TaxTMI 
TaxTMI 
2019 (7) TMI 1848
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....er 15, 2012 raising the following questions : "(i) Whether, in the facts and circumstances of the case, interest earned by the applicant from secured, redeemable, non-convertible debentures (NCDs) of JKL Ltd. is taxable at the rate of 10 per cent. in the hands of the applicant as per article 11(2)(a) of the India-Singa pore tax treaty ? (ii) If answer to question 1 above is in the affirmative, whether JKL Ltd. is liable to withhold taxes at the rate of 10 per cent. based on the provisions of section 195 of the Income-tax Act, 1961 (Act) read with article 11(2)(a) of the India-Singapore tax treaty on payment/credit of interest on non-convertible debentures to the applicant ?" 4. The application was admitted under section 245R(2) on August 7, 2015 for final hearing. JKL Ltd. is an Indian company and wholly owned subsidiary of MNO Ltd. JKL Ltd. is engaged in the business of providing telecom services. JKL Ltd. proposed to roll out telecom services in the various services area and in order to fund the capital expenditure and refinance existing short term debt, JKL Ltd. raised a loan by way of issuance of secured, redeemable, non-convertible debentures (NCDs) to the....
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....rwise of any activities other than its own . . .". 7. It is also added that as per memorandum of association of the applicant its object clause mentions the activity of merchant banking, raising loans, etc. 8. Therefore, it is pleaded that in terms of Monetary Authority of Singapore Act, memorandum of association and the activities listed under definition of financial institution under the Reserve Bank of India Act, the applicant is a financial institution. 9. Thereafter referring to article 11 of the India-Singapore treaty (reproduced below) - It is submitted that the applicant is "similar financial institution eligible for concessional rate of 10 per cent. + SC + EC. Article 11 "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other 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 beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed : (a) 10 per cent. of the gross amount of the interest if such interest is pai....
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....e. The Department on the other hand has contended that under article 11(2)(a) of the India- Singapore treaty, the beneficial rate would be available in respect of loan granted by bank carrying bona fide banking business or similar financial institution and investment in non-convertible debenture (NCD) of JKL Ltd. (JKL Ltd.) did not amount to loan granted by applicant to JKL Ltd. It is outlined that the applicant is a foreign institutional investor and now foreign portfolio investor under the Securities and Exchange Board of India and is not equivalent to similar financial institution. It is emphasized that the case of the applicant is covered under section 115AD and the interest is taxable at the rate of 20 per cent. 13. It is an admitted fact that the applicant is approved as merchant banker under section 28 of the Monetary Authority of Singapore Act. Under MAS framework, the merchant banker falls under umbrella term financial institution. It is also undisputed that the applicant is not a bank as otherwise it would have been approved so under the Banking Act (Cap.19). It is also undisputed that the applicant has not secured any banking licence under the Reserve Bank of India. O....
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....h the purpose for which monies are utilized by the issuer of the instrument. The investment decision is unilateral on the part of the investor. Both debenture and loan are debts but have distinct characteristics. 18. Coming to the facts of the instant case, the applicant is a foreign institutional investor (and now FPI) registered under the Securities and Exchange Board of India and as per Notification of January 7, 2014, Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, The foreign portfolio investor is only allowed to invest in specified securities. To quote- "Chapter IV Investment conditions and restrictions 20. Commencement of investment.-No foreign portfolio investor shall make any investments in securities in India without complying with the provisions of this Chapter. 21. Investment restrictions.-(1) A foreign portfolio investor shall invest only in the following securities, namely- (a) (Shares), debentures and warrants of companies, listed or to be listed on a recognized stock exchange in India, (through primary and secondary markets) ; (b) Units of schemes floated by domestic mutual fu....
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....nt bank, insurance companies, etc. The applicant is a merchant bank which is akin to an investment bank who is looking for investment opportunities apart from offering specialised advisory services. Commercial bank on the other hand is mainly into accepting deposits and extending credit. Investment, merchant bank, leasing companies, insurance companies, etc. are part of non-banking financial companies. 21. The applicant is a foreign institutional investor and has no mandate to grant loans. Even otherwise the Indian entity, i. e., JKL Ltd. requires to comply with external commercial borrowing (ECB) and Foreign Exchange Management Act guidelines in order to raise loans from foreign entity and for issuing non-convertible debentures no such guidelines need to be followed. For argument sake even it is taken that the activities of the applicant permit giving loans as per the Monetary Authority of Singapore Act and memorandum of association, in the instant case, the applicant has only invested in debentures of JKL Ltd. and not granted any loan. 22. Thus, we hold that investment in non-convertible debentures of JKL Ltd. does not tantamount to granting of loan and neither the activity....