2005 (2) TMI 19 - AAR - Income Tax

Applicant who carry systematic & organised course of activity in the matter of holding shares, is engaged in business of holding shares of various companies. A Limited and B Limited are Indian companies, which are wholly owned subsidiaries of the applicant Whether the loan advanced would be taxable as the applicant s income by way of deemed dividend - since advance ruling has to be in relation to the tax liability of a non-resident, impugned application is not maintainable so rejected

Summary

Issues involved:
1. Taxability of loan advanced as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.
2. Entitlement to claim relief under Double Taxation Avoidance Agreement (DTAA) for determining tax liability in India.
3. Taxability of deemed dividend income as 'dividend' under Article 10 of the DTAA.
4. Tax liability in India for deemed dividend income in absence of Permanent Establishment under Article 5 of the DTAA.

Analysis:

1. The applicant, a company incorporated in the Netherlands, sought a ruling on whether a loan advanced would be taxable as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961. The loan was granted by an Indian company, wholly owned by the applicant, to another Indian company. The Authority noted that the transaction was between resident Indian companies, not involving the applicant directly. As per the definition of 'advance ruling,' the transaction did not meet the criteria for a ruling as it did not involve a non-resident applicant undertaking or proposing the transaction. Therefore, the application was deemed not maintainable and was rejected.

2. The applicant also inquired about claiming relief under the DTAA for determining tax liability in India. The Authority considered the provisions of the DTAA between India and the Netherlands, noting that the applicant did not have a place of management, branch office, or permanent establishment in India as per the treaty. It was argued that the profits of the applicant were not taxable in India under the DTAA. However, the ruling on this issue was not addressed as the application was found to be not maintainable due to the nature of the transaction.

3. Regarding the taxability of deemed dividend income as 'dividend' under Article 10 of the DTAA, the Authority did not provide a specific ruling on this issue due to the application being deemed not maintainable. The applicant's query on whether the deemed dividend income would be taxable as 'dividend' under the DTAA was left unanswered as the transaction did not meet the criteria for an advance ruling.

4. Lastly, the issue of tax liability in India for deemed dividend income in the absence of a Permanent Establishment under Article 5 of the DTAA was raised. The applicant argued that it did not have a Permanent Establishment in India and, therefore, should not be liable to tax in India for the deemed dividend income. However, this issue was not addressed in detail as the application was rejected on the grounds of maintainability, as the transaction did not involve a non-resident applicant as required for an advance ruling.

In conclusion, the Authority rejected the application on the basis of maintainability, as the transaction did not meet the criteria for an advance ruling involving a non-resident applicant. Therefore, the specific issues raised by the applicant regarding taxability, relief under the DTAA, and liability in India for deemed dividend income were not addressed in detail in the ruling.