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2023 (1) TMI 1337 - HC - Income TaxAccrual of income in India - income from External Commercial Borrowings ("ECB") - claim of exemption u/s 90 r/w Article 11 of the DTAA as the company was carrying on bona fide banking business in Mauritius - ITAT allowed assessee's appeal and by the impugned order held that the interest income on securities was exempt from tax in India under Clause (c) of Article 11(3) of the DTAA - whether assessee in involved in bonafide banking activity? - Revenue's case is that Clause (c) of Article 11 of the DTAA will not apply to assessee. This is because assessee does not have a banking business license from the Reserve Bank of India. HELD THAT:- To fall under Clause 3(c) of Article 11 of the DTAA, assessee need not have to be carrying on banking business in India. Assessee should only be a resident of Mauritius and must be carrying on bona fide banking business in Mauritius. We have to note that in the draft assessment order dated 30th March 2015 passed under Section 144C (1) r/w Section 143(3) of the Act, the AO while granting exemption to the interest on ECB has accepted that assessee is carrying on bona fide banking business in Mauritius. So also in the final assessment order dated 28th January 2016. Therefore, the fact that assessee is carrying on a bona fide banking business in Mauritius is not disputed. Under Article 11(3) of the DTAA interest arising in a contracting state (in this Case India) shall be exempt from tax in that State (in India) provided it (the Income) is derived and beneficially owned by any bank carrying on a bona fide banking business which is a resident of the other contracting State (Mauritius). Therefore, so long as assessee is carrying on bona fide banking business in Mauritius being a resident of Mauritius, the interest that assessee would earn in India shall be exempt from tax in India. If we have to accept, what DR submitted, that assessee should have had a banking license from the Reserve Bank of India, then what would be applicable is Clause 6 of Article 11 of the DTAA and that has not been relied upon by the AO. Moreover, the AO has, as noted earlier, granted exemption to the interest on FCB by accepting that assessee is carrying on bona fide banking business in Mauritius. No infirmity in the order passed by the ITAT. No substantial question of law.
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