Mauritius treaty exemption for bank interest upheld, with no section 234B interest once the income was not taxable in India.

Interest earned by a Mauritius-resident bank from foreign currency loans and debt securities was held exempt under Article 11(3)(c) of the India-Mauritius treaty because the assessee was treated as the beneficial owner carrying on bona fide banking business, supported by its Tax Residency Certificate and CBDT Circular No. 789. The income was therefore not taxable in India. As the underlying interest was not taxable and tax was expected to be deducted at source, interest under section 234B was held not leviable. The assessee obtained relief on both substantive taxability and consequential interest, and the Revenue's appeal failed.

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Issues: (i) whether interest income earned from foreign currency loans and debt securities was exempt from Indian tax under Article 11(3)(c) of the India-Mauritius tax treaty on the footing that the assessee was a beneficial owner carrying on bona fide banking business; and (ii) whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Issue (i): whether interest income earned from foreign currency loans and debt securities was exempt from Indian tax under Article 11(3)(c) of the India-Mauritius tax treaty on the footing that the assessee was a beneficial owner carrying on bona fide banking business.

Analysis: The issue was treated as covered by earlier orders in the assessee's own case. The decisive considerations were that the assessee was a tax resident of Mauritius, held a Tax Residency Certificate, and the treaty benefit under Article 11(3)(c) applied where the interest was derived and beneficially owned by a Mauritius-resident bank carrying on bona fide banking business. The CBDT Circular No. 789 dated 13.04.2000 was applied as supporting the evidentiary value of the Mauritius residence certificate for residence and beneficial ownership.

Conclusion: The interest income was held not taxable in India, and this issue was decided in favour of the assessee.

Issue (ii): whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Analysis: The levy was considered consequential to the taxability issue. Once the interest income itself was held not taxable in India, and in view of the principle that the payer was obliged to deduct tax at source in such a case, no occasion remained for charging interest under section 234B.

Conclusion: Interest under section 234B was held not leviable, and this issue was decided in favour of the assessee.

Final Conclusion: The assessee succeeded on the substantive taxability dispute and on the interest-charge issue, while the remaining grounds were either not pressed or rendered academic, resulting in partial relief to the assessee and dismissal of the Revenue's appeal.

Ratio Decidendi: Where a Mauritius-resident bank is found to be the beneficial owner of treaty-covered interest income and the residence certificate is accepted as sufficient evidence under the CBDT circular, the interest is exempt under Article 11(3)(c) of the India-Mauritius treaty and consequential interest under section 234B cannot be levied.

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