The recent reference of the Division Bench Bombay High Court in the case of Foseco India Limited v. Assistant Commissioner of Income Tax Circle (1), Pune[1] for the constitution of a larger bench has reignited a debate on the true nature of India’s Dividend Distribution Tax (DDT) under Section 115-O between 1997 and 2020. The appellant in this case is an Indian company with foreign shareholders. It decided in the financial year 2013-14 to pay dividends to its shareholders. The dividends that it declared to its foreign shareholders amounted to INR 7,66,30,021. Under section 115-O, the appellant was obligated to deduct and deposit tax at an effective rate (including other levies like cess) of 16.994% on this amount. It did so. However, since these foreign shareholders were based in the UK, the appellant sought to take advantage of the beneficial rate of taxation on dividends under the India-UK Double Tax Avoidance Agreement (DTAA). The rate of taxation on these dividends would have been 10% under the India-UK DTAA.
Rejections by Multiple Fora
The appellant filed a refund application under Section 237, claiming that the applicable rate of taxation on dividends as per the India-UK DTAA was 10% and since they had already deducted and deposited 16.994%, they were eligible for a refund of the excess amount. The respondent denied this via an order dated 25.11.2022. The appellant’s appeals to the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Authority (ITAT) also failed. The common argument advanced by all of these fora was that Section 115-O did not tax dividends in the hands of the shareholder. Instead, it was an additional tax on those parts of the company’s profit which had been declared to be distributed.
In support of this tenuous position, the Mumbai ITAT’s order in Total Oil India Pvt Ltd v. DCIT,[2] as well as the Bombay High Court’s decision in Godrej and Boyce Manufacturing Ltd v. DCIT,[3] were relied upon. In both of these judgments, the benches had held that since the wording of Section 115-O made profits declared to be distributed taxable in the hands of the company that was distributing, there was no room for the application of a DTAA. The DTAA would only be applicable if an amount was taxable in the hands of a UK-based shareholder, which was not the case here.
Understanding the Intent and Architecture of the DDT
The DDT has been codified in Section 115-O. Under it, between 1997 and 2020, domestic companies had to pay an additional income tax, known as DDT, on any dividends they declared, distributed, or paid. This levy was treated as the final tax settlement on those distributions, which consequently made the dividend income tax-exempt for shareholders under Section 10(34). The Bombay High Court in Godrej and Boyce, as well as present judgement, created a fictional differentiation between tax on dividends in the hands of a shareholder, and tax on dividends in the hands of the company paying the dividends. They re-christened the latter as an “additional tax on the profits of the company” and attempted to distinguish it from tax on dividends.
However, to understand the true nature of this tax, it is important to see its treatment before 1997 and subsequently after 2020. In 1997, when this tax incidence was shifted from the shareholder to the company, it was not because the government had begun to treat dividends as a different source of income or the DDT as a taxation of a distinct tax base, but rather because the process was too cumbersome. A direct quote from the budget speech of 1997 will make this clear:
“Under the existing system of collection of tax on dividends, every company, at the time of paying dividend to a shareholder in excess of Rs. 2500, is required to deduct tax at the specified rate and deposit it in the Central Government account. The company is also required to issue TDS certificates to all shareholders in whose cases the tax has been deducted. The shareholders, in turn, have to show the dividend in their return of income and pay the tax at the rate applicable in their case. They also have to enclose the TDS certificates along with the return and claim credit for the tax deducted at source. Many a time, the tax deducted or a part thereof is required to be refunded to the assessee. Thus, the procedure for tax collection is cumbersome and involves a lot of paperwork.”
The memorandum to the Finance Act of 2020 is telling in regard to the nature of tax on dividends under the Indian legislative framework. In her speech, the Honorable Finance Minister stated that the government shall be returning to the original method of taxing dividends. In saying so, she was referring to the pre-1997 era, where dividends declared by a company were taxable in the hands of the shareholder receiving it. The government it seems, decided to do away with the “additional tax on the profits of the company” and return to older method, potentially, because the process that was too cumbersome in 1997, was no longer as cumbersome, thanks to the integration of taxpayers with the digital space.
Interestingly, Article 11 of the India-UK DTAA, which is the provision for the taxation of dividends, was last amended in 2014. If India had done away with tax on dividends in the period of 1997-2020, it would not have entered into a reciprocal agreement providing a beneficial rate. Crucially, under international law, the principle of pacta sunt servanda demands that treaty obligations be performed in good faith. Section 90(2) of the Income Tax Act reinforces Treaty supremacy, ensuring beneficial treaty terms override domestic law. A mere administrative shift in collection method cannot be understood to bypass India’s commitment to foreign investors under Article 11.
The Bombay High Court, in its present decision, has also failed to notice these very significant changes. The 42-page judgement makes no reference whatsoever to this change in the position of the law on tax on dividends after 2020. However, the implication is clear. The tax on profits declared to be distributed under 115-O was always a tax on dividends, and the Goa bench of the Bombay High Court was correct in its interpretation of 115-O as well as Article 11 of the India-UK DTAA.
The Unlikely Dissent of the Goa Bench
The Bombay High Court’s decision in Godrej and Boyce had also been upheld by the Supreme Court via a different judgement.[4] In such a situation, this should have been an open and shut matter. However, what made this dispute contentious was the judgement of the Goa bench of the Bombay High Court in the case of M/s. Colorcon Asia Private Limited Vs. Joint Commissioner of Income Tax and Ors.[5] Breaking away from Godrej and Boyce as well as from Total Oil, the bench in ColorCon held that the amounts which were being taxed under section 115-O were essentially the dividends, however the tax incidence had been shifted from the shareholder to the company paying the dividends. Since Article 11 of the India-UK DTAA applied to dividends and provided a beneficial rate of 10%, it was the DTAA which would be applicable, not the Income Tax Act.
The Bombay High Court’s Decision: A Missed Opportunity, with a Silver Lining
Although the Division Bench of the Bombay High Court has not given its decision in the matter, it has strongly indicated its preference for the view already espoused in cases like Godrej and Boyce. The silver lining is that the Division Bench has referred the matter to the Chief Justice for the constitution of a larger bench in light of the coordinate benches of two judges each that seem to disagree on the nature of the dividend distribution tax. This leaves open the possibility that a larger bench might be able to review the decision in Godrej and Boyce to give effect to the true intent behind 115-O and to ensure that India is able to live up to its treaty obligations, specifically those under the India-UK DTAA.
[1] INCOME TAX APPEAL NO. 1123 OF 2025.
[2] ITA No 6997/Mum/2019 dated. 20.04.2023.
[3] 2010 SCC OnLine Bom 1174.
[4] 2017 (7) SCC 421.
[5] 2025 SCC OnLine Bom. 5983.
The DDT Debate: Did Bombay High Court Misread the Intent?
The recent reference of the Division Bench Bombay High Court in the case of Foseco India Limited v. Assistant Commissioner of Income Tax Circle (1), Pune[1] for the constitution of a larger bench has reignited a debate on the true nature of India’s Dividend Distribution Tax (DDT) under Section 115-O between 1997 and 2020. The appellant in this case is an Indian company with foreign shareholders. It decided in the financial year 2013-14 to pay dividends to its shareholders. The dividends that it declared to its foreign shareholders amounted to INR 7,66,30,021. Under section 115-O, the appellant was obligated to deduct and deposit tax at an effective rate (including other levies like cess) of 16.994% on this amount. It did so. However, since these foreign shareholders were based in the UK, the appellant sought to take advantage of the beneficial rate of taxation on dividends under the India-UK Double Tax Avoidance Agreement (DTAA). The rate of taxation on these dividends would have been 10% under the India-UK DTAA.
Rejections by Multiple Fora
The appellant filed a refund application under Section 237, claiming that the applicable rate of taxation on dividends as per the India-UK DTAA was 10% and since they had already deducted and deposited 16.994%, they were eligible for a refund of the excess amount. The respondent denied this via an order dated 25.11.2022. The appellant’s appeals to the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Authority (ITAT) also failed. The common argument advanced by all of these fora was that Section 115-O did not tax dividends in the hands of the shareholder. Instead, it was an additional tax on those parts of the company’s profit which had been declared to be distributed.
In support of this tenuous position, the Mumbai ITAT’s order in Total Oil India Pvt Ltd v. DCIT,[2] as well as the Bombay High Court’s decision in Godrej and Boyce Manufacturing Ltd v. DCIT,[3] were relied upon. In both of these judgments, the benches had held that since the wording of Section 115-O made profits declared to be distributed taxable in the hands of the company that was distributing, there was no room for the application of a DTAA. The DTAA would only be applicable if an amount was taxable in the hands of a UK-based shareholder, which was not the case here.
Understanding the Intent and Architecture of the DDT
The DDT has been codified in Section 115-O. Under it, between 1997 and 2020, domestic companies had to pay an additional income tax, known as DDT, on any dividends they declared, distributed, or paid. This levy was treated as the final tax settlement on those distributions, which consequently made the dividend income tax-exempt for shareholders under Section 10(34). The Bombay High Court in Godrej and Boyce, as well as present judgement, created a fictional differentiation between tax on dividends in the hands of a shareholder, and tax on dividends in the hands of the company paying the dividends. They re-christened the latter as an “additional tax on the profits of the company” and attempted to distinguish it from tax on dividends.
However, to understand the true nature of this tax, it is important to see its treatment before 1997 and subsequently after 2020. In 1997, when this tax incidence was shifted from the shareholder to the company, it was not because the government had begun to treat dividends as a different source of income or the DDT as a taxation of a distinct tax base, but rather because the process was too cumbersome. A direct quote from the budget speech of 1997 will make this clear:
“Under the existing system of collection of tax on dividends, every company, at the time of paying dividend to a shareholder in excess of Rs. 2500, is required to deduct tax at the specified rate and deposit it in the Central Government account. The company is also required to issue TDS certificates to all shareholders in whose cases the tax has been deducted. The shareholders, in turn, have to show the dividend in their return of income and pay the tax at the rate applicable in their case. They also have to enclose the TDS certificates along with the return and claim credit for the tax deducted at source. Many a time, the tax deducted or a part thereof is required to be refunded to the assessee. Thus, the procedure for tax collection is cumbersome and involves a lot of paperwork.”
The memorandum to the Finance Act of 2020 is telling in regard to the nature of tax on dividends under the Indian legislative framework. In her speech, the Honorable Finance Minister stated that the government shall be returning to the original method of taxing dividends. In saying so, she was referring to the pre-1997 era, where dividends declared by a company were taxable in the hands of the shareholder receiving it. The government it seems, decided to do away with the “additional tax on the profits of the company” and return to older method, potentially, because the process that was too cumbersome in 1997, was no longer as cumbersome, thanks to the integration of taxpayers with the digital space.
Interestingly, Article 11 of the India-UK DTAA, which is the provision for the taxation of dividends, was last amended in 2014. If India had done away with tax on dividends in the period of 1997-2020, it would not have entered into a reciprocal agreement providing a beneficial rate. Crucially, under international law, the principle of pacta sunt servanda demands that treaty obligations be performed in good faith. Section 90(2) of the Income Tax Act reinforces Treaty supremacy, ensuring beneficial treaty terms override domestic law. A mere administrative shift in collection method cannot be understood to bypass India’s commitment to foreign investors under Article 11.
The Bombay High Court, in its present decision, has also failed to notice these very significant changes. The 42-page judgement makes no reference whatsoever to this change in the position of the law on tax on dividends after 2020. However, the implication is clear. The tax on profits declared to be distributed under 115-O was always a tax on dividends, and the Goa bench of the Bombay High Court was correct in its interpretation of 115-O as well as Article 11 of the India-UK DTAA.
The Unlikely Dissent of the Goa Bench
The Bombay High Court’s decision in Godrej and Boyce had also been upheld by the Supreme Court via a different judgement.[4] In such a situation, this should have been an open and shut matter. However, what made this dispute contentious was the judgement of the Goa bench of the Bombay High Court in the case of M/s. Colorcon Asia Private Limited Vs. Joint Commissioner of Income Tax and Ors.[5] Breaking away from Godrej and Boyce as well as from Total Oil, the bench in ColorCon held that the amounts which were being taxed under section 115-O were essentially the dividends, however the tax incidence had been shifted from the shareholder to the company paying the dividends. Since Article 11 of the India-UK DTAA applied to dividends and provided a beneficial rate of 10%, it was the DTAA which would be applicable, not the Income Tax Act.
The Bombay High Court’s Decision: A Missed Opportunity, with a Silver Lining
Although the Division Bench of the Bombay High Court has not given its decision in the matter, it has strongly indicated its preference for the view already espoused in cases like Godrej and Boyce. The silver lining is that the Division Bench has referred the matter to the Chief Justice for the constitution of a larger bench in light of the coordinate benches of two judges each that seem to disagree on the nature of the dividend distribution tax. This leaves open the possibility that a larger bench might be able to review the decision in Godrej and Boyce to give effect to the true intent behind 115-O and to ensure that India is able to live up to its treaty obligations, specifically those under the India-UK DTAA.
[1] INCOME TAX APPEAL NO. 1123 OF 2025.
[2] ITA No 6997/Mum/2019 dated. 20.04.2023.
[3] 2010 SCC OnLine Bom 1174.
[4] 2017 (7) SCC 421.
[5] 2025 SCC OnLine Bom. 5983.
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