RBI approval for debentures is not tax exemption; interest paid to the Mauritius company remained subject to withholding tax.

RBI permission for issue of debentures and payment of interest was not Government approval for tax exemption under the Income-tax Act or under Article 11(4) of the India-Mauritius treaty. The AAR found no separate exemption authorisation from the Department of Economic Affairs or Department of Revenue, and held that treaty relief required a transaction-specific exemption granted by the competent tax authority, not merely foreign-exchange approval. As neither domestic-law exemption nor treaty-based exemption was available, tax had to be withheld on the interest payment under section 193 of the Income-tax Act.

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Issues: Whether the approval granted by the Reserve Bank of India for issue of debentures and the interest payable thereon amounted to Government approval for exemption from tax under the Income-tax Act, 1961 or under Article 11(4) of the Double Taxation Avoidance Agreement between India and Mauritius, and whether tax was deductible at source on the interest paid to the Mauritius company.

Analysis: The Authority held that the Reserve Bank of India's permission was granted under foreign exchange regulation and did not amount to approval by the Government of India for tax exemption. The material on record showed no separate approval from the Department of Economic Affairs or the Department of Revenue for exemption under section 10(15)(iv) of the Income-tax Act, 1961. The Authority further held that exemption under the treaty was independent of domestic exemption, but Article 11(4) required transaction-specific tax exemption by the competent Government authority, which in the Indian context was the Ministry of Finance, Department of Revenue or its authorised representative. Since the RBI approval did not confer tax exemption under the treaty, the treaty benefit was unavailable.

Conclusion: The interest payment was not exempt either under the Income-tax Act, 1961 or under Article 11(4) of the treaty, and tax was deductible at source under section 193 of the Income-tax Act, 1961.

Final Conclusion: The applicant was liable to withhold tax on the interest paid or credited to the foreign company for the relevant year because neither domestic-law exemption nor treaty-based exemption had been granted.

Ratio Decidendi: Approval by the Reserve Bank of India for a foreign borrowing or debenture issue does not, by itself, constitute Government approval for tax exemption; treaty-based exemption from interest tax requires a separate, competent tax exemption authorisation.

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