2020 (7) TMI 276 - AT - Income Tax

Income accrued in India - Interest income from foreign currency loan and Securities - beneficial ownership of funds - Eligibility of exemption under Article 11(3)(c) of India - assessee placed on record the Tax Residency Certificate (for short TRC ) issued by the Mauritius Revenue Authority evidencing the assessee‟s tax residence in Mauritius - HELD THAT - We find that the said issue had been deliberated upon by the Tribunal in the assessee‟s own case for the preceding years 2020 (3) TMI 1242 - ITAT MUMBAI wherein in the backdrop of identical fact pattern involved in the said years, it has consistently been held that as per Article 11(3)(c) of the India-Mauritius tax treaty the interest income would not be exigible to tax in India. - Decided in favour of assessee.

Issues Involved:
1. Justification of CIT(A) in directing the AO to follow ITAT decisions on interest income from foreign currency loans and securities.
2. Assessee's involvement in bona fide banking activities and its impact on exemption claims under Article 11(3)(c) of the India-Mauritius DTAA.
3. Proof of beneficial ownership of funds by the assessee to claim exemption under Article 11(3)(c).
4. Applicability of CBDT Circular No. 789 to interest income.
5. Reliance on the Bombay High Court judgment in Universal International Music B.V. for beneficial ownership of interest income.
6. Request to set aside the CIT(A) order and restore the AO’s order.

Detailed Analysis:

1. Justification of CIT(A) in directing the AO to follow ITAT decisions on interest income from foreign currency loans and securities:
The CIT(A) directed the AO to follow the ITAT's decisions for earlier assessment years (AYs) 2009-10, 2010-11, and 2011-12, which concluded that the interest income was not taxable in India. The assessee, a tax resident of Mauritius, claimed exemption under Article 11(3)(c) of the India-Mauritius DTAA, asserting that the interest income derived and beneficially owned by it was exempt. The ITAT upheld this view, noting that the conditions under Article 11(3)(c) were satisfied.

2. Assessee's involvement in bona fide banking activities and its impact on exemption claims under Article 11(3)(c) of the India-Mauritius DTAA:
The AO questioned whether the assessee was involved in bona fide banking activities, a prerequisite for claiming exemption under Article 11(3)(c). The assessee provided a banking license issued by the Bank of Mauritius and a letter from the Central Bank of Mauritius certifying its bona fide banking business. The ITAT found that the assessee was indeed carrying on bona fide banking business, thus fulfilling the criteria under Article 11(3)(c).

3. Proof of beneficial ownership of funds by the assessee to claim exemption under Article 11(3)(c):
The AO contended that the assessee failed to prove beneficial ownership of the interest income, suggesting it might be a conduit company. However, the assessee relied on the Tax Residency Certificate (TRC) issued by the Mauritius Revenue Authority and CBDT Circular No. 789, which constituted sufficient evidence of beneficial ownership. The ITAT, referencing the Supreme Court's validation of the circular in Azadi Bachao Andolan, concluded that the TRC was adequate proof of beneficial ownership.

4. Applicability of CBDT Circular No. 789 to interest income:
The AO argued that CBDT Circular No. 789 was only applicable to dividends and capital gains, not interest income. However, the ITAT, citing the Bombay High Court's judgment in Universal International Music B.V., applied the circular to interest income as well, supporting the assessee's claim of beneficial ownership and exemption under the DTAA.

5. Reliance on the Bombay High Court judgment in Universal International Music B.V. for beneficial ownership of interest income:
The CIT(A) and ITAT relied on the Bombay High Court's judgment, which held that a TRC issued by foreign tax authorities was sufficient to establish beneficial ownership. The ITAT found the facts of the assessee's case aligned with this precedent, thereby supporting the exemption claim under Article 11(3)(c).

6. Request to set aside the CIT(A) order and restore the AO’s order:
The revenue requested the ITAT to set aside the CIT(A)'s order and restore the AO's assessment. However, the ITAT, after reviewing the precedents and the consistency in its earlier rulings, upheld the CIT(A)'s order, dismissing the revenue's appeal.

Conclusion:
The ITAT dismissed the revenue's appeal, affirming that the assessee's interest income from foreign currency loans and securities was not taxable in India under Article 11(3)(c) of the India-Mauritius DTAA. The ITAT validated the CIT(A)'s reliance on earlier ITAT decisions and the applicability of CBDT Circular No. 789, confirming the beneficial ownership and exemption claims of the assessee.

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