TMI Blog2019 (7) TMI 1848X X X X Extracts X X X X X X X X Extracts X X X X ..... l institution eligible for concessional rate under India-Singapore treaty. 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. Thus, we hold that investment in non-convertible debentures of JKL Ltd. does not tantamount to granting of loan and neither the activity is similar to granting of loan and the applicant cannot be covered under the category of similar financial institution as per India-Singapore treaty and is not entitled to concessional rate of 10 per cent. The recourse of learned authorised representative to Organisation for Economic Co-operation and Development and United Nations Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 applicant on a private placement basis. JKL Ltd. issued 1280 secured redeemable non-convertible debentures with face value of ₹ 1,00,00,000 each. The applicant subscribed to 15.75 per cent., 1280 secured redeemable non- convertible debentures of face value of ₹ 1,00,00,000 each aggregating to ₹ 1282,00,00,000 issued by JKL Ltd. on December 29, 2011. The non-convertible debentures will mature at the end of 8th year from the date of allotment of non-converti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company) ; (b) 15 per cent. of the gross amount of the interest in all other cases. 10. The learned authorised representative has also referred to Organisation for Economic Co-operation and Development commentary para 7.7 and UN model commentary para 12, wherein it is stated that the source taxation of interest constitute an obstacle to internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. On the basis of the activities elaborated the learned authorised representative has laboured hard to justify that the applicant is a similar financial institution eligible for concessional rate under India-Singapore treaty. 14. Let us examine article 11(2)(a) and the propositions of learned authorised representative and the Department. Article 11(2)(a) reads as under : 10 per cent. of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 funds, whether listed on a recognized stock exchange or not ; (c) Units of schemes floated by a collective investment scheme ; (d) Derivatives traded on a recognized stock exchange ; (e) Treasury bills and dated Government securities ; (f) Commercial papers issued by an Indian company ; (g) Rupee denominated credit enhanced bonds ; (h) Security receipts issued by asset reconstruction companies ; (i) Perpetual debt instruments and debt capital instruments, as specified by the Reserve Bank of India from time to time ; (j) Lis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delines 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 is similar to granting of loan and the applicant cannot be covered under the category of similar financial institution as per India-Singapore treaty and is not entitled to concessional rate of 10 per cent. 23. The recourse of learned authorised representative to Organisation for Economic Co-operation and Development and United Nations Commentaries are of no avail once it is held that the transaction in question is not of granting of loan similar to that by bank carrying banking business. 24. However, we are in agreement with the learned authorised representative that the applicant's case falls under article 11(2)(b) of the India ..... X X X X Extracts X X X X X X X X Extracts X X X X
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