Treaty protection for India Depository Receipt income barred Indian taxation for the pre-amendment period

Dividend-like receipts from India Depository Receipts were treated as taxable in India under domestic law because the structure was operated through an Indian depository, with receipt and accrual held to occur in India. The contrary argument that payment was completed abroad was rejected, and the deeming provisions on receipt and accrual were applied. Treaty protection under the India-Mauritius DTAA was nevertheless available because the recipient was a Mauritius resident and the payment was not treated as a dividend under Article 10; it fell within Article 22 as residuary income. For the period before 1 April 2017, exclusive taxing rights vested in Mauritius, so Indian taxation was barred and the addition was deleted.

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Issues: (i) Whether the dividend-like receipts arising from India Depository Receipts were taxable in India in the assessee's hands under the Income-tax Act, 1961; (ii) Whether the assessee was entitled to treaty protection under the India-Mauritius Double Taxation Avoidance Agreement so as to avoid Indian taxation for the relevant period.

Issue (i): Whether the dividend-like receipts arising from India Depository Receipts were taxable in India in the assessee's hands under the Income-tax Act, 1961.

Analysis: The receipts were held to arise from a structure created and operated in India through the domestic depository, with the IDRs listed in India and the payment made to the IDR holder through the Indian depository. The Court treated the income as having a clear business connection with India and rejected the contention that receipt was completed abroad merely because the foreign custodian initially handled the cash flow. It also held that the deeming provisions concerning receipt and accrual were not displaced by reliance on the separate timing-focused provision relating to deemed receipt in a previous year.

Conclusion: The receipts were taxable in India under the domestic law and were held to be received in India and to accrue or arise in India.

Issue (ii): Whether the assessee was entitled to treaty protection under the India-Mauritius Double Taxation Avoidance Agreement so as to avoid Indian taxation for the relevant period.

Analysis: The Court held that the assessee was a resident of Mauritius and therefore entitled to invoke the treaty. It further held that Article 10 did not apply because the payment could not be characterised as a dividend paid by a company resident in a Contracting State to a resident of the other Contracting State. The income therefore fell within Article 22 as residuary income. For the period prior to 1 April 2017, Article 22(1) conferred exclusive taxing rights on the residence State, and India could not tax the amount in the source State. The Court also rejected the contrary view that the domestic depository could be treated as an Indian resident for treaty purposes.

Conclusion: The assessee was entitled to treaty protection and the income could not be taxed in India for the pre-1 April 2017 period.

Final Conclusion: The addition made on account of IDR dividend receipts was deleted, and the appeal succeeded on the ground that the treaty barred Indian taxation for the relevant period notwithstanding the domestic law position.

Ratio Decidendi: Where income connected with an Indian depository structure is otherwise taxable under domestic law, a non-resident Mauritius resident may still avoid Indian taxation if the receipt is not covered by the dividend article of the treaty and falls within the residuary article granting exclusive taxing rights to the residence State for the relevant pre-amendment period.

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