2017 (2) TMI 952 - AT - Income Tax

Interest income earned on the debt securities - India-Maritius Tax Treaty - AO includes that the assessee being FII and unregistered as a bank in India, the interest income earned by such FII cannot be considered as earning out of bona fide business activities, thus invoked the provisions of section 11(2) of the treaty - the said interest income was proposed to be taxed u/s 115AD of the Income Tax Act, 1961 which provides for taxing such interest income of FII @ 20% - Held that - We do not agree with the reasoning given by the DRP on the expressions relating to derived from and bona fide banking activities . It is also not a case of the Revenue that the assessee must be doing banking activities in India. Thus, the assessee should be considered as an eligible bank, who earned interest income out of bona fide banking activities. We order accordingly. That leaves us with the other issue relating to the beneficial ownership of the interest income earned by the assessee out of FII activities in India. As discussed by us in the preceding paras of this order, the assessee is under obligation to furnish basic data relating to the source of funds that entered into the FII activities in India, the end utilization of the interest income earned by the assessee etc. Assessee must demonstrate that the invested funds beneficially belong to the assessee and the interest income earned out of FII activities in India are also beneficially owned by the assessee. Since, the assessee is claiming DTAA exemptions on the said interest income, the onus is on the assessee to demonstrate that the assessee is not a conduit company for the benefit of any third person and also no back to back transactions are involved in the FII activities of the bank. Further also, the Assessing Officer should understand the expression beneficial ownership relates to the international fiscal concept and it should be given such a meaning respecting the secrecy clauses of the assessee, if any. For this limited purpose, we remand this issue to the file of the AO for bringing clarity on various aspects of the issue relating to the beneficial ownership . Accordingly, Grounds raised by the assessee are allowed protanto. Levy of interest u/s 234B - Held that - After hearing both the parties and on perusal of the said judgment DIT vs. NGC Network Asia LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT we find, the said judgment is relevant for the proposition that when a duty is cast on the payer to deduct and pay the tax at source, on payer s failure to do so, interest u/s 234B cannot be imposed on the payee-assessee. Considering the settled position of the issue, we are of the opinion, Ground no.4 raised by the assessee should be allowed in its favour. Levy of penalty u/s 271(1)(c) of the Act, in our opinion is premature in nature and demands no specific adjudication at this point of time.

Issues Involved:
1. Denial of benefit under Article 11(3)(c) of the India-Mauritius DTAA.
2. Requirement for substantiating bona fide banking business in Mauritius.
3. Requisitioning irrelevant details by DRP.
4. Levy of interest under Section 234B of the Income Tax Act.
5. Initiation of penalty proceedings under Section 271(1)(c) of the Act.

Issue-Wise Detailed Analysis:

1. Denial of Benefit under Article 11(3)(c) of the India-Mauritius DTAA:
The core issue revolves around whether the interest income earned by the assessee, a bank registered in Mauritius, is exempt under Article 11(3)(c) of the India-Mauritius DTAA. The assessee claimed exemption for the interest income from debt securities, arguing it was earned through bona fide banking business in Mauritius. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) denied the exemption, stating the interest income was not related to bona fide banking business and was not beneficially owned by the assessee. The Tribunal reviewed the treaty provisions and concluded that the exemption applies to any bank carrying on bona fide banking business in Mauritius, irrespective of whether the banking activities are conducted in India or not. The Tribunal remanded the issue back to the AO to verify the beneficial ownership of the interest income with a directive to the assessee to provide relevant data.

2. Requirement for Substantiating Bona Fide Banking Business in Mauritius:
The DRP mentioned that the assessee did not provide sufficient evidence to prove it derived income from bona fide banking business in Mauritius. The Tribunal, however, emphasized that the treaty does not require the bank to conduct banking activities in India to claim the exemption. The Tribunal disagreed with the DRP’s interpretation and stated that the assessee should be considered as an eligible bank engaged in bona fide banking activities in Mauritius.

3. Requisitioning Irrelevant Details by DRP:
The DRP had requisitioned details which the assessee claimed were irrelevant and drew incorrect conclusions based on them. The Tribunal found that the DRP's reasoning on the expressions "derived from" and "bona fide banking activities" was incorrect. The Tribunal clarified that the exemption under Article 11(3)(c) applies to any bank carrying on bona fide banking business in Mauritius, and the interest income earned from securities in India should be exempted.

4. Levy of Interest under Section 234B of the Income Tax Act:
The AO levied interest under Section 234B on the grounds that the assessee, being a non-resident, was not liable to pay advance tax as its income was subject to withholding tax in India. The Tribunal referred to the judgment of the Bombay High Court in the case of DIT vs. NGC Network Asia LLC, which established that if the payer fails to deduct tax at source, interest under Section 234B cannot be imposed on the payee. Consequently, the Tribunal allowed this ground in favor of the assessee.

5. Initiation of Penalty Proceedings under Section 271(1)(c) of the Act:
The AO initiated penalty proceedings under Section 271(1)(c) for concealment of income or furnishing inaccurate particulars. The Tribunal found this ground premature and dismissed it as academic, indicating that it did not require specific adjudication at that point.

Conclusion:
The Tribunal partially allowed the appeal, remanding the issue of beneficial ownership of interest income back to the AO for further verification. The Tribunal allowed the ground related to the levy of interest under Section 234B, while dismissing the initiation of penalty proceedings as premature. The Tribunal emphasized the correct interpretation of the treaty provisions, ensuring that the assessee’s interest income from securities in India is exempt under Article 11(3)(c) of the India-Mauritius DTAA, provided the beneficial ownership is established.

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