Bombay High Court States HSBC Bank, Having Bona Fide Banking Business in Mauritius, is Exempt From Tax Under DTAA
The Assessing Officer had refused to accept the assessee's claim that the interest income from securities was exempt from duty
The Bombay High Court has held that since the HSBC Bank carried bona fide banking business in Mauritius, it is exempt from tax in India.
The bench of Justice KR Shriram and Justice Neela Gokhale observed that the interest arising in a contracting state (India) shall be exempt from tax, provided the income was derived and beneficially owned by a bank carrying on a bona fide banking business that is a resident of the other contracting state.
The respondent-assessee is a limited liability company incorporated, registered, and tax-resident in Mauritius. It is a Foreign Institutional Investor (FII) duly licensed by the Securities and Exchange Board of India (SEBI).
During the assessment proceedings, the Assessing Officer (AO) noted that the assessee earned Rs.94,57,45,856 as interest income on securities. The assessee claimed it as exempt income under Article 11(3) of the Indo-Mauritius Double Taxation Avoidance Agreement (DTAA).
The AO refused to accept the assessee's claim that the interest income from securities in India was exempt from tax as per DTAA Clause (c) of Article 11(3). However, he accepted that the assessee's income from external commercial borrowings (ECB) was exempt under Section 90, read with Article 11, as the company had a bona fide banking business in Mauritius.
The assessee filed objections with the Dispute Resolution Panel (DRP) under Section 144C.
The DRP upheld the findings of the AO, based on which the AO passed the assessment order under sub-section (13) of Section 144C read with Section 143(3) of the Income Tax Act.
The assessee pleaded before the Income Tax Appellate Tribunal (ITAT), which allowed the appeal. The order held that the interest income on securities was exempt from tax in India under DTAA Clause (c) of Article 11(3).
The department noted that the Clause did not apply to the assessee, as it did not have a banking business license from the Reserve Bank of India (RBI).
The High Court noted that to fall under Clause 3(c) of the DTAA, the assessee was not supposed to be carrying a banking business in India. It only needed to be a resident of Mauritius and have a bona fide banking business in Mauritius.
The Court held that in the draft assessment order passed under Section 144C (1) read with Section 143(3), the AO, while granting exemption to the interest on the ECB, accepted that the assessee had a bona fide banking business in Mauritius. Since the fact was undisputed, the assessee was entitled to exemption from tax in India.