2026 (2) TMI 154 - AT - Income Tax

Dividend tax rate under IndiaUK DTAA limited to 10% for UK resident shareholders; refund and interest relief directed.

For dividend distributions to nonresident shareholders who are tax residents of the United Kingdom, the tribunal applied the lower treaty rate under the ... Applicability of the tax rate on dividend paid to non-resident shareholders - India-UK DTAA - HELD THAT:- It is undisputed fact that section 115-0 of the Act prescribes DDT rate at 20.36%. Whereas, the DTAA between India and United Kingdom provides for a lower rate of tax on dividend at 10% of the gross amount of dividend. The assessee company, with respect to the non-resident shareholders which are the tax residents of UK, inadvertently computed the DDT liability by applying the rate prescribed u/s 115-0 of the Act instead of the lower rate of tax as provided in the India-UK, DTAA. Accordingly, the Assessee company paid excess DDT under the provisions of the Act, as against the DDT liability, if the benefit of Article 11 of the India-UK DTAA was adopted i.e., at 10% and claimed refund of excess DDT paid. Very recent judgement in the case of M/s. Colorean Asia Pvt. Ltd. [2025 (12) TMI 677 - BOMBAY HIGH COURT] clearly over ruled the Special Bench decision of the Mumbai Tribunal in M/s. Total Oil India (P) Ltd. [2023 (4) TMI 988 - ITAT MUMBAI (SB)] and held that the Assessee is eligible for the benefit of the lower rate of 10% prescribed under Article 11 of the DTAA on the DDT paid. Hon’ble Bombay High Court held that the Authority has erred in not appreciating that DDT erroneously collected in excess of 10% as provided by India-UK DTAA, which is contrary to law and violative of Article 265 of the Constitution of India. Thus, Hon’ble High Court concluded that the assessee is entitled to restrict the tax rate on dividends distributed by it to resident share-holders at United Kingdom at 10% under Article 11 of the India -UK Tax Treaty. Respectfully following the above judicial precedent we therefore direct the Jurisdictional Assessing Officer to charge DDT only to the extent of 10% invoking Article 11 of DTAA between India- UK and grant refund of the excess DDT paid by the assessee company. In the result the ground no. 1 raised by the assessee is allowed. Levy of additional interest u/s 234B and 234C pursuant to the Advance Pricing Agreement entered into with the CBDT - The incremental income got crystallized and determined only pursuant to the signing of the APA on 19-08-2019, which is a subsequent event which could not have been foreseen by the Assessee, it was impossible for the Assessee to estimate the increment in income pursuant to APA. Thus, advance tax could not have been paid on such incremental income and was accordingly, advance tax was paid only on the current income of the Appellant. On identical case in the case of M/s. Colt Technology Services (I) Pvt Ltd.[2022 (5) TMI 272 - ITAT DELHI] held that, the levy of interest u/s 234B and 234C of the Income Tax Act on additional income agreed as per advance pricing agreement entered between appellant and the CBDT is illegal. Thus, we hereby direct the JAO to delete the levy of additional interest u/s. 234B and 234C of the Act and refund the same as per the provisions of law. Short grant of credit of Tax deducted at source (TDS) - JAO is directed to verify the same and grant TDS credit as claimed in the modified return and as per the provisions of law. Issues: (i) Whether Dividend Distribution Tax (DDT) paid by the domestic company in respect of dividends remitted to UK resident shareholders is to be restricted to 10% under Article 11 of the India-UK DTAA and excess refunded; (ii) Whether interest under sections 234B and 234C is leviable on additional income declared in the modified return filed pursuant to an Advance Pricing Agreement (APA); (iii) Whether credit for Tax Deducted at Source (TDS) as claimed in the modified return should be granted.Issue (i): Whether DDT on dividends paid to UK resident shareholders must be limited to 10% under Article 11 of the India-UK DTAA and excess DDT refunded.Analysis: Section 115-O prescribes DDT while Section 90(2) gives precedence to treaty provisions more beneficial to the taxpayer. Article 11 of the India-UK DTAA restricts the source-state tax on dividends to the specified rate. The statutory scheme and legislative history identify dividend as income of the shareholder for DTAA application; DDT is a tax in substance on dividend income of the shareholder though collected from the company. Applying Section 90(2) and Article 11 results in limitation of the tax rate on dividends payable to UK resident beneficial owners.Conclusion: Held in favour of the assessee. DDT shall be charged only up to 10% for dividends paid to UK resident shareholders and the excess DDT paid is to be refunded.Issue (ii): Whether interest under sections 234B and 234C can be levied on additional income declared in a modified return filed pursuant to an APA.Analysis: The APA determined incremental income after the period for advance tax payments had elapsed; the assessee could not reasonably have anticipated and paid advance tax on such additional income during the relevant year. Precedent and statutory interpretation require establishment of default in payment of advance tax for levy of sections 234B and 234C interest; where the additional income crystallizes only after APA, interest on that incremental income is not leviable.Conclusion: Held in favour of the assessee. Interest under sections 234B and 234C shall be deleted and refunded insofar as charged on APA-related incremental income.Issue (iii): Whether the assessing officer must grant TDS credit as claimed in the modified return.Analysis: The modified return pursuant to APA entitles the assessee to claim reliefs and credits as per law; verification of TDS records is a ministerial exercise to ensure proper credit is given in accordance with the modified return and applicable provisions.Conclusion: Held in favour of the assessee. The assessing officer is directed to verify and grant the claimed TDS credit in accordance with law.Final Conclusion: The appeal is allowed in part: the DDT is to be restricted to 10% under Article 11 of the India-UK DTAA with refund of excess, interest under sections 234B and 234C charged on APA incremental income is deleted with refund, and claimed TDS credit is to be verified and granted; consequential and procedural aspects are to be effected by the assessing officer.Ratio Decidendi: Where a treaty provision is more beneficial under Section 90(2), the treaty rate under Article 11 limits the DDT payable on dividends to the specified rate for resident beneficial owners of the treaty partner; additionally, interest under sections 234B and 234C is not leviable on incremental income that crystallizes only upon an APA and could not have been the basis for advance tax defaults during the relevant year.