2021 (5) TMI 968 - AT - Income Tax

Income chargeable to tax in India - IDR dividend received from SCB-India - receipts from India based depository, i.e., Standard Chartered Bank- India, in respect of shares of Standard Chartered Bank plc- UK represented by the India Depository Receipts (IDRs) - business connection between this income and India - assessee before us is a company incorporated in, and fiscally domiciled in, Mauritius - when is the amount, so distributed to the IDR holders on account of dividend receipts, can be said to be received in the hands of the IDR holders- at the point of time when the amount is received by BNY Mellon outside India, on behalf of the SCB-India, or when is it received by the IDR holders in India from the SCB-India? - HELD THAT - We find that it is an admitted position all along that SCB-India is a branch office of Standard Chartered Bank UK, and there is no material before us to dislodge this position. Because a depository must only be an Indian company under the law, even if that be so, does not mean that even when a domestic depository is admittedly branch of a foreign company, it must be treated as an Indian company. The approval by the SEBI to SCB-India, being a domestic depository for the issuance of IDRs representing equity shares in SCB-UK is a reality; we cannot wish it away, and we must interpret the tax liability in the light of this reality. Even today, there is nothing more than a suspicion lurking in the mind of the learned Commissioner (DR) that the SCB-India could be a company incorporated in India. If the approval given by the SEBI to the Indian depository is given wrongly, that is something which has no bearing on the issue that we are dealing with, and that is tax implications flowing from distribution of dividend by the domestic depository. Learned counsel has also pointed out that the expression depository and domestic depository are expressions with distinct connotations and the requirements of depository cannot be read into the requirements of domestic depository . As learned counsel rightly points out, the expression domestic depository is defined, under rule 3(i)(c) of the Companies (Issue of Indian Depository Rules, 2004), as custodian of securities registered with the Securities and Exchange Board of India, hereinafter referred to as SEBI and authorised by the issuing company to issue Indian Depository Receipts . The objection raised by the learned Departmental Representative is thus devoid of legally sustainable merits. As regards the submissions about unintended benefit to the assessee, from an overall global perspective, we are not really concerned with such a question at this stage. All we have to examine is whether the impugned income taxable in India is treaty-protected in the hands of this assessee or not, and, so far as this question is concerned, for the detailed reasons set out above, our answer is in affirmative. The income in question is treaty-protected inasmuch as it cannot be taxed in the hands of the assessee, in India, by virtue of Article 22(1) of the Indo Mauritius tax treaty. In view of the above discussions, the reasoning adopted by the Dispute Resolution cannot meet our judicial approval. We reject the stand of the DRP as devoid of legally sustainable merits. As the taxability of the IDR dividends fails, in terms of the provisions of the applicable tax treaty, i.e., Indo-Mauritius tax treaty, and as the provisions of the applicable tax treaty, being more beneficial to the assessee, override the provisions of the domestic law, the taxability of the dividends on the IDRs fails. The addition being IDR dividend received from SCB-India, thus stands deleted. It must, however, be clarified that relevant treaty provision of Article 22 having been subjected to significant change by insertion of sub-article (3) thereto, this decision on treaty protection will hold good only for the pre-amendment period i.e., pre-1st April 2017. Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of dividend income received by the assessee in India.
2. Applicability of the India-Mauritius Double Taxation Avoidance Agreement (DTAA) to the dividend income.
3. Interpretation of the term "Indian Depository Receipts" (IDRs) and its implications on taxability.
4. Validity of the Dispute Resolution Panel's (DRP) findings.

Detailed Analysis:

1. Taxability of Dividend Income Received by the Assessee in India:
The primary issue was whether the receipts of ?9,74,66,600 from Standard Chartered Bank-India, in respect of shares represented by IDRs of Standard Chartered Bank plc-UK, were chargeable to tax in India. The assessee, a company incorporated in Mauritius, received dividends from SCB-India for the underlying shares related to the IDRs. The Assessing Officer (AO) held that the dividends were taxable in India, as the first point of receipt was in the bank accounts of the IDR holders in India. The AO rejected the assessee's contention that the dividends were received abroad by BNY-US, noting that the money continued to be in the possession of SCB-UK and was paid in India.

2. Applicability of the India-Mauritius Double Taxation Avoidance Agreement (DTAA):
The assessee argued that under the India-Mauritius DTAA, the dividends did not meet the definition of dividends under Article 10 and should be taxed under Article 22, which allows exclusive taxation in the residence jurisdiction, i.e., Mauritius. The DRP rejected this claim, stating that the company distributing the dividend income was a resident of India for the purposes of the DTAA. However, the tribunal found that the dividend income could not be taxed under Article 10 of the DTAA as neither SCB-UK nor SCB-India was a resident of India. Consequently, the income fell under the residuary head of "other income" under Article 22, which could only be taxed in Mauritius.

3. Interpretation of the Term "Indian Depository Receipts" (IDRs) and Its Implications on Taxability:
The tribunal provided a detailed explanation of IDRs, stating that they are derivative financial instruments issued by an Indian depository based on underlying shares of a foreign company. The dividends received by SCB-India from SCB-UK were distributed to IDR holders in India. The tribunal emphasized that the IDR holders are not shareholders of the foreign company but are entitled to the benefits of the underlying shares. The tribunal concluded that the dividends received by the IDR holders were received in India and thus taxable in India.

4. Validity of the Dispute Resolution Panel's (DRP) Findings:
The DRP's findings were challenged on the grounds that SCB-India, being a branch of SCB-UK, was not a resident of India for the purposes of the DTAA. The tribunal found the DRP's reasoning incorrect, noting that SCB-India was a permanent establishment of a UK-based company and not a taxable unit in India. The tribunal rejected the DRP's stand, stating that the income in question was treaty-protected and could not be taxed in India.

Conclusion:
The tribunal concluded that the dividend income received by the assessee from SCB-India, attributable to the IDRs, could not be taxed in India due to the provisions of the Indo-Mauritius tax treaty. The addition of ?9,74,66,600 was deleted, and the appeal was allowed. The tribunal clarified that this decision would hold good only for the pre-amendment period, i.e., pre-1st April 2017, due to changes in the relevant treaty provisions.