2021 (10) TMI 446 - AT - Income Tax

Income accrued in India - Interest income from foreign currency loan and Securities - proof of beneficial ownership of funds - eligibility ot claim exemption under Article 11(3)(c) of India-Mauritius DTAA - treaty interpretation - HELD THAT - As decided in own case 2020 (3) TMI 1372 - ITAT MUMBAI CBDT Circular no. 789 dated 13.04.2000 would equally apply even in the situation before us where the application of the provisions of the India-Mauritius Tax Treaty is sought to be applied for considering the taxability of interest income as per Article 11(3)(c) of the India- Mauritius Tax Treaty - even in the context of the impugned interest income, Circular no. 789 dated 13.04.2000 (supra) of the CBDT is applicable while applying the provisions of Article 11(3)(c) of the India-Mauritius Tax Treaty. On this aspect itself we uphold the plea of the assessee that assessee is the 'beneficial owner' of the impugned interest income on the strength of the Tax Residency Certificate issued by the Mauritian authorities. - Decided in favour of assessee.

Issues Involved:

1. Justification of CIT(A)'s direction to follow ITAT's decision on interest income from foreign currency loans and securities.
2. Consideration of the assessee's involvement in bona fide banking activities.
3. Assessment of beneficial ownership of interest income.
4. Applicability of CBDT Circular No. 789 to interest income.
5. Reliance on the Tax Residency Certificate for proving beneficial ownership.

Issue-Wise Detailed Analysis:

1. Justification of CIT(A)'s Direction to Follow ITAT's Decision:

The primary issue raised was whether the CIT(A) was justified in directing the Assessing Officer to follow the ITAT's decision on interest income from foreign currency loans and securities. The Assessing Officer contended that the assessee had not furnished necessary financial documents, such as annual reports, during the assessment proceedings and failed to prove beneficial ownership of funds, which is a prerequisite for claiming exemption under Article 11(3)(c) of the India-Mauritius DTAA. The Tribunal found that this issue was already covered in favor of the assessee by previous decisions of coordinate benches for earlier assessment years, where it was held that the interest income was derived by the assessee and it was carrying on bona fide banking business.

2. Consideration of the Assessee's Involvement in Bona Fide Banking Activities:

The second issue questioned whether the assessee was involved in bona fide banking activities, as no banking license had been granted by the RBI for banking activities in India. The Tribunal noted that the assessee, a limited liability company incorporated and tax resident in Mauritius, had earned interest income from investments in debt securities made in accordance with SEBI regulations. The Tribunal upheld the CIT(A)'s direction to follow the ITAT's decision, which had previously concluded that the assessee was indeed carrying on bona fide banking business.

3. Assessment of Beneficial Ownership of Interest Income:

The third issue revolved around whether the assessee had demonstrated beneficial ownership of the interest income. The Tribunal referred to the previous decisions where it was held that the interest income was beneficially owned by the assessee. The Tribunal emphasized that the assessee had obtained a Tax Residency Certificate from the Mauritian Revenue authorities, which was considered sufficient evidence for accepting the status of residence and beneficial ownership as per CBDT Circular No. 789 dated 13.04.2000.

4. Applicability of CBDT Circular No. 789 to Interest Income:

The fourth issue was whether the CIT(A) was justified in relying on CBDT Circular No. 789, which primarily applies to incomes earned by way of dividends and capital gains on the sale of shares, for interest income. The Tribunal upheld the CIT(A)'s reliance on the circular, noting that the Bombay High Court in the case of DIT vs. Universal International Music B.V had applied the circular in the context of royalty income. Thus, the Tribunal found it appropriate to apply the circular to the interest income in question.

5. Reliance on the Tax Residency Certificate for Proving Beneficial Ownership:

The fifth issue questioned the reliance on the Tax Residency Certificate to prove beneficial ownership. The Tribunal reiterated that the Tax Residency Certificate issued by the Mauritian authorities constituted sufficient evidence for accepting the status of residence and beneficial ownership for applying the provisions of the India-Mauritius Tax Treaty. The Tribunal found no reason to deviate from the earlier decisions that had accepted the Tax Residency Certificate as proof of beneficial ownership.

Conclusion:

The Tribunal concluded that the issues raised in the appeal were already covered in favor of the assessee by previous decisions of coordinate benches. The Tribunal upheld the CIT(A)'s direction to follow the ITAT's decision and found no reason to interfere with the conclusions arrived at by the CIT(A). The appeal was dismissed, and the Tribunal emphasized that this decision was specific to the peculiar facts of the case and the India-Mauritius DTAA. The judgment was pronounced in the open court on the 29th day of September, 2021.

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