Delhi ITAT Allows DTAA Benefit On DDT; Caps DDT At 10% Under Indo-Japan DTAA

The Hon'ble Delhi Income Tax Appellate Tribunal (hereinafter referred to as ‘Delhi ITAT') in the case of Mitsui Kinzoku Components India Pvt. Ltd. v. CIT (Appeals)¹ , National Faceless Appeal Centre, Delhi, relying on the Bombay High Court's landmark ruling in Colorcon Asia Pvt. Ltd. [2025] 181 taxmann.com 301, has held that Dividend Distribution Tax (“DDT”) on dividends paid by an Indian company to its Japanese parent is governed by the India–Japan DTAA and cannot exceed the treaty-prescribed rate. The Tribunal further held that the Bombay High Court's decision in Colorcon Asia is binding and conclusively settles the controversy, rendering reliance on the ITAT Special Bench ruling in Deputy Commissioner of Income-tax vs. Total Oil India (P.) Ltd. [2023] 149 taxmann.com 332 misplaced.

FACTS OF THE CASE

• Mitsui Kinzoku Components India Pvt. Ltd. (“the Assessee”) is an Indian company and a wholly-owned subsidiary of Mitsui Mining and Smelting Company Limited, Japan, a tax resident of Japan.
• During AYs 2011-12 to 2013-14, the Assessee declared and paid dividends to its Japanese parent.
• On such dividend distribution, the Assessee discharged Dividend Distribution Tax (DDT) under Section 115-O at an effective rate of 16.61% (15% plus surcharge and cess).
• The Assessee contended that, under Article 10 of the India–Japan DTAA, tax on dividends payable to a Japanese resident cannot exceed 10% of the gross dividend. Since the ITR-6 utility did not permit modification of DDT rates, the Assessee could not claim treaty relief in the return and therefore filed a refund application under Section 237 for excess DDT paid.
• The Assessing Officer rejected the refund claim, holding that no refund was claimed in the return and DDT was a tax on the Indian company and outside the scope of the DTAA.
• The CIT(A) upheld the rejection, relying on the Mumbai ITAT Special Bench ruling in Total Oil India Pvt. Ltd.

APPELLANT'S CONTENTIONS

• DDT is in substance a tax on dividend income of the shareholder, with Section 115-O only shifting the mode of collection to the distributing company.
• By virtue of Section 90(2), the more beneficial DTAA provisions override domestic law, and therefore Article 10 caps dividend taxation at 10%.
• The inability to claim the refund through the return was due to systemic limitations of the e-filing utility, which cannot defeat a substantive treaty right.
• Excess tax collection beyond the treaty rate violates Article 265 of the Constitution, which prohibits retention of tax not authorised by law.
• Strong reliance was placed on the Bombay High Court's ruling in Colorcon Asia Pvt. Ltd., which has overruled the Special Bench decision in Total Oil India Pvt. Ltd. on identical legal principles.

REVENUE'S CONTENTIONS

• DDT is an additional income tax on the distributing company, not on the shareholder.
• DTAA benefits can be availed only where the tax is levied on the non-resident, which is not the case for DDT.
• Refund cannot be granted since the claim was not made in the return of income.

OBSERVATIONS OF THE DELHI ITAT

• The Delhi ITAT noted that the Bombay High Court in Colorcon Asia Pvt. Ltd. has conclusively settled the controversy in this regard. Bombay High Court, in the context of India – UK DTAA, had observed that:
  • Articles 1 and 2 of the DTAA cover “income tax” and taxes of a similar character. Since DDT is classified as an income tax on dividend income, it falls within the ambit of Article 11.
  • The plain language of Article 11(1) is triggered upon payment of dividends by an Indian company to a UK resident. Article 11(2) thereafter restricts India's taxing right to a maximum of 10%, except in specified cases relating to immovable property.
  • Rejecting the rulings of the Board for Advance Rulings (BFAR) in this case and Total Oil India Pvt. Ltd., the Court held that Article 11 looks only at the nature of income (dividends) and not the identity of the taxpayer. There is no requirement under the DTAA that the dividend must be taxed in the hands of the shareholder in India. DDT is a levy on dividend income, and although collected from the company, it retains the character of tax on shareholder income. Legislative history confirms that Section 115-O merely shifts the mode of collection without altering the substantive charge.
  • Unilateral domestic law amendments, such as Section 115-O, cannot override treaty obligations. Denial of the 10% treaty cap would defeat the DTAA, lead to double taxation, and run contrary to binding Supreme Court precedents.
  • DDT collected in excess of 10% is erroneous and contrary to law, and retention of such excess tax violates Article 265 of the Constitution.
• Accordingly, the appeal in Colorcon Asia Pvt. Ltd. was allowed. The BFAR ruling was set aside, and the Court declared that Colorcon Asia is entitled to restrict DDT on dividends paid to its UK parent to 10% under Article 11 of the India–UK DTAA, with liberty to the Department to gross up the tax while applying the treaty cap.
• Applying the above ratio mutatis mutandis, the Delhi ITAT held that Article 10 of the India–Japan DTAA similarly caps tax on dividends at 10%.
• The Tribunal rejected the Revenue's reliance on Total Oil India Pvt. Ltd., observing that it stands overruled by the Bombay High Court.
• On the procedural objection, the ITAT held that technical limitations of the efiling portal cannot defeat a lawful refund, especially where the assessee has filed a valid application under Section 237 and excess tax has been collected contrary to treaty provisions.
• Accordingly, the ITAT directed the Assessing Officer to grant refund of excess DDT after verification and to apply the 10% treaty cap on dividends paid to the Japanese parent.

AURTUS COMMENTS

This ruling marks the first ITAT decision applying the Bombay High Court's principle upheld in Colorcon Asia to the India–Japan DTAA, reinforcing that DDT is subject to treaty rate caps and that excess collection must be refunded, notwithstanding procedural or system-driven constraints. Considering that the issue would affect a large number of companies, it remains to be seen whether other Courts also align to the view of the Bombay High Court. Further, considering the stakes involved, it may be expected that an appeal would be filed in Supreme Court against the decision in the case of Colorcon Asia. Until the Supreme Court delivers its final verdict, this issue is likely to be litigious.

Footnote

1. Mitsui Kinzoku Components India Pvt. Ltd. v. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, ITA Nos.- 3910, 3911 & 3912/Del/2024

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