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TMI Blog2017 (2) TMI 952X X X X Extracts X X X X X X X X Extracts X X X X ..... ‘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 relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; and b) the letter issued by Bank of Mauritius stating that the appellant carries on bona fide banking business in Mauritius 3. DRP erred in requisitioning irrelevant details and further erred in drawing incorrect, irrelevant and untenable conclusions on that account. 4. The DCIT erred in levying interest of ₹ 11,58,22,658/- on the appellant. He failed to appreciate that the appellant being a non-resident, is not liable to pay advance tax under section 207 read with section 209 of the Act as its taxable income is subject to withholding of taxes in India and hence interest under section 234B is not leviable. 5. On the facts and in the circumstances of the case, the DCIT erred in initiating penalty proceedings u/s 271(1)(c) of the Act." 2. Briefly stated relevant facts of the case are that the assessee is a Foreign Company (NR) registered as a 'Bank' in Mauritius filed the return of income declaring the total income of ₹ 67.51 Crs (rounded off). The case was referred to the TPO for benchmarking of certain international transactions entered into by the assessee with Associated Enterprise (AE). TPO found the transactions are at Arm's Length (AL) and therefore, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is derived beneficially owned by any bank, carrying on a bona fide banking activities. The contents of paras 2.1 and 2.2 of the DRP's order are relevant. The objection relating to the levy of interest u/s 234B of the Act was dismissed stating that this ground does not relate to any variation in income. Further, the penalty proceedings dismissed as premature. Eventually, the Assessing Officer considered the above direction of the DRP and applied the treaty provisions of Article 11(2) to the interest receipts out of securities amounting to ₹ 94.57 Crs and computed the assessed income at ₹ 94.57 Crs (rounded of) against the returned income of ₹ 67.57 Crs. Aggrieved with the same, assessee filed the present appeal before the Tribunal. 4. During the proceedings before us, Shri P.J. Pardiwala, Ld Counsel for the assessee explained the above facts and developments that happened before the Revenue Authorities. Further, he brought our attention to the treaty provisions of Article 11(3) and submitted that the assessee is a bank duly registered in Mauritius and is also a FII duly incorporated as such in India after obtaining approvals as per the provisions of SEBI. He als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uritius. Further, bringing our attention to the expression "bona fide" in clause-(c) of the Article 11(3) of the treaty, Ld Counsel for the assessee submitted that this is not the case of the AO that assessee is engaged in any banking activities which are not bona fide. Ld Counsel for the assessee summed up by stating that the assessee is a bank by birth in Mauritius and it was registered as an FII in India and earned interest income from securities and engaged in bona fide banking activities. Therefore, exemption as claimed by the assessee is required to be allowed. Further, bringing our attention to Article 11(6) of the treaty, Ld Counsel for the assessee submitted that such interest income will have to be taxed if the claim of the assessee is not accepted even if the interest is earned out of banking activities, which is not the intention of the Legislation. This will lead to the absurdity if the order of the AO / DRP is confirmed. Further, he submitted that this argument was not raised before the DRP / AO. He also submitted that this is a case of exception provided in Article 11(3) and therefore, the same has to be interpreted strictly and there is no express condition in the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xemption under clause (c) to Article 11(3) of the treaty. Per contra, the case of the assessee is that the assessee is entitled to such exemption under the said Article even if there are no banking activities in India, a contract State. 6. For resolving this dispute, we proceed to peruse the relevant Article 11(3) of the treaty and the same reads as under:- ARTICLE-11 Interest: 1.... 2..... 3. Interest arising in a Contracting State shall be exempt from tax in that state provided it is derived and beneficially owned by: a) the Government or a local authority of the other Contracting State; b) any agency or entity created or organised by the Government of the other Contracting State; or c) any bank carrying on a bonafide banking business which is a resident of the other Contracting State. 7. From the above, we find it necessary to elaborate the expressions viz (i) derived; (ii) beneficial ownership and (iii) bona fide banking activities. It is evident from the above extracted portion of the Article 11(3) of the Treaty that it provides for exemption in respect of the interest arising in a Contracting State ie in India provided, the interest income is derived and be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the FII activities in India with the contractual understanding that the interest income so earned by the bank is for ultimate transfer of such interest income to the said third parties in Mauritius. The above fiscal scheme may also include back to back transactions, whereby the bank will not be beneficiary of such interest income earned by the bank in Indian soil. For analysis of the same and to reach relevant and proper conclusions, there is a requirement of data to be furnished by the bank / FII to the tax authorities in the assessment proceedings and if such an exercise of furnishing the data meets the requirement of the AO in the instant case. Considering the above, we infer that the 'beneficial owner' can be the one with the full right and the privilege to benefit directly from the interest income earned by the FII-Bank (Indo-food International Finance Ltd vs. J.P. Morgan Chase Bank NA London Branch [2006] EWCA case 158). The income must be attributable to the assessee for tax purposes and the same should not be aimed at transmitting to the third parties under any contractual agreement / understanding. The bank should not act as a conduit for any person, who in fact receives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame which read as under:- "2.11. It is undisputed fact that in India, the assessee does not carry out any business of banking in India nor it is permitted by RBI to carry banking business in India. The assessee in India is registered as an FII only and permitted under SEBI regulations to make investments in India in securities as well as debt instruments. Further, it is undisputed that the interest income received by assessee from India is from its activity as FII in India. Though the assessee claims that it is a banking company but no evidence has been placed on record that it did derive any income from carrying out any bonafide banking business in Mauritius. The assessee has also not submitted its own financials to show that it was operating as a bank in Mauritius in FY 2010-2011. Further, by use of expression "derived" and ....by....(c) any bank carrying on a bona fide banking business, it is very clear that the interest which is the subject matter of relief under Article 11(3)(c) must have a first level direct nexus with the carrying of bonafide business activity. As held by the Apex Court in the case of Liberty India 317 ITR 218 (SC), expression derived connotes a first level ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 13. Further also, the Assessing Officer should understand the expressio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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