India: Mumbai Tribunal: TRC Is Sufficient Evidence Of Beneficial Ownership

Last Updated: 12 October 2018
Article by Shashwat Sharma and Shipra Padhi
  • Tribunal holds that a valid TRC is evidence of not just residence of taxpayer but also it being the beneficial owner of income.
  • CBDT Circular 789/2000 relied upon by Tribunal to extend the benefit of presumption of residence and beneficial ownership in the case of interest income as well.
  • Tribunal also holds a Mauritius resident taxpayer need not carry out banking activity in India as well in order to avail of the benefit of the exemption from Indian taxes under Article 11(3)(c) of the Treaty.

Recently, in the case of HSBC Bank (Mauritius) Ltd. v. Deputy Commissioner of Income-tax (IT)-2(2)(2), Mumbai,1 the Mumbai Bench of the Income Tax Appellate Tribunal (the "Tribunal") held that a valid Tax Residence Certificate ("TRC") held by a Mauritius taxpayer would constitute sufficient evidence of the taxpayer being the beneficial owner of the income being earned by it for the purposes of the India Mauritius Double Taxation Avoidance Agreement (the "Treaty").

Facts

HSBC Bank (Mauritius) Ltd. is a limited liability company which is incorporated, registered and a tax resident of Mauritius (the "Taxpayer"). The Taxpayer had earned interest income of INR 950 million (approximately) from investments in Indian debt securities. Relying upon Article 11(3)(c) of the Treaty,2 the Taxpayer claimed an exemption from Indian taxes in respect of this income. However, the said exemption was denied by the tax authorities on the ground that the requisite conditions prescribed in Article 11(3)(c) of the Treaty were not fulfilled by the Taxpayer as:

  1. the interest was not "derived" by the Taxpayer;
  2. that interest was not "beneficially owned" by the Taxpayer; and
  3. that the Taxpayer ought to be carrying on bona fide banking business, which it did not.

On an appeal by the Taxpayer to the Tribunal, the Tribunal passed an order dated December 16, 2016, by way of which it agreed with the Taxpayer's contentions with respect to points (i) and (iii) above. However, with respect to the condition of beneficial ownership, the Tribunal remanded the issue to the file of the Assessing Officer. This was contested by the Taxpayer by way of a Miscellaneous Application under Section 254(2) of the Income Tax Act ("ITA") and the Tribunal recalled its decision so far as it pertained to the issue of "beneficial ownership" through its order dated January 10, 2018.

Issue:

The limited issue before the Tribunal was to consider whether the Taxpayer was the beneficial owner of the interest income earned by it and hence, eligible to claim the benefits of Article 11(3)(c) of the Treaty.

Tribunal's Ruling:

Article 11(3)(c) of the Treaty prescribes that interest income arising in India shall be exempt from tax in India provided it is derived and beneficially owned by any bank carrying on a bona fide banking business which is resident of Mauritius.3

The Taxpayer relied on the Circular No. 789/2000 dated April 13, 2000 (the "Circular") issued by the Central Board of Direct Taxes ("CBDT") which, prescribed that wherever a TRC is issued by the Mauritian authorities, such a TRC will constitute sufficient evidence for not only accepting the status of residence, but also the beneficial ownership in order to apply the provisions of the Treaty.4

The Taxpayer drew the attention of the Tribunal to the judgment of the Hon'ble Supreme Court of India in the case of Union of India v. Azadi Bachao Andolan,5. It was also pointed out that the Ministry of Finance through its Press Clarification dated March 1, 2013 has clarified that the Circular continues to be in force.

The Tribunal had to consider whether the Circular could be relied upon by the Taxpayer considering the fact that it had been issued specifically in the context of income by way of dividend and capital gains arising from the sale of shares. In this regard, the Tribunal referred to the judgment of the Hon'ble Bombay High Court in the case of DIT v. Universal International Music B.V,6 where a company incorporated under the laws of Netherlands and holding a valid TRC issued by the Netherland authorities was considered to be the beneficial owner of the royalty income received from the Indian company on the basis of the Circular, even though the income in this case was in the nature of royalty income (and not dividends or capital gains). Accordingly, the taxpayer in this case was held to be entitled to the benefits of Article 12 of the Double Taxation Avoidance Agreement between India and Netherlands.

Relying upon the above mentioned judgment of the Bombay High Court, the Tribunal held that the Circular would equally apply even in the instant case where the issue concerned the Taxpayer's eligibility to avail benefits of the Treaty in respect of the interest income derived by it.

The Tribunal also referred to a decision of its Chennai Bench in the case of Hyundai Motor India Ltd. v. Dy. CIT.7 where the Chennai Tribunal held a Mauritius bank to be the beneficial owner of interest income.

Conclusion:

This is a very welcome judgment for non-resident taxpayers as the Tribunal has clearly held that as long as the taxpayer is able to produce a valid TRC, it should be considered as sufficient evidence not just of the residence of the taxpayer but also of the taxpayer being the beneficial owner of the income in question. Further, the Tribunal also decided to allow the benefit of the Circular to interest income despite the Circular being limited to income from capital gains and dividends.

The ruling will be especially relevant for debt investments from Mauritius, in light of the amendments to the Treaty in 2016, due to which interest is subject to a lower withholding tax of 7.5%.

While the instant case is with respect to interest earned by a Mauritius bank, the same reasoning should also hold good for investments by institutional investors. Interestingly, one of the arguments raised by the revenue in this matter was the fact that the Taxpayer was only carrying out the activity of a Foreign Institutional Investor (FII) in India. In an earlier order dated December 16, 2016, the Tribunal had also held that merely because the Taxpayer was not carrying out any banking activity in India would not disentitle it to claim the benefit of Article 11(3)(c) of the Treaty as long as it was carrying out banking activities in Mauritius. The Tribunal noted that in order to be eligible for this exemption, the Treaty does not require a Mauritius entity to carry out banking activity in India as well. The Tribunal agreed that the Taxpayer being a bank, is allowed to invest in India as a FII after receiving requisite registration from SEBI and carrying out such activity cannot be considered as being mala fide in nature.

Footnotes

1 [2018] 96 taxmann.com 544 (Mumbai - Trib.)

2 Article 11(3) of the Treaty is reproduced below as follows:

"Interest arising in a Contracting State shall be exempt from tax in that State provided it is derived and beneficially owned by:
(a) the Government or a local authority of the other Contracting State ;
(b) any agency or entity created or organised by the Government of the other Contracting State ; or
(c) any bank carrying on a bona fide banking business which is a resident of the other Contracting State.
"

3 Ibid.

4 The CBDT Circular 789 clarifies as follows:

"2. ........ It is hereby clarified that wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly."

5 [2003] 263 ITR 706

6 [2013] 214 Taxman 19 (Bom.)

7 [2017] 81 taxmann.com 5

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Shashwat Sharma
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions