Articles 10, 22 of India-Mauritius DTAA; Ss. 5, 9(1)(i), (iv) of the Act – Mauritius resident FII invested in IDR having underlying shares of a UK resident company and received dividend – Such dividend, though not taxable u/s 9(1)(iv), was taxable u/s 9(1)(i) – However, since it was not ‘dividend’ under Article 10 of India-Mauritius DTAA, it was residual income subject to treatment under Article 22; as taxing rights of such income were vested only in Mauritius up to 31st March, 2017, it was not taxable in India
FACTS
The assessee was a company incorporated and fiscally domiciled in Mauritius. The Mauritius Revenue Authority had issued it a Tax Residency Certificate. The assessee had invested in Indian Depository Receipts (IDRs) issued by Standard Chartered Bank – India Branch (SCB-India), having shares in Standard Chartered Bank plc (SCB-UK) as underlying asset. Bank of New York Mellon, USA (BNY-US) held these shares as custodian of depository. Shares of SCB-UK were listed on London Stock Exchange and IDRs issued were listed on stock exchanges in India.
During the relevant financial period, the assessee received dividends in respect of the underlying shares. The assessee claimed non-taxability under ITA and the Treaty by contending that: the dividend pertained to SCB-UK, which was a foreign company; it was received abroad by BNY-US; hence, dividend neither accrued nor arose in India, nor was it received or deemed to be received in India. It further contended that SCB India was a bare trustee (i.e., akin to a nominee) under the English law for IDR holders. Since dividend was first received outside India, its subsequent remittance to IDR holders in the Indian bank account cannot trigger taxation based on receipt. Further, as per the definition of dividend under Article 10 of the India-Mauritius DTAA, the receipt was not dividend. Hence, it would be subject to the provisions of Article 22. Since taxing rights of income covered in Article 221 are vested in residence jurisdiction, it could only be taxed by Mauritius and not India.
After examining the facts and legal framework of IDRs, the A.O. concluded that deposit in bank accounts of IDR holders in India was the first point of receipt of dividend. Till that time, money continued to be in possession of the payer, i.e., SCB-UK. Therefore, it could not be said to have been received outside India. Accordingly, the A.O. proposed to tax dividends u/s 115A(1)(a) @ 20% (plus applicable surcharge and cess).
HELD
• While IDR may be issued by an Indian Depository, it is a derivative financial instrument that draws its value from the underlying shares of a foreign company. Though shares may be held by the overseas custodian, they constitute property of the Indian depository which passes on all accruing benefits to IDR holders. For example, if the domestic depository receives dividends or any other distribution in respect of the deposited shares (including payments on liquidation of foreign company), receipts are converted into INR and paid in INR to IDR holders.
• In this case, though shares are held by the Indian depository, they constitute assets of SCB-India, even if as a trustee. Therefore, receipt was not dividend simplicitor from a foreign company but it had a clear, significant and crucial business connection with India.
• Circular No. 4/2015 was issued by CBDT in the context of a situation where, while underlying assets (shares of Indian companies) were in India, depository receipts were issued abroad and investors investing in such depository receipts were also abroad. They had no connection in India, other than the underlying asset of companies. However, under the extended scope of Explanation 5 to section 9(1)(i), such investors would have suffered taxation in India. Circular No. 4/2015 was issued to mitigate such situation.
• The present case is diametrically opposite to that which CBDT intended to cover. Here is a case where, while the underlying shares were abroad, depository receipts were issued in India and the beneficiaries entitled to the benefits of the underlying shares are also in India. Accordingly, Circular No. 4/2015 had no relevance in this case.
• To contend that other than dividend from an Indian company, no other dividend can be taxed in the hands of a non-resident in India because section 9(1)(iv) of the Act deems only dividend from an Indian company to be income accruing or arising in India, is fallacious. While dividend from a foreign company cannot be taxed u/s 9(1)(iv), it can be taxed under sections 9(1)(i) and 5(2). Insofar as the IDR holder is concerned, in reality and in law, the amount is received in India. Hence, for a non-resident IDR holder it will be income deemed to accrue or arise, as also received in India.
• In the context of section 5(2)(a) of the Act, the expression required to be interpreted is ‘income deemed to receive in India by or on behalf of such a person (i.e., non-resident)’, whereas section 7 defines ‘income deemed to be received in a previous year’. There is a clear distinction between the two provisions. The deeming fiction envisaged in section 5, namely, ‘income deemed to be received in India in such year by or on behalf of non-resident’ is not relevant insofar as the scope of ‘income deemed to be received in previous year’ is concerned because, while the former deals with the situs of income, the latter deals with the timing of income. From the facts it is clear that dividend was received in India.
• Article 10 of the India-Mauritius DTAA deals with taxability of dividends. For Article 10 to apply, dividend should be paid by a company which is resident of a contracting state to the resident of the other contracting state. However, as per the facts, dividends can be treated as having been paid either by SCB-UK or by SCB-India, which is a PE of SCB-UK. In either case, payment cannot be treated as payment by an Indian resident. Therefore, Article 10 of the India-Mauritius DTAA will have no application to such dividend.
• Prior to insertion of sub-Article (3) in Article 22 with effect from 1st April, 2017, residuary income, which was not specifically covered under any other Article and which was also not covered under exclusion clause in Article 22(2), could be taxed only in the residence state. Dividend from IDRs is not covered by any of the specific provisions of the India-Mauritius DTAA. It is also not covered by the exclusion clause in Article 22(2). Further, it pertains to the period prior to 1st April, 2017. Hence, only the residence state has taxing right and cannot be taxed in source jurisdiction, i.e., India.
• Observations of DRP as regards the basis of taxability, namely, ‘assessed to tax on account of place of management’ is ex facie incorrect inasmuch as SCB-India is a PE of a UK tax resident company and not an independent taxable entity in India. In CIT vs. Hyundai Heavy Industries Ltd. [(2007) 291 ITR 482 (SC)], the Supreme Court has observed that ‘it is clear that under the Act, a taxable unit is a foreign company and not its branch or PE in India’. Accordingly, the taxable entity in India is SCB-UK, though taxation is limited to profits attributable to its PE, i.e., SCB-India. Also, the place of management of SCB-UK is the UK.
• The tax authority contended that this is a case of triple non-taxation because: an American company incorporates a subsidiary in Mauritius; holds shares in a UK company; through an Indian depository; and does not pay taxes in any of the jurisdictions. He further mentioned that it is a blatant case of India-Mauritius DTAA abuse that must be discouraged. The proposition was rejected by observing that such considerations were irrelevant to the facts of the case before the Tribunal.
• Since the provisions of the India-Mauritius DTAA are more beneficial to the assessee than the Act, they will override the Act. Consequently, having regard to the provisions of Article 22 of the India-Mauritius DTAA, dividends on IDRs will not be taxable only up to 31st March, 2017, while India will have the right to taxation for the period effective from 1st April, 2017 on account of amended Article 22(3) of the Treaty permitting source taxation in respect of income accruing or arising from a source in India.
