India’s tax authorities have moved the Supreme Court to challenge a Bombay High Court decision that capped Dividend Distribution Tax at 10% under the India–UK tax treaty, a ruling that could unlock substantial refund claims for pre-2020 dividend payments.
The Indian Income Tax Department filed a special leave petition before the Supreme Court on 30 January 2026, challenging a Bombay High Court ruling that held Dividend Distribution Tax (DDT) could be limited by applicable tax treaties. The appeal seeks to overturn a decision that could trigger significant refund claims if upheld.
High Court redefines the character of DDT
The dispute stems from a judgment issued on 28 November 2025 by the Bombay High Court (Goa Bench) in the case of M/s. Colorcon Asia Pvt. Ltd., an Indian subsidiary of a UK parent. The court allowed a tax appeal against a Board for Advance Rulings decision denying treaty benefits on DDT.
Under Section 115-O of the Income Tax Act, 1961, DDT was historically treated as a tax on the distributing Indian company rather than on shareholders. On this basis, tax authorities argued that DDT fell outside the scope of Double Taxation Avoidance Agreements (DTAAs).
The High Court rejected this position, holding that DDT is, in substance, a tax on dividend income belonging to shareholders. Relying on legislative history and Supreme Court precedent, including Union of India v. Tata Tea Co. Ltd., the court noted that shifting the tax burden to companies was done largely for administrative convenience and did not alter the nature of the tax.
Treaty supremacy and the India–UK DTAA
Having classified DDT as a dividend tax, the court applied Article 11 of the India–UK DTAA, which caps dividend taxation at 10% where the beneficial owner is a UK resident. This contrasted with the higher effective DDT rate of approximately 20.36% under domestic law.
The court emphasised Section 90(2) of the Income Tax Act, under which treaty provisions prevail where they are more beneficial to the taxpayer. It also relied on the Vienna Convention on the Law of Treaties, which states that Parliament cannot unilaterally override negotiated treaty obligations through domestic legislation.
The court found that all treaty conditions were satisfied: the payment constituted a dividend, was made by an Indian resident to a UK resident, and the UK parent was the beneficial owner. Accordingly, it set aside the earlier ruling and limited the DDT rate to 10%.
The Supreme Court’s decision is expected to provide final clarity on whether treaty limits apply to DDT paid prior to its abolition. If the High Court ruling is upheld, companies may seek substantial refunds of excess DDT.
DDT was abolished with effect from 1 April 2020. Under the current regime, dividends paid to non-residents are generally subject to a 20% withholding tax, which can clearly be reduced under applicable tax treaties.
