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International Tax Update- Interest Income from India- Foreign Remittance- TDS u/s 195

Income Tax - Direct Tax Code - DTC - By: - CA Rohit Gupta - Dated:- 18-3-2015 - A. Taxation as per Domestic Law: A.1. Definition of Interest 2(28A) interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised ; 2(28B) interest on securit .....

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9. (1) The following incomes shall be deemed to accrue or arise in India :- (v) income by way of interest payable by- (a) the Government ; or (b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the interest .....

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for rate of Tax: Income Tax Proviso Provisions Domestic Tax Rate Rate as per DTAA 115A Interest received from Government or an Indian concern on monies borrowed or debt incurred by Government or the Indian concern in foreign currency 20% 10%/15% 194LC Interest received from Specified Company (i) in respect of monies borrowed by it at any time on or after the 1st day of J .....

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idge ; or (v) construction of port including inland port ; or (vi) construction of ships in a shipyard ; or (vii) construction of dam ; or (viii) developing and building a housing project 5% 10%/15% 194LD The income by way of interest of a person being a Foreign Institutional Investor(FII) or a Qualified Foreign Investor(QFI) payable by any person on or after the 1st day of June, 2013 but before the 1st day of July, 2017 in respect of investment .....

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nterest, as may be required by the regulations under which such trust is granted registration Business Trust has been defined to mean a Trust registered as an Infrastructure Investment Trust or a Real Estate Investment Trust the units of which are required to be listed on a recognized Stock Exchange. 0% 10%/15% 194LBA Tax is to be deductible if a business trust distributes any income referred to in section 115UA being of the nature referred t .....

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owances. B. Taxation as Per DTAA: Article 11 of DTAAs is divided into six paragraphs. Paragraph 1 provides the right of taxation of interest to the state of residence of the lender. Paragraph 2 gives the restricted right to the source state to tax the interest at a fixed percentage of the gross amount. Paragraph 3 defines the expression interest. Paragraph 4,5 and 6 brings about the exceptional scenarios such as where interest paid has a relation with the permanent establishment or a fixed base .....

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des the penalty charges for late payment from the purview of interest. DTAAs generally provide the maximum rate of taxation. The rate of taxation ranges from 10% to 15%. However, DTAAs with Greece, Libya, Mauritius, Egypt leave the rate of tax to be determined as per domestic laws. C. Specific Indian Case Laws: Discounting Charges- Discounting of a promissory note/export sale bills does not involve creation of a debt or coming into existence of a debtor-creditor relationship, amount of discount .....

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- For carrying out appraisal it charged upfront appraisal fees irrespective of fact as to whether loan/credit facility was advanced to applicant or not. Held, Upfront appraisal fee was not interest income from a debt claim. It was debt itself. Nor can the payments be said to be service fees or other charges 'in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized'. Thus, the income on account of the upfront appraisal fees was busin .....

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pany could not be said to have lent amount of unpaid purchase price to assessee-company either in cash or in kind, there was no question of interest payable assessee-company to non-resident company being deemed to be income accruing or arising from any money lent at interest and brought into India in kind. CIT v. Saurashtra Cement and Chemical Industries Ltd. 1974 (9) TMI 34 - GUJARAT High Court Interest on compensation: If the amount is paid as interest to a non-resident in the usual course of .....

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assumes the character of a judgment debt, the decree passed by the civil court must be executed subject only to the deductions and adjustments permissible under the Code of Civil Procedure, 1908. There is no provision under the Income-tax Act or under section 195 in particular or under the Code of Civil Procedure where the amount of the interest payable under a decree was deductible from the decretal amount on the ground that it was an interest component on which tax was liable to be deducted at .....

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ld have been received as a due on account of any money either borrowed or debt incurred. Since, in instant case, amount which was agreed to be paid by way of interest as per order of Company Court, was not on account of any money either borrowed or debt incurred, same could not be treated as interest at all as defined in above provision. For purpose of assessment of income-tax, it was part of sale consideration and, therefore, said amount was to be treated only as capital gain and not income fro .....

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article 11 of DTAA between India and USA and it is, accordingly, liable to be taxed as income of LMCC under Act and under article 11 of DTAA. LMN India Ltd., In re 2008 (10) TMI 21 - AUTHORITY FOR ADVANCE RULINGS Sale of Compulsory Convertible Debentures: The gains arising to a non-resident investor from sale of compulsorily convertible debentures ( CCDs ) in an Indian company do not assume the character of interest and should be treated as capital gains. Zaheer Mauritius v. Director of Income .....

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public announcement, same would be considered as part of consideration received by assessee against shares tendered in open offer and would be taxed as capital gain and not as interest. Genesis Indian Investment Co. Ltd. V. CIT 2013 (8) TMI 838 - ITAT MUMBAI Prepayment Discount liable for TDS: Pre-payment discount given by assessee to foreign buyers in absence of any mention in purchase contract that assessee was obliged to give said discount, was in nature of interest and tax was deductible a .....

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ion 2(28A), being an income deemed to have accrued or arisen in India under section 9(1)(v)(b) (Uniflex Cables Ltd. V. DCIT 2012 (4) TMI 190 - ITAT MUMBAI ) Usance Interest on Ship breaking Activity: Usance interest is exempt if paid in respect of ship breaking activity and assessee was not liable to withhold tax at source. CIT v. Vijay Ship breaking Corporation 2008 (10) TMI 6 - SUPREME COURT Interest by Indian branch to its Head Office: Discussed in detail later: C.1. Interest by Indian Bran .....

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in case of Sumitomo Mitsui Banking Corporation wherein the Mumbai ITAT held :Indian PE and the HO along with its other branches are the same legal entity and one cannot make profit out of self. Hence, interest paid by the Indian PE to the HO are neither taxable as income nor tax deductible as expenditure under the domestic tax law of India. However, where the concerned tax treaty treated the PE and HO as separate entities and there existed specific provisions that enabled Indian PE to claim tax .....

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e that, in the case of a non-resident assessee, engaged in the business of banking, any interest payable by the Indian PE to the HO or any PE or any other part of such assessee entity outside India shall be deemed to accrue or arise in India and would be chargeable to tax in addition to any income attributable to the Indian PE in India. The PE in India shall be deemed to be a person separate and independent of the non-resident assessee. Accordingly, the Indian PE shall be obligated to deduct tax .....

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1.4.2015 Non-Treaty scenario Favourable Treaty scenario Treaty as well as non-treaty scenario Income of PE in India 100 100 100 Less: Interest payment to HO 20 20 Taxable income of the PE 100 80 80 Income of the HO - Nil 20 D.1. Issues still to be Address .....

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dividends, it is likely that company will prefer borrowings from shareholders to increase its shareholders contributions. Though many countries have passed legislation designed to prevent such devices resulting in tax avoidance and particularly envisaging that interest paid be treated as dividend in cases where there appears to be thin capitalisation or under capitalisation. India is still an exception and presents opportunity to explore such option to reduce tax outflow on dividend and pay inte .....

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ith countries like Belgium where DTAA specifically provides that Dividend also include income even paid in the form of Interest- derived from capital invested by the members of a company other than a company with share capital which is resident of Belgium. b) Credit card interest: Banks providing credit card facilities is different from debt created between lender and borrower. The service charges received from credit card holders on overdue payments is not interest on loan and thus amount due f .....

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arent, did not loan money to its U.S.-based subsidiary, International. Instead, Vitro promised to pay notes issued by International in the event of a default. International paid its parent company a guaranty fee in exchange for that service. The US Subsidiary paid a guarantee fee to the Mexican Corporation and did not withhold US Income tax from the guarantee. The tax court concluded that the Guarantee fee is not interest because the Mexican parent did not make a loan to the U.S. Subsidiary and .....

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same is not a service fee and hence not in the nature of interest. -Also, going by the DTAAs, guarantee fees may qualify as business income under Article 7 or Other income under Article 21 but not as interest income. Hence, guarantee fees is not taxable in India as interest income. d) Loan from Banks - Taxation by the State of source is typically levied on the gross amount of the interest and therefore ignores the real amount of income derived from the transaction for which the interest is paid, .....

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