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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 ..... 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 Rs. 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 Tax Residency Certificate issued by the Mauritius Revenue Authorities. The assessee is an investor in the Indian Depository Receipts (IDR, in short) by "Standard Chartered Bank- India Branch" (SCB-India, in short), with the underlying asset in the form of shares in a UK based company by the name of Standard Chartered Bank plc (SCB-UK, in short) held by the depository's custodian, i.e., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, including, of course, the assessee. References were also made to the contents of Red Herring Prospectus (RHP) of the IDR issue to highlight the fact that even according to the RHP, 'dividends paid to the non-resident IDR holders shall be taxable in India, if it is received in India or is deemed to be received in India, that the exemption from dividend taxation in India is not available under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain 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 company' but defining it as "means a company incorporated outside India, making an issue of IDRs through a domestic depository". As for the connotations of expression 'domestic depository', rule 3(i)(c) explains it as "means 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 Receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 dividends or any other cash distribution in respect of the deposited shares (including any amounts received in the liquidation of the foreign company) or otherwise in connection with the deposited property", the amounts are to be converted into Indian Rupees and paid in Indian Rupees by cheque, pay orders and demand drafts and payable at par at the place where the IDR holders reside". While making these payments, "the domestic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 receipts, was to act "as bare trustee under the English law and the IDR holders will accordingly be tenants in common of such deposited property to the extent of the deposited property is represented by the IDRs in respect of which they are the IDR holders" (clause 7.1 of the depository agreement dated 8th May 2010; @ pages 8-88 of the paper-book). As a bare trustee of the IDR holders, the SCB- India has first received the dividends ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us 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 the hands of the persons who had no other connection, except the underlying asset of the related companies in India, and such a situation is materially different in the sense that here is a domestic depository that holds the IDRs with underlying assets abroad, the IDRs are listed in India as a derivative financial instrument, and the central point of the investment-related activity is in India. Such a situation cannot be compared with a direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidend 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 be, and is indeed is, on the basis of the dividend declared by the SCB-UK but then what the assessee is entitled to are the benefits flowing from the shareholdings in SCB-UK as an underlying asset of the IDRs. What is rightfully due to the assessee in income character is the net amount received from the Indian depository and not the dividend simplictor as declared by the SCB-UK. The income, therefore, accrues to the IDR holder at the point of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overned 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 employee under a pension scheme referred to in section 80CCD. None of these items have anything to do with any situation other than a situation becoming relevant for an employee, which is not the case. All that this provision deals with is as to when the income is deemed to be received, even though there is no actual receipt in the relevant previous year, and not with whether an income is deemed to be received by, or on behalf of, such a person- refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contraction state, i.e., Mauritius or India, but then since SCB-India is only an Indian branch office, i.e., permanent establishment, of a UK tax resident, these requirements of article 10 is not fulfilled. It is a payment by a UK resident to a Mauritius resident who is not covered by the scope of article 10. He contends that since the income in question cannot be treated as a dividend as it does not fulfill the requirements of article 10 of the Indo-Mauritius tax treaty, it falls in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eless, 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 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 resid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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 taxed in India in the hands of the assessee on the facts of this case. 13. As we hold so, we may also briefly deal with the reasoning adopted by the Dispute Resolution Panel in rejecting the aforesaid plea of the assessee. The relevant observations of the DRP are as follows: "It is noted that the Standard Chartered Bank Mumbai, which is assessed to tax in India on account of place of management, is the Domestic Depository which has made the payment of divided to the assessee company. It is noted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B-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. That apart, 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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