Mauritius treaty benefit and no section 234B interest where tax was deductible at source from the payer.

A Mauritian residence certificate, read with CBDT Circular No. 789, was treated as sufficient to establish beneficial ownership and treaty entitlement for interest on foreign currency loans under Article 11(3)(c) of the India-Mauritius tax treaty, so the income was held exempt from Indian taxation and the addition was deleted. The Tribunal also held that interest under section 234B could not be levied on the non-resident recipient where tax was deductible at source from the payer, and the levy was deleted.

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Issues: (i) whether interest income earned on foreign currency loans was exempt from Indian taxation under Article 11(3)(c) of the India-Mauritius tax treaty on the footing that the assessee was the beneficial owner of the income; (ii) whether interest under section 234B of the Income-tax Act, 1961 was leviable on the assessee in the absence of tax deduction at source by the payer.

Issue (i): whether interest income earned on foreign currency loans was exempt from Indian taxation under Article 11(3)(c) of the India-Mauritius tax treaty on the footing that the assessee was the beneficial owner of the income.

Analysis: The assessee relied on its tax residency in Mauritius and on CBDT Circular No. 789 dated 13.04.2000, which treats a Mauritian residence certificate as sufficient evidence of residence and beneficial ownership for treaty purposes. The same approach had also been accepted in the assessee's own earlier year and was supported by the reasoning that the treaty benefit cannot be denied merely because the revenue sought further proof of immediate source or application of funds. The Tribunal followed its earlier decision and accepted the treaty claim.

Conclusion: The assessee was held to be the beneficial owner of the interest income and the addition was deleted.

Issue (ii): whether interest under section 234B of the Income-tax Act, 1961 was leviable on the assessee in the absence of tax deduction at source by the payer.

Analysis: The levy of advance-tax interest was challenged on the ground that the payer was statutorily obliged to deduct tax at source and, having failed to do so, the burden could not be shifted to the non-resident payee. The Tribunal applied the settled principle that where tax was deductible at source from the payment itself, interest under section 234B could not be fastened on the recipient assessee.

Conclusion: The levy of interest under section 234B was deleted.

Final Conclusion: The appeal succeeded in full, with the treaty exemption upheld for the interest income and the consequential interest demand set aside.

Ratio Decidendi: A Mauritian tax residency certificate, read with CBDT Circular No. 789 dated 13.04.2000, is sufficient to establish treaty entitlement and beneficial ownership for the relevant interest income, and section 234B interest is not chargeable to a non-resident payee where the payer was required to deduct tax at source.

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