CIT (IT) v. HSBC Bank (Mauritius) Ltd (2024)

🏦 CIT (IT) v. HSBC Bank (Mauritius) Ltd – Bombay High Court on Exemption of Interest Income under India–Mauritius DTAA (2024)

📘 Background

The taxation of interest income under Section 9(1)(v) of the Income-tax Act, 1961, often leads to disputes in cross-border banking transactions, especially where Double Taxation Avoidance Agreements (DTAAs) provide preferential treatment to non-resident financial institutions.

In CIT (IT) v. HSBC Bank (Mauritius) Ltd [(2024) 298 Taxman 54 (Bom)(HC)], the Bombay High Court reaffirmed that interest income earned in India by a Mauritius-based bank is exempt from Indian tax under Article 11(3)(c) of the India–Mauritius DTAA, provided the entity is carrying on bona fide banking business in Mauritius.

This judgment strengthens treaty protection for offshore banking institutions investing in Indian debt instruments.

⚙️ Facts of the Case

• Assessee: HSBC Bank (Mauritius) Ltd., a tax resident of Mauritius.
• Assessment Year: 2011–12.
• Nature of Income:
  • The assessee earned interest income from Indian securities and external commercial borrowings (ECBs).
• Return of Income:
  • Claimed exemption under Article 11(3)(c) of the India–Mauritius DTAA, which exempts interest derived by a bank carrying on bona fide banking business in Mauritius.
• Assessment Proceedings:
  • The Assessing Officer (AO) denied exemption, contending that the assessee did not hold an RBI banking license, and therefore could not be regarded as a “bank” for the purpose of Article 11(3)(c).
• Dispute Resolution Panel (DRP):
  • Affirmed the AO’s findings.
• Income Tax Appellate Tribunal (ITAT):
  • Reversed the AO’s view, holding that the assessee was engaged in bona fide banking operations in Mauritius, and therefore interest income from securities was exempt under the DTAA.
• Revenue Appeal:
  • The Revenue challenged the Tribunal’s ruling before the Bombay High Court.

❓ Point of Dispute

Whether interest income earned in India by a Mauritius-based bank carrying on bona fide banking business in Mauritius is exempt from Indian taxation under Article 11(3)(c) of the India–Mauritius DTAA.

📑 Relevant Legal Provisions

🔹 Section 9(1)(v) – Income Deemed to Accrue or Arise in India

Interest income is deemed to accrue or arise in India if it is:

• Payable by the Government of India, or
• Payable by a resident (subject to conditions).

🔹 Article 11(3)(c) of India–Mauritius DTAA

“Interest arising in a Contracting State shall be exempt from tax in that State if the interest is derived and beneficially owned by a bank carrying on bona fide banking business which is a resident of the other Contracting State.”

📑 Assessee’s Arguments

• The assessee carried on genuine banking business in Mauritius, regulated by the Mauritius Financial Services Commission (FSC).
• The absence of an RBI license was irrelevant, as the treaty only requires the entity to be a bona fide bank in its country of residence.
• The AO himself acknowledged in the draft assessment order that the assessee carried on bona fide banking operations while granting exemption for interest on ECBs.
• Therefore, the same reasoning must apply to interest earned on securities.

📑 Revenue’s Arguments

• The assessee could not be treated as a “bank” within the meaning of Article 11(3)(c) since it did not hold an Indian banking license under the Banking Regulation Act, 1949.
• The exemption under the DTAA applies only to banks engaged in banking business in both jurisdictions.
• Therefore, the interest income from securities should be taxed under Section 9(1)(v).

⚖️ Tribunal’s Findings

• The Tribunal found that the assessee was carrying on banking business in Mauritius, duly regulated under Mauritian law.
• The interest was beneficially owned by the assessee, and hence eligible for exemption under Article 11(3)(c).
• The AO’s inconsistency—granting exemption for ECB interest but denying it for securities—was unsustainable.

⚖️ High Court’s Decision

The Bombay High Court upheld the Tribunal’s decision and ruled in favour of the assessee.

Key Findings:

1. Bona Fide Banking Business in Mauritius:
   • The Court held that the assessee’s operations were regulated by the Mauritius Financial Services Commission, proving it was engaged in bona fide banking business.
   • The requirement of an RBI license was not relevant, as the DTAA only requires the bank to be bona fide in its country of residence, not in India.
2. Consistency in Treatment:
   • In the draft assessment order, the AO himself accepted that the assessee carried on bona fide banking business and granted exemption on ECB interest.
   • Hence, denying exemption on interest from securities was contradictory and unjustified.
3. Treaty Override:
   • Under Section 90 of the Income-tax Act, the DTAA provisions override domestic law where more beneficial.
   • Accordingly, Article 11(3)(c) of the DTAA superseded Section 9(1)(v), providing full exemption for the interest income.

✅ Held

• The assessee carried on bona fide banking business in Mauritius.
• The interest income from Indian securities was beneficially owned by the assessee.
• Such interest was exempt from Indian taxation under Article 11(3)(c) of the India–Mauritius DTAA.
• The absence of an RBI license in India does not disqualify a foreign bank from claiming exemption.
• Revenue’s appeal dismissed.

💡 Key Takeaways

1. Treaty Protection for Offshore Banks:
   A bank resident in Mauritius and regulated by its authorities can claim exemption under Article 11(3)(c) without an Indian banking license.
2. Beneficial Ownership Critical:
   The exemption applies only if the interest income is beneficially owned by the foreign bank.
3. Consistency in Tax Treatment:
   The AO cannot grant exemption for one category of interest (e.g., ECBs) and deny it for another (e.g., securities) without justification.
4. DTAA Supremacy:
   The India–Mauritius DTAA prevails over domestic law, ensuring that treaty benefits are not denied merely due to technical procedural grounds.
5. Judicial Clarity:
   This ruling reinforces judicial consistency and enhances foreign investor confidence in India’s adherence to treaty obligations.

🌐 Why This Case Matters

This landmark ruling strengthens the tax certainty framework for foreign banking entities investing in India. It reaffirms that India–Mauritius DTAA benefits extend to genuine banking institutions even without a physical or regulatory presence in India.

The decision also bolsters cross-border debt investments and financial services through Mauritius, reaffirming India’s commitment to treaty-based taxation principles.

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