TaxTMI 
TaxTMI 
2004 (5) TMI 56
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....t liability being more than the profits available, entire profit will be paid by way of interest to the foreign company. 2. The applicant has filed this application U/s. 245Q(1) of the Income-tax Act, 1961 ("the Act") and based on the above facts has sought the ruling of this Authority on the following question :- "Whether in the facts and circumstances of the case and having regard to the terms of borrowal with the foreign company and also the clauses of the Double Taxation Avoidance Agreement between India and Mauritius, the applicant is required to deduct tax at source under the laws for the year ended 31-03-2002 on the payment of interest to the foreign company especially when the foreign company has no permanent establishment in India and interest income is exempt from tax?" 3. The applicant admits that under domestic law, payment of interest to a non-resident on borrowings utilized in India, is deemed to accrue or arise in India U/s. 9(1)(v) of the Act and the liability for tax is attracted under Section 9(1)(v)(c) of the Act. The amount of interest being interest on debentures treated as securities, requires tax deduction at source under Section 193 of the Act. 4. Under ....
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....the case of DLJMB Mauritius Investment Co. Ltd. Vs. CIT (1997) 226 ITR 268(AAR). It is stated that in this case the AAR has held that Reserve Bank of India can be described as Government for purposes of Article 11 of the DTA Agreement with Mauritius. Based on the said ruling, the applicant argues that the approval granted by the Reserve Bank of India amounts to approval by the Government and whatever interest is payable under the Agreement to the foreign company is not liable to tax in India as it is exempt under Article 11(4) of the DTAA between Indian and Mauritius. 8. In the case of DLJMB Mauritius Investment Co. Ltd. Vs CIT, 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? Answer - Yes, but only to the extent the Indian tax laws confer exemption in respect of such interest or to the extent any such ....
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....rd to exemption under the domestic laws, the same is also being considered because of the ruling given by the Authority in DLJMB case. 13. The first question that comes up for consideration is whether approval granted by the Reserve Bank of India in all the cases, amounts to approval by the Government. 14. As already stated that for this proposition, the applicant has placed reliance on the Ruling given by this Authority in the case of DLJMB Mauritius Investment Co. Ltd., supra. In DLJMB case, the Authority observed as under:- "20…………..A question may be raised whether the FIPB or the RBI can be said to be the Government of India for the purposes of this Article. Though the tax treaty does not define the expression "Government", under Article 3(2), any term not defined therein will, unless the context otherwise requires, have the meaning which it has under the laws in force in India . 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 and the FIPB which is only a Committee of Government of India can appropriately be described as 'Government' for the purposes of....
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.... till further review." * The current practice in regard to granting of tax exemption was reiterated explicitly in the Press Note F.No.4(48)/96-ECB, dated 19.6.1996 in regard to guidelines on Policy and Procedures for ECBs for 1996-97. Paragraph numbers 16 and 17 of Part I(ECB Policy) are relevant for the purpose of the point in issue 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. 20. 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....
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....ption provided under Article 11(4) of the DTAA with Mauritius . In the circumstances, separate and transaction based approval for tax exemption is necessary under Article 11 of the DTAA with Mauritius. Since in the case of the applicant, there is no evidence to show that tax exemption under the Act has either been granted by the Department of Economic Affairs or by the Department of Revenue, and the approval of the loan granted by the Reserve Bank of India for the purposes of FERA does not amount to tax exemption under the Act, it is for consideration, if the approval to the loan granted by the RBI can be considered as tax exemption by the Government under the DTAA. 25. 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." 26. Even otherwise, the nodal ministry for entering into tax ....