In a major relief to HSBC Bank, the Bombay High Court noted that the bona fide banking business in Mauritius is exempt from income tax in India.
Respondent-Assessee is a Limited Liability Company incorporated and registered in and tax resident of Mauritius. It is admittedly a Foreign Institutional Investor ( “FII” ) duly licensed by the Securities and Exchange Board of India ( “SEBI” ).
During the course of assessment proceedings, the Assessing Officer ( “AO” ) noticed that assessee earned an amount of Rs.94,57,45,856/- as interest income on securities. Assessee claimed the same as Exempt Income under Article 11(3) of the Indo-Mauritius Double Taxation Avoidance Agreement ( “DTAA” ).
The AO did not accept assessee’s claim that the interest income from securities in India was exempt from tax in India as per clause (c) of Article 11(3) of the DTAA.
Revenue’s case in short is Clause (c) of Article 11 of the DTAA will not apply to assessee. This is because assessee does not have a banking business license from the Reserve Bank of India. In our view, to fall under Clause 3(c) of Article 11 of the DTAA, assessee need not have to be carrying on banking business in India. Assessee should only be a resident of Mauritius and must be carrying on bona fide banking business in Mauritius.
A Division Bench of Dr Justice Neela Gokhale and Justice KR Shriram observed that “Under the said Article, therefore, interest arising in a contracting state ( in this Case India ) shall be exempt from tax in that State (in India) provided it (the Income) is derived and beneficially owned by any bank carrying on a bona fide banking business which is a resident of the other contracting State ( Mauritius ). Therefore, so long as assessee is carrying on bona fide banking business in Mauritius being a resident of Mauritius, the interest that assessee would earn in India shall be exempt from tax in India.”
“Moreover, the AO has, as noted earlier, granted exemption to the interest on FCB by accepting that assessee is carrying on bona fide banking business in Mauritius. In the circumstances, we do not find any infirmity in the order passed by the ITAT. No substantial question of law arises. Appeal dismissed” the Court noted
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