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Informist, Friday, May 15, 2026

 

NEW DELHI – The Supreme Court will decide whether a dividend distribution tax rate higher than that mentioned in treaties with other countries can be levied on Indian companies paying dividends to foreign companies or shareholders. The court will also rule on whether dividend distribution tax, being an income tax, is governed by double tax avoidance agreements between the parties.

 

Framing another issue, the court said it will deal with the question whether tax under Section 115-O of the  Income Tax Act, 1961, on any amount declared, distributed, or paid by a company by way of dividend chargeable to additional income tax is in the nature of tax on distributed profits or tax on dividend. The court will hear the case next on Aug. 12.

 

The court noted that issues regarding higher rate of dividend distribution tax have come up before different high courts. It asked its registry to circulate a note to the high courts that the Supreme Court is currently dealing with the issue and so they should consider staying further proceedings on any matter involving similar questions.

 

The case has its genesis from Colorcon Asia Pvt. Ltd., an Indian company, paying dividend to Colorcon Ltd., a company based in the UK, for the assessment years 2016-17 through 2018-19. Colorcon Asia also paid dividend distribution tax at the rate specified in the Income Tax Act, 1961. Colorcon Asia had made a cumulative dividend payout in excess of INR 1 billion.

 

The company said the tax rate on dividends to its UK parent should be restricted to 10% under the India-UK Double Taxation Avoidance Agreement. Colorcon UK owns 100% of the equity shares of Colorcon Asia. The Board for Advanced Rulings, New Delhi, ruled that the dividend distribution tax paid by Colorcon Asia to its parent company is squarely outside the scope of the double taxation avoidance agreement. The tax department argued that the tax paid under Section 115-O of the Income Tax Act is an additional tax on the domestic company and not a tax in respect of non-residence income in India. Therefore, the provisions of avoidance are not attracted and Colorcon Asia should be charged a higher tax rate of 20% on dividends paid to its parent company, it said.  End

 

Reported by Surya Tripathi

Edited by Rajeev Pai

 

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