HSBC Bank (Mauritius) Ltd.[1] (Taxpayer), a tax resident of Mauritius, is a foreign institutional investor (FII) duly registered with Securities and Exchange Board of India (SEBI). During the relevant tax year 2010-11, the Taxpayer earned interest income on securities and claimed exemption in accordance with extant India-Mauritius tax treaty wherein interest income arising in India which is beneficially owned by a Non-Resident (NR) bank carrying on bonafide banking business[2] was regarded as exempt from tax in India. The tax authority denied such exemption on the ground that the Taxpayer does not have a banking business license from Reserve Bank of India (RBI).
The Bombay HC ruled that the interest income on securities earned by the Taxpayer in India shall be exempt from tax in India in accordance with India-Mauritius tax treaty due to following reasons:
- The tax authority while granting exemption w.r.t interest on external commercial borrowings (ECB) accepted that the Taxpayer was carrying on bonafide banking business in Mauritius. Thus, the fact that the Taxpayer is carrying on a bona fide banking business in Mauritius is not in dispute.
- In order to claim exemption under India-Mauritius tax treaty, the taxpayer only needs to be a resident of Mauritius and must be carrying on a bonafide banking business in Mauritius and need not necessarily have a banking business in India.
- Further, in response to tax authority's argument regarding absence of banking license from the RBI, the High Court observed that if such an argument were to be accepted, then it may be a case of determining whether interest income is arising from permanent establishment (PE) in India and accordingly be governed by PE Article rather than the Interest Article of tax treaty. However, this line of argument was not taken up by the tax authority and, hence, the HC did not dwell on this issue.
[1] ITA No 1169 OF 2018, Assessment Year: 2011-12.
[2] Clause (c) of Article 11(3) of India-Mauritius tax treaty providing exemption is omitted w.e.f. 1 April 2017. The text of the provision prior to omission is as under –
" Interest arising in a Contracting State shall be exempt from tax in that State provided it is derived and beneficially owned by:
(c) any bank carrying on a bona fide banking business which is a resident of the other contracting State."
