BARCLAYS CAPITAL MAURITIUS LTD.,MUMBAI vs. ACIT , IT 1(2)(1), MUMBAI

PER VIKAS AWASTHY, JM:

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 ITA NO.7209/MUM/2019(A.Y.2016-17)

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

3 ITA NO.7209/MUM/2019(A.Y.2016-17)

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

4 ITA NO.7209/MUM/2019(A.Y.2016-17)

application of Article-22 of the tax treaty. The facts in the case of assessee are parimateria.

“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)

5 ITA NO.7209/MUM/2019(A.Y.2016-17)

- The Domestic Depository; (Standard Charted Bank, Mumbai in the present case). - The IDR Holder (Assessee in this case).

• The Issuing Company appoints the Domestic Depository (located in India), pursuant to a Deposit Agreement, which sets out the rights and obligations of the Issuing Company and the Domestic Depository and the IDR Holders.

• The Issuing Company issues a Deed Poll, in favor of and for the benefit of the IDR Holders to evidence that the Issuing Company is bound by all the obligations under the Deposit Agreement towards the IDR Holders; as if the Deposit Agreement had been originally entered into directly with the IDR Holders.

• The Overseas Custodian is appointed by the Domestic Depository pursuant to the Custody Agreement.

• The Issuing Company deposits the equity shares with the Overseas Custodian who holds the deposited shares on behalf of the Domestic Depository. The Overseas Custodian will hold the equity shares on behalf of the Domestic Depository and will, upon receipt of instructions from the Domestic Depository(as instructed by the IDR Holders), take certain actions (e.g. voting at general meetings, conversion/”redemption into underlying shares, etc.) with respect to the deposited shares, to enable the IDR Holders to obtain the benefit of such deposited shares.

• The Domestic Depository issues the IDRs representing the deposited shares to the subscribers (IDR Holders) and holds the Deposited Property (and all rights, benefits and obligations attaching thereto) as bare trustee under English law for the IDR Holders. Thereafter, the Domestic Depository will ensure that the IDRs are listed on an Indian Stock Exchange for trading as a fisted security.

• The IDR Holder is able to enforce all the obligations under Deposit Agreement read with the Deed Poll as if all IDR Holders are direct party to the Deposit Agreement. The IDR for all practical purposes represents an interest in the underlying equity shares and the IDR Holders enjoy all the rights and benefits vis-a-vis a shareholder.” The DRP and the Assessing Officer after examining the transaction, facts of the case and Article-10 of the India – Mauritius DTAA rejected assessee’s contention, that the dividend on IDR is taxable in Mauritius. It is an undisputed fact that the dividend on IDR has been received in India. The DRP and the Assessing Officer however, accepted alternate claim of the assessee to the extent that the assessee will get the benefit of India Mauritius tax treaty,

6 ITA NO.7209/MUM/2019(A.Y.2016-17)

however, the benefit of tax treaty shall be eligible to the asssessee as per clause 2(b) of Article -10 and hence, the dividend is eligible to be taxed @15%.

7 ITA NO.7209/MUM/2019(A.Y.2016-17)

taxation of dividend income declared by a foreign company outside India” and that such a situation “may cause unintended double taxation and would be contrary to the generally accepted principles of source rule as well as the object and purpose of the amendment made by the Finance Act, 2012”. The question of taxability of these dividends was in the hands of the persons who had no other connection, except the underlying asset of the related companies in India, and such a situation is materially different in the sense that here is a domestic depository that holds the IDRs with underlying assets abroad, the IDRs are listed in India as a derivative financial instrument, and the central point of the investment-related activity is in India. Such a situation cannot be compared with a direct shareholding in a foreign company, who has no other business connection in India except for what may be perceived to be covered by extended scope of Explanation 5 to Section 9(1)(i) and which remains confined to the company in question holding underlying assets in India. In fact, the present case is diametrically opposed to the fact situation that the CBDT intended to cover. Here is a case in which IDRs are in India with underlying shares, from which an IDR derives the value, are situated abroad, and, in any event, IDR holder is not simply a shareholder. He is entitled to the benefits of the shareholding but the derivate securities yielding him these benefits is in India, though these derivative securities derive their value and benefits from the underlying assets abroad. When we pointed it out, leaned counsel submitted that these facts are much better than the facts dealt by the CBDT. That aspect of the material is, even if that be so, immaterial. The circulars issued under section 119(2), as the circular in question inherently is, bind the field authorities on what these circulars hold, and not on what could be the underlying principles which could be deduced from these circulars. If a case does not fit in the words of the circular, it is not covered by the circular. One cannot claim that since relaxation from the rigour of law is granted in even worse cases, such cases, even if these cases donot fit into the cases referred to by a circular, must also get the same relaxation from the rigour of the law. Coming back to the Section 9(1)(i), as Shri Sanjay Singh, learned Commissioner (DR), aptly puts it, the requirements of Section 9(1)(i) are clearly fulfilled. Section 9(1)(iv) does not start with a non-obstante clause or in any manner restricts the scope of Section 9(1)(i) in the sense that only such dividends can be taxed in the hands of a non-resident which fulfill the requirements of Section 9(1)(iv). The receipt in question is a dividend from a foreign company, even if that is how it is treated, which has clear business connection with Indian domestic depository and this derivative instrument, i.e. a financial instrument deriving its value from the underlying asset, was created in India and listed on Indian stock exchanges. It is true that dividends from an Indian company are deemed to be income accruing or arising in India, but to suggest that since dividend income can be brought to tax in the hands of a non-resident only in case it is from dividend from an Indian company is fallacious in logic. Just because it is a dividend income other than that from an Indian company, which cannot be taxed in Section 9(1)(iv), it cannot escape the rigour of Section 9(1)(i). Viewed thus, the receipt of dividends from the SCB-UK by the assessee, if that is how it can be treated, is an income deemed to be accruing or arising in India. Let us see it from a different perspective as well. It would, however, appear that what is received by the assessee is the net dividend amount as declared by the Indian depository and not the dividend of the foreign company. The dividend declared by the Indian depository could be, and is indeed is, on the basis of the dividend declared by the SCB-UK but then what the assessee is entitled to are the benefits flowing from the shareholdings in SCB-UK as an underlying asset of the IDRs. What is rightfully due to the assessee in income character is the net amount received from the Indian depository and not the dividend simplictor as declared by the SCB-UK. The income, therefore, accrues to the IDR holder at the point of time when the Indian depository works out the amount payable to IDR holders and then pays it accordingly. Viewed thus, the point

8 ITA NO.7209/MUM/2019(A.Y.2016-17)

of time when income accrues to the IDR holder is when the Indian depository declares the outgo and is received when the Indian depository pays the money. In such a situation, so far as the IDR holder is concerned, the amount in question is received in India in reality and in law. There is one more argument of the assessee that is required to be dealt with. Learned counsel has repeatedly highlighted the position that the Indian depository is a “bare trustee in the English law and a tenant in common in respect of the shares represented by the IDRs held by the IDR holder”. It is on this basis that he has contended that whatever the Indian depository receives is as trustee of the IDR holders and the receipt in the hands of the IDR holders is the receipt when, as their trustee, Indian depository receives the money aboard, i.e. though its custodian NYB-Mellon. However, no arguments are advanced on the precise scope of the expressions ‘bare trustees’ and ‘tenants in common’, particularly under the English law. Whatever be the terminology employed in the agreements, there cannot be any, and there is no, dispute that ownership of the equity shares in SCB-UK is with SCB-India, the Indian depository, and that the dividend income is received by SCB-India, through its custodian BNY Mellon. If BNY Mellon, without a business connection in India, was to be bare trustees of the IDR holders, maybe one could have argued that the dividends are received as income outside India, and not taxable as such. That is, however, not the case before us. Whatever may be physical flow of funds i.e. via foreign custodian under instructions from the Indian depository, it is clearly evident from the chart set out below paragraph 6 earlier in this order, the constructive flow of dividends is from the UK based company to the Indian depository. Learned counsel has also pleaded that the income in question cannot be considered to be deemed to be received in India because the requirements of Section 7, which defines the expression ‘income deemed to be received’ are not satisfied. This plea proceeds on the fallacy that the expression income “deemed to be received in India in such year by or on behalf of such person (i.e. nonresident)” appearing in Section 5(2)(a) will be governed by the definition assigned to expression “incomes deemed to be received in a previous year” appearing in Section 7 which deals with the timing, rather the factum, of an income, and is relevant only for the salaries employees as it covers only three items namely- (i) the annual accretion in the previous year to the balance at the credit of an employee participating in a recognised provident fund, to the extent provided in rule 6 of Part A of the Fourth Schedule ; (ii) the transferred balance in a recognised provident fund, to the extent provided in sub-rule (4) of rule 11 of Part A of the Fourth Schedule ; and (iii) the contribution made, by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD. None of these items have anything to do with any situation other than a situation becoming relevant for an employee, which is not the case. All that this provision deals with is as to when the income is deemed to be received, even though there is no actual receipt in the relevant previous year, and not with whether an income is deemed to be received by, or on behalf of, such a person- referring to a nonresident. If the interpretation canvassed by the learned counsel is to be accepted, section 5(2)(a) will become meaningless, so far as deeming fiction of receipt is concerned, for persons other than the individuals holding salaried employments in in India but then, because of their presence on account of employment, such persons will be residents in India under section 6(1)(a) anyway. That is an incongruous position. The law is being interpreted in a manner so as to make it redundant. It is only elementary that law is to be interpreted in a manner so as to make it workable rather than redundant (ut res magis valeat quam pereat) and any interpretation leading to absurdities is to be avoided. For this short reason alone, this hyper pedantic plea of the assessee cannot meet any judicial approval. In any event, this interpretation is incorrect for the simple reason, as we have noted earlier, that Section 7 defines ‘income deemed to be received in a previous year’

9 ITA NO.7209/MUM/2019(A.Y.2016-17)

whereas the expression required to be interpreted, in the context of Section 5(2)(a), is ‘income deemed to received in India by or on behalf of such a person (i.e. non-resident)’. The payment to the foreign custodian was for, and on behalf of, the Indian depository. When this proposition was put to the learned counsel, in the course of hearing, he submitted that a deeming fiction is to be strictly construed. If a situation does not meet the situation envisaged in the deeming fiction, it cannot be brought into the scope of deeming fiction by a liberal interpretation thereof. This plea is simply incorrect. The deeming fiction envisaged in Section 5, at the cost of repetition, for the scope of income “deemed to be received in India in such year by or on behalf of such person (i.e. non-resident)” is irrelevant so far as the scope of “incomes deemed to be received in a previous year” is concerned. The former deals with situs of an income and the latter, as the scope of Section 7 would clearly demonstrate, deals with the timing of an income. The submissions of the learned counsel, on this point as well, do not appeal to us. In view of these discussions, it is quite clear that the dividend income, in the hands of the assessee, is received in India, and is deemed to accrue or arise in India. The authorities below, therefore, cannot be held to be in error in holding that the monies received by the assessee from the Indian depository, in respect of the dividends paid by the SCB-UK as attributable to the IDRs held by the assessee, were taxable in India. We confirm the action of the authorities below on this point and decline to interfere in the matter.” 7. The Co-ordinate Bench thereafter, proceeded to decide the issue whether the assessee would be eligible for treaty benefit, if yes, whether the transaction would fall within the meaning of Article-10 or Article-22 of the DTAA. The relevant extract of the findings of the Tribunal on this issue are as under:

10 ITA NO.7209/MUM/2019(A.Y.2016-17)

being subjected to the taxes protected by the treaty. What is thus relevant is the fact of taxation in the other Contracting State. Once the eligibility for treaty protection is established, the next thing is what is the treatment envisaged to that nature of income under the tax treaty. Let us, in this backdrop, take a look at the provisions of Article 10(1) of the Indo-Mauritius tax treaty, which provides that “(d)ividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State”. Clearly, therefore, fact of dividend being paid “by a company which is resident of a Contracting State” to the resident of the other Contracting State is a sine qua non for application of article 10, which deals with taxability of dividends under the Indo- Mauritius tax treaty. Given the facts of this case, which we have discussed earlier in this order, the dividends can be treated as having been paid either by the SCB-UK itself or by the SCB-India. Whichever way one looks at it, none of these payments can be treated as by an Indian resident, i.e. one of the Contracting States. Whether we treat the person making the payment to the assessee as SCB-UK or as SCB-India, the fact remains that none of them is a resident in India- while former is a company incorporated in, and fiscally domiciled in, the United Kingdom, the latter is an Indian branch office, and permanent establishment, of a company, incorporated or fiscally domiciled in India. None of these entities, i.e., the foreign company or the Indian depository, can thus be treated as ‘residents of a Contracting State’ for the purpose of the Indo-Mauritius tax treaty. The dividend income in question, therefore, cannot be brought to tax in India under article 10 of the treaty. There is no other specific article of the Indo- Mauritius tax treaty under which this dividend income can be taxed. That carries it to the residuary head, i.e., Article 22, which provides as follows: ARTICLE 22- OTHER INCOME 1. Subject to the provisions of paragraph (2) of this article, items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Convention, shall be taxable only in that Contracting State. 2. The provisions of paragraph (1) shall not apply to income, other than income from immovable property as defined in paragraph (2) of article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply. *(3) Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of Convention and arising in the other Contracting State may also be taxed in that other State. [* Inserted by the Notification No. SO 2680(E) {NO.68/2016 (F.No.500/3/2012-FTD- II){, dated 10-8- 2016, w.e.f. 1-4-2017] 12. What is clearly discernable from the above provision is that till 1st April 2017, the residuary income, which was not specifically covered by any of the specific treaty provisions and not covered by the exclusion clause in Article 22(2), could only be taxed in the residence jurisdiction to the exclusion of the powers of the source jurisdiction to tax the same. Once we come to the conclusion that the income in question, i.e., dividend income from the IDRs, is

11 ITA NO.7209/MUM/2019(A.Y.2016-17)

not covered by any of the specific provisions of the Indo-Mauritius tax treaty, is not covered by the exclusion clause in article 22(2), and it pertains to the period prior to 1st April 2017, it is a corollary to these findings that the said income cannot be taxed in the source jurisdiction, i.e. India, either. We, therefore, uphold the plea of the assessee that the IRD dividends in question cannot be taxed in India in the hands of the assessee on the facts of this case. 13. xxxxxxxx Xxxxxxxx 17. xxxxxxxx

12 ITA NO.7209/MUM/2019(A.Y.2016-17)

proceedings at this stage is premature, ground No.2 of appeal is dismissed accordingly.

Order pronounced in the open court on Monday the 26th day of September , 2022.

Sd/- Sd/- ( GAGAN GOYAL ) (VIKAS AWASTHY) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER मुंबई/ Mumbai, �दनांक/Dated 26/09/2022 Vm, Sr. PS(O/S) ��त�ल�प अ�े�षतCopy of the Order forwarded to :

BY ORDER, //True Copy// (Dy./Asstt. Registrar)/ Sr. Private Secretary ITAT, Mumbai