2005 (2) TMI 18 - AAR - Income Tax

Applicant, a resident company, has taken a loan of US 34,00,000 from Rabobank of Singapore - As per para, (c) of schedule 5 of the loan agreement detailing with general terms and conditions, the tax liability of the Rabobank (a non-resident) is to be borne by the applicant and payment of interest is to be made net of all taxes held that interest paid to M/s. Rabobank will constitute income in the hands of the non-resident and TDS under section 195 of the Income-tax Act, 1961, is deductible

Summary

Issues:
1. Whether interest paid to M/s. Rabobank constitutes income in the hands of the non-resident?
2. Whether TDS under section 195 of the Income-tax Act, 1961 is deductible?

Analysis:

Issue 1:
The applicant sought an advance ruling on whether interest paid to M/s. Rabobank would be considered income in the hands of the non-resident. The applicant argued that as per the India-Singapore Double Taxation Avoidance Agreement (DTAA), interest arising in India and paid to a resident of Singapore may be taxed in Singapore. However, the Revenue relied on different clauses of the DTAA to support the deduction of tax at the source in India. The Authority analyzed the relevant clauses of the DTAA and concluded that the interest paid to M/s. Rabobank would indeed constitute income in the hands of the non-resident.

Issue 2:
The second issue pertained to the deductibility of Tax Deducted at Source (TDS) under section 195 of the Income-tax Act, 1961. The applicant contended that no tax should be deducted in India as per the DTAA provisions. However, the Authority ruled that TDS under section 195 of the Income-tax Act, 1961 is indeed deductible in this case. The ruling was based on the interpretation of the DTAA clauses and the specific circumstances of the case, leading to the conclusion that the non-resident lender's interest income is subject to TDS.

In summary, the Authority for Advance Rulings examined the provisions of the India-Singapore DTAA and determined that the interest paid to M/s. Rabobank constitutes income in the hands of the non-resident, and TDS under section 195 of the Income-tax Act, 1961 is deductible in this scenario. The ruling was delivered on February 21, 2005, after a thorough analysis of the applicant's arguments and the relevant legal framework.