2023 (1) TMI 1112 - AT - Income Tax

Income accruing or arising in India - dividend on IDR - assessee has received dividend from Indian entity and the dividend had accrued/ paid to the assessee in India - DRP and AO after examining the transaction, facts of the case and Article-10 of the India Mauritius DTAA rejected assessee s contention, that the dividend on IDR is taxable in Mauritius - whether the assessee would be eligible for treaty benefit, if yes, whether the transaction would fall within the meaning of Article-10 or Article-22 of the DTAA? - HELD THAT - As in case Morgan Stanley Mauritius Co Ltd. 2021 (5) TMI 968 - ITAT MUMBAI in a lucid manner explained the provisions of Article- 10 and Article-22 and thereafter explained as to how the transaction would not fall within the ambit of Article 10 and hence, is covered by residuary Article - 22. The Tribunal after examining the transaction concluded that the taxability of IDR dividends fail in the light of India Mauritius DTAA Article 22. Revenue has not brought out any distinguishing feature in the transaction in assessee s case and in the case of Morgan Stanley Mauritius Co Ltd vs. DCIT (supra). In the absence of any contrary material, we see no reason to take any other view except to follow the order of Co-ordinate Bench on identical set of facts. Following the order of Tribunal in the case of Morgan Stanley Mauritius Co Ltd vs. DCIT (supra), Ground No.1 of appeal is allowed for parity of reasons

Summary

Issues Involved:
1. Taxability of dividend income received by the assessee from Indian Depository Receipts (IDRs) under the India-Mauritius Double Taxation Avoidance Agreement (DTAA).
2. Applicability of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

1. Taxability of Dividend Income from IDRs:
The primary issue revolves around whether the dividend income received by the assessee, a tax resident of Mauritius, from Indian Depository Receipts (IDRs) issued by Standard Chartered Bank Plc (SC Plc), a UK-based company, is taxable in India under the India-Mauritius DTAA.

- Assessee's Argument:
The assessee argued that the dividend income received from IDRs should not be regarded as income received or deemed to be received in India. The dividend was declared by SC Plc UK, distributed to the Overseas Custodian Bank in the UK, and subsequently transferred to the assessee's bank account in India. The assessee contended that under the India-Mauritius DTAA, specifically Article 22, such dividend income is not taxable in India as the company paying the dividend is not a resident of India.

- Revenue's Argument:
The Department argued that the transaction is covered by Article 10 of the DTAA, which deals with dividends. They contended that the dividend income received by the assessee is taxable in India at a concessional rate of 15% as per Article 10 of the DTAA. The Department emphasized that the dividend was received in India and should be taxed accordingly.

- Tribunal's Findings:
The Tribunal examined the transaction and the relevant articles of the DTAA. It referred to a similar case, Morgan Stanley Mauritius Co Ltd vs. DCIT, where it was held that dividend income from IDRs is not taxable in India under Article 22 of the DTAA. The Tribunal noted that the dividend income was received by the assessee in India and confirmed the findings of the authorities below. However, it concluded that the dividend income falls under the residuary clause (Article 22) of the DTAA and is not taxable in India. The Tribunal stated, "The taxability of IDR dividends fails in the light of India - Mauritius DTAA - Article 22."

- Conclusion:
The Tribunal allowed the assessee's appeal on the issue of taxability of dividend income from IDRs, following the precedent set in the Morgan Stanley case. It held that the dividend income is not taxable in India under the India-Mauritius DTAA.

2. Applicability of Penalty Proceedings under Section 271(1)(c):
The second issue pertains to the initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961, for concealment of income or furnishing inaccurate particulars of income.

- Assessee's Argument:
The assessee challenged the initiation of penalty proceedings, arguing that it was premature at this stage.

- Tribunal's Findings:
The Tribunal agreed with the assessee's contention that challenging penalty proceedings at this stage is premature. It dismissed ground No. 2 of the appeal accordingly.

- Conclusion:
The Tribunal dismissed the appeal regarding the initiation of penalty proceedings under section 271(1)(c) as premature.

Final Judgment:
The appeal of the assessee was partly allowed. The Tribunal ruled that the dividend income from IDRs is not taxable in India under the India-Mauritius DTAA, following the precedent set in the Morgan Stanley case. The challenge to the initiation of penalty proceedings was dismissed as premature. The order was pronounced in the open court on September 26, 2022.