3 Article 11(3) of India-Mauritius DTAA – clarification issued by CBDT; Circular No. 789; Tax Residency Certificate can be the basis for determining beneficial ownership of interest income

HSBC Bank (Mauritius) Limited vs. DCIT

A.Y: 2011-12; Date of Order: 2^nd
July, 2018

Article 11(3) of India-Mauritius DTAA –
clarification issued by CBDT; Circular No. 789; Tax Residency Certificate can
be the basis for determining beneficial ownership of interest income

Facts

The Taxpayer was a
limited liability company incorporated, registered and tax resident, in
Mauritius and was engaged in banking business. During the year under
consideration, the Taxpayer earned interest from investments in debt securities
in accordance with the SEBI Regulations. The Taxpayer claimed that its income
was exempt in India in terms of Article 11(3)(c) of the India-Mauritius DTAA.

The AO, in
conformity with the directions of DRP, denied the exemption on the ground that
the Taxpayer did not fulfil the following three conditions prescribed in
Article 11(3)(c) of the India-Mauritius DTAA.

(i)   the interest was not “derived” by the
Taxpayer;

(ii)   interest was not “beneficially owned” by the
Taxpayer; and

(iii)  the Taxpayer did not carry on bonafide
banking business.

Aggrieved, the
Taxpayer appealed before the Tribunal. The Tribunal held that the Taxpayer
derived interest income and that it was carrying on bonafide banking
business. As regards the third condition pertaining to ‘beneficial ownership’,
the Tribunal remanded the matter to AO.

The Taxpayer
agitated the issue through miscellaneous application before the Tribunal.
Thereafter, the Tribunal recalled its order insofar as it pertained to
‘beneficial ownership’. To support its proposition of being beneficial owner of
interest, the Taxpayer primarily relied on the Tax Residency Certificate (TRC)
issued by the Mauritian Revenue authorities.

Held

–     Clarification issued by
CBDT on circular no. 789 dated 13.04.2000 states that wherever a Certificate of
Residency is issued by the Mauritian authority, such Certificate will
constitute sufficient evidence for accepting the status of residence as well as
the beneficial ownership for applying the provisions of the India-Mauritius
DTAA.

–    While the aforesaid CBDT
Circular was issued specifically in the context of income by way of dividend
and capital gain on sale of shares, same shall also be applicable in the
context of interest income under Article 11(3)(c) of the India-Mauritius Tax
Treaty. Reliance was placed on Bombay HC in case of Universal International
Music B.V (TS-56-HC-2013) wherein HC had relied upon the aforesaid Circular
in the context of royalty income.

–    Basis the Circular, TRC
obtained by the Taxpayer from Mauritian tax authority was sufficient evidence
that the ‘beneficial ownership’ of the impugned interest income was of the
Taxpayer.