COURTKUTCHERY SPECIAL ON NRI’s DIVIDEND TAX RULES
Bombay High Court: Dividend Tax for NRIs Must Follow DTAA Rates, Not Higher Domestic Law
Court says treaty benefits override Indian tax law
Ruling offers relief and refund opportunities for NRIs
By Our Legal Reporter
New Delhi: January 30, 2026:
In a significant judgment, the Bombay High Court has clarified that dividends paid by Indian companies to non-resident shareholders must be taxed strictly according to the rates specified in the applicable Double Taxation Avoidance Agreement (DTAA). The ruling came in the case of Colorcon Asia Pvt. Ltd. vs JCIT/PCIT/DCIT, where the court held that India cannot impose taxes beyond treaty limits.
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This decision is crucial for NRIs, foreign investors, and multinational companies, as it ensures that treaty benefits are respected and provides scope for refunds where excess tax was collected.
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Background of the Case
- The dispute arose when Indian subsidiaries paid dividends to non-resident shareholders.
- The tax department-imposed Dividend Distribution Tax (DDT) at rates higher than those prescribed under the DTAA.
- The Bombay High Court ruled that Section 90(2) of the Income Tax Act, 1961 makes it clear that DTAA provisions override domestic law.
- The court emphasized that unilateral amendments to Indian tax law cannot diminish treaty benefits.
Court’s Observations
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- Treaty Prevails: The court reaffirmed that DTAA provisions prevail over conflicting domestic law.
- Article 11 of India-UK DTAA: Dividends paid to UK shareholders must be taxed at the concessional rate of 10%, not higher.
- Excess Tax Collection Invalid: Any tax collected beyond DTAA limits violates Article 265 of the Constitution of India, which prohibits taxation without authority of law.
- Refund Opportunity: NRIs and foreign investors who paid higher taxes may now claim refunds.
Legal and Economic Significance
- For NRIs: Ensures fair taxation and prevents double taxation.
- For Indian Companies: Provides clarity on dividend distribution and reduces litigation risks.
- For Global Investors: Strengthens India’s credibility in honouring international tax treaties.
- For Tax Authorities: Reinforces the principle that treaty obligations cannot be overridden by domestic law.
Broader Implications
- Investor Confidence: The ruling boosts confidence among foreign investors, encouraging more capital inflows.
- Refund Claims: NRIs and foreign companies may file claims for refunds of excess DDT paid.
- Policy Impact: The judgment may influence future tax reforms and treaty negotiations.
- Global Alignment: India’s stance aligns with international norms of respecting treaty obligations.
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Conclusion
The Bombay High Court’s ruling that dividends paid to non-residents cannot be taxed at rates higher than DTAA provisions is a landmark in India’s tax jurisprudence. It ensures fairness, respects treaty obligations, and provides relief to NRIs and foreign investors. By reinforcing the supremacy of international agreements over domestic law, the judgment strengthens India’s position as a reliable investment destination.
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