Category: Tribunal News: Part B: International Tax Decisions

2. [2025] 172 taxmann.com 515 (Mumbai – Trib.)

Vanguard Emerging Markets Stock Index Fund vs. ACIT (IT) ITA No: 4657 (MUM) of 2023

A.Y.: 2021-22 Dated: 18^th March, 2025

Article 13 of India-Ireland DTAA –Right entitlement to equity shares cannot be equated with shares – Under Article 13(6) of India-Ireland DTAA, taxing right in respect thereof vests with Resident State.

FACTS

The Assessee, a tax resident of Ireland, was registered with SEBI as a Foreign Portfolio Investor (FPI). During the relevant AY, the Assessee had earned short-term capital gain of ₹6.53 Crores from transfer of Rights Entitlement (RE). In respect thereof, the Assessee claimed benefit under Article 13(6) of India-Ireland DTAA without setting-off the same against other short-term loss of ₹42.95 Crores.

The AO held that RE was taxable and the total income was to be computed under the Act before claiming any relief under Section 90(2). Accordingly, the AO set off short-term capital gains against capital losses and denied exemption under DTAA.

The DRP held that RE and shares are related assets and the same are granted only to the existing shareholders to subscribe to shares at a discounted price. Hence, Article 13(5) has to be broadly interpreted to include any rights in respect of shares, alienation of which grants source taxation right to India.

Aggrieved by the final order, the Assessee appealed to ITAT.

HELD

As per Section 62 of the Companies Act, 2013, RE are not to be equated with shares. RE is an offer to subscribe to the shares of the Company that is granted to shareholders.

The SEBI Circular on process of rights issue provides that REs would be credited to demat account and a separate ISIN will be allotted. Trading of RE in demat form is made subject to Securities Transaction Tax at a rate different from shares.

Reliance was placed on the Supreme Court decision in Navin Jindal vs. ACIT [2010] 187 Taxman 283, where it was held that a right to subscribe to additional shares or debentures is a separate and independent right from shares. In terms of Section 55(2)(aa) of the Act, read with Section 2(42A)(d), cost of acquisition of renounced REs is deemed to be Nil.

The OECD Model Convention on Income and Capital, 2017 states that in terms of residual provision of capital gains Article, gains from alienation of capital assets not expressly covered under specific paragraphs ofArticle 13 are to be taxable only in resident state. The UN Model Convention, 2017 also provided the same. In 2017, UN Model Convention was amended to include the concept of other comparable interests, such as interest in partnership or trust in para 13(4) (which deals with share of company that derives value directly or indirectly from immovable property) and 13(5) (which deals with alienation of share of a company) of capital gains article.

The pre-MLI Article 13(4) dealt with alienation of shares of a company that derives significant value directly or indirectly from immovable property. Article 13(5) deals with alienation of shares of a company. In effect, Articles 13(4) and 13(5) of the India-Ireland DTAA do not include ‘other comparable interests’ to shares of a company. However, in 2019, Multilateral Instruments (MLI) amended the scope of Article 13(4) to include ‘comparable interest’ only in relation to partnership or trust. The MLI did not amend the scope of shares of a company to include comparable interest in Article 13(5).

The Tribunal applied Article 3(2) of India-Ireland DTAA, Section 90(3) of the Act and definition of shares as per Section 2(84) of Companies Act. It noted that shares mean a share in company’s capital and includes stock. Therefore, an asset that derives value or comes into existence from another asset cannot be equated with original asset.

In light of the foregoing, the Tribunal held that in terms of Article 13(6), transfer of REs was taxable only in Ireland. The Tribunal further held that capital losses computed under provisions of the Act r.w. Article 13(5) cannot be set-off against gains from Article 13(6) as India does not have taxing rights in respect of such gains.

BCAJ Admin

4 [2023] 148 taxmann.com 79 (Mumbai – Trib)

Schindler China Elevator Company Ltd. vs. ACIT

ITA No: 3355/Mum/2023

A.Y.:2020-21

Dated: 22^nd March, 2024

Income in respect of offshore supply of goods made on CIF basis to customers in India did not accrue in India, and hence, was not liable to tax in India because property in goods had passed outside India and payment was also made outside India.

FACTS

Assessee was a non-resident company incorporated in China. It was engaged in the business of designing, manufacturing and supplying elevators and escalators.

Assessee had formed a consortium with its Indian AE for bidding in tenders floated by two Indian companies for design, manufacture, supply, installation, testing and commissioning of escalators. Consortium of Assessee and AE were awarded the tenders. During the relevant year, Assessee had earned certain income from supply of escalators. It contended that the said income represented business profits and since it did not have PE in India, in terms of Article 7 of the India-China DTAA, the business profits were not taxable in India.

The AO contended that Assessee had earned income from India in respect of a composite contract having significant on-shore elements. Assessee had entered into an arrangement with its Indian AE for fulfilment of obligations of Assessee under the contracts. Both contracts were composite and indivisible and could not be split into separate parts for supply and commissioning as was contended by Assessee. The AO further contended that the consortium was liable to be assessed as an AOP and income from transactions was chargeable to tax in India because no benefit of India-China DTAA could be granted to AOP. AO held that Assessee had a clear business connection in India and it was having regular income from India from the contracts. Therefore, AO held that 5 per cent of total receipts of Assessee were taxable as income from composite contract and were liable for taxation in India @ 40 per cent.

DRP rejected the objections filed by Assessee and confirmed the draft assessment order. AO passed final assessment order in line with the draft assessment order.

HELD

•  ITAT noted that the facts in current year were identical to those in Assessee’s own case for earlier year where coordinate bench of ITAT had held that since both transfer of property in goods and also the payment, were carried out outside India, the transaction could not be taxed in India. Hence, for current year also ITAT relied on the said decision. ITAT summarised the relevant observations and operational part of the ruling as follows.
•  Assessee had formed consortium for bidding in tenders. Assessee had entered into MOU with AE. Both parties had jointly bid for the project as a consortium and each party was responsible for its own scope of work, which was separately defined. Work of AE could begin only after goods reached port of destination. In MOU, the parties had specified the percentage of effort and time that was expected to be spent by each of them on the project. The said percentage did not, in any way, imply share of profit or losses. Each party was to raise separate invoices as per the contract price and retain its own profits, or bear its own losses, as the case may be.
•  MOU was made part of contracts and thus, the distinct scope of work and separate responsibility of each member of the consortium was also accepted by Indian customers. Assessee had contended that since consideration it received was in respect of offshore supply of elevators and escalators to both customers, it was not taxable in India. The Revenue had not brought any material on record to controvert the contention of the Assessee. AE had offered consideration received by it in respect of its scope of work for taxation in India.
•  Draft assessment order had held that since the offshore supplies had been made by Assessee at an Indian port of destination, the delivery of the goods was in India. Therefore, profit made by Assessee on CIF basis was liable to be taxed in India since the sale was completed in India.
•  Relying upon decision of another coordinate bench in JCIT vs. Siemens Aktiengesellschaft, [2009] 34 SOT 16 (Mumbai), coordinate bench of ITAT had rejected these contentions. The said decision referred to the expression “Cost, Insurance and Freight” as per INCO Terms, 1990. It was noted that in case of CIF though the seller pays cost, insurance and freight etc., the buyer bears all risks of loss of, or damage to, the goods from port of shipment to port of destination. Hence, in case of CIF, theproperty in goods passed on to the buyer at the portof shipment. Therefore, when Assessee made offshore supply of equipment to buyer on CIF Bombay basis for agreed consideration, the property in the equipment passed to the buyer at the port of shipment itself.
•  Following the aforesaid coordinate bench ruling in Siemens Aktiengesellschaft, the coordinate bench of ITAT in case of Assessee for earlier year had held that the title in the property in the goods shipped by Assessee was transferred at the port of shipment itself.
•  The coordinate bench had also relied upon SC judgment in Ishikawajma-Harima Heavy Industries, wherein SC had held that only such part of incomeas was attributable to operations carried out in Indiacould be taxed in India. Thus, since both transferof property in goods and also the payment, were carried out outside India, the transaction could not be taxed in India.
•  ITAT held that issues raised in the present case, were similar to those in preceding AY. Hence, relying on the decision of coordinate bench of ITAT in earlier year, ITAT held that since, in the present case, the Assessee did not carry out any operation in India in respect of its scope of work, income earned by Assessee from offshore supply of escalators and elevators to Indian customers was not taxable in India.
•  Accordingly, ITAT deleted additions.

BCAJ Admin

3 [2024] 160 taxmann.com 632 (Delhi – Trib.)

Norwest Venture Partners X-Mauritius vs. DCIT

ITA No: 2311/Del/2023

A.Y.: 2020-21

Dated: 19^th March, 2024

Capital gains on transfer of shares acquired prior to 1^st April, 2017 were not taxable in terms of Article 13(4) of India-Mauritius DTAA because of grandfathering provisions; it was evident from TRC that Assessee was a tax resident of Mauritius.

FACTS

Assessee was a non-resident company incorporated under laws of Mauritius. The Assessee was an investment holding company. The ultimate parent company of Assessee was beneficially owned by an American entity. Assessee was issued Category-1 Global Business License in Mauritius. Based on Tax Residency Certificate (“TRC”) issued by Mauritius Revenue Authority, it was a tax resident of Mauritius. In India, Assessee was registered with SEBI as a foreign venture capital investor. Assessee had invested in equity shares of various Indian companies. During the previous year relevant to AY 2020-21, Assessee had sold shares of certain Indian companies and derived capital gains. In its return, Assessee had claimed exemption in respect of LTCG in terms of Article 13(4) of India-Mauritius DTAA.

Revenue noted that ultimate parent company of Assessee was beneficially owned by an American entity. Revenue held that: (a) Assessee was controlled and managed from outside of Mauritius; (b) it did not have any commercial substance or real economic activity in Mauritius; and (c) mere TRC was not sufficient evidence to prove tax residency of Assessee in Mauritius. Therefore, adopting substance over form approach, revenue concluded that Assessee was a shell / conduit company and consequently, it was not entitled to avail benefits under India-Mauritius DTAA.

DRP directed Revenue to factually verify facts and contention of Assessee on the basis of documents/submissions available in the assessment records and without conducting any fresh enquiry. DRP also directed revenue to pass a speaking and reasoned order. Revenue retained the proposed addition in the draft assessment order.

HELD

•  Assessee was carrying on investment activity in India since July 2007. Even after 1^st April, 2017 when capital gain exemption was withdrawn, Assessee continued to make substantial investments in India.
•  SEBI had registered Assessee as foreign venture capital investor in 2007. SEBI would have granted registration only after due verification of credentials of Assessee. So, Assessee was a genuine investor and not a fly-by-night operator.
•  Assessee had furnished documentary evidences for claiming benefit in terms of Article 13(4), read with Section 90. On the contrary, neither draft nor final assessment order brought on record any conclusive evidence to prove the allegation that since the control and management of Assessee was not in Mauritius, Assessee was a shell/conduit company.
•  Category-1 Global business license and TRC would have been issued only after due verification of facts and evidence by Mauritius Tax Authority. Hence, its correctness could not be questioned.
•  CBDT has also accepted the sanctity of TRC by issuing Circular No.789 dated 13^th April, 2000, which states that TRC issued by Mauritius Tax Authority will constitute sufficient evidence regarding residential status and beneficial ownership for applying DTAA provisions, including in respect of income from capital gain on sale of shares. Hence, denial of treaty benefits clearly runs in the teeth of the said Circular.
•  This issue has been well-settled by now, beginning from SC judgment in Azadi Bachao Andolan. Judgments of Bombay HC in JSH Mauritius and Bid Services, judgement of P & H HC in Serco BPO, and judgement of coordinate bench in MIH India also supported the case of Assessee. Reference made by DRP to LOB clause in Article 27A of DTAA is irrelevant in this case because Assessee had not claimed any benefit under Article 13(3B), and Revenue had also failed to demonstrate fulfilment of conditions therein regarding shell/conduit company.
•  Restoration of issue by DRP without deciding on merits was contrary to scheme of Section 144C as it did not confer power to set aside. Such an action of DRP had resulted in gross violation of rules of natural justice because once a direction is issued, AO had to pass final assessment order in conformity with such directions without providing any further opportunity of being heard to Assessee. As Revenue had merely confirmed the draft assessment order, the impugned order was also not sustainable since directions of DRP were not implemented in letter and spirit.

BCAJ Admin

20. DCIT vs. Total Oil India (Pvt) Ltd
[2023] 149 taxmann.com 332 (Mumbai-Trib.) (SB)
[ITA No: 6997/Mum/2019]
A.Y.: 2016-17
Date of order: 20th April, 2023

Section 115-O read with Dividend Article of DTAA – Dividend Distribution Tax (DDT) rate prescribed under section 115-O cannot be reduced to rate mentioned in Dividend Article of DTAA rate applicable to a non-resident shareholder.

FACTS

Taxation of dividend income under the Act has been subject to various amendments from time to time. Pre-1997, classical system of taxation was prevalent wherein the dividends were taxed in the hands of shareholders and companies declaring these dividends were required to withhold taxes on dividend income. From the year 1997 to 2020 (except for April 2002 to March 2003) the classical system was done away with and DDT regime existed. As per this regime, the company declaring dividend was made liable to pay taxes on dividends declared/distributed or paid. Consequently, such dividend income was regarded as exempt in the hands of the shareholders under the ITL. Vide Finance Act, 2020, DDT regime was abolished, and the classical system of taxation was restored.

On the judicial front, various Courts and ITAT have ruled on the DDT issue. Notably, given below are the relevant observations for the present controversy:

• The SC in the case of Tata Tea⁴ held that the entirety of income distributed by the company engaged in the business of growing and manufacturing tea is dividend subject to DDT even if it is partially paid out of the exempt agricultural income of the company. A dividend distributed by a company, being a share of its profits declared as distributable among the shareholders, does not partake in the character of profits from which it reaches the hands of the shareholder. Since dividend income is not agricultural income, the same will be chargeable to tax.
• Further, the SC in the case of Godrej & Boyce⁵ held that the dividend income was exempt in the hands of the shareholder and, hence, any expense in relation to such exempt income cannot be regarded as deductible. The SC held that tax incidence on dividend income was in the hands of the payer company. A domestic company is liable to pay DDT as a distinct entity and not as an agent of the shareholders. Accordingly, the income is not taxable in the hands of recipient shareholders and, thus, the same did not form part of the total income of the shareholder.
• Delhi ITAT in the case of Giesecke & Devrient⁶ and Kolkata ITAT in the case of Indian Oil Petronas Pvt Ltd⁷, held that the DDT rate on dividend paid to non-resident shareholders needs to be restricted to the rates prescribed under the DTAA, if the conditions for DTAA entitlement are satisfied. The Tribunal noted that DDT is effectively a tax on dividend income, the incidence of which needs to be seen from the perspective of the recipient shareholder. Accordingly, the income tax should be charged at the lower of rate specified under the Act or DTAA for the recipient.

4    (2017) 398 ITR  260 (SC)
5    394 ITR 449 (SC),
6    [TS-522-Tribunal-2020]
7    [TS-324-Tribunal-2021(Kol)]

Later, Mumbai ITAT in the case of Total Oil India Pvt Ltd⁸ expressed its apprehensions about the correctness of the Tribunal decisions in the case of Giesecke & Devrient and Indian Oil Petronas Pvt Ltd and directed for the constitution of a Special Bench

Question for consideration before the Special Bench was:

“Where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts additional income-tax (tax on distributed profits) referred to in section 115-O of the Income-Tax Act,1961 (in short ‘the Act’), whether such additional income-tax payable by the domestic company shall be at the rate mentioned in Section 115-O of the Act or the rate of tax applicable to the non-resident shareholder(s) with reference to such dividend income”

HELD

Though dividend is an income in the hands of the shareholder, taxability need not necessarily be in the hands of the shareholder. The sovereign has the prerogative to tax the dividend, either in the hands of the recipient⁹ of the dividend or otherwise¹⁰.

Section 115-O is a complete code in itself, in so far as levy and collection of tax on distributed profits is concerned. Charge in the form of additional income tax (i.e., DDT) is created on amount declared, distributed or paid by domestic company by way of dividend. Further, DDT is a tax on “distributed profits” and not a tax on “dividend distributed”. The non-obstante nature of provision is an indication that the charge under the DDT provisions is independent and divorced from the concept of “total income” under the ITL.

DDT is liability of the company and not payment on behalf of the shareholders as DDT paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends. The fact that no further credit or deduction can be claimed by the company or by any other person also suggests that shareholder does not enter the domain of DDT. The payee’s right to recover excess taxes which are deducted/collected at source or the right of subrogation in the event when payer pays excess over and above what he/she has to pay to the payee, is absent in the entire scheme of DDT provisions under the Act.

8    (ITA No. 6997/Mum/2019)
9    Classical/progressive system
10    Simplistic system where the company which distributes the dividend is required to discharge the tax liability on the sum distributed by way of dividend as an additional income tax on the company itself and consequently such dividend income was exempt in the hands of shareholders

• The SC in the case of Tata Tea Co. Ltd¹¹ did not deal with the nature of DDT, i.e., whether it is tax on the company or a tax on the shareholder. Reliance placed by the assessee on the said SC decision to suggest that DDT is a tax paid on behalf of the shareholder is not valid. The decision of SC in Tata Tea (supra) does not support that DDT is tax paid on behalf of the shareholders or that DDT is not the liability of the company. The SC, in that case, upheld the constitutional validity of DDT levy in respect of dividend paid out of that portion of profit of tea manufacturing company which is regarded as agricultural income of the company. The SC held that dividend does not bear the same character as profits from which it is paid and ruled that dividend is included within the definition of ‘income’ under the ITL.
• Assessee’s reliance on the SC ruling in case of Godrej & Boyce Mfg. Co Ltd.¹² to contend that DDT is paid on behalf of the shareholder and has to be regarded as payment of liability of the shareholder, discharged by the domestic company paying DDT is also not correct. The observation of the underlying Bombay HC decision regarding the legal characteristics of DDT is that it is tax on a company paying the dividend, is chargeable to tax on its profits as a distinct taxable entity, the domestic company paying DDT does not do so on behalf of the shareholder, and nor does it act as an agent of the shareholder in paying DDT. The conclusion cannot be said to have been diluted or overruled by the SC. The SC by taking a different basis reached the same conclusion that DDT is not a tax paid by the domestic company on behalf of the shareholder.

11    [(2017) 398 ITR  260 (SC)]
12    394 ITR 449

• As against above, the Bombay HC in the case of Small Industries Development Bank of India¹³ (SIDBI) held that DDT is not a tax on dividend in the shareholder’s hands but an additional income-tax payable on the company’s profits, more specifically on that part of the profits which is declared, distributed or paid by way of dividend.
• Interplay of DDT and DTAA
• DTAAs need to be considered from the perspective of the recipients of income, i.e., shareholders. Where DDT paid by the domestic company in India, is a tax on its income distributed and not tax paid on behalf of the shareholder, the domestic company does not enter the domain of DTAA at all.
• The DTAAs should specifically provide for treaty benefit in case of DDT levied on domestic company. Illustratively, the protocol to India-Hungary DTAA has extended the treaty protection¹⁴ to DDT wherein it has been stated that when the company paying the dividends is a resident of India then tax on distributed profits shall be deemed to be taxed in the hands of shareholder and will be eligible for reduced tax rate as provided in the DTAA.
• Thus, wherever the Contracting States intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA.

13    133 taxmann.com 158
14    Protocol to India-Hungary DTAA provides: “When the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend”

shailesh.kwebmaker

19. ITO vs. Total Sports & Entertainment India Pvt Ltd
[TS-145-ITAT-2023(Mum)]
[ITA No: 5717 & 6129/Mum/2016]
A.Y.: 2014-15
Date of order: 27th March, 2023

Article 28 of India-Malaysia DTAA – Article 28 cannot be invoked if the company is having substance in the form of employees, revenue and is set up for valid business reasons; Article 12 of India-Malaysia DTAA – Sub-licensing payment to a Malaysian company for: (a) Logo Rights; (b) Advertising Privileges; (c) Promotion Activities Rights; and (d) Rights to Complimentary Tickets, in respect of the cricket matches outside India, is not in nature of royalty under Article 12 of India-Malaysia DTAA.
 
FACTS

Assessee, an Indian company, was engaged in the business of seeking rights sponsorships for any sports and entertainment event. It is a WOS of a Cayman Islands company (Cayman Hold Co). Cayman Hold Co was a holding company of 11 companies around the world including the assessee and a Malaysia company.

Cayman Hold Co had acquired advertisement rights of the Sri Lanka National Cricket Team¹. The rights included: (a) Logo Rights; (b) Advertising Privileges; (c) Promotion Activities Rights; and (d) Rights to Complimentary Tickets. Cayman Hold Co had sub-licensed these rights to the Malaysian company which in turn further sub-licensed them to the assessee.

The Assessee monetized these rights to an Indian company and made sub-licensing payment to Malaysian company without deducting TDS.

Article 28 of India-Malaysia DTAA provides that a person shall not be entitled to its benefits if its affairs were arranged in such a manner as if the main purpose or one of the main purposes was to take the benefits of India-Malaysia DTAA. On the footing that: a) payments were in nature of royalty and b) Malaysian Company was interposed between the assessee and Cayman Hold Co to avail DTAA benefits of India-Malaysia DTAA, AO invoked Article 28 of India-Malaysia DTAA. Accordingly, AO held the assessee to be in default. CIT(A) held that Article 28 was not applicable to case of the assessee. CIT(A) bifurcated the payments in two parts in the ratio of 60:40. He considered 60 per cent of payment as advertisement charges for display of logo and content of billboard and held they were not in nature of royalty. He considered balance 40 per cent of payment as for the use of name ‘official partners’ or ‘official advertisers’ providing links on the website of the assessee and use of various items (which included photographs, etc.) of the teams for promoting products related to the assessee’s clients, and regarded them as royalty. Being aggrieved both parties appealed to ITAT.

HELD

Article 28 of India-Malaysia DTAA

After considering the following facts, the ITAT held the that Malaysian company was not a conduit or paper company set up to avail benefits under India-Malaysia DTAA.

• All the senior management team members (CEO, COO, CFO, etc.) were located in Malaysia.
• Rights obtained by Hold Co or other companies in the group were generally sub-licensed to the Malaysia company as the head office entity.
• Practice of sub-licensing was followed for companies across world and not only for India.
• Turnover of the Malaysian company was much higher than the revenue earned by it from the assessee.
• The Malaysian company was in existence much prior to the Hold Co and the assessee.
• Conclusion could have been different if the entire setup would have been in Cayman Islands and the Malaysian entity would have been a mere name lender in this set of transactions with no role to play.

1. Similar was the arrangement in arrangement in case of sponsorship rights of the West Indies Cricket Team.

ROYALTY TAXATION

• ITAT followed Delhi HC judgment in the case of Sahara India Financial Corporation Ltd², in which it was held as follows.
• Payment towards various sponsorship rights in respect of ICC tournament was not in connection with the right to use, or by way of consideration for the right to use, any of the three categories³ mentioned in Article 13 of the DTAA.
• There was no transfer of, copyright or, the right to use the copyright, flowing to the assessee. Therefore, payment made by the assessee would not fall within article 13(3)(c) of the said DTAA.

2     [2010] 321 ITR 459 (Delhi)
3    (a) any patent, trademark, design or model, plan, secret formula or process;
(b) industrial, commercial or scientific equipment or information concerning industrial, commercial or scientific experience; and
(c) any copyright of literary, artistic or scientific work cinematographic films and films or tapes for radio or television broadcasting.

shailesh.kwebmaker