TMI Blog2011 (5) TMI 342X X X X Extracts X X X X X X X X Extracts X X X X ..... ated under the laws of United States of America (USA) and is a tax resident of USA. The applicant provides various financial services to its group companies as well as to the other companies. The financial activities consists of wide range of activities including to subscribe, buy, underwrite or otherwise acquire, own, hold, sell or exchange securities or investments of any kind including negotiable 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitting the application for a ruling has set out the questions on which it proposes to give a ruling. They are extracted below: 1. Whether the income earned by the applicant by way of discounting of bills of exchange or promissory notes pertaining to its Indian group entities is liable to tax in India as per the provisions of Income-tax Act, 1961 ('the Act') or under the provisions of Double 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 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price is taken from that entity. The ABC Indian entity then discounts the promissory note with another ABC entity in USA, the applicant. The percentage of discount given is really the interest taken by the applicant upfront, on the money advanced by it to the Indian entity. This is clearly a ruse to avoid payment of 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 int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation has been admitted or allowed under section 245R(2) of the Act for an examination of the further materials for the purpose of giving a ruling under section 245R(4) of the Act, we do not think it necessary to further consider this objection and we think it proper to give a Ruling on the questions posed. 8. A reference 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 payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt there with all the liabilities of a indorser if a transferor by delivery, then with the liabilities attaching to that character. In either case, he parts with all rights, title and interests in the bill and its proceeds." Their Lordships also referred to section 50 of the Negotiable Instruments Act dealing with the effect 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Privy Council in Bennsion v. Shiber AIR 1946 PC 145 and that of the Supreme Court in Radha Kissen Chamria v. Keshardeo Chamria AIR 1957 SC 743 show that as a matter of contract, amounts that are not otherwise loans could be held to be treated as loan by the parties and could also generate interest as known to law. 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 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard that the purchaser, the debtor, would apply to the seller to specify the place of payment. Hence applying the normal rule that the debtor must seek the creditor', the payment is to be made in India to the Indian entity. It is this promissory note payable in India that is discounted by the applicant. The discounted amount is sent to India 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he veil while interpreting the effect of DTAAs in terms of the relevant provisions of the Income-tax Act. 22. This Authority has jurisdiction to see whether the transaction is designed prima facie for avoidance of Income-tax. We think that section 245R(2) of the Act must receive a purposive interpretation. We are pronouncing on an activity 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) of the Act. 24. What is the effect of the use of the expression prima facie in the provision? According to the P. Ramanatha Aiyar's Law Lexicon, prima facie means, 'at first sight, on the first appearance, on the face of it; so far as can be judged from the first disclosure, presumably; a fact presumed to be true unless disproved by some 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PE in India, that the income is not taxable in India, this question is academic. We do not think it necessary to give a ruling on that question in this case. We leave it open. 27. As regards question no.3, the applicant has asserted that it has no permanent establishment in this country. On behalf of the Revenue, it is contended that the necessary facts are not set out in the application and it is not possible for the Revenue to answer the question. We therefore assume for the purpose of this ruling that the applicant has no permanent establishment in this country. We make it clear that it would be open to the Revenue to gather the necessary facts to enable it to come to a definite conclusion on this question. 28. The ruling on question no. 4 is that the applicant will not be subject to withholding of tax under section 195 of the Act in view of our ruling on question no. 1. 29. Question no. 5 is also answered in the negative in the light of the ruling on question no.1. 30. Since there is a liability on the applicant under the Income-tax Act for being taxed on the income, being its business income and its liability is warded off only by the terms of the DTAA, we rule, consis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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