2011 (12) TMI 30 - AAR - Income Tax

Double Tax Avoidance Convention- deduction of tds on the interest payable on installments of promissory notes due under export credit facility COFACE agreed to ensure the credit facility to be extended by the seller -Dassault Aviation SA (seller) endorsing instruments irrevocably and unconditionally to BNP Paribas- interest payment by applicant is not in connection with debt that is effectively connected to a PE of BNP in India-Held that - Clause (b) of paragraph 3 of the India France Convention exempts interest income from tax in the State in which it arises in respect of France, if the loan and credits extended or endorsed by Banque Francaise due Commerce Exteriur or COFACE and any institution in change of the public financing of external trade and in respect of India, if it is extended or endorsed by Export Import Bank of India or any institution incharge of the public financing of external trade. In the Convention with Canada, interest arising in India paid to a resident of Canada is taxable only in Canada if it is paid in respect of a loan extended, guaranteed or insured by the Export Development Corporation and interest arising in Canada and paid to a resident of India is taxable only in India if the credit is extended, guaranteed or insured by the Export Import Bank of India. If the coverage or protection is understood as extended to loan or credit insured by one of the institutions referred to in the Convention between India and France in the context of the provisions noticed above, it has to be held that a loan or credit insured by COFACE would also come within the purview of Article 12.3(b) of the India-France Convention. Even though payment were made into the account of BNP Paribas, France in its New York account, still India-France convention will have application & not the treaty between India and USA since BNP Paribas in France continues to be the beneficial owner of the installments of loan and the interest. Thereby in view of the Article 12.3 (b) of the DTAC between India and France as modified by the Most Favoured Nation protocol , the interest payable to Dassault or BNP PARIBAS on endorsement of the promissory notes in its favour is not taxable in India. Consequently, there will be no obligation on the applicant to withhold tax on the interest paid to Dassault or to BNP PARIBAS on the transaction.

Summary

Issues Involved:
1. Taxability of interest payment to Dassault under Article 12(3)(b) of the India-France Double Taxation Avoidance Convention (DTAC).
2. Taxability of interest payment to BNP Paribas after the assignment of promissory notes.
3. Obligation of the applicant to deduct tax at source under section 195(2) of the Income-tax Act on interest payments to Dassault and BNP Paribas.

Issue-Wise Detailed Analysis:

1. Taxability of Interest Payment to Dassault:
The applicant argued that the interest payable to Dassault, insured by COFACE, was not taxable in India under Article 12.3(b) of the DTAC between India and France. The Revenue contended that Article 12.3(b) was not applicable since the interest was not derived in connection with a loan or credit extended or endorsed by COFACE. The Authority examined the definitions and interpretations of "endorse" and concluded that mere insurance by COFACE did not amount to "extending or endorsing" a loan. However, considering the Most Favoured Nation (MFN) clause in the protocol to the India-France Convention, which aligns with treaties with Canada, Hungary, and Ireland, the Authority ruled that the interest payable to Dassault was not taxable in India.

2. Taxability of Interest Payment to BNP Paribas:
After Dassault assigned the promissory notes to BNP Paribas, the applicant maintained that the tax treatment should remain unchanged. The Revenue argued that payments made to BNP Paribas' New York branch should be governed by the India-USA treaty. The Authority determined that the beneficial ownership remained with BNP Paribas in France, and thus the India-France DTAC applied. The interest payable to BNP Paribas was also exempt from tax in India under Article 12.3(b) as modified by the MFN clause.

3. Obligation to Deduct Tax at Source:
Given the conclusions on the taxability of interest payments to Dassault and BNP Paribas, the Authority ruled that the applicant had no obligation to withhold tax on these interest payments under section 195(2) of the Income-tax Act. The interest payments were exempt from taxation in India under the applicable provisions of the DTAC and the MFN clause.

Conclusion:
The Authority ruled that the interest payments to Dassault and BNP Paribas were not taxable in India under Article 12.3(b) of the India-France DTAC, as modified by the MFN clause. Consequently, the applicant was not required to withhold tax on these interest payments.

Ruling Pronounced:
The ruling was pronounced on the 5th day of December, 2011.