18. [2020] 117 taxmann.com 750 (Mumbai-Trib.) DCIT vs. HSBC Bank
(Mauritius) Ltd. ITA No: 1320/ Mum/2019 A.Y.: 2015-16 Date of order: 8th
July, 2020
Article 11(3)(c) of the India-Mauritius DTAA
– Interest income earned from India by a Mauritian company engaged in the
banking business is exempt under Article 11(3)(c) of the India-Mauritius DTAA;
in terms of Circular No 789, TRC issued by Mauritius tax authority is valid
proof of residence as well as beneficial ownership
FACTS
The assessee, a resident of Mauritius, carried on banking business as a
licensed bank in Mauritius. The assessee was also registered as an FII with
SEBI. Article 11(3)(c) of the India-Mauritius DTAA exempts interest income from
tax in India if: (i) the interest is derived and beneficially owned by the
assessee; and (ii) the assessee is a bank carrying on bona fide banking
business in Mauritius. The assessee had received interest income from
securities and loans to Indian tax residents. According to the assessee, being
a tax resident of Mauritius, it qualified for exemption under Article 11(3)(c)
of the DTAA and hence, interest earned by it was not chargeable to tax in
India. To support its beneficial ownership and residential status, the assessee
placed reliance on the Certificate of Residency (TRC) issued by Mauritius tax
authorities and also Circular No 7896.
The A.O., however, did not grant exemption on the ground that the banking
activities carried out by the assessee in Mauritius were minuscule and were
only for namesake purpose. Further, Circular No. 789 dealt with taxation of
dividends and capital gains under the India-Mauritius DTAA and did not apply in
case of interest. Accordingly, the A.O. charged tax on interest @ 5% u/s 115AD
of the Act, read with section 194LD.
On appeal, relying upon the orders of the Tribunal in favour of the
assessee in earlier years7, the CIT(A) concluded in favour of the
assessee.
Being aggrieved, the Tax Department filed an appeal before the Tribunal
where it contended that the earlier years’ orders did not deal with the Tax
Department’s objection that the assessee was not a beneficial owner of the
interest and was a conduit company.
HELD
- The following observations from the orders of earlier years8
in the case of the assessee are relevant:
- As per Circular 789, wherever a Certificate of Residency is issued by
the Mauritius tax authority, such Certificate will constitute sufficient
evidence for accepting residential status as well as beneficial ownership for
application of the India-Mauritius DTAA.
- Circular 789 equally applies to taxability of interest in terms of
Article 11(3)(c) of the DTAA.
- Thus, having regard to the Tax Residency Certificate issued by the
Mauritius tax authority, the assessee is ‘beneficial owner’ of interest income.
- Accordingly, interest earned by the assessee is exempt in terms of
Article 11(3)(c) of the India-Mauritius treaty.
Note: The decision is in the context of the India-Mauritius DTAA prior
to its amendment with effect from 1st April, 2017. Post-amendment,
Article 11(3A) reads as follows:
‘Interest arising in a Contracting State shall be exempt from tax in
that State provided it is derived and beneficially owned by any bank resident
of the other Contracting State carrying on bona fide
banking business. However, this exemption shall apply only if such interest
arises from debt-claims existing on or before 31st March, 2017.’
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6 Circular No 789 provides that TRC will
constitute sufficient evidence in respect of tax residence as well as
beneficial ownership for application of DTAA
7 A.Y. 2009-10 (ITA No. 1086/Mum/2018), A.Y.
2010-11 (ITA No. 1087/Mum/2018) and A.Y. 2011-12 (ITA No. 1708/Mum/2016)
8 A.Y. 2014-15 (ITA No. 1319/Mum/2019)
