2011 (5) TMI 342 - AAR - Income Tax

DTAA between India and USA - discounting of the bills of exchange or promissory notes or on their maturity or on rediscounting thereof - No PE - Held that Discounting of a bill of exchange or promissory note being a purchase of the instrument as it were and especially when it is discounted without recourse - the income of the applicant from discounting would not be taxed in India, on the case set out by the applicant in the light of Article 7 of DTAA.

Issues Involved:
1. Taxability of income from bill discounting under the Income-tax Act and DTAA.
2. Timing and amount of taxable income.
3. Existence of a Permanent Establishment (PE) in India.
4. Applicability of withholding tax under section 195.
5. Requirement for transfer pricing documentation and Form 3CEB.
6. Obligation to file a return of income in India.

Detailed Analysis:

1. Taxability of Income from Bill Discounting under the Income-tax Act and DTAA:
The applicant, a US-based company, sought a ruling on whether its income from discounting bills of exchange or promissory notes for its Indian group entities is taxable in India under the Income-tax Act or the Double Taxation Avoidance Agreement (DTAA) between India and the USA. The applicant argued that since it has no Permanent Establishment (PE) in India, the discounting income should be considered business income and not taxable in India. The Revenue contended that the discount represents interest income under section 2(28A) of the Act. However, the Authority ruled that discounting a bill is a purchase of a negotiable instrument and does not create a debtor-creditor relationship, thus not qualifying as interest under the Act or DTAA. Consequently, the income from discounting is not taxable in India under the DTAA.

2. Timing and Amount of Taxable Income:
The applicant sought clarity on when the income from discounting would be taxable-at the time of discounting, maturity, or rediscounting. The Authority concluded that income accrues at the time of discounting the promissory note, even though the proceeds are realized later. However, since the income is not taxable in India due to the DTAA, this issue was deemed academic and left open.

3. Existence of a Permanent Establishment (PE) in India:
The applicant asserted it has no PE in India, which the Revenue disputed due to a lack of detailed facts. The Authority assumed for the purpose of the ruling that the applicant has no PE in India but left it open for the Revenue to investigate further. The ruling emphasized that without a PE, the business income from discounting is not taxable in India under Article 7 of the DTAA.

4. Applicability of Withholding Tax under Section 195:
Given the ruling that the discounting income is not taxable in India, the Authority ruled that the applicant is not subject to withholding tax under section 195 of the Income-tax Act.

5. Requirement for Transfer Pricing Documentation and Form 3CEB:
The applicant questioned whether it needed to maintain transfer pricing documentation and file Form 3CEB if the income is not taxable in India. The Authority ruled that since the income is not taxable under the DTAA, the applicant does not need to comply with these requirements.

6. Obligation to File a Return of Income in India:
Despite the income being non-taxable due to the DTAA, the Authority ruled that the applicant must file a return of income in India, consistent with the ruling in VNU International BV, In re.

Conclusion:
The Authority ruled that the income from discounting bills of exchange or promissory notes is not taxable in India under the DTAA between India and the USA. The applicant is not subject to withholding tax or transfer pricing documentation requirements but must file a return of income in India. The issue of a Permanent Establishment was left open for further investigation by the Revenue.

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