R U L I N G (By Mr. Justice Syed Shah Mohammed Quadri)

Transcription

1 BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI =========== P R E S E N T Hon ble Mr. Justice Syed Shah Mohammed Quadri (Chairman) Mr. A.S. Narang (Member) Friday, the Twenty-fifth February two thousand five A.A.R. NO. 639 OF 2004 Name & address of the applicant X-Limited The Netherlands Commissioner concerned Present for the Department CIT (International Taxation) Bangalore Mr. Yashwant Y. Chavan Addl. CIT (International Taxation), Bangalore Present for the Applicant Mr. P.J. Pardiwalla, Advocate R U L I N G (By Mr. Justice Syed Shah Mohammed Quadri) In this application, under section 245Q(1) of the Income-tax Act, 1961 (for short the Act ), X-Limited, the applicant, is a company incorporated under the laws of Netherlands and is a tax resident of Netherlands. The applicant seeks ruling of the Authority on the following questions:- (1) Whether the loan advanced would be taxable as the Applicant s income by way of deemed dividend on account of the fictional provisions of section 2(22)(e) of the Act? 1

2 (2) Whether the Applicant is entitled to claim relief under the provisions of the DTAA in determining the tax liability in India in respect of such deemed dividend income? (3) Whether such deemed dividend income would be taxable as dividend as per the provisions of Article 10 of the DTAA? (4) If the answer to question (3) above is in negative, given the fact that the Applicant does not have a Permanent Establishment in India within the meaning of Article 5 of the DTAA, would the Applicant be liable to tax in India in respect of such deemed dividend, in light of the provisions of the DTAA? 2. The applicant has been carrying on a systematic and organized course of activity in the matter of holding shares. It claims to be engaged in the business of holding shares of various companies. A Limited and B Limited are Indian companies, which are wholly owned subsidiaries of the applicant. During the financial year , A Limited granted interest-bearing loans to B Limited amounting to Rs. 36,30,23,497/-. The date of disbursement of the loan, the quantum of loan and the rate of interest are given in the following table:- Date of disbursement Amount (Rs) Rate of interest July 10, ,30,23,497/ percent per annum July 30, ,00,00,000/ percent per annum August 29, ,00,00,000/ percent per annum Total amount loaned 36,30,23,497/- At all material time, the applicant held 100 per cent of the equity shares capital of the aforementioned subsidiaries. At the 2

3 time when the loans were granted by A Ltd to B Ltd, the former had accumulated profits exceeding the amount of loan advanced to B Ltd. It may be noted that A Ltd is not a company in which the public are substantially interested. Reference is made to clause (e) of Section 2(22) of the Act, defining dividend and it is added that as per explanation to section 115-Q, the provisions of section 115- O do not apply to sums deemed as dividend under section 2(22)(e) as section 115-O of the Act was not operative in the financial year when the dividend would be deemed to be declared by A Ltd. By March 31, 2003 (financial year ) the entire loan of Rs. 36,30,23,497/-, advanced by A Ltd together with interest due, was repaid by B Ltd. 3. On 21 st January, 1989, the Government of the Republic of India and the Kingdom of the Netherlands have entered into an agreement for avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, which was notified on (hereinafter referred to as the Treaty ). The treaty came into effect in India on May 1, 1990 (assessment year ). The applicant states that it is not a resident even within the meaning of article 4 of the treaty. It does not have any place of management, branch office etc. or a permanent establishment within the meaning of article 5(2) of the treaty. The 3

4 profits of the applicant, it is submitted, are not taxable in India as per the provisions of article 7 of the treaty. 4. The Commissioner of Income tax (International Taxation), Bangalore (hereinafter referred to as the Commissioner ) submitted his comments to the application. It is stated that both the parties to the transactions of the loan are Indian companies. There is no transaction between the applicant, a non-resident, and the resident companies. Under section 245N(a) of the Act, an advance ruling may be given only in respect of tax liability of a non-resident arising out a transaction undertaken or is proposed to be undertaken by it. Reliance is placed on the ruling of the Authority in Hindustan Power Plus Ltd. (267 ITR 685). After the amendment of section 245N(a)(ii), any determination by the Authority should relate to taxability of non-resident arising out of a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with such non-resident. Though the applicant holds 100% equity shares in the Indian companies, the transaction cannot be said to be between a resident and non-resident. The applicant is not entitled to the benefit of the ruling of the Authority under section 245N of the Act. It is submitted that even on merits, it is not entitled to any relief and the application is liable to be rejected. 5. Mr. Yashwant Y. Chavan, who appeared for the Commissioner, contended that the application is not maintainable 4

5 and the question of maintainability be taken up first. Mr. P.J. Pardiwalla, advocate for the applicant, on the other hand contended that whether the transaction is between the applicant, non-resident, and the resident companies will become clear only when the Authority would decide the matter on merits. He has therefore, requested that the questions be answered and the issue of maintainability be decided along with questions set-forth by the applicant in the application. In our view as the question of maintainability goes to the very root of the jurisdiction of the Authority to pronounce ruling on the aforementioned questions, it would be apt to decide the issue of maintainability of the application before embarking upon any discussion on merits. The expression advance ruling is defined in para (a) of section 245N of the Act. For a proper appreciation of the issue involved, it would be necessary to extract the aforementioned provisions here :- Section 245N of the Act 245N. In this Chapter, unless the context otherwise requires, - (a) advance ruling means- (i) a determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant; or 5

6 (ii) (iii) a determination by the Authority in relation to [the tax liability of a non-resident arising out of] a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with [such] nonresident, and such determination shall include the determination of any question of law or of fact specified in the application; a determination or decision by the Authority in respect of an issue relating to computation of total income which is pending before any income-tax authority or the Appellate Tribunal and such determination or decision shall include the determination or decision of any question of law or of fact relating to such computation of total income specified in the application: [Provided that where an advance ruling has been pronounced, before the date on which the Finance Act, 2003 receives the assent of the President, by the Authority in respect of an application by a resident applicant referred to in sub-clause (ii) of this clause as it stood immediately before such date, such ruling shall be binding on the persons specified in section 245S;] A perusal of the aforementioned definition of advance ruling shows that it has three clauses. The first clause speaks of a determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant. The second clause relates to a determination by the Authority in relation to the tax liability of a non-resident arising out of a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with [such] non-resident. Clause(ii) was amended by Finance Act 2003 w.r.e.f The proviso appended to para (a) is concerned with advance rulings 6

7 that have been pronounced before the said Finance Act received the assent of the President. The determination referred to in the aforementioned two clauses covers any question of law or of fact specified in the application. The third category of determination, mentioned in clause (iii), pertains to an issue relating to computation of total income which is pending before any incometax authority or the Appellate Tribunal and such determination or decision also includes a decision on any question of law or of fact relating to computation of income. Clause (iii) of para (a) was added along with clause (iii) of para (b) definition of applicant and it relates to a resident falling within the notified class or category. The amendment of clause (ii) of para(a), referred to above, clause (iii) of the definition of advance ruling and the proviso are not relevant for the present discussion. The issue needs to be resolved with reference to clauses (i) and (ii) of para (a) of Section 245N of the Act. We have noticed above that clause (i) has two ingredients-- (1) a transaction which has been undertaken or is proposed to be undertaken by a non-resident and (2) such non-resident is the applicant. From the facts stated above, it is evident that the applicant is a non-resident but the transaction of loans is between A Ltd and B Ltd which are resident in India. Here obviously the 7

8 first requirement is not satisfied. Therefore, the determination would not fall under clause(i). In re Connecteurs Cinch SA ( 1 ), this Authority ruled that where the determination under clause (i) is sought and its requirements are not fulfilled, the application is not maintainable. The germane parts of clause (ii) are: (1) a transaction has been undertaken or is proposed to be undertaken by a resident who is the applicant; (2) the determination by the Authority should relate to the tax liability of such non-resident. Obviously, the applicant here is a non-resident and further in this case the transaction of loan was undertaken by two resident companies of which the applicant is the holding company. But this makes no difference as they are independent legal entities. On the facts of this case the question of tax liability of non-resident does not arise though the questions are crafty and appear to relate to the tax liability of the non-resident which in reality do not relate to the applicant. It follows that no determination under clause (ii) can be made. In re Hindustan Powerplus Ltd. ( 2) this Authority observed, A comparison of the provision before the amendment and after the amendment shows that whereas before the amendment a determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with a non-resident, was ( ) ITR ITR 685 ( ) 8

9 within the meaning of the expression advance ruling, after the amendment a determination should relate to taxability of a non-resident arising out of a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with such non-resident. Thus, it is evident that the advance ruling has to be in relation to the tax liability of a non-resident. (emphasis supplied) For the aforementioned reasons, the application is not maintainable and it is accordingly rejected. Pronounced in the open Court of the Authority on this 25 th day of February Sd/- (JUSTICE S.S.M. QUADRI) CHAIRMAN Sd/- (A.S. NARANG) MEMBER F.No. AAR/639/2004 New Delhi, dated : (A) This copy is certified to be a true copy of the advance ruling and is sent to: 1. The applicant. 2. The CIT(International taxation), Bangalore. 3. The Jt. Secretary (FT & TR-I, II), M/Finance, CBDT, New Delhi 4. Guard file. (B) In view of the provisions contained in Section 245S of the Act, this ruling should not be given for publication without obtaining prior permission of the Authority. Sd/- (A.K. Pandey) Addl. Commissioner of Income-tax 9