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.