Treaty withholding relief on approved foreign borrowings may apply without separate lower-withholding approval, supporting refund of protested deductions.

Approved foreign-currency borrowings may qualify for the beneficial withholding rate under the India-Mauritius DTAA where the lender's residence and treaty eligibility are established and the transaction has government approval. The notes state that treaty relief, including a nil rate where applicable, does not require separate approval for lower or nil withholding merely because the borrowing was approved for concessional withholding. They further state that a borrower not acting as the foreign lender's representative assessee need not seek a refund for the lender; tax deducted under protest without a legal withholding obligation should be refunded with applicable interest.

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Issues: (i) Whether approval of the external commercial borrowing under Section 194LC(2)(ia) of the Income-tax Act, 1961 was sufficient to enable application of the beneficial rate under Article 11 of the India-Mauritius Double Taxation Avoidance Agreement, 1983 without separate approval under Section 195(2) or Section 197 of the Income-tax Act, 1961; (ii) whether the tax deducted and deposited under protest was refundable to the petitioner.

Issue (i): Whether approval of the external commercial borrowing under Section 194LC(2)(ia) of the Income-tax Act, 1961 was sufficient to enable application of the beneficial rate under Article 11 of the India-Mauritius Double Taxation Avoidance Agreement, 1983 without separate approval under Section 195(2) or Section 197 of the Income-tax Act, 1961.

Analysis: Section 90(2) of the Income-tax Act, 1961 gives effect to the more beneficial provisions of an applicable tax treaty. Section 194LC(2)(ia) provides for approval of qualifying foreign-currency borrowings for concessional withholding on interest. The borrowing had been approved after scrutiny, and the foreign lender's residence and eligibility under Article 11 of the India-Mauritius Double Taxation Avoidance Agreement, 1983 were established through the requisite documentation. The treaty required approval of the transaction by the Government but did not prescribe a separate approval mechanism for treaty relief. Section 195(2) operates as a safeguard where chargeability or the appropriate amount is in doubt and is not an independent condition for treaty eligibility in a transparent and approved transaction.

Conclusion: Approval under Section 194LC(2)(ia) was sufficient to apply the beneficial DTAA rate, including a nil rate where applicable, and no separate approval under Section 195(2) or Section 197 was required.

Issue (ii): Whether the tax deducted and deposited under protest was refundable to the petitioner.

Analysis: The petitioner was not the foreign lender's representative assessee under Section 160 of the Income-tax Act, 1961 and was not required to seek refund on the lender's behalf. As the petitioner had no legal obligation to deduct tax at 5% in view of the applicable DTAA, retention of the amount by the Revenue would constitute retention of tax without lawful authority. The amount was therefore refundable with applicable interest under Section 244A of the Income-tax Act, 1961.

Conclusion: The petitioner was entitled to refund of the 5% TDS deposited under protest together with applicable interest.

Final Conclusion: The petitioner may apply the beneficial DTAA rate to interest payable to the foreign lender on the basis of the existing government approval, and the amount deposited under protest is to be returned with applicable interest.

Ratio Decidendi: Where an approved foreign-currency borrowing satisfies the conditions of the applicable tax treaty and the foreign recipient's treaty eligibility is established, the approval under Section 194LC(2)(ia) of the Income-tax Act, 1961 is sufficient for applying the treaty's beneficial withholding rate; a separate approval under Section 195(2) or Section 197 is not required.

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