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. K.D. Singh (Member) Mr. K.D. Gupta (Member) Monday, the Thirty First May Two Thousand Four A.A.R. NO. 600 OF 2002 Name & address of the applicant Commissioner concerned Present for the Department M/s. Rockwool (India) Ltd, Plot No.38, 1-10-63/2,Chikoti Garden, Begumpet, Hyderabad-16. Commissioner of Income Tax-II, Hyderabad. None Present for the Applicant None R U L I N G (By Mr. K.D. GUPTA) The applicant, M/s. Rockwool (India) Ltd. (RIL), a company resident in India and having its registered office at Hyderabad is engaged in the manufacturing of Resin Bonded Thermal Insulation Material since 1990. It suffered heavy losses and filed an application with Board for Industrial and 1
Financial Reconstruction (BIFR). BIFR declared RIL as sick unit on 3.1.1996 and appointed Industrial Finance Corporation of India as the Operating Agency. With the permission of BIFR and the Reserve Bank of India (RBI), Alghanim Industries (Mauritius) Ltd. (AIM) were inducted as co-promoters in May, 1997. As on 31.3.2002, AIM held 77.7% equity in RIL. AIM is a company registered in Mauritius and as such is a nonresident for the purposes of the Income-tax Act, 1961 (the Act). The proposed loan from AIM will be in the form of External Commercial Borrowing (ECB) to be taken under the automatic route of approval currently in vogue as notified by Ministry of Finance, Government of India. The proposed loan will have the following terms and conditions in compliance with ECB guidelines :- a) Payment of interest half yearly on 30 th June and 31 st December of each year. b) The tenure of loan will be three years with a grace period of two years. c) Rate of interest will be linked to six monthly LIBOR with a spread of 1.75% above LIBOR. d) The loan will be unsecured. 2. Based on the above facts, the applicant has sought advance ruling on the following question :- Whether payment/credit of interest, upfront fees to be made to the account of Alghanim Industries (Mauritius) Ltd. Mauritius, for an external commercial borrowing to be contracted under the automatic route, which is covered under the Double Taxation Avoidance 2
Agreement signed between India and Mauritius, will be exempt from withholding tax? 3. The applicant has submitted in Annexure II of the application its interpretation of law on the basis of which ruling is sought. The submissions of the applicant are as under :- (i) (ii) (iii) (iv) (v) (vi) that under section 9(1)(v) of the Act, interest payable by a resident tax payer to any person is deemed to accrue in India and thus attracts withholding tax at the time of payment/credit of such interest to the account of the payee. However, while considering payments to non-residents relevant provisions of Double Tax Avoidance Agreement (DTAA) entered into by India with such countries have to be taken into account; That as per section 90(2) of the Act, an assessee has liberty to adopt either the provisions of the Act or the Articles of DTAA, whichever is beneficial to the assessee; That India has entered into one such agreement with Mauritius which would apply in the current context.; That Article 11(4) of the DTAA between India and Mauritius provides for exemption from withholding tax on interest payment in case the interest is for an approved loan; That the proposed loan taken under the automatic approval notified by Government of India would be on par with and to be treated as an approved loan for the purposes of Article 11(4) of the said agreement; That the Authority for Advance Rulings, in the case of DLJMB (AAR No.315 of 1997 decided on 16 th July, 1997) held that transaction entered into by the applicant is approved by the FIPB or RBI or any other government body entitled to grant such approval to the terms of the transaction, the interest receivable by the applicant there 3
under will be exempt within the meaning of Article 11(4) from Indian Income-tax. ; (vii) That vide press release dated 14.6.2000 GOI initiated further liberalized procedures for ECB Approvals under automatic route. The grant of approval under automatic route as provided for in the press release is reproduced hereunder for immediate reference. 1. ECB Approvals on automatic route : The Government has decided, in principle, to place fresh ECB approvals upto USD 50 Millions and all refinancing of existing ECBs under the automatic route. Necessary software and institutional arrangements are being developed to operationalise the automatic route. RBI is being requested to work out the modalities for its implementation. ; (viii) That is it evident from the above that availment of loan under the automatic route in due compliance with ECB Guidelines would tantamount to grant of approval by Government of India in respect of such loan availed and as such will fall within the exemption provided under Article 11(4) of Indo-Mauritius DTAA. The use of the word approval in the press release by the Government should be treated as grant of Government s approval in regard to every transaction covered under the automatic route and thus can be said to be approved in this regard by the Government as provided in Article 11(4) of DTAA. (ix) That in view of the aforesaid reasons, the interest payable to AIM on the proposed loan qualifies for withholding tax exemption in view of clear exemption provided in DTAA as quoted supra. 4. Commissioner of Income-tax-II, Hyderabad is the jurisdictional Commissioner in this case. In the comments received vide his letter dated 31.1.2003, it is stated that under Article 11(4) of the DTAA read with section 10(15) of the Act, the exemption from taxing interest in a contracting state shall 4
be available to the extent approved by the Government of that state, if the transaction giving rise to the debt claim relationship has been approved in this regard by the Government of that contracting state. According to CIT there is no specific approval in the present case from the Government of India regarding the transaction as also regarding the extent of tax exemption. It is stated that a harmonious construction of these provisions clearly implies a specific approval of the transaction from Government of India. In the present case, this requirement has not been satisfied. The Commissioner has also mentioned that under Article 11(8) of the said DTAA read with section 10(15) of the Act, the arms length cost needs to be ascertained wherever any special relationship between the tax payer and the recipient exists. The proposed lender holds 77.7% equity in the capital of the applicant. 5. In his rejoinder, the applicant has stated that since RIL has not yet taken any action on the borrowing and the proposal is only at conceptual stage, question of any existing approval does not arise. It is reiterated that the ruling of this authority in the case of DLJMB (supra) is clearly applicable on the facts of the case. 6. None attended on the dates of hearing. The applicant and the Commissioner have requested that ruling may be pronounced on the basis of their submissions. 7. The applicant has placed reliance on the ruling given by this Authority in the case of DLJMB (supra). The relevant question and the ruling given by the Authority was as under :- Question Whether on the facts and circumstances of the case, interest received by the Applicant pursuant to a loan agreement in respect of debentures and or any other debt claims issued pursuant to the approval of the Reserve Bank of India (Hereinafter referred to as the RBI )/Government will be exempt from tax under Article 11 of the Treaty? 5
Answer Yes, but only to the extent the Indian tax laws confer exemption in respect of such interest or to the extent any such exemption is conferred by the Government. 8. Over the years, ECB guidelines have changed. Presently eligible borrowers are permitted to raise ECB under the Automatic Route equivalent to USD 50 Million per financial year. The borrowers are not required to seek any prior approval at all. Earlier, the approval of ECBs was granted by Department of Economic Affairs and RBI was required to grant approval under Foreign Exchange Regulation Act. However, the approval for tax exemption under section 10(15)(iv) of the Act was granted either by the Department of Economic Affairs, or the Department of Revenue of the Government of India. It has to be examined whether in view of the ruling in the case of DLJMB (supra), the payment of interest on ECB under Automatic Route, qualifies for tax exemption under Article 11(4) of the DTAA with Mauritius. The exemption under section 10(15)(iv) of the Act is not available now in respect of the loans raised after 1 st June, 2001. 9. In DLJMB case, the Authority observed that the tax treaty does not define the expression Government, Both under the Constitution of India and on general principles, the Reserve Bank of India which is a government agency completely owned by the Government of India can appropriately be described as Government for the purposes of clause (4) of Article 11 of the DTAA. Though in common parlance, the Reserve Bank of India may be appropriately described as Government the said proposition may not hold good in all circumstances. There can be exceptions to this proposition by specific exclusions or by implication. It has to be examined whether RBI was ever authorized to grant exemption from tax. 10. As regards exemption under the Act, paragraph numbers 16 and 17 of Part I of the guidelines on Policy and Procedures for ECBs for 1996-97 (Press 6
note F.No.4(48)/96-ECB, dated 19.6.1996) issued by Department of Economic Affairs, Ministry of Finance are relevant and they are extracted below :- 16. Exemption from withholding tax All interest payments and fees etc. related to external commercial borrowings would be eligible for withholding tax exemptions under section 10(15)(iv)(b) to (g) of the Income-tax Act, 1961. Exemption under section 10(15)(iv)(b),(d) to (g) are granted by Department of Economic Affairs while exemption under section 10(15)(iv)(c) is granted by Department of Revenue, Ministry of Finance. 17. Approval under FERA After receiving the approval from ECB Division, Department of Economic Affairs, Ministry of Finance, the applicant is required to obtain approval from the Reserve Bank of India under the Foreign Exchange Regulation Act, 1973 and to submit an executed copy of the Loan Agreement to this Department for taking the same on record, before obtaining the clearance from RBI for drawing the loan. Monitoring of end-use of ECB will continue to be done by RBI. 11. It is thus clear that the work relating to exemption from withholding tax was never delegated by the Government to the RBI. Though exemption under section 10(15)(iv) is not available for the borrowings made after specified date, the tax exemption under Article 11(4) of the DTAA with Mauritius is still available. It has to be considered if the loan taken under Automatic Route implies tax exemption under Article 11(4) of the DTAA. 12. The guidelines under Automatic Route and Approval Route for ECBs were explained by the RBI in Circular No.60 of 31 st January, 2004 (RBI/2004/34- A.P.(DIR Series). Paragraph dealing with All-in-Cost Ceilings reads as under :- All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. Moreover, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost, It is, therefore, evident that ECB under Automatic Route does not amount to automatic tax exemption. 7
13. The DTAAs themselves define Competent Authority for the purposes of the Agreement. Article 3(1)(h) of the DTAA with Mauritius defines the term Competent Authority as under :- Article 3(1)(h) The term Competent Authority means in case of India, the Central Government in the Ministry of Finance (Department of Revenue) or their authorized representative, and in the case of Mauritius, the Commissioner of Income Tax or his authorized representative. 14. Even otherwise, the nodal ministry for entering into tax avoidance agreements and their implementation is Department of Revenue in the Ministry of Finance and the tax exemption under Article 11(4) can be granted only by the said department of Ministry of Finance. The applicant, therefore, has to approach Department of Revenue to seek exemption from withholding tax on interest payable to Mauritius lender. 15. We accordingly rule in AAR No.600 of 2002 as under :- Payment/credit of interest, upfront fees to be made to the account of Alghanim Industries (Mauritius) Ltd., Mauritius, for an external commercial borrowing to be contracted by the applicant under the automatic route will not be exempt from withholding tax as the applicant has not obtained approval under Article 11(4) of the Double Tax Avoidance Agreement between India and Mauritius from Government of India-namely, Department of Revenue, Ministry of Finance. 8
Pronounced by the Authority on this 31sr.day of May, 2004 Sd/- (JUSTICE S.S.M. QUADRI) CHAIRMAN Sd/- K.D. SINGH) MEMBER Sd/- (K.D.GUPTA) MEMBER F..No. AAR/600/2002 Dated. (A) This copy is certified to be a true copy of the advance ruling and is sent to: 1. The applicant. 2. The Commissioner of Income-tax-II. Hyderabad. 3. The Joint Secretary (FT&TR.), M/Finance, CBDT, North Block, New Delhi. 4. Guard file. (B) In view of the provisions contained in Section 245S of the Act, this order should not be given for publication without obtaining prior permission of the Authority. ( Pramila Shrivasrav) Secretary 9