & Adv Yogesh Malpani.

1. Prologue

1.1. India’s dividend taxation regime has seen repeated flip-flops between the classical system of taxation, where dividends were taxed in the hands of the shareholder, to the Dividend Distribution Tax (‘DDT’) regime, where additional tax on dividends/distributed profits was levied on the company. The DDT regime was introduced in 1997 by inserting section 115-O under the Income-tax Act, 1961 (‘the Act’). It was later abolished in 2002, only to be reintroduced in 2003. After going through some amendments along the way, the DDT regime was abolished again in 2020, marking the homecoming of the classical system.

1.2. However, the DDT regime left behind a contentious issue as to the rate of DDT when dividends are paid to non-resident shareholders. In short, whether DDT would apply at the rate provided under section 115-O or the lower rate of tax on dividends prescribed under the applicable Double Taxation Avoidance Agreement (‘DTAA’). This fuelled refund claims for ‘excess’ DDT paid over and above DTAA rates.

1.3. While certain rulings of the Hon’ble Tribunal[1] held that the lower DTAA dividend tax rate would override the 115-O rate, the Hon’ble Special Bench of the Tribunal in the case of Total Oil[2] decided the controversy in favour of the Revenue, holding that DDT would be payable at 115-O rate only. The Special Bench essentially held that DDT is a tax on the company, and it is not paid on behalf of the shareholders; consequently, the domestic company or section 115-O does not enter the domain of the DTAA.

1.4. Recently, the controversy reached the Hon’ble Bombay High Court in the case of Colorcon[3]. The appeal before the High Court was filed by the assessee challenging a ruling of the BFAR[4] which, relying upon Total Oil, held that DDT paid by the assessee company to a UK resident company would be chargeable at 115-O rate, and not the beneficial rate of 10% under the India-UK DTAA.

1.5. The Hon’ble High Court pronounced a landmark decision reversing the ruling of the BFAR and overruling Total Oil, holding that DDT is ultimately a tax on dividend, irrespective of who pays it, and therefore, the treaty provisions restricting the rate of tax on dividends at 10% would override the 115-O rate.

1.6. Interestingly, substantially similar arguments were advanced and same key precedents were relied upon by both sides in Total Oil as well as Colorcon. The divergence in the outcome, so to say, seems to be a result of the approach adopted:

• In Total Oil, the Special Bench premised its analysis on the provisions of the Act to reach a conclusion that DDT would not fall within the purview of the DTAA, since it is not a tax paid on behalf of the non-resident shareholder;

• In Colorcon, on the other hand, the High Court premised its analysis on the provisions of the DTAA to reach a conclusion that the DTAA does cover DDT within its purview, since DDT is ultimately a tax on dividend. The High Court adopted a simplistic approach of examining the nature of income (i.e., dividend) and the right to tax the same as agreed between both the States, and not who is taxed or on whose behalf such tax is levied.

1.7. Instead of dissecting the aforesaid rulings, this article makes a humble attempt to decipher the controversy threadbare on first principles, not necessarily in the sequence of the relevant provisions of the Act or the DTAA, but in a waterfall manner. The discussion considers the provisions of the India-UK DTAA and begins with the following preliminary question:

2. How does the DTAA allocate taxation rights over dividend?

2.1. The taxation of dividends under the India-UK DTAA is governed by Article 11. The relevant extract of the same is reproduced below, contextualized to the present facts for ease of reference:

2.2. When an Indian company pays dividend to a UK resident shareholder, Article 11(1) allocates the primary right of taxation over such ‘dividend’ to the UK. However, Article 11(2) confers a concurrent right of taxation also to India, albeit with a restriction that the tax shall not exceed, inter alia, 10% of the gross amount of dividend, if the beneficial owner of the dividend is a UK resident.

2.3. A plain reading of Article 11 makes it manifest that it addresses the taxation of ‘dividends’ simpliciter, neither specifying the modality of taxing the same, nor in whose hands the tax may ultimately be levied. In fact, the phrase “and according to the laws of India” suggests that this provision leaves it to the legislative freedom of India to determine the manner and incidence of taxation of ‘dividends’, which suggests making way for both, the classical system as well as the DDT regime. The phrase “and according to the laws of India”, thus, has to be given full effect to.

2.4. DDT under section 115-O, as stated hereinabove, is technically an additional tax on the company declaring the dividends. However, when Article 11(2) states that the provisions of this paragraph shall not affect “the taxation of the company in respect of the profits out of which the dividends are paid”, it does not, by any means, refer to DDT. It essentially clarifies that the treaty restriction on dividend tax rate does not impact the corporate tax rate applicable to the company (ref: OECD commentary on Article 10, Para 13). In fact, the language of the phrase itself supports this view, as it does not refer to taxability of “amount distributed as dividends out of the company’s profits”[5], but the taxability of the company’s “profits”, “out of which”, “the dividends are paid”.

2.5. In essence, since Article 11(2) deals with tax on dividends simpliciter, it is not relevant to analyse whether DDT is a tax on the ‘shareholder’ or the ‘company’. To determine whether Article 11(2) covers DDT within its purview, the pivotal question is:

3. Whether DDT is a tax on ‘dividend’?

3.1. The answer to this question speaks itself out on a bare perusal of section 115-O, relevant extract of which is reproduced hereunder:

3.2. Thus, apart from other textual cues, when section 115-O says; a) any amount declared/distributed/paid as ‘dividend’ shall be charged to additional income-tax; and b) such tax shall be treated as “final payment of tax” in respect of such ‘dividend’, it propounds beyond any doubt that DDT is, in fact, a tax on dividend and therefore, the same is subject to the provisions of Article 11(2).

3.3. While this conclusion based on the plain language should obviate the need to refer to the legislative history or judicial precedents, the sheer intricacy of the issue and divergent conclusions drawn from the judicial precedents warrant a brief examination of the same:

(i) The explanatory memorandums to various Finance Bills introducing/reintroducing section 115-O and budget speeches clearly emphasise the legislative viewpoint of treating dividend as an income of the shareholder only, albeit the incidence of tax is shifted upon the company for administrative convenience (ref: Paras 22-26 of Colorcon);

(ii) The Hon’ble Supreme Court’s judgement in Tata Tea[6] is a case in point. The issue before the Apex Court was qua the constitutional validity of section 115-O and the same was upheld on the underlying reasoning that DDT, in essence, is a tax on ‘dividend’, which falls within the inclusive definition of ‘income’ under section 2(24) of the Act. Accordingly, section 115-O levying tax on such dividend income is within the legislative competence of the parliament.

(iii) The decision of the Hon’ble Bombay High Court in Godrej & Boyce[7], treads on a different path owing to the peculiar issue before the Court in the context of section 14A. Suffice to say, the Hon’ble High Court held that DDT is a tax on the company, not the shareholder and since the dividend income is exempt (to be precise, does not form part of the total income) in the hands of the shareholder, any expenditure incurred by shareholder to earn such dividend income would be disallowed under section 14A.

It is critical to highlight, that there are certain observations in the aforesaid decision to the effect that DDT is not a tax on dividend. However, when this decision was challenged before the Hon’ble Supreme Court[8], the decision was partly affirmed, albeit on a slightly different reasoning, putting greater focus on the plain language of section 14A.

Pertinently, the Apex Court did observe: “even if it is 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, no material difference to the applicability of Section 14A would arise”, and it was left at that. Likely due to this indifference, there is no conclusive finding of the Apex Court on the same.

(iv) Similarly, the decision of Hon’ble Bombay High Court in the case of SIDBI[9] again deals with a different issue. The question before the High Court was that once non-obstante provisions of SIDBI Act exempts SIDBI from paying income-tax, would it still be required to pay DDT on dividends distributed to its shareholders. Relying on the reasoning in Godrej & Boyce, the Court held that since DDT is a tax in the hands of SIDBI, it would not be required to pay the same owing to the overriding provisions of the SIDBI Act. While this decision was relied upon by the Special Bench in Total Oil, it doesn’t find mention in Colorcon.

3.4. Again, as discussed hereinabove, the question to be answered in the present case is not whether DDT is a tax in the hands of the shareholder or the company. The question precisely is, whether it is a tax on dividend. The decision of the Hon’ble Supreme Court in Tata Tea answers the same in affirmative. In fact, any other view or interpretation, including the Hon’ble Bombay High Court’s observation in Godrej & Boyce, would render section 115-O to be constitutionally invalid, when analysed from the lens of Tata Tea.

3.5. Yet another aspect which deserves mention is that unlike other treaties, the Protocol to the India-Hungary DTAA specifically extends treaty protection to DDT, by stating that “the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend”. However, as discussed hereinabove, Article 11 being person agnostic, obviates the need for any such deeming fiction in order to bring DDT within its purview. Thus, the specific inclusion under the India-Hungary DTAA may be termed as an exercise out of abundant caution.

3.6. In light of the above, DDT being a tax on ‘dividend’, squarely falls within the purview of Article 11(2) of the India-UK DTAA. Yet, this conclusion alone does not suffice. Even though DDT is a tax on dividend falling within the purview of Article 11(2), the DTAA fundamentally applies only to the specific taxes listed in Article 2: “Taxes Covered”. Consequently, to claim any benefit under Article 11(2), DDT must also cross the threshold of being a tax covered under Article 2. The discussion thus shifts to the following question:

4. Whether DDT falls within the purview of “taxes covered” under Article 2 of the DTAA?

4.1. Article 2 of the India-UK DTAA, to the extent relevant, states as under:

4.2. DDT, by the very nomenclature as used in section 115-O, is “additional income-tax”. The terminology itself suggests that while it is ‘additional’, ultimately, it is “income-tax”.

4.3. Although the term ‘tax’ is defined under section 2(43) of the Act, the term ‘income-tax’ is not defined. In any case, section 4, the charging section of the Act clearly treats “additional income-tax” as being ‘included’ within the broader term “income-tax”, when it states as under:

“Charge of income-tax.

(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:

…”

(emphasis supplied)

4.4. Thus, DDT has been statutorily recognised as “income-tax” and there is nothing to suggest that it constitutes a distinct levy separate from the income tax. Therefore, one may not be required to invoke the provisions of Article 2(2) which deals with applicability of the India-UK DTAA to identical or substantially similar taxes as the income-tax.

4.5. Thus, it may be concluded that DDT under section 115-O is duly covered within the purview of the DTAA and the same also falls within the ambit of Article 11(2) of the DTAA. Therefore, the provisions of the DTAA, being more beneficial vis-à-vis the provisions of the Act, shall apply in view of section 90(2) of the Act. Accordingly, the rate of tax on dividends under the DTAA shall override the DDT rate under section 115-O of the Act. Now, the next inextricably linked question is:

5. Whether grossing-up is still required under section 115-O(1B) while considering the DTAA rate of 10%?

5.1. As per Article 11(2) of the India-UK DTAA, the tax charged by India on dividends paid by an Indian company to a UK resident “shall not exceed” 10% of the “gross amount of the dividends”. “Gross amount” here connotates the actual dividend received, without granting any deduction of any expenditure. Thus, the Indian tax on such dividend can only be a flat amount of 10% of the dividend actually received.

5.2. On the other hand, section 115-O(1B) of the Act provides for grossing-up of the dividend amount, such that after paying DDT on the grossed-up amount, the remaining amount equals the net dividend actually distributed.

5.3. Thus, if the DTAA rate of 10% is subjected to grossing-up under section 115-O(1B), it would result into an effective tax rate of 11.11% on dividend actually received by the shareholder.

5.4. As per one view, grossing-up of dividend amount does not actually have an impact on the tax rate, which, as per the DTAA, would remain 10% only, albeit on the grossed-up amount. This, in a sense, would be akin to other scenarios wherein the payer may undertake to discharge the tax liability on behalf of the recipient, owing to which, the payment is grossed-up in similar manner and tax liability is discharged on the grossed-up amount.

5.5. However, the other view is that what cannot be done directly, cannot be done indirectly. Therefore, since the language of Article 11(2) only speaks of a flat rate of 10% and does not leave any room for any artificial grossing up of the dividend amount, the contradictory provisions of section 115-O(1B), not being beneficial to the assessee, should not be applicable in view of section 90(2) of the Act.

5.6. In Colorcon, while there is no discussion on this issue, the concluding sentence of the judgement grants liberty to the Revenue to “gross up the tax rate in an appropriate manner”. Therefore, notwithstanding the Court’s detailed discussion affirming the supremacy of Article 11(2) over section 115-O, the issue of grossing-up may not have conclusively settled.

5.7. This brings us to yet another, and the final aspect of the discussion (at least for the purposes of this article!). Ultimately, DDT is paid by the company and corresponding dividends are exempt in the hands of the shareholders. Therefore, from the shareholders’ standpoint, there is no juridical double taxation per se. This, in turn, raises the following question:

6. In absence of juridical double taxation on dividends in the hands of the shareholders, is access to the DTAA still available? That too at the instance of the company which is paying the dividend?

6.1. This aspect, one may rightly contend, ought to have been addressed at the outset. However, examining the preceding issues first might facilitate a better appreciation of this question, given the somewhat conceptual nature of the discussion that follows.

6.2. Be that as it may, it is pertinent to first outline the general circumstances that give rise to double taxation. Broadly, double taxation may arise in the following two forms:

(i) Juridical double taxation: Generally, refers to the imposition of comparable taxes in two (or more) Contracting States on the same taxpayer in respect of the same subject matter and for identical period[10].

In the context of dividends, it could arise when, for instance, dividend paid by an Indian company to a non-resident shareholder is taxable both in India and the country of residence of the shareholder.

(ii) Economic double taxation: Generally, refers to the situation that arises when the same transaction or income is taxed in two or more Contracting States during the same period, but in the hands of different taxpayers. As per the OECD Model commentary, in contrast to the notion of juridical double taxation, which has, generally, a quite precise meaning, the concept of economic double taxation is less certain[11].

In the context of dividends, it could arise when, for instance, the Indian company pays taxes on its profits in India and thereafter, the dividends are taxed in the hands of the non-resident shareholder in its country of residence.

6.3. While the OECD states that its Model Convention provides a means of settling the most common problems that arise in the field of international “juridical double taxation”[12], it does not suggest, by any mean, that resolving “economic double taxation” is not intended. In fact, the OECD Model Commentary by itself refers to the concept as “so called” juridical double taxation[13]. Thus, in substance, both these concepts remain academic in nature for general understanding, without any legal footing under the international tax laws or the DTAAs.

6.4. However, in Colorcon, an argument was raised by the Revenue that DDT is a tax on domestic resident company in India and not on the shareholder resident of UK, and its levy does not give rise to any "juridical double taxation"[14]. While there is no finding of the Hon’ble High Court on this aspect, an attempt has been made hereunder to analyse the issue further.

6.5. The DTAAs clearly specify their objective in the preamble as being the avoidance of “double taxation”, without restricting the same to a particular specie of double taxation. Further, there is nothing in the language of the DTAA limiting its application only to the matters concerning “juridical double taxation”. In fact, Article 24(1)(b) of the India-UK DTAA expressly addresses “economic double taxation” too, qua dividends, by granting to the UK shareholders the proportionate credit of Indian tax payable by the Indian company on its own profits (commonly referred to as “underlying tax credit”, a classic way to eliminate the so called economic double taxation).

6.6. Therefore, in absence of anything to suggest that the DTAA only deals with “juridical double taxation”, any such limitation cannot be impliedly read into the DTAA. At this juncture, it may be relevant to quote from Klaus Vogel on Double Taxation Conventions[15], wherein, after discussing the concepts of juridical as well as economic double taxation, the Ld. Author concludes as under:

“5. The concept of 'double taxation', its prerequisites and its limitations, have been subject to much academic controversy. Application of tax treaties, however, is merely a matter of interpretation of the respective treaty. What conceptually is- and what is not- 'double taxation' is therefore of no importance for the treaty's application.”

(emphasis supplied)

6.7. Accordingly, deciding whether DTAA applies in a given scenario is just a matter of the interpretation of the respective treaty. Therefore, as far as the present case is concerned, what is required to be examined is whether an Indian company can claim to be governed by the India-UK DTAA qua its liability to pay DDT on the dividends paid to UK resident shareholders.

6.8. The answer lies in Article 1 of the India-UK DTAA, which specifies the ‘Scope’ of the DTAA and states, in no uncertain terms, that “this Convention shall apply to persons who are residents of one or both of the Contracting States”. Accordingly, the Indian company being a resident of India in the present case is undoubtedly entitled to claim shelter under the provisions of the India-UK DTAA and invoke the provisions of Article 11(2) qua its liability to discharge DDT on dividends paid to the UK resident shareholders.

7. Conclusion

In view of the aforesaid analysis, it may be concluded that the treaty provisions restricting the rate of tax on dividends at 10% would override the 115-O rate for payment of DDT. Consequently, companies which have paid ‘excess’ DDT would be entitled to claim refund of the same, in accordance with the manner(s) as may be prescribed or permissible under law.

Very recently, the Hon’ble Delhi Bench of the Tribunal had an occasion to deal with this issue in the case of Mitsui Kinzoku Components[16]. In that case, the Revenue had disallowed the taxpayer’s application under section 237 of the Act for refund of ‘excess DDT’, citing the lower tax rate of 10% under the India-Japan DTAA. The Hon’ble Tribunal, relying upon Colorcon, decided the issue in favour of the taxpayer. Significantly, the Tribunal also rejected the Revenue’s objection based on section 239 of the Act, which mandates every claim of refund through a return of income, on the reasoning that the departmental utility for filing return of income did not permit altering the DDT rate.

Nonetheless, while Colorcon has undoubtedly tilted the scales in favour of the taxpayers, it is expected that a matter of such significance may be challenged by the Revenue before the Hon’ble Supreme Court. Thus, the controversy is far from being finally settled.

Disclaimer:

The views expressed in this article are personal views of the authors. This article is intended to provide general information and should not be construed as professional advice. It should neither be regarded as comprehensive nor sufficient for the purposes of decision making. The authors do not take any responsibility for accuracy of the information or views contained in this article nor undertake any legal liability for the contents thereof.

[1] Income Tax Appellate Tribunal

[2] DCIT vs. Total Oil India Pvt. Ltd.: ITA 6997/Mum/2019 (order dated 20 April 2023)

[3] Colorcon Asia Pvt. Ltd. vs JCIT: Tax Appeal No. 5/2024 (judgement dated 28 November 2025)

[4] Board for Advance Ruling

[5] Similar phraseology is used in section 115-O, as we will see later.

[6] UOI v. Tata Tea Co. Ltd.: [2017] 398 ITR 260 (SC) – judgement dated 20 September 2017

[7] Godrej & Boyce Mfg. Co. Ltd. v. DCIT: [2010] 328 ITR 81 (Bom HC)

[8] Godrej & Boyce Mfg. Co. Ltd. v. DCIT: [2017] 394 ITR 449 (SC) – judgement dated 8 May 2017, prior to Tata Tea.

[9] Small Industries Development Bank of India v. CBDT: [2022] 441 ITR 80 (Bom HC)

[10] OECD Model Commentary – Introduction, Para 1

[11] OECD Model Commentary on Article 10, Para 41

[12] OECD Model Commentary - Introduction, Para 3

[13] OECD Model Commentary on Article 23A and 23B, Para 1

[14] Para 17 of Colorcon

[15] Quoted from Para 51 of the Delhi HC’s decision in Hyatt International Southwest Asia Ltd. vs. ADIT: [2025] 472 ITR 53

[16] Mitsui Kinzoku Components India Pvt. Ltd. vs. CIT(A): ITA No. 3910/Del/2024 (order dated 31 December 2025)