The Income-Tax Appellate Tribunal (ITAT) has ruled that Mauritius-based HSBC Bank will not have to pay tax on the interest income of Rs 1,498 crore it earned from India, handing a setback to the income-tax department which wanted the earning taxed.
It said the foreign entity was the beneficial owner of the interest income earned during the assessment year 2015-16.
The ruling assumes significance as it sheds light on the issue of beneficial ownership of interest income under the India-Mauritius tax treaty.
The Mumbai bench of ITAT, in a July 8 order, said as the taxpayer held a valid banking licence and tax resident certificate issued by the Mauritius government, it was eligible for exemption granted to Mauritius banks from taxability of interest income in India.
HSBC Bank, a limited liability company incorporated as tax resident in Mauritius and also registered as foreign institution investor with Sebi, came under the I-T department lens after showing nil income in AY16. It was earning interest income from India on foreign currency loans and debt securities. The tax department in 2018 asked HSBC to cough up tax at the rate of 5 per cent on its interest income. HSBC said it was a licensed bank carrying on bona fide banking business in Mauritius. The tax authorities denied tax treaty benefits, alleging that even though the taxpayer had a banking licence in Mauritius, it carried out miniscule banking operations in that country and was not registered as a bank in India.
The tax authorities said HSBC, though holding a valid tax resident certificate, was not a beneficial owner of interest, and also the certificate was not a conclusive proof of beneficial ownership. It also said that the assessee bank was established for “treaty shopping” purpose.
Tax treaties cap the tax rate on interest at a lower level, usually in the range of 5-15 per cent, provided that the recipient is the “beneficial owner”.
However, in 2017, India revised the tax treaty, removing the benefit on interest income and said it was to be taxable in line with domestic law. The current treaty has fixed the tax rate at 7.5 per cent.
Shailesh Kumar, Partner, Nangia & Co, said: “The decision reinforces the principle that if the taxpayer provides necessary documentary evidence such as valid tax residency certificate, banking licence, etc., treaty benefits can’t be denied, unless a contrary documentary evidence is produced. TRC will generally be considered as a conclusive evidence for claiming benefits.”