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2019 (7) TMI 1848 - AAR - Income TaxIncome taxable in India - interest earned by the applicant from secured, redeemable, non-convertible debentures (NCDs) of JKL Ltd. - whether taxable at the rate of 10 per cent. in the hands of the applicant as per article 11(2)(a) of the India-Singa pore tax treaty - Liability to withhold taxes at the rate of 10 per cent. based on the provisions of section 195 read with article 11(2)(a) of the India-Singapore tax treaty on payment/credit of interest on non-convertible debentures to the applicant - HELD THAT - 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) - 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. 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 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. We are in agreement with the learned authorised representative that the applicant's case falls under article 11(2)(b) of the India-Singapore treaty and the applicant is eligible for lower rate of 15 per cent. in comparison of rate of 20 per cent. laid down in section 115AD of the Income-tax Act for the simple reason that the applicant is well within its rights to choose more beneficial provisions between treaty and local tax laws. Ruling Question No. 1 - The interest earned by the applicant on non-convertible debentures of JKL Ltd. is taxable at the rate of 15 per cent. as per article 11(2)(b) of the India-Singapore tax treaty. Question No. 2 - JKL Ltd. is liable to withhold tax at the rate of 15 per cent. under the provision of section 195 of the Income-tax Act on payment of interest to applicant.
Issues Involved:
1. Taxability of interest earned by the applicant from secured, redeemable, non-convertible debentures (NCDs) of JKL Ltd. under the India-Singapore tax treaty. 2. Liability of JKL Ltd. to withhold taxes on the interest paid to the applicant under section 195 of the Income-tax Act, 1961. Issue-wise Detailed Analysis: Issue 1: Taxability of Interest Earned by the Applicant The applicant, a tax resident of Singapore and a Foreign Institutional Investor (FII) registered with SEBI, sought clarity on the tax rate applicable to the interest earned from NCDs of JKL Ltd. The applicant argued that under Article 11(2)(a) of the India-Singapore tax treaty, the interest should be taxed at a concessional rate of 10%. The applicant contended that it qualifies as a "similar financial institution" under the treaty, given its status as a merchant banker approved by the Monetary Authority of Singapore (MAS). The Department countered that the applicant, registered as an FII, does not qualify as a "similar financial institution" akin to a bank under Article 11(2)(a). The Department emphasized that the term "financial institution" is not defined in the India-Singapore treaty, and the applicant's status as an FII does not equate to a banking institution. Consequently, the Department argued that the interest income should be taxed at 20% under section 115AD of the Income-tax Act. Upon examining the documents and rival contentions, the Authority concluded that the applicant, though a merchant banker under MAS, does not qualify as a bank or a similar financial institution under the treaty. The Authority noted that the applicant’s investment in NCDs does not amount to granting a loan, a key criterion for the concessional rate under Article 11(2)(a). Thus, the applicant is not entitled to the 10% concessional rate. However, the Authority agreed that the applicant could benefit from the more favorable provisions of Article 11(2)(b) of the treaty, which allows for a 15% tax rate on interest income. This provision is more beneficial than the 20% rate under section 115AD of the Income-tax Act. Issue 2: Liability of JKL Ltd. to Withhold Taxes Given the Authority's ruling on the tax rate, JKL Ltd. is required to withhold taxes at the rate of 15% on the interest paid to the applicant. This withholding is in accordance with section 195 of the Income-tax Act, read in conjunction with Article 11(2)(b) of the India-Singapore tax treaty. Conclusion: - The interest earned by the applicant on NCDs of JKL Ltd. is taxable at the rate of 15% as per Article 11(2)(b) of the India-Singapore tax treaty. - JKL Ltd. is liable to withhold tax at the rate of 15% on the interest paid to the applicant under section 195 of the Income-tax Act.
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