TaxTMI 
TaxTMI 
2017 (2) TMI 952
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....the Act read with Article 11(2) of the India-Maritius Tax Treaty. He erred in holding that a. The interest income was not related to bona fide banking business carried on by the appellant in Mauritius; and b. Interest income was not shown to be beneficially owned by the appellant. 2. DRP has erroneously mentioned that the appellant has not placed any evidence on record to substantiate that it did derive any income from carrying out bonafide banking business in Mauritius. While mentioning this, the DRP has not considered the following documents filed by the appellant before the DRP during DRP proceedings. a) The banking license issued by the Bank of Mauritius, the Central Bank of Republic of Mauritius and the banking regulator; 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 Rs. 11,58,22,658/- on the appellant. He failed to appreciate that the appellant being a non-resident, is not liable to pa....
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....he Act. Aggrieved with the same, assessee filed an application before the DRP-I, Mumbai. 3. The DRP considered the objections raised by the assessee and analysed the treaty provisions. Eventually, DRP confirmed the proposal of the AO for taxing the said interest income under the provisions of section 115AD of the Act giving a categorical finding that the assessee cannot be considered carrying on the bona fide banking business as proposed by the AO. Further, the additional reason given by the DRP for confirming the addition is that the assessee cannot be considered as a beneficial owner of interest as claimed by the assessee. The DRP is of the opinion that the interest so earned by the assessee shall be exempted from the tax provided the same 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 appl....
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....e treaty is to the person (bank specific) and the same cannot be denied when the assessee is registered as FII in India. Assessee never ceases to be a Bank in respect of interest income earned as FII in India. The said exemption is available not only to the interest earned in respect of the banking activities ie raising loans and giving advances but also in respect of the interest out of investments made in securities. Assessee cannot lose the treaty benefits in respect of the income earned in India merely because geographical location barriers. He also demonstrated that there is no requirement in the Article for assessee to earn the interest income in India so long as the assessee is engaged in the bona fide banking activities in Mauritius. 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....
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.... the DRP is required to be dismissed. 5. We have heard both the parties and perused the orders of the Revenue Authorities as well as the voluminous paper book filed before us. On hearing both the parties and on perusal of the facts of the case, we find that the case of the Revenue is that the interest income earned from the securities in the capacity of assessee-FII is not eligible for exemption as the assessee has not earned the same in the capacity of the assessee-bank. It is an undisputed fact that the assessee is incorporated as a bank in Mauritius and not so in India. Assessee incorporated only as FII in India. As per the Revenue, the interest income derived by the bank out of banking activities in India is alone eligible for exemption 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 sha....
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....on to "any bank" used in Clause (c) of Article 11(3) of the Treaty. The principles of literal interpretation suggest the above reasoning. From this point of view, in our view, the Revenue's reliance on the judgment of the Apex Court in the case of Liberty India (supra) stands fulfilled differently and the same is in favour of the assessee. (ii) Beneficial ownership 9. This expression is neither defined in treaty nor in the domestic law. However, an intermediary ie a bank, nominee, an agent or a fiduciary with narrow powers will not be 'beneficial owner'. Further, the conduit companies are also outside the meaning of 'beneficial owner'. There may be a situation that the banks are used by the third parties in the resident countries for transmitting their funds into 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 pr....
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....ed to Mauritius country in this case. The same should not be confused the FII activities in India. Further, we are of the opinion that the doing only the FII activities of the bank in India will not constitute to any malafide to the banking activities of the bank in Mauritius. In other words, the assessee as a bank in Mauritius is qualified to perform FII activities in India since approved by SEBI and the same will not come on the way of the expression 'bona fide banking activities'. It is not the requirement of the treaty that the assessee must be doing banking activities in India as well to avail the exemption provided in Article 11(3)(c) of the Treaty. 11. Further, we have also perused the contents of paras 2.11 and 2.12 of the DRP and find it relevant to extract the same 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 rec....
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....s requested to explain the immediate source of funds as per its bank statement for making investment in India. However, the assessee has failed to show the immediate source of funds and also the immediate application of the income. Hence, the condition of beneficial ownership of such interest by the assessee itself being not proved, on this ground also such income cannot fall under the exemption clause (c) of Article 11(3). The interest income of Rs. 94,57,45,856/- cannot be held to be exempt from tax in India. The action of the AO of taxing the interest income of Rs. 94,57,45,856/- is, therefore, upheld." 12. From the above, we do not agree with the reasoning given by the DRP on the expressions relating to 'derived from' and 'bona fide banking activities'. It is also 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 prece....