HSBC Bank Carrying On Bona Fide Banking Business In Mauritius Exempt From Tax In India: Bombay High Court

The Bombay High Court has held that HSBC Bank carrying on bona fide banking business in Mauritius is exempt from tax in India.

The bench of Justice K. R. Shriram and Justice Neela Gokhale has observed that interest arising in a contracting state (India) shall be exempt from tax in that state (in India) provided the income is derived and beneficially owned by any bank carrying on a bona fide banking business that is a resident of the other contracting state (Mauritius).

The respondent or assessee is a limited liability company incorporated, registered, and tax-resident in Mauritius. It is a Foreign Institutional Investor (FII) duly licensed by the Securities and Exchange Board of India (SEBI).

During the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee earned an amount of Rs. 94,57,45,856 as interest income on securities. The assessee claimed it as exempt income under Article 11(3) of the Indo-Mauritius Double Taxation Avoidance Agreement (DTAA).

The AO did not accept the assessee's claim that the interest income from securities in India was exempt from tax in India as per clause (c) of Article 11(3) of the DTAA. The AO, however, had accepted that the assessee's income from external commercial borrowings (ECB) was exempt under Section 90, read with Article 11 of the DTAA, as the company was carrying on bona fide banking business in Mauritius.

The assessee filed objections with the Dispute Resolution Panel (DRP) under Section 144C. The DRP upheld the findings of the AO, based on which the AO passed the assessment order under sub-section (13) of Section 144C r/w 143(3) of the Income Tax Act. The matter was carried in an appeal to the ITAT, and the ITAT allowed the assessee's appeal, and the order held that the interest income on securities was exempt from tax in India under Clause (c) of Article 11(3) of the DTAA.

The department noted that Clause (c) of Article 11 of the DTAA will not apply to the assessee because the assessee does not have a banking business license from the Reserve Bank of India.

The court noted that to fall under Clause 3(c) of Article 11 of the DTAA, the assessee does not have to be carrying on banking business in India. The assessee should only be a resident of Mauritius and must be carrying on bona fide banking business in Mauritius.

The court held that in the draft assessment order passed under Section 144C (1) r/w Section 143(3), the AO, while granting exemption to the interest on the ECB, has accepted that the assessee is carrying on bona fide banking business in Mauritius. Therefore, the fact that the assessee is carrying on a bona fide banking business in Mauritius is not disputed. An assessee will be entitled to exemption from tax in India.

Counsel For Petitioner: Suresh Kumar

Counsel For Respondent: P. F. Kaka

Case Title: Commissioner of Income Tax Versus M/s. HSBC Bank (Mauritius) Ltd.

Case No.: Income Tax Appeal (IT) No.1169 Of 2018

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