Treaty residency and residuary income under India-Mauritius DTAA exempted IDR dividend from Indian tax.

Dividend received on Indian Depository Receipts by a Mauritius tax resident was not taxable in India under Article 10 of the India-Mauritius DTAA because the payment did not meet the treaty requirement of a dividend paid by a company resident in a Contracting State to a resident of the other Contracting State. As no specific treaty article otherwise covered the income and the relevant period predated Article 22(3), the amount fell within the residuary article and was taxable only in Mauritius. The addition was deleted. Penalty initiation was also challenged, but the substantive treaty relief remained the operative outcome.

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Issues: Whether dividend received on Indian Depository Receipts was taxable in India under Article 10 of the India-Mauritius DTAA, or fell within Article 22 as residuary income and was therefore taxable only in Mauritius.

Analysis: The assessee was a tax resident of Mauritius and was entitled to treaty protection. The dividend, though routed through the Indian depository mechanism, was held to arise from the underlying foreign shares and did not satisfy the conditions for Article 10, which requires dividend paid by a company resident in a Contracting State to a resident of the other Contracting State. On the facts, the payment could not be treated as falling within Article 10. Since no specific treaty article covered the income, and the relevant period was prior to the insertion of Article 22(3), the income fell within Article 22. Under that residuary provision, such income was taxable only in the residence State.

Conclusion: The dividend on the Indian Depository Receipts was not taxable in India under Article 10 and was covered by Article 22 of the India-Mauritius DTAA; the addition was deleted.

Final Conclusion: The assessee succeeded on the substantive treaty issue, and the appeal was allowed to that extent, while the challenge to penalty initiation did not alter the overall partial relief.

Ratio Decidendi: Where income is not expressly dealt with by a specific treaty article and the relevant period predates the amendment expanding the source State's taxing right under the residuary article, such income is taxable only in the residence State under the DTAA.

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