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TMI Blog2023 (1) TMI 1112X X X X Extracts X X X X X X X X Extracts X X X X ..... ature 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 - ITA NO.7209/MUM/2019 - - - Dated:- 26-9-2022 - SHRI VIKAS AWASTHY, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER For the Appellant : Shri Nishant Thakkar, Advocate with,Ms.Jasmin Amalsadvala ,Shri Harshit Sangoi. For the Respondent : S/Shri Milind S. Chavan Nihar Samal ORDER PER VIKAS AWASTHY, JM: This appeal by the assessee is directed against the assessment order dated 24/09/2019 passed under section 143(3) r/w/s/ 144C (13) of the Income Tax Act, 1961 [ in short the Act ] for the assessment year 2016-17. 2. Shri Nishant Thakkar appearing on behalf of the assessee submitted that the assessee is a tax resident of Mauritius. The assessee is registered with Securities and Exchange Board of India (SEBI) as Foreign Inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorized Representative of the assessee submitted that since the assessee is a tax resident of Mauritius, the assessee is entitled to the India- Mauritius DTAA benefit to the extent it is more beneficial than the provisions of the Act. The ld. Authorized Representative of the assessee contended that Article -10 of the Treaty would apply only where the company paying dividend is resident of India. Here, the company paying dividend is SC PLc (resident of UK) and not Domestic Depository. The dividend is received by assessee, a tax resident of Mauritius. Therefore, the conditions necessary to trigger Article - 10 of India- Mauritius DTAA are not satisfied. The dividend income earned by the assessee falls within the residuary clause i.e. Article-22 of India- Mauritius Double Taxation Avoidance Agreement (DTAA) and, hence not taxable in India. The ld. Authorized Representative of the assessee submitted that identical issue had come up before the Tribunal in the case of Morgan Stanley Mauritius Co Ltd vs. DCIT in ITA No.7388/Mum/2019 for the assessment year 2015-16. The Tribunal vide order dated 28/05/2021, after examining the issue in detail held that dividend on IDR is not taxable in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic Depository pursuant to the Custody Agreement. The Issuing Company deposits the equity shares with the Overseas Custodian who holds the deposited shares on behalf of the Domestic Depository. The Overseas Custodian will hold the equity shares on behalf of the Domestic Depository and will, upon receipt of instructions from the Domestic Depository(as instructed by the IDR Holders), take certain actions (e.g. voting at general meetings, conversion/ redemption into underlying shares, etc.) with respect to the deposited shares, to enable the IDR Holders to obtain the benefit of such deposited shares. The Domestic Depository issues the IDRs representing the deposited shares to the subscribers (IDR Holders) and holds the Deposited Property (and all rights, benefits and obligations attaching thereto) as bare trustee under English law for the IDR Holders. Thereafter, the Domestic Depository will ensure that the IDRs are listed on an Indian Stock Exchange for trading as a fisted security. The IDR Holder is able to enforce all the obligations under Deposit Agreement read with the Deed Poll as if all IDR Holders are direct party to the Deposit Agreement. The IDR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty in India, or through or from any assets or source of income in India will be deemed to accrue or arise in India. The shares may be held by an overseas custodian but these shares constitute property of the Indian depository, i.e. SCB-India. In other words, the assets are held by the SCB-India as property of the SCB-India, though through 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly puts it, the requirements of Section 9(1)(i) are clearly fulfilled. Section 9(1)(iv) does not start with a non-obstante clause or in any manner restricts the scope of Section 9(1)(i) in the sense that only such dividends can be taxed in the hands of a non-resident which fulfill the requirements of Section 9(1)(iv). The receipt in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t taxable as such. That is, however, not the case before us. Whatever may be physical flow of funds i.e. via foreign custodian under instructions from the Indian depository, it is clearly evident from the chart set out below paragraph 6 earlier in this order, the constructive flow of dividends is from the UK based company to the Indian 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 exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvisaged in Section 5, at the cost of repetition, for the scope of income deemed to be received in India in such year by or on behalf of such person (i.e. non-resident) is irrelevant so far as the scope of incomes deemed to be received in a previous year is concerned. The former deals with situs 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, do not 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. 7. The Co-ordinate Bench thereafter, proceeded to decide the issue whether the assessee would be eligible for treaty benefit, if yes, whether the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, 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 a company which is resident of a Contracting State to the resident of the other Contracting State is a sine qua non for application of article 10, which deals with taxability of dividends under the Indo- Mauritius tax treaty. Given the facts of this case, which we have discussed earlier in this order, the dividends can be treated as having been paid either by the SCB-UK itself or by the SCB-India. Whichever way one looks at it, none of these payments can be treated as by an Indian resident, i.e. one of the Contracting States. Whether we treat the person making the payment to the assessee as SCB-UK or as SCB-India, the fact remains that none of them is a resident in India- while former is a company incorporated in, and fiscally domiciled in, the United Kingdom, the latter is an Indian branch office, and permanent establishment, of a company, incorporated or fiscally domiciled in India. None of these entities, i.e., the foreign company or the Indian deposito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 taxed in India in the hands of the assessee on the facts of this case. 13. xxxxxxxx Xxxxxxxx 17. xxxxxxxx 18. 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 of Rs 9,74,66,600, 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. The Co-ordinate Bench in a lucid manner explained the provisions of Article- 10 and Article-22 and thereafter explained as to how th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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