Barclays Capital Mauritius Limited Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that 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.
Facts-
The assessee is a tax resident of Mauritius. The assessee is registered with Securities and Exchange Board of India (SEBI) as Foreign Institutional Investor (FII). The assessee is carrying on investment activities in Indian capital market.
The assessee filed its ROI for the impugned AY declaring total income as Nil. The assessee claim carry forward of STCG of Rs.545,37,91,785/- and LTCG of Rs.11,62,361/-. It was submitted that the assessee had earned dividend income amounting to Rs.3,37,04,020/- in respect of shares represented by Indian Depository Receipts(IDR) issued by Standard Chartered Bank Plc. (SC Plc) incorporated in United Kingdom. The said IDRs are listed on Stock Exchange in India. The dividend has been received by overseas custodian bank in UK and ultimately remitted to all IDR holders (including assessee). An IDR has been recognized as a security to facilitate trading thereof on the Indian Stock Exchange. The dividend that an IDR holder receives, is in fact a dividend on the shares of SC Plc (a foreign company). Thus, the dividend cannot be regarded as income from the IDR.
Conclusion-
The holder of IDR in present case is assessee instead of Morgan Stanley Mauritius Co. Ltd. The Tribunal held that in so far as the fact that dividend income is received by assessee in India is not in dispute, hence, the findings of authorities below cannot be faulted in holding that the money is received by the assessee therein from Indian Depository in respect of dividend paid by Standard Chartered Bank Plc UK is taxable in India, hence, the findings of the authorities below to that extent were confirmed by the Tribunal.
The Co-ordinate Bench in a lucid manner explained the provisions of Article10 and Article-22 and thereafter explained as to how the transaction would not fall within the ambit of Article 10 and hence, is covered by residuary Article – 22. The Tribunal after examining the transaction concluded that the taxability of IDR dividends fail in the light of India – Mauritius DTAA –Article 22.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
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 Institutional Investor (FII). The assessee is carrying on investment activities in Indian capital market. The assessee filed its return of income for the impugned assessment year declaring total income as Nil. The assessee claim carry forward of short term capital gain of Rs.545,37,91,785/- and long term capital gain of Rs.11,62,361/-. Reiterating the submissions made before the Dispute Resolution Panel(DRP), the ld. Authorized Representative of the assessee submitted that during the period relevant to the assessment year under appeal, the assessee had earned dividend income amounting to Rs.3,37,04,020/- in respect of shares represented by Indian Depository Receipts(IDR) issued by Standard Chartered Bank Plc. (SC Plc) incorporated in United Kingdom. The said IDRs are listed on Stock Exchange in India. The dividend has been received by overseas custodian bank in UK and ultimately remitted to all IDR holders (including assessee). An IDR has been recognized as a security to facilitate trading thereof on the Indian Stock Exchange. The dividend that an IDR holder receives, is in fact a dividend on the shares of SC Plc ( a foreign company). Thus, the dividend cannot be regarded as income from the IDR.
2.1 The ld. Authorized Representative for the assessee dividend on equity shares was declared by SC Plc UK and distributed to the Overseas Custodian bank in the bank account (in foreign currency) of the Domestic Depository and subsequently transferred to the bank account of the assessee in Indian INR. Mere remittance of such dividend to the Assessee in an Indian bank account should not be regarded as dividend being received or deemed to be received in India. Further, under the provisions of the Act, such dividend also cannot be regarded as deemed to have been received in India. The dividends so received by the Assessee are in respect of the underlying equity shares of the Issuing Company (i.e. SC Plc) and not on the IDRs listed on the recognized stock exchange in India. Hence, dividend on IDRs declared by SC Plc should be considered and regarded as dividend declared and payable abroad in respect of equity shares of a foreign company (i.e. SC Plc). Hence, it is income which is accruing or arising outside India. The Assessing Officer held that dividend received by the assessee is taxable under the provisions of Act as well as under Treaty -Article -10.
2.2 The ld. Authorized 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 India by virtue of application of Article-22 of the tax treaty. The facts in the case of assessee are parimateria.
3. Per contra, Shri Milind S. Chavan representing the Department vehemently defended the impugned order. The ld.Departmental Representative submitted that transaction is covered by DTAA Article -10. Hence, the assessee is eligible for concessional rate of tax @15% under Article -10. The ld. Departmental Representative referring to Article -10 of the treaty submitted that expression “Resident” should be considered as defined in the treaty and not as per the Act, if reliance is to be placed on DTAA. The ld. Departmental Representative further contended that the assessee has received dividend from Indian entity and the dividend had accrued/ paid to the assessee in India.
4. Rebutting the contentions raised on behalf of the Revenue the ld. Authorized Representative of the assessee submitted that the Tribunal in the case of Morgan Stanley Mauritius Co Ltd vs. DCIT (supra) in para -11 of the order has examined the applicability of Article -10 of the India – Mauritius tax treaty and concluded that provisions of Article-10 are not attracted in the present transaction.
5. We have heard the submissions made by rival sides and have examined the orders of authorities below. We have also considered the decision on which the ld. Authorized Representative of the assessee has placed reliance. The key features of IDR as per the prospectus are as under:
“The principal participants in the IDR facility are:
– The Issuing Company (SCPlc in this case);
– The Overseas Custodian; ( The Bank of New York Mellon in the instant case)
– The Domestic Depository; (Standard Charted Bank, Mumbai in the present case). – The IDR Holder (Assessee in this case).
