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TMI Blog2021 (5) TMI 968X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s whether or not the Assessing Officer was justified in holding that the receipts of ₹ 9,74,66,600, 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), were chargeable to tax in India in the hands of the assessee. The way the assessee puts it, by way of a ground of appeal is that On the facts and circumstances of the case, the learned AO, based on the directions of Hon ble DRP erred in making an addition of ₹ 9,74, 66,600, being the dividend income received by the Appellant in respect of shares represented by IDRs of SC Plc, as chargeable to tax in India. In this regard, the learned AO, based on the directions of Hon'ble DRP, erred on the following grounds . The assessee has raised several sub grounds of appeal, but, in substance, these sub grounds of appeal are arguments in support of the aforesaid ground of appeal. 3. The issue in appeal lies in a narrow compass of material facts. The assessee before us is a company incorporated in, and fiscally domiciled in, Mauritius. The assessee is thus a tax resident of Mauritius and holds a valid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an only be subjected to tax under article 22 which is in the domain of exclusive taxation in the residence jurisdiction, i.e., Mauritius. None of these submissions, however, impressed the Assessing Officer. With a very detailed analysis of the factual position with respect to the Indian Depository Receipts and legal framework thereof, and with a very detailed analysis of the legal framework regarding taxability thereof, the Assessing Officer concluded that so far as the IDR holders are concerned, the first point of receipt of dividend is when it is deposited in the bank accounts of the IDR holders in India, and, therefore, it cannot be said that the income in question is received outside India. He noted the claim of the assessee that the money dividend was received outside India as it was deposited in the bank account of SCB-India in SCB-UK, as maintained abroad, and then distributed by the SCBIndia upon conversion, but rejected the same on the ground, inter alia, that the money continued to be in the possession of the person who was to pay the same, i.e. SCB-UK, and that, in reality as also in substance, the payment was made in India in the Indian bank accounts of the IDR holders, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y an Indian Depository, it derives its value from the underlying asset in the form of equity shares of a foreign company. The benefits accruing from the shares in question are, subject to terms on which depository issues the IDRs, are passed on to the IDR holders, and, in that sense, the IDR holders are beneficiaries of the underlying shares in the foreign company. While IDRs may be convertible, subject to certain conditions and requirements about the holding period of IDRs, into underlying equity shares of the foreign company, the IDRs are not necessarily convertible in the equity shares in question. In effect, thus, the IDRs provide a mechanism in which an investor in the Indian market can have the benefits flowing from the shareholding in participating foreign companies. Coming to more specifics about the IDRs, we may add that Indian Depository Receipt is defined, under rule 3(i)(d) of the Companies (Issuance of Indian Depository Receipts) Rule 2004, as means any instrument in the form of a depository receipt created by Domestic Depository in India against the underlying equity shares of issuing company . Rule 3(i)(e) restricts the natural meaning of the expression issuing c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf is a trustee of the issuing company. The physical movement of shares is thus between the issuing company, i.e., Standard Chartered Bank plc, the custodian, Bank of New York Mellon, while the constructive movement is from the Standard Chartered Bank plc (i.e., issuing company) to the Standard Chartered Bank- India (domestic depository) to the Bank of New York Mellon (the custodian). In terms of a diagram, this movement could be explained as follows: 6. On the strength of the equity shares of SCB-UK so held through the custodian, with the authorization of the SCB-UK and with the approval of the SEBI, after listing of the IDRs on the Indian Stock Exchanges, the SCB-India issues the IDRs in question and raises the funds in the Indian capital markets. The funds so raised presumably get repatriated to the SCB-UK as well, but that s not material anyway. What is material is the dividend distribution by the domestic depository to the IDR holders, and that is what has led to this litigation before us. The SCB-India receives dividends from SCB-UK in respect of the shares held by SCB-India, and under the applicable arrangements if the domestic depository receives any cash dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount 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. This question assumes significance that the IDR holders include non-resident FIIs (Foreign Institutional Investors) and these IDR holders can be taxed in respect of these receipts only when the amounts in question are received, or deemed to be received, in India. Learned counsel s line of reasoning, as implicit from his complex web of arguments, is that since the SCB India, acting as a bare trustee, has first received the dividends, through its UK based custodian BNY-Mellon, the income is received outside India and is subsequently transferred to its Indian account. It cannot thus be said that the income is received in India. Elaborating upon this point, it is contended that an income which can be taxed in the hands of the non-resident assessee before us, a Mauritius based FII, can only be brought to tax under section 5(2) only such income as is received in India or is deemed to be received in India, accrue or arise in India or is deemed to accrue or arise in India. It is then pointed out that the SCB- India, under the terms of depository ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough a custodian abroad., i.e., BNY-Mellon. The source of income is equity shares of the foreign company and shares are held by an Indian depository and constitute assets of the SCB-India, even if as a trustee. It is not, therefore, a dividend simplicitor from a foreign company. It has a clear, significant, and crucial business connection with India. When one takes a look at the diagrams set out earlier in this order, it would be preposterous to suggest that the receipts in question have no business connection with India. As for learned counsel s reliance on the CBDT circular # 4/2015 (supra), it is important to bear in mind the fact that this circular was issued in view of the apprehensions that on account of Explanation 5 having been inserted in Section 9(1)(i) an extended application of the provisions of the Explanation may result in taxation of dividend income declared by a foreign company outside India and that such a situation may cause unintended double taxation and would be contrary to the generally accepted principles of source rule as well as the object and purpose of the amendment made by the Finance Act, 2012 . The question of taxability of these dividends was in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question is a dividend from a foreign company, even if that is how it is treated, which has clear business connection with Indian domestic depository and this derivative instrument, i.e. a financial instrument deriving its value from the underlying asset, was created in India and listed on Indian stock exchanges. It is true that dividends from an Indian company are deemed to be income accruing or arising in India, but to suggest that since dividend income can be brought to tax in the hands of a non-resident only in case it is from dividend from an Indian company is fallacious in logic. Just because it is a dividend income other than that from an Indian company, which cannot be taxed in Section 9(1)(iv), it cannot escape the rigour of Section 9(1)(i). Viewed thus, the receipt of dividends from the SCB-UK by the assessee, if that is how it can be treated, is an income deemed to be accruing or arising in India. Let us see it from a different perspective as well. It would, however, appear that what is received by the assessee is the net dividend amount as declared by the Indian depository and not the dividend of the foreign company. The dividend declared by the Indian depository could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian depository. Learned counsel has also pleaded that the income in question cannot be considered to be deemed to be received in India because the requirements of Section 7, which defines the expression income deemed to be received are not satisfied. This plea proceeds on the fallacy that the expression income deemed to be received in India in such year by or on behalf of such person (i.e. nonresident) appearing in Section 5(2)(a) will be governed by the definition assigned to expression incomes deemed to be received in a previous year appearing in Section 7 which deals with the timing, rather the factum, of an income, and is relevant only for the salaries employees as it covers only three items namely- (i) the annual accretion in the previous year to the balance at the credit of an employee participating in a recognised provident fund, to the extent provided in rule 6 of Part A of the Fourth Schedule ; (ii) the transferred balance in a recognised provident fund, to the extent provided in sub-rule (4) of rule 11 of Part A of the Fourth Schedule ; and (iii) the contribution made, by the Central Government or any other employer in the previous year, to the account of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of an income and the latter, as the scope of Section 7 would clearly demonstrate, deals with the timing of an income. The submissions of the learned counsel, on this point as well, donot appeal to us. In view of these discussions, it is quite clear that the dividend income, in the hands of the assessee, is received in India, and is deemed to accrue or arise in India. The authorities below, therefore, cannot be held to be in error in holding that the monies received by the assessee from the Indian depository, in respect of the dividends paid by the SCB-UK as attributable to the IDRs held by the assessee, were taxable in India. We confirm the action of the authorities below on this point and decline to interfere in the matter. 10. Learned counsel s armoury, however, is not exhausted. He seeks treaty protection under the Indo-Mauritius tax treaty. It is his submission that the assessee is admittedly a resident of Mauritius in terms of article 4(1) of the treaty, that the TRC is also placed on record, and that article 10 comes into play only when a resident of one of the contracting states, i.e., residents of India or Mauritius, pays a dividend to the resident of the other contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be protected by the treaty. As to who made the payment of income in question, i.e., a resident of the other Contracting State or any other person, is not relevant so far as treaty protection is concerned. What essentially follows is that when the person making the payment of income in question is not a resident of one of the Contracting States and yet such an income has tax implication in one of the Contracting States, the person resident in the other Contracting State will nevertheless, therefore, have treaty protection in the Contracting State where that income is being subjected to the taxes protected by the treaty. What is thus relevant is the fact of taxation in the other Contracting State. Once the eligibility for treaty protection is established, the next thing is what is the treatment envisaged to that nature of income under the tax treaty. Let us, in this backdrop, take a look at the provisions of Article 10(1) of the Indo-Mauritius tax treaty, which provides that (d)ividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State . Clearly, therefore, fact of dividend being paid by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of Convention and arising in the other Contracting State may also be taxed in that other State. [* Inserted by the Notification No. SO 2680(E) {NO.68/2016 (F.No.500/3/2012-FTD-II){, dated 10-8- 2016, w.e.f. 1-4-2017] 12. What is clearly discernable from the above provision is that till 1st April 2017, the residuary income, which was not specifically covered by any of the specific treaty provisions and not covered by the exclusion clause in Article 22(2), could only be taxed in the residence jurisdiction to the exclusion of the powers of the source jurisdiction to tax the same. Once we come to the conclusion that the income in question, i.e., dividend income from the IDRs, is not covered by any of the specific provisions of the Indo-Mauritius tax treaty, is not covered by the exclusion clause in article 22(2), and it pertains to the period prior to 1st April 2017, it is a corollary to these findings that the said income cannot be taxed in the source jurisdiction, i.e. India, either. We, therefore, uphold the plea of the assessee that the IRD dividends in question cannot be taxe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roup, and one does not know which is the entity represented by the SCB-India. He also points out that it is a case of triple non-taxation inasmuch as here is a company which is owned by a US-based business house, it forms a subsidiary in Mauritius, holds the shares in a UK company through an Indian depository, and it does not pay taxes at any of these places of operations. He submits that it s a blatant case of treaty abuse that must be discouraged. 16. 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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