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The Bombay High Court in the case having appeal no. ITA/1169/2018 has held that HSBC Bank carrying on bona fide banking business in Mauritius is exempt from tax in India.

The brief facts about this case are:

• The respondent assessee is an LLP based out and a tax resident in Mauritius and an FII duly licensed by the SEBI.
• During assessment proceedings, the AO has noticed that the assessee earned a substantial amount of interest income on securities on which the assessee has claimed the interest income as exempt income under Article 11(3) of the Indo-Mauritius DTAA.
• The AO didn’t accept the assessee’s claim but had accepted that the assessee’s income from 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.
• DRP: The assessee filed objections with the DRP and the DRP upheld the findings of the AO and passed the assessment order.
• ITAT: The matter went to ITAT and the ITAT had allowed the assessee’s appeal.
• Subsequently, the department noted that Article 11(c) of the DTAA will not apply to the assessee because the assessee does not have a banking business license from the RBI.

CourtFindings

• The court noted that to fall under Article 11(3)(c) of the DTAA, the assessee does not have to be carrying on banking business in India where 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, 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.
• Decision: 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. (In the favour of the assessee).