2021 (5) TMI 968 - AT - Income Tax

Tribunal rules dividend income from SCB-India not taxable under India-Mauritius DTAA

Morgan Stanley Mauritius Co Ltd Versus Deputy Commissioner of Income Tax International Taxation Circle 3 (2) (2), Mumbai

Morgan Stanley Mauritius Co Ltd Versus Deputy Commissioner of Income Tax International Taxation Circle 3 (2) (2), Mumbai - TMI Issues Involved:1. Taxability of dividend income received by the assessee in India.2. Applicability of the India-Mauritius Double Taxation Avoidance Agreement (DTAA) to the dividend income.3. Interpretation of the term 'Indian Depository Receipts' (IDRs) and its implications on taxability.4. Validity of the Dispute Resolution Panel's (DRP) findings.Detailed Analysis:1. Taxability of Dividend Income Received by the Assessee in India:The primary issue was whether the receipts of Rs. 9,74,66,600 from Standard Chartered Bank-India, in respect of shares represented by IDRs of Standard Chartered Bank plc-UK, were chargeable to tax in India. The assessee, a company incorporated in Mauritius, received dividends from SCB-India for the underlying shares related to the IDRs. The Assessing Officer (AO) held that the dividends were taxable in India, as the first point of receipt was in the bank accounts of the IDR holders in India. The AO rejected the assessee's contention that the dividends were received abroad by BNY-US, noting that the money continued to be in the possession of SCB-UK and was paid in India.2. Applicability of the India-Mauritius Double Taxation Avoidance Agreement (DTAA):The assessee argued that under the India-Mauritius DTAA, the dividends did not meet the definition of dividends under Article 10 and should be taxed under Article 22, which allows exclusive taxation in the residence jurisdiction, i.e., Mauritius. The DRP rejected this claim, stating that the company distributing the dividend income was a resident of India for the purposes of the DTAA. However, the tribunal found that the dividend income could not be taxed under Article 10 of the DTAA as neither SCB-UK nor SCB-India was a resident of India. Consequently, the income fell under the residuary head of 'other income' under Article 22, which could only be taxed in Mauritius.3. Interpretation of the Term 'Indian Depository Receipts' (IDRs) and Its Implications on Taxability:The tribunal provided a detailed explanation of IDRs, stating that they are derivative financial instruments issued by an Indian depository based on underlying shares of a foreign company. The dividends received by SCB-India from SCB-UK were distributed to IDR holders in India. The tribunal emphasized that the IDR holders are not shareholders of the foreign company but are entitled to the benefits of the underlying shares. The tribunal concluded that the dividends received by the IDR holders were received in India and thus taxable in India.4. Validity of the Dispute Resolution Panel's (DRP) Findings:The DRP's findings were challenged on the grounds that SCB-India, being a branch of SCB-UK, was not a resident of India for the purposes of the DTAA. The tribunal found the DRP's reasoning incorrect, noting that SCB-India was a permanent establishment of a UK-based company and not a taxable unit in India. The tribunal rejected the DRP's stand, stating that the income in question was treaty-protected and could not be taxed in India.Conclusion:The tribunal concluded that the dividend income received by the assessee from SCB-India, attributable to the IDRs, could not be taxed in India due to the provisions of the Indo-Mauritius tax treaty. The addition of Rs. 9,74,66,600 was deleted, and the appeal was allowed. The tribunal clarified that this decision would hold good only for the pre-amendment period, i.e., pre-1st April 2017, due to changes in the relevant treaty provisions.