M /S. DMI LTD ,MAURITIUS V. ACIT INT TAX CIRCLE 2(1) (2), MUMBAI

ITA 603/MUM/2022

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The case involves M/s. DMI Ltd., a Mauritius-based company, appealing against the assessment order which taxed a corporate guarantee commission provided to an Indian company, DMI Finance Pvt. Ltd., for a loan. The tax authorities argued that the commission was taxable in India under Article 22 of the India-Mauritius DTAA. The tribunal examined whether the commission, categorized as 'other income', was taxable in India or Mauritius, considering the DTAA provisions effective before and after the amendment on 01/04/2017. The tribunal concluded that prior to the amendment, such income was only taxable in the resident state, Mauritius.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 26606 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2017-2018
• Other Referred Cases: Morgan S Mauritius Co. Ltd vs. DCIT, Barclays Mauritius Ltd vs. ACIT
• Laws Referred To: India Mauritius DTAA, Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KRISHNA KUMAR
• Assessee Lawyers: AJAY VOHRA
• Keywords: Double taxation relief; Permanent establishment
• Section: 22; 191

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, ‘I’ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER ITA No.603/Mum/2022 (Assessment Year :2017-18) M/s. DMI Limited C/o. MITCO, 4th Floor EBENE SKIES, EBENE RUE D EL INSTITUT, MAURITIUS-999999 FOREIGN MAURITIUS Vs. Assistant Commissioner of Income Tax Int Tax Circle 2(1)(2 Mumbai PAN/GIR No.AAECD1115E (Appellant) .. (Respondent) Assessee by Shri Ajay Vohra / Shri Anshul Suchar (virtually present) Revenue by Shri Krishna Kumar, Sr.DR Date of Hearing 12/03/2025 Date of Pronouncement 25/03/2025 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against final assessment order dated 27/01/2022, passed in pursuance of the directions given by the DRP vide order dated 25/01/2022 for the quantum of assessment passed u/s.143(3) r.w.s. 144C(13) for the A.Y.2017-18. ITA No.603/Mum/2022 M/s. DMI Ltd., 2 2. The only ground which has been argued before us reads as under:- 3. That the AO/ DRP erred on facts and in law in holding that the corporate guarantee commission is taxable in India in terms of Article 22-Income from other sources of the India Mauritius DTAA which provides that \"Notwithstanding the provisions of paragraphs 1 and 2 items of income of a resident of a Contracting State not dealt with in the foregoing Articles of Convention and arising in the other Contracting State may also be taxed in that other State\" without appreciating that Paragraph (3) of Article 22 of the DTAA is not applicable for assessment year 2017-18 4. That the AO/ DRP erred on facts and in law in failing to appreciate that Paragraph (3) of Article 22 of the DTAA inserted vide Notification No. SO 2680(E) (NO.68/2016 (F.No.500/3/2012- FTD-II)), dated 10-8-2016 is applicable with effect from 1-4-2017 and consequently applies to assessment year 2018-19 and onwards 5 That the AO/ DRP erred on facts and in law in failing to appreciate that Protocol dated 10.05.2016 (entered into force on the 19.07.2016) amending the India Mauritius DTAA categorically provides that in the case of India, Article 22(3) of the DTAA shall be applicable from 1st April next following the date on which the Protocol enters into force i.e. from 01.04.2017.” 3. The brief facts qua the issue raised are that assessee, i.e. M/s. DMI Ltd., is a company having its registered office at Mauritius and its principal activity is investment holding. During the F.Y.2016-17, M/s. DMI Finance Pvt. Ltd., i.e. Indian base company which is AE of the assessee had approached several banks (BOITL Consortium) for sanction of additional / fresh credit facility amounting to Rs.410 Crores. The BOITL Consortium sanctioned credit facility as per the terms and conditions stated in the ‘Consortium Term Loan Facility ITA No.603/Mum/2022 M/s. DMI Ltd., 3 Agreement’. The assessee had given corporate guarantee to the Consortium on behalf of DMI Finance Pvt. Ltd., for the credit facility obtained by it from the banks. The assessee has filed its return of income for A.Y.2017-18 on 29/09/2017 declaring ‘nil’ income. The ld. TPO to whom reference was made u/s.92CA(1) for the determination of ALP, wherein one of the issue was the corporate guarantee, the TPO held that ALP of 1.16% should be applied on the corporate guarantee provided of Rs. 410 Crores which worked out to Rs.4,75,60,000/-. 4. To justify the ALP of the corporate guarantee, assessee had chosen ‘other method’ as MAM and it was contended that DMI Ltd., did not charge any commission considering this transaction to be in the nature of shareholders activity and further, assessee did not incur any cost. Apart from that, during the course of TP proceedings various objections were raised which has been rejected by the ld. TPO. One of the contention which was raised by the assessee before the ld. TPO was, that the corporate guarantee commission is not taxable in India in view of India Mauritius DTAA because there it does not fall in any category of income falling within the various articles of the DTAA. In so far as the Article relating to ‘other income’ as per Article 22 of India- Mauritius DTAA, it was contended that guarantee commission if at all is to be considered as ‘other income’ also, then prior to amendment made in DTAA in Article 22 with effect from 1/04/2017, such income was taxable in Resident State that is, Mauritius. Reliance was placed on the notification dated 10/08/2016 whereby para 3 was inserted in Article 22 stating ITA No.603/Mum/2022 M/s. DMI Ltd., 4 that items of income of a resident of a contracting state not dealt with in the foregoing Articles of this convention and arising in the other contracting state may also be taxed in that other state. Thus, by virtue of this amendment /insertion of para 3, ‘other income’ if it include guarantee commission may be taxed in source country. Ld. AO held that, since there is no Article dealing with the guarantee commission, therefore, it would be covered by Article 22 of India-Mauritius DTAA and therefore, he held that guarantee commission accrued in the hands of the assessee would be taxed in India and finally, he proceeded to determine the ALP at 1.16% of the corporate guarantee provided on the loan of Rs.410 Crores. 5. The ld. DRP has not adjudicated this issue despite specific objection was raised before him. 6. Before us ld. Sr. Counsel for the assessee Shri Ajay Vohra submitted that it is not in dispute that guarantee commission does not fall under any other heads of income provided in India Mauritius DTAA. At the most, it will fall as ‘other income’ under Article 22. He submitted that ld. TPO has himself interpreted it falls under Article 22. However, prior to 01/04/2017, other income which is not covered under any of the Articles of the DTAA, Article 22 provided that same shall be taxable as ‘income’ in the resident state, i.e., in Mauritius. It was only after 01/04/2017 para (30 has been inserted wherein source country has also been given the right to tax. Once such right to tax has come into force from 01/04/2017 as per notification dated ITA No.603/Mum/2022 M/s. DMI Ltd., 5 10/08/2016 therefore, it is apparently clear till 01/04/2017, the other income or residuary income which was not specifically covered in any of the specific Articles of India-Mauritius DTAA could only be taxed in the Country of residence i.e. in Mauritius only. 7. In support, he relied upon the following judgments of the Tribunal:- (i) Copy of Mumbai Bench of Tribunal in the case of Morgan S Mauritius Co. Ltd vs. DCIT: 191 ITD 88 (ii) Copy of Mumbai Bench of Tribunal in the case of Barclays Mauritius Ltd vs. ACIT: 146 taxmann.com 134 8. On the other hand ld. DR relied upon the order of the ld. TPO. 9. We have heard both the parties and also perused the relevant finding given by the ld. TPO. The only issue which has been contended before us is that the TP adjustment in the hands of the assessee on account of guarantee commission cannot be made in view of the then existing Articles of India Mauritius DTAA. Here in this case, assessee had sought relief under DTAA being a resident of Mauritius and under the treaty it has claimed that Corporate Guarantee Commission does not fall under specific heads of income in other Article and at most it falls under residuary Article 22, whereby income can be subjected to tax in the resident Country i.e. in Mauritius. Article 22 envisages that, if any items of income of a resident of a contracting state which are not expressly dealt in the Articles of the convention, the same is taxable only in that contracting state, that is ITA No.603/Mum/2022 M/s. DMI Ltd., 6 Mauritius. Thus, even if guarantee commission falls under the head ‘other income’, then same is not taxable in the source country. For the sake of ready reference, the relevant Article which was applicable prior to 01/04/2017 reads as under:- “ARTICLE 22 Other income 1. Subject to the provisions of paragraph (2) of this article, items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Convention, shall be taxable only in that Contracting State. 2. The provisions of paragraph (1) shall not apply to income, other than income from immovable property as defined in paragraph (2) of article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base, in such case, the provisions of article 7 or article 14, as the case may be, shall apply.” 10. Ergo, any transaction prior to 01/04/2017, if there is any item of income which are not covered or expressly dealt in any of the Articles of the treaty, the same is taxable only in the state of residence i.e. here in this case is Mauritius. The amendment was brought in the said Article by insertion of para 3 w.e.f. 01/04/2017 inserted by Notification No. SO 2680(E) (No.68/2016) (F.No.500/3/2012-FTD-II) (dated 10/08/2016 w.e.f. 01/04/2017. What is clearly discernable from the above provision is that, till 1st April 2017, the residuary income, which ITA No.603/Mum/2022 M/s. DMI Ltd., 7 was not specifically covered by any of the specific treaty provisions and not covered by the exclusion clause in Article 22(2), could only be taxed in the residence jurisdiction to the exclusion of the powers of the source jurisdiction to tax the same. Once it is found that the income in question, i.e., Guarantee Commission is not covered by any of the specific Article of the Indo-Mauritius tax treaty and is not covered by the exclusion clause in article 22(2), and it pertains to the period prior to 01/04/2017, it is a corollary that the said income cannot be taxed in the source jurisdiction, i.e. India. We, therefore, uphold the plea of the assessee that Guarantee Commission in question cannot be taxed in India in the hands of the assessee. 11. The amended para now reads as under:- “(3) Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of Convention and arising in the other Contracting State may so be taxed in that other State.” The aforesaid insertion of para 3 makes it very clear that till 01/04/2017, the residuary income which was not specifically covered by any of the specific Articles of the treaty and also not covered by exclusion of clause under Article 22(2) shall be taxed in the resident state and source state has no right to tax the same. Now, it is after the insertion of para 3, the jurisdiction to tax has also been given to the source State i.e. here in India. Accordingly, we agree with the contention of the assessee that guarantee commission which is not covered by any specific ITA No.603/Mum/2022 M/s. DMI Ltd., 8 Article of the India-Mauritius DTAA, the same cannot be taxed in India and under Article 22 as existing during the relevant previous year when right of taxation of such residuary income or other income which here in this case is guarantee commission, can only be taxed in the resident state, i.e., in Mauritius. It is only any transaction post 01/04/2016, the right of taxation has also been given to the source state i.e. if any such income falls under the residuary clause or other income, the source Country has the right to tax. Accordingly, on this ground addition made by the ld. TPO/ AO is directly to be deleted and no adjustment is called for. Accordingly, on this ground, the appeal of the assessee is allowed and other grounds are not adjudicated as the same has been rendered academic. 12. In the result, appeal of the assessee is allowed. Order pronounced on 25th March, 2025. Sd/- (VIKRAM SINGH YADAV) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 25/03/2025 KARUNA, sr.ps ITA No.603/Mum/2022 M/s. DMI Ltd., 9 Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// "