2012 (3) TMI 46 - AAR - Income Tax

DTAA between India and Sweden applicant availed loan facility from AB SVENSK Export Kredit (SEK), a company incorporated in Sweden facility being guaranteed by the Swedish Export Credits Guarantee Board (EKN) whether payment of interest (through the Facility Agent NORDEA Bank AB( PUBL )) is exempt in India withholding of tax - Held that - Payment of interest to SEK through NORDEA Bank AB is not taxable in India under Article 11.3 of the India-Sweden Double Taxation Avoidance Convention in view of and only in view of the Most Favoured Nation Clause in the India-Sweden Protocol which has to be taken as part of the Convention. Since it is claimed that SEK has no Permanent Establishment in India, there will be no obligation on the applicant to withhold taxes u/s 195 of the Income-tax Act, on the interest payable on the transaction.

Summary

Issues involved:
1. Taxability of interest paid under a loan facility agreement guaranteed by a foreign entity under the India-Sweden Double Taxation Avoidance Convention.
2. Interpretation of the Most Favoured Nation Clause in the India-Sweden Protocol in relation to the tax exemption on interest payments.

Analysis:
1. The applicant, a company engaged in telecommunication services in India, sought an Advance Ruling on the taxability of interest paid under a loan facility agreement guaranteed by a foreign entity. The applicant contended that the interest paid should be exempt from taxation in India under Article 11.3 of the India-Sweden Double Taxation Avoidance Convention. The Authority framed questions regarding the taxability of the interest payment, considering the guarantee provided by the foreign entity and the applicability of the tax treaty between India and Sweden.

2. The Authority examined the argument presented by the applicant that guaranteeing a loan is equivalent to extending or endorsing a loan, thus making the interest exempt from taxation. However, referencing a previous ruling in a similar case, the Authority concluded that guaranteeing a loan does not equate to extending or endorsing a loan. Therefore, the interest paid under the loan facility agreement was not eligible for tax exemption under the India-Sweden Double Taxation Avoidance Convention based on Article 11.3.

3. Additionally, the applicant relied on the Most Favoured Nation Clause in the India-Sweden Protocol, suggesting that a loan guaranteed by a foreign entity should be exempt from tax under the Convention. The Authority referred to a previous ruling where a similar argument was upheld. Consequently, the Authority ruled that the interest payment by the applicant to the foreign entity through a designated bank was not taxable in India under the India-Sweden Double Taxation Avoidance Convention, specifically due to the Most Favoured Nation Clause in the Protocol. As a result, the obligation to withhold taxes under Section 195 of the Income-tax Act did not apply, given the absence of a Permanent Establishment of the foreign entity in India.

4. The ruling provided clarity on the tax treatment of interest payments under a loan facility agreement guaranteed by a foreign entity, emphasizing the significance of the provisions in the India-Sweden Double Taxation Avoidance Convention and the interpretation of the Most Favoured Nation Clause in the Protocol. The decision highlighted the impact of international tax treaties on cross-border transactions and the determination of tax liability concerning interest payments in such scenarios.