2024 (1) TMI 1403 - HC - Income Tax

Entitlement of exemption from tax in India - interest arising in a contracting state/India - appellant, a Foreign Institutional Investor (FII) from Mauritius - assessee earned an amount as interest income on securities - HELD THAT - 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. We have to note that in the draft assessment order passed u/s 144C (1) r/w Section 143(3) of the Act, the AO while granting exemption to the interest on ECB has accepted that assessee is carrying on bona fide banking business in Mauritius. So also in the final assessment order - The fact that assessee is carrying on a bona fide banking business in Mauritius is not disputed. Article 11(3) of the DTAA 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. If we have to accept, what Appellant submitted, that assessee should have had a banking license from the Reserve Bank of India, then what would be applicable is Clause 6 of Article 11 of the DTAA and that has not been relied upon by the AO. 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. No infirmity in the order passed by the ITAT. No substantial question of law.

Summary

Issues:
1. Interpretation of Article 11(3) of the Indo-Mauritius Double Taxation Avoidance Agreement (DTAA) regarding exemption of interest income.
2. Determination of whether the appellant, a Foreign Institutional Investor (FII) from Mauritius, is involved in bona fide banking activities.
3. Assessment of the appellant's entitlement to tax exemption in India based on its banking activities in Mauritius.

Analysis:
The appellant filed an appeal under Section 260A of the Income Tax Act against the Income Tax Appellate Tribunal's (ITAT) order regarding the tax treatment of interest income earned on securities during Assessment Year 2011-12. The appellant, a Limited Liability Company from Mauritius, claimed the interest income as exempt under Article 11(3) of the DTAA. The Assessing Officer (AO) disallowed the claim but accepted the exemption for income from External Commercial Borrowings (ECB) as the appellant was engaged in bona fide banking business in Mauritius.

The appellant challenged the AO's decision through objections with the Dispute Resolution Panel (DRP), which upheld the AO's findings. The matter was then taken to the ITAT, which ruled in favor of the appellant, stating that the interest income on securities was indeed exempt under the DTAA. The appellant raised substantial questions of law, questioning the ITAT's decision regarding the appellant's involvement in bona fide banking activities and the exemption of interest income derived from banking activities in India.

The High Court analyzed the provisions of Article 11(3) of the DTAA, emphasizing that the exemption applies to interest derived and beneficially owned by any bank carrying on bona fide banking business in the contracting state (Mauritius). The court noted that the appellant's bona fide banking business in Mauritius was not disputed by the AO, and therefore, the interest income earned in India should be exempt from tax in India.

The court rejected the Revenue's argument that the appellant needed a banking license from the Reserve Bank of India to qualify for the exemption, stating that such a requirement was not necessary under the relevant clause of the DTAA. The court upheld the ITAT's decision, concluding that no substantial question of law arose, and dismissed the appeal.

In summary, the High Court affirmed the ITAT's ruling, emphasizing the appellant's bona fide banking activities in Mauritius as the basis for tax exemption under the DTAA, regardless of the lack of a banking license from the Reserve Bank of India.