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TMI Blog2011 (5) TMI 342X X X X Extracts X X X X X X X X Extracts X X X X ..... instruments, commercial paper etc. As a part of its business, it draws, makes, accepts, endorses, discounts, executes and issues promissory notes, bills of exchange etc. The applicant has been providing financial services to US and Europe entities, and has now started providing services to Asian entities as well. ABC India Pvt. Ltd. ("ABC India") is a group company incorporated in India and is engaged in the business of trading in wheat, grains, soyameal, oilseeds, sugar, cotton and other food products. ABC India also manufactures, processes and refines edible oils and plastic films, manufactures and trades in animal feeds, nutrition, artificial flavours and emulsions. In addition to the above, ABC India undertakes merchanting trade in goods/commodities traded across the globe, as per Indian Exim Policy and DGFT guidelines. The applicant as part of its regular finance business wants to carry out bill discounting activities for ABC India without having any physical presence in India. ABC India proposes to transact with the applicant for purchase of bills of exchange drawn by them on the buyer in pursuance of goods sold under normal/merchanting trade as well as purchase of promiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uble Taxation Avoidance Agreement between India and United States of America (DTAA)? 2. In case the above income is held to be taxable in India considering the provisions of the Act or DTAA, what will be the amount taxable in India and whether such income will be taxed at the time of discounting of the bills of exchange or promissory notes or on their maturity or on rediscounting thereof ? 3. On the facts and in the circumstances of the case whether the applicant can be considered to have a permanent establishment in India and if yes, whether any profits on the discounting of the bills of exchange or promissory notes can be attributed to such permanent establishment as per Article 7 of the DTAA. 4 Whether the income of the applicant will still be subject to withholding tax under section 195 of the Act in case the income from above transaction is held to be 'not taxable' in India. 5 Whether transfer pricing documentation (as provided under section 92D of the Income-tax Act, 1961 read with Rule 10D of the Income-tax Rules, 1962) is required to be maintained and Form 3CEB (as provided under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f taxes in India and this Authority should decline to answer the questions raised and even if it is inclined to answer them, they have to be answered by keeping this in mind. 5. On behalf of the Revenue, it is contended that it is really a case of the applicant advancing a loan to the Indian entity which discounts the promissory note and the percentage of discount given is really the interest charged on the loan but appropriated upfront and that such a payment would satisfy the definition of 'interest' under section 2(28A) of the Act. It is submitted that the entity that seeks discount on the promissory note is getting the sale proceeds from the sale of the goods to a foreign buyer on a price to be paid at a future date for use immediately. By this process, the cost of getting the pre-mature payment, is the percentage of discount and that percentage depends upon the interest rate in the market. Thus, it is a case where the applicant is really getting interest on the amount from the entity in India. The interest is collected in advance in India. Under the Double Taxation Avoidance Agreement (DTAA) debt claims of every kind is provided for and this is one mode of financing an export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence to authorities shows that discounting of a bill is distinguishable from a pledge or deposit of security. They also show that it is distinguishable from a bill left for collection. In Ditchfield v. Sharp [1983] 3 ALL ER 681, the expression 'discount' was explained as a deduction made from the amount of a bill of exchange or promissory note by one who gave the value for it before it was due. In Lomax v. Peter Dixon & Co. [1943] 2 ALL ER 255, It was stated that in discounting of bills of exchange, exchequer bill etc., the discount is the reward and in a normal case (since such bills do not as a rule carry interest) the only reward which the person discounting the bill obtains for his money. In Buchanan v. McDonald 33 SLR 200 it was stated that discount has no technical or universal meaning. In what is perhaps, its most common meaning, it is equivalent to the payment of interest in advance e.g. when a banker advances the amount upon a bill of exchange which is not yet due, discounting the interest upto the date of payment. In P. Ramanatha Aiyar's Law Lexicon, the meanings given are "an allowance or deduction generally of so much percent, made for pre-payment or prompt payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect of an endorsement, to notice that the property in the instrument then passes to the endorsee. The observation in Halsbury's Law of England noticed therein is that where the transaction is really one of discounting, the banker is of course at liberty to deal with the bill as he pleases rediscounting or transferring it. 10. Thus, the position appears to be that discounting of a bill amounts to purchase of the negotiable instrument and it does not involve any relationship of debtor and creditor between the endorser and the endorsee. As a general rule, an endorsement of a promissory note does not also result in an assignment of the original debt. 11. In the case before us also, it is not disputed that what governs the quantum of discount is the libor rate and/ or the prevailing rate of interest. But what is contended on behalf of the applicant is that merely because of that fact, a discount given cannot be treated as payment of interest by the person who gets the instrument discounted with a view to have immediate payment and the nature of the payment remains merely a discount. It cannot be said to satisfy the definition of 'interest' in the Act or the general perception of int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 14. But in a simple transaction of discounting of a bill of exchange and prompt payment, there is no contract implied or express to deem the amount involved as a deposit or loan. In the contract put forward in the case on hand also it cannot be said that the parties intended the amount involved as a loan or as money owed. It was purely a discounting of a promissory note payable at a future date and making of immediate payment on taking a discount. On the basis of the above decisions it cannot be held that any payment of interest is involved in the proposed transaction. The promissory note to be discounted is also not to bear any interest on the purchase price covered by the note for the delayed payment. 15. Article 11 of the DTAA deals with taxation of interest. Sub-article (4) defines 'interest' for the purpose of the convention. It reads: Article 11 "4. The term "interest" as used in this Convention means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities, and income from bonds or debentures, including premiums or prizes at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia as can be seen from the Discounting Agreement produced. On discounting, the income accrues or is deemed to accrue. An amount can accrue or arise if a legal right to receive it is acquired. On discounting the promissory note, the legal right to receive the proceeds accrues to the applicant. If so, the income to the applicant accrues in India. It is not disputed that it is the business income of the applicant. That business income accrues in India, though realized later. Such business income is taxable in India under the Income-tax Act subject to the rights conferred by or the protection afforded by the DTAA. 19. Under Article 7 of the DTAA, the profits of an enterprise of a contracting State shall be taxable only in that State unless the enterprise carries on business in the other contracting State through a permanent establishment situated therein. It is the case of the applicant that it has no permanent establishment in India. We have assumed for the purpose of this ruling that the applicant has no permanent establishment in India as clarified while answering question no.3 set out for ruling. Since we have held that the income is not interest income, Article 11 of DTAA is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a proposed activity as projected by the applicant before us. The proviso to section 245R though placed in the context of the initial allowing of the application (really, admitting for consideration) for consideration and for giving a ruling, its object is clear. It seeks to prevent the obtaining of a ruling when the question is already in the seisin of the regular authorities under the Act, when it involves a determination of fair market value of any property or when it relates to a transaction or issue that is designed prima facie for the avoidance of income-tax. It is true that at the stage of allowing the application under section 245R(2) of the Act, the Authority can and should consider all these questions. But does that fact prevent the Authority from considering the question when the application is taken up for rendering a ruling under sub-section (4) of section 245R of the Act? We do not think so. After all, the object of the proviso to section 245R(2) is very clear. It is to tell the Authority to decline a ruling if any one of those aspects is involved. If after the order under section 245R(2) is made and while the application is being considered under section 245R(4), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence to the contrary, arising at first sight, based on the first impression'. We may notice that the expression used is not ex-facie, meaning, in the light of what is apparent. The use of the expression prima facie thus, gives a little leeway to this Authority to consider the question of avoidance of tax, but still, it gives to this Authority only the jurisdiction to consider the question prima facie. This seems to suggest that this consideration can only be at the initial stage of the application. But as we have observed earlier, to confine it to that stage would really defeat the purpose of the introduction of the proviso. But since the intention appears to be not to confer on this Authority the jurisdiction to thoroughly examine the facts and circumstances to come to a definite conclusion as to whether a scheme for avoidance of tax is involved, the inquiry in this regard can only be of a limited nature. Thus, considered on the facts of this case, it is difficult to say prima facie that there is a scheme for avoidance of income-tax. Counsel for the applicant pointed out that in terms of the Treaty, the income would be the 'business income' of the applicant and would be taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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