R U L I N G [By Justice P.K. Balasubramanyan)

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1 BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI 5 th December, 2011 PRESENT Mr Justice P.K. Balasubramanyan (Chairman) Mr. V.K. Shridhar (Member) A.A.R. No.953 of 2010 Name & address of the applicant : Poonawalla Aviation Private Limited, 212/2, Off Soli Poonawalla Road, Hadapsar, Pune Commissioner Concerned : Commissioner of Income-tax-II, Pune Present for the applicant : Mr. Rajan Vora, CA (SR Batliboi & Co.) Mr. Rahul Kashikar, CA (SR Batliboi & Co.) Mr. Siddharth Kaul, (SR Batliboi & Co.) Mr. Arijit Charkravarty, Advocate Present for the Department : Mr. Mukundraj M.Chate, DDIT(IT), Pune. R U L I N G [By Justice P.K. Balasubramanyan) The applicant, a company incorporated in India entered into an agreement dated for purchase of an aircraft from Dassault Aviation SA, a company incorporated in France. That agreement was amended on and again on On , the Compagnie Francaise d Assurance pour le Commerce Exterieur ( COFACE hereafter) agreed to ensure the credit facility to be extended by the seller. As per amended agreement, the price payable was $ 41,000,000. Out of that amount, Dassault, the seller, agreed to provide as export credit facility a sum of $ 30, Out of that amount, the credit insurance premium 1

2 of $ was to be paid to COFACE towards insurance premium. The amount loaned, or in respect of which the credit facility was extended was to be repaid in six-monthly instalments commencing from and ending on The instalment inclusive of interest payable on was $ ,92. Two sets of 14 promissory notes, one set each for each installment payable, covering the principal and the interest separately were executed by the applicant in favour of Dassult. On all the promissory notes were irrevocably and unconditionally assigned by Dassault to BNP Paribas, France. The present application under section 245Q(1) of the Income-tax Act, 1961 ( the Act hereinafter) was thereafter filed by the applicant on seeking an advance ruling wanting to know whether it had any obligation to withhold tax on the interest payable on this and the succeeding installments under section 195 of the Act in view of the relevant provision contained in the Double Taxation Avoidance Convention ( DTAC ) entered into by India and France. This Authority admitted the application under section 245R(2) of the Act for giving a ruling on the following questions: 1. Whether payment of interest to Dassault is taxable in view of provision of Article 12(3)(b) of the India-France Agreement for avoidance of double taxation ( treaty )? 2. Whether payment of interest to BNP (after the assignment of promissory notes by Dassault to BNP), is 2

3 taxable in India in view of the provisions of Article 12(3)(b)? 3. (a) Based on the answers to question (1) above, and in view of the facts as stated in Attachment III, and also in light of the declaration provided by Dassault that it does not have a permanent establishment in India in terms of Article 5 of the Treaty (attachment IX), whether the applicant would require to deduct tax at source under section 195(2) of the Act on the payment of interest to Dassault, if yes at what rate? (b) Based on the answers to question (2) above, and in view of the facts as stated in Attachment III, and also in light of the fact the interest payment by applicant is not in connection with debt that is effectively connected to a PE of BNP in India, whether the applicant would require to deduct tax at source under section 195(2) of the Act on the payment of interest to BNP, if yes at what rate? 2. According to the applicant, in view of the insurance of credit facility provided by COFACE, the payment of interest payable to Dassault and subsequently to BNP Paribas was not taxable in India in view of Article 12.3(b) of the DTAC between India and France. The fact that the promissory notes executed in favour of Dassault were assigned to BNP Paribas would not make any difference. The payment would continue to 3

4 be non-taxable and there was no obligation on the applicant to withhold tax thereon in terms of section 195 of the Act. It is to be noticed that the questions relate only to the payment of interest and not to the repayment of the principal debt in installments. 3. The Revenue, in its comments submitted that Article 12.3(b) has no application and the interest was taxable in India. It is contended that under Article 12.2 the interest paid was taxable in India. The interest was not derived in connection with a loan or credit extended by or endorsed by the Banque Francaise du Commerce Exterior or COFACE and hence Article 12.3 was not attracted to exempt the interest from taxation in India. It is pointed out that COFACE has only provided an export credit insurance covering the risk of non-payment for the seven years export credit originally in favour of Dassault now assigned to BNP PARIBAS. Extending of credit insurance was not extending or endorsing a loan. Moreover, it was seen that the installments were payable in New York in USA and not in Paris in France, by the applicant. The India-France convention had hence no application 4. In its reply, the applicant reiterated the position adopted in the application and contended that the communication from COFACE clearly stated that it supports the credit facility relating to the purchase of the Aircraft by the applicant. The word endorse was of wide amplitude and the providing of insurance cover amounted to an endorsement of the loan. Even after assignment of the promissory notes the beneficial owner 4

5 continued to be a resident of France and hence the India-France Treaty applied and Article 12.3 (b) was attracted. Mere payment into the account of BNP Paribas, France in its New York account would not make any difference. In its additional comments, the Revenue reiterated that payment made into the New York branch of BNP PARIBAS would not attract the provisions in the Treaty between India and France. It was also pointed out that there was nothing to show that the agreements and assignments were executed from outside India. In its further submissions, the applicant sought to controvert the position adopted by the Revenue. 5. A further submission was made by the applicant pleading that Article 12.3 (b) of the Treaty between India and France applied and even if paragraph 3(b) did not apply, the applicant was entitled to the benefit of the Most Favoured Nation clause contained in clause 7 of the protocol to India-France Convention entered into on In view of the fact that India had entered into Double Taxation Avoidance Convention with other countries after , the crucial date as per the India-France protocol, even insurance of the credit extended by COFACE was sufficient to enable the applicant to claim the benefit under Article 12.3(b) of the DTAC. It is pointed out that in treaties entered into with Canada on , with Hungary on , and with Ireland on , insurance of credit facility has also been brought within the purview of relief against taxation with India. The same position would govern the 5

6 India-Franch Treaty also in view of the Most Favoured Nation Clause. So, in any event, the application of Article 12.3 (b) cannot be kept out. Article 12 of the Convention between India and France to the extent relevant reads: Article 12 - Interest 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2: (a) Interest arising in a Contracting State shall be exempt from tax in that Contracting State provided it is derived and beneficially owned by: (i) the Government, a political sub-division or local authority of the other Contracting State; or (ii) the Reserve Bank of India in the case of India and the Banque de France (and Agence Francaise de Development) in the case of France; or 6

7 (iii) any other institution as may be agreed from time to time between the competent authorities of the Contracting States; (b) interest arising in a Contracting State shall be exempt from tax in that Contracting State if it is beneficially owned by a resident of the other Contracting State and is derived in connection with a loan or credit extended or endorsed by: (i) in the case of France, the Banque Francaise due Commerce Exteriur, or the Compagnie Francaise d Assurance pour le Commerce Exterieur (COFACE); (ii) in the case of India, the Export-Import Bank of India; (iii) any institution of the other Contracting State in charge of the public financing of external trade. It is the case of the applicant that the credit facility extended by Dassult to it being insured by COFACE, would amount to it being a loan or credit extended or endorsed by it within the meaning of clause (b) (i) of paragraph 3 of Article 12 of the Convention. The contention of the revenue is that mere extending of an insurance would not amount to extending or endorsing a loan within the meaning of clause (b)(i) of paragraph 3 of Article 12. According to the applicant, the expression endorse is wide enough to include the extending of an insurance for the credit by COFACE. 7

8 6. The expression endorse is not defined in the Convention or in the Income-tax Act. According to Ramanatha Aiyar s Law Lexicon, endorse is to confirm. According to the Oxford Dictionary, it is to declare one s public approval of Webster gives the meaning as to approve openly. According to the applicant, since COFACE has granted support to Dassault for the export credit facility granted to the applicant, it would be endorsement of the credit by COFACE. 7. Insurance is a contract by which one party in consideration of a premium engages to pay an agreed sum on a certain event or indemnify another against a contingent loss (see Ramanatha Aiyar). In a wider sense, a contract of insurance will come within the scope of a contract of indemnity. But a contract of insurance against loss or damage to the subject matter of the insurance would not be a contract of indemnity. Here, the insurance is extended to the creditor, not to the debtor. The contract by the insurer is to indemnify the creditor, on the basis of the insurance contract. The liability is not based on the contract between the debtor and the creditor. COFACE has not extended the insurance facility to the debtor, the applicant. So, the mere fact that COFACE has insured the credit extended by Dassault, and is obliged to pay on the happening of the contingency agreed upon, does not mean that it has endorsed the credit facility extended by Dassault to the applicant. 8. It is argued that going by the French version of the Convention, when a loan or credit is granted or guaranteed by COFACE, it would come 8

9 within paragraph 3(b) of Article 12. COFACE has not guaranteed the repayment of the loan by the applicant. It has only engaged itself to pay an agreed sum to Dassault on the happening of a certain event, the event of Dassault incurring a loss on not being able to recover the loan or credit it has extended to the applicant. A contract of guarantee is a tripartite contract. Dassault. It is only bilateral in this case, between COFACE and the The reliance on so-called literal translation of the French version does not advance the case of the applicant. 9. We may notice that France when entering into Double Taxation Avoidance Conventions with other countries has used expressions guaranteed or assured or guaranteed or insured by COFACE. Such expressions are not used in the Indo-French Convention. A convention is a matter of bargain between two nations and the terms of a particular convention has to be understood from the words used therein. If the words are not clear, may be, a purposive interpretation can be resorted to. There appears to be no compelling reason for not understanding the words used as they are. 10. The Revenue has argued that admittedly payments were to be made in PNB Paribas branch, New York in the US and hence it should be the treaty between India and USA that should apply, if at all. This argument is met by the applicant by pointing out that BNP Paribas in France continues to be the beneficial owner of the installments of loan and the interest and what is relevant to determine the situs is the beneficial 9

10 ownership. Merely because the payment was made into the branch in New York, it would not make the branch New York the beneficial owner. The beneficial ownership of BNP Paribas has not been endorsed or assigned to the New York branch. Nor has this transaction, transferred to the New York branch. There was, therefore, no merit in the contention raised on behalf of the Revenue. 11. On a reading of paragraph 3 of Article 12 of the Convention, what is exempt from tax in India is the interest arising in India if it is beneficially owned by a resident of France. There is no material before us to show that the beneficial ownership of the credit has passed from BNP Paribas, France to an entity in the United States. We are, therefore, inclined to agree with the submission of the applicant that the Treaty between India and France would govern the transaction. 12. Giving by the Convention between India and France, we are satisfied that the mere extending of insurance cover by COFACE does not amount to extending or endorsing the loan or credit by COFACE so as to attract paragraph 3(b) (i) of Article 12 of the DTAC. 13. It is then argued that a protocol was signed by India and France on by which the benefit of the Most Favoured Nation clause has been extended to this Convention and based on it, insurance of the credit by COFACE is sufficient to exempt the interest paid in this case from taxation in India. Clause 7 of the Protocol to the Covenant is relied upon. 10

11 14. The Protocol starts by saying that at the time of signing the Convention the two parties have agreed on the provisions set out therein which were to form an integral part of the Convention. Clause 7 which is relied on reads: 7. In respect of articles 11 (dividends), 12 (Interest) and 13 (royalties, fee for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol singed after , between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of that income shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later. It is submitted that in Treaties India had entered into with Canada, Hungary and Ireland exemption from taxation for interest relating to a loan or credit is available not only in respect of loans or credits made, guaranteed or extended, but also in respect of loans insured by institutions corresponding to COFACE in France. The corresponding provision in the India-Canada Convention reads: (b)(i) interest arising in India and paid to a resident of Canada shall be taxable only in Canada if it is paid in 11

12 respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Export Development Corporation. The Convention with Hungary and Ireland include loans or credits insured by the Hungarian Exim Bank and the Central Bank of Ireland respectively. One aspect to be noted is that in the case of the Conventions relied on, the benefit is available only in respect of one institution, namely, the Export Development Corporation in the case of Canada, the Hungarian Exim Bank in the case of Hungary and the Central Bank of Ireland in the case of Ireland whereas in respect of France, it covers loans or credits extended or endorsed by two institutions, the Banque Francaise du Commerce Exteriur or COFACE. 15. It is argued that clause 7 of the Protocol makes it clear that if the taxation at source of interest income is limited by India in its treaty with another country after either by lowering the rate of tax or making the scope of taxation more restricted, the same benefit will also be available to the applicant. 16. In his introduction to Double Taxation Conventions (Third Edition), Klaus Vogel, has clarified the role of a protocol and its role in interpreting a treaty. He says, Protocols and in some cases other completing documents are frequently attached to treaties. Such documents elaborate and complete the text of a treaty, sometimes even altering the text. Legally they are a part of the treaty, and their binding force is equal 12

13 to that of the principal treaty text. When applying a tax treaty, therefore, it is necessary carefully to examine these additional documents. A protocol is said to be a treaty by itself that amends or supports the existing treaty. We cannot also forget the observations of the Supreme Court in Azadi Bachao Andolan (263 ITR 706) at page 751 that An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. So the argument of the revenue that the protocol cannot be relied on to understand the scope of taxation cannot be accepted. 17. Clause 7 speaks of India limiting its taxation at source on interest dealt with in Article 12 of the Convention by providing a lower rate or by providing a scope more restricted than the rate or scope provided for in the Convention, the same rate or scope shall also apply to the Convention in question. A question of lowering of rates is not involved here. What is contended is that the scope of taxation of interest has been further restricted by taking out of the purview of taxation, even loans or credits insured by Banque Francaise du Commerce Exteriur or COFACE. Going strictly by the other treaties relied on the restriction is only on taxing the interest income insured by Banque Francaise. No entity similar to COFACE is referred to in the treaties with Canada, Hungary and Ireland. It is seen that COFACE is a body incorporated under the laws of France, 13

14 acting on behalf of the French State in the export credit insurance. It appears, therefore, to be a body created for extending insurance on behalf of the French State, somewhat akin to Export Import Bank of India. 18. Clause (b) of paragraph 3 of the India France Convention exempts interest income from tax in the State in which it arises in respect of France, if the loan and credits extended or endorsed by Banque Francaise due Commerce Exteriur or COFACE and any institution in change of the public financing of external trade and in respect of India, if it is extended or endorsed by Export Import Bank of India or any institution incharge of the public financing of external trade. In the Convention with Canada, interest arising in India paid to a resident of Canada is taxable only in Canada if it is paid in respect of a loan extended, guaranteed or insured by the Export Development Corporation and interest arising in Canada and paid to a resident of India is taxable only in India if the credit is extended, guaranteed or insured by the Export Import Bank of India. 19. If the coverage or protection is understood as extended to loan or credit insured by one of the institutions referred to in the Convention between India and France in the context of the provisions noticed above, it has to be held that a loan or credit insured by COFACE would also come within the purview of Article 12.3(b) of the India-France Convention. Hence, on the argument on behalf of the applicant based on the Most Favoured Nation clause, we have to rule that the interest payable in the case on hand is not taxable in India. 14

15 20. Based on this conclusion, we rule on question no.1 that the interest payable to Dassault is not taxable in India under Article 12.3(b) of the India-France Double Taxation Avoidance Convention in view of the Most Favoured Nation Clause in the India-France Protocol which has to be taken as part of the Convention. On question no. 2 we rule that the interest payable to BNP PARIBAS on endorsement of the promissory notes in its favour is also not taxable in India in view of the Article 12.3 (b) of the DTAC between India and France as modified by the Most Favoured Nation protocol. In view of the above, on question no. 3, we rule that there will be no obligation on the applicant to withhold tax on the interest paid to Dassault or to BNP PARIBAS on the transaction. 21. Accordingly, the ruling is pronounced on this 5 th day December, (V.K. Shridhar) Member (P.K. Balasubramanyan) Chairman 15

BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) PRESENT. Mr Justice P.K. Balasubramanyan (Chairman) Mr. V.K.

BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) 22 nd Day of March, 2012 PRESENT Mr Justice P.K. Balasubramanyan (Chairman) Mr. V.K.Shridhar (Member) A.A.R. No. P of 2010 Name & address of the applicant