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BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI
3rd Day of May, 2011
PRESENT
Mr Justice P.K. Balasubramanyan (Chairman) Mr. J. Khosla (Member)
Mr. V.K.Shridhar (Member)
A.A.R. No. 840 of 2010
Name & address of the applicant ABC International Inc.
USA Commissioner Concerned Director of Income-tax (International Taxation-I) New Delhi
Present for the Applicant Mr. Percy Pardiwalla, Sr. Adv. Ms. Preeti Goel, Advocate
Mr. Prashanti Khatore, CA Ms. Vanita Bansal, CA
Mr. Banish Bansal, CA Mr. Vivek Sawhney, CA Ms. Sonam Khanna, CA
Present for the Department Mr. G.C. Srivastava, Advocate Mr. Alok Malviya, DCIT
R U L I N G [By Justice P.K. Balasubramanyan]
1. The applicant has approached this Authority being desirous of
obtaining an advance ruling on a transaction which is proposed to be
undertaken. The nature of the activity as set out by the applicant in
its application is as follows:-
“ABC International Inc., the applicant is a company
incorporated under the laws of United States of America (USA)
and is a tax resident of USA.
2
The applicant provides various financial services to its group
companies as well as to the other companies. The financial
activities consists of wide range of activities including to
subscribe, buy, underwrite or otherwise acquire, own, hold, sell
or exchange securities or investments of any kind including
negotiable instruments, commercial paper etc. As a part of its
business, it draws, makes, accepts, endorses, discounts,
executes and issues promissory notes, bills of exchange etc.
The applicant has been providing financial services to US and
Europe entities, and has now started providing services to
Asian entities as well.
ABC India Pvt. Ltd. (“ABC India”) is a group company
incorporated in India and is engaged in the business of trading
in wheat, grains, soyameal, oilseeds, sugar, cotton and other
food products. ABC India also manufactures, processes and
refines edible oils and plastic films, manufactures and trades in
animal feeds, nutrition, artificial flavours and emulsions. In
addition to the above, ABC India undertakes merchanting trade
in goods/commodities traded across the globe, as per Indian
Exim Policy and DGFT guidelines.
3
The applicant as part of its regular finance business wants to
carry out bill discounting activities for ABC India without having
any physical presence in India.
ABC India proposes to transact with the applicant for purchase
of bills of exchange drawn by them on the buyer in pursuance
of goods sold under normal/merchanting trade as well as
purchase of promissory notes (PN) issued by such buyer. The
PN is more frequently used instrument by ABC India. The
applicant will enter into a discounting agreement with ABC India
for purchase of the PN at a discount specifying the details of
PN to be discounted, face value, discounted value, rate of
discount, name of the company who issued the PN, date of
maturity of PN, bank details for payment etc. The discount for
purchasing the PN will be calculated on the basis of various
factors such as prevalent LIBOR plus certain margin depending
upon the market condition.
ABC India will send the requisite set of documents alongwith
endorsed PN to their bank with instruction that the bank will
send the documents to the applicant for discounting of PN and
will collect payment from the applicant.
4
After receiving the documents and endorsed PN from the bank,
the applicant will make the payment of PN purchased (after
deducting its discounting charges as per the agreement) to the
bank, which in turn will make the payment to ABC India.
The applicant will discount the PN on “without recourse” basis
and make the remittance of the purchase price (i.e. face value
minus discounting charges) to ABC India. The endorsement of
PN „without recourse‟ basis signifies that all risk and rewards of
the PN are transferred to the applicant and in no case the
applicant makes ABC India liable to make payment to the
applicant in case of delay or default in payment by the entity
who issued the PN.
The applicant may further sell the PN or hold it till maturity date
or if the buyer is desirous of prepaying the bill before the
maturity, accept such request depending upon its own
commercial considerations. In any of these situations payment
will be received by the applicant from a party outside India and
will be received outside India”.
5
2. On the basis of the facts as set out above, the applicant has
sought an advance ruling on six questions which it had formulated in
its application. This Authority while admitting the application for a
ruling has set out the questions on which it proposes to give a ruling.
They are extracted below:
1. Whether the income earned by the applicant by way of discounting of bills of exchange or promissory notes pertaining to its Indian group entities is liable to tax in India as per the provisions of Income-tax Act, 1961 („the Act‟) or under the provisions of Double Taxation Avoidance Agreement between India and United States of America (DTAA)?
2. In case the above income is held to be taxable in India considering the
provisions of the Act or DTAA, what will be the amount taxable in India and whether such income will be taxed at the time of discounting of the bills of exchange or promissory notes or on their maturity or on rediscounting thereof?
3. On the facts and in the circumstances of the case whether the applicant
can be considered to have a permanent establishment in India and if yes, whether any profits on the discounting of the bills of exchange or promissory notes can be attributed to such permanent establishment as per Article 7 of the DTAA.
4. Whether the income of the applicant will still be subject to withholding tax
under section 195 of the Act in case the income from above transaction is held to be „not taxable‟ in India.
5. Whether transfer pricing documentation (as provided under Section 92 D
of the Income-tax Act, 1961 read with Rule 10D of the Income-tax Rules, 1962) is required to be maintained and Form 3CEB (as provided under section 92E of the Act) required to be filed with the Return of Income pertaining to this transaction, even if income arising from the above transaction is held to be „not liable to tax‟ in India.
6. Whether the applicant has to file a return of income in case it does not
have any income chargeable to tax in India.
3. It is submitted on behalf of the applicant that the Indian entity,
which belongs to its group and which sells goods to a foreign entity
6
and receives in lieu of payment of the price then and there, a
promissory note payable without interest at a future date proposes to
get it discounted with the applicant. The discount is one without
recourse. The applicant would present the instrument on maturity
and would recover the proceeds or discount the promissory note with
another entity, but accepting the risk in respect of the promissory
note. Since the applicant has no Permanent Establishment in India,
the amount of discount given by the applicant to the Indian entity is
not taxable in India and it is really the business income of the
applicant that has to be assssed outside India. It is contended that
the discounted margin cannot be described as income by way of
interest within the meaning of Section 2(28A) of the Income-tax Act
read with Section 9(1)(v) of the Act. Discounting of a promissory note
or a bill of exchange is a well understood mercantile practice and
while discounting the instrument there is no advance of a loan or
creation of a debt. It is really a purchase of a negotiable instrument.
What is made out of the transaction by the applicant is the difference
between the sum for which the promissory note was executed
realized on maturity and the discounted amount paid to the Indian
entity even before maturity.
7
4. It is highlighted on behalf of the Revenue that the proposed
transaction is a case of merchanting trade. The goods that are dealt
with by the ABC entity in India are goods from outside the country.
They are purchased from another ABC entity that is a non-resident
and the promissory note in lieu of price is taken from that entity. The
ABC Indian entity then discounts the promissory note with another
ABC entity in USA, the applicant. The percentage of discount given
is really the interest taken by the applicant upfront, on the money
advanced by it to the Indian entity. This is clearly a ruse to avoid
payment of taxes in India and this Authority should decline to answer
the questions raised and even if it is inclined to answer them, they
have to be answered by keeping this in mind.
5. On behalf of the Revenue, it is contended that it is really a case
of the applicant advancing a loan to the Indian entity which discounts
the promissory note and the percentage of discount given is really the
interest charged on the loan but appropriated upfront and that such a
payment would satisfy the definition of „interest‟ under section 2(28A)
of the Act. It is submitted that the entity that seeks discount on the
promissory note is getting the sale proceeds from the sale of the
goods to a foreign buyer on a price to be paid at a future date for use
8
immediately. By this process, the cost of getting the pre-mature
payment, is the percentage of discount and that percentage depends
upon the interest rate in the market. Thus, it is a case where the
applicant is really getting interest on the amount from the entity in
India. The interest is collected in advance in India. Under the
Double Taxation Avoidance Agreement (DTAA) debt claims of every
kind is provided for and this is one mode of financing an export. The
amount is debited to the account of the seller as expenses for raising
the money immediately. Thus, the amount is taxable as interest in
India.
6. It is also contended on behalf of the Revenue that two other
companies belonging to the Group of the applicant are already in
such business and the Authorities under the Income-tax Act have
initiated proceedings against them for recovery of the taxes due. In
respect of one of those entities, the jurisdictional ITAT has held that
the amount is not taxable and the appeal taken to the High Court has
been heard and the judgment is awaited. In the other, proceedings
before the Authorities are going on. Since a similar question was
already pending before the concerned Income-tax authorities under
9
the Act as regards the other group companies of the applicant, this is
not a case for giving an advance ruling under section 245R of the Act.
7. As far as the objection that the question sought to be raised
before us is pending before the Assessing authorities or the Appellate
Authority under the Act and hence, we should decline to give a ruling
is concerned, the same is met by Sr. Counsel for the applicant by
referring to a ruling of this Authority in the case of LS Cable Limited
(AAR No. 858-861 of 2009). This Authority while dealing with an
argument of this nature on behalf of the department, took the view
that the transaction in respect of which the ruling was sought was
different from the one in which other entities are involved and
consequently the bar created by Clause (i) of the proviso to Section
245R(2) of the Act was not attracted. We may also notice that the
applicant in this case is different, while at the same time we take note
of the fact that the expression “in the applicant‟s case” that occurred
in the proviso, was deleted by Finance Act, 2000. In the case cited,
this Authority proceeded to hold in a situation like the present one
that the application cannot be said to be barred under clause (i) to
proviso to section 245R(2) of the Act. For the purposes of this case,
especially when the application has been admitted or allowed under
10
section 245R(2) of the Act for an examination of the further materials
for the purpose of giving a ruling under section 245R(4) of the Act, we
do not think it necessary to further consider this objection and we
think it proper to give a Ruling on the questions posed.
8. A reference to authorities shows that discounting of a bill is
distinguishable from a pledge or deposit of security. They also show
that it is distinguishable from a bill left for collection. In Ditchfield V.
Sharp [(1983) 3 ALLER 681], the expression „discount‟ was explained
as a deduction made from the amount of a bill of exchange or
promissory note by one who gave the value for it before it was due.
In Lomax V. Peter Dixon & Co. [(1943) 2 ALLER 255], It was stated that
in discounting of bills of exchange, exchequer bill etc., the discount is
the reward and in a normal case (since such bills do not as a rule
carry interest) the only reward which the person discounting the bill
obtains for his money. In Buchanan vs. McDonald (33 SLR 200) it was
stated that discount has no technical or universal meaning. In what
is perhaps, its most common meaning, it is equivalent to the payment
of interest in advance e.g. when a banker advances the amount
upon a bill of exchange which is not yet due, discounting the interest
upto the date of payment. In P. Ramanatha Aiyar’s Law Lexicon, the
11
meanings given are “an allowance or deduction generally of so much
percent, made for pre-payment or prompt payment of a bill or account,
interest taken in advance, a reduction.”
9. In Dena Bank v. M.P. National Textiles Corporation Limited
[1982 AIR (MP) 85], a Division Bench of the Madhya Pradesh High
Court explained the position thus:
“It may also be noted that under the banking laws when the bills are
handed over to the banker by his customer in order that the same
be collected when due, and the proceeds be credited to the
customer’s account, then they are called. “Bills for collection”. This
term distinguishes from the term, “Bill negotiated” or “Bill
discounted”, which are bills for which the banker has given value at
once, instead of waiting till the banker has actually received the
proceeds of the bills when collected. Thus, in the case of the bills
handed over to the banker by the customer for collection when due
and to credit the amount in the account of the customer after the
proceeds are actually collected, it is not a case of sale and purchase
of negotiable instruments or documents of title relating to goods
because these bills are merely handed over to the banker for
collection and credit when received and the banker has no property
in them. But the “Bills negotiated” or Bills discounted” stand on a
different footing by which the discounter is a holder for full value and
gets absolute title over it. In this behalf a reference may be made to
Sheldon’s Practice and Law of Banking. Tenth Edition, at page 306,
wherein the author has discussed that “to discount a bill” is to buy it,
to become the transferee of it, by having it endorsed or transferred
12
by delivery by the holder, giving him a price settled, either by
agreement or by the current rate in the money market. It has been
further stated that a discounter is a holder for full value and not a
pledgee: he can deal and part with the bills as he likes, his title to the
bill and to sue on it is absolute and covers the whole face value; he
is in no sense a trustee for the previous holder as to any part of the
bill or its proceeds and that the person who gets the bill discounted
is a transferor if by endorsement there with all the liabilities of a
indorser if a transferor by delivery, then with the liabilities attaching
to that character. In either case, he parts with all rights, title and
interests in the bill and its proceeds.”
Their Lordships also referred to Section 50 of the Negotiable
Instruments Act dealing with the effect of an endorsement, to notice
that the property in the instrument then passes to the endorsee. The
observation in Halsbury‟s Law of England noticed therein is that
where the transaction is really one of discounting, the banker is of
course at liberty to deal with the bill as he pleases rediscounting or
transferring it.
10. Thus, the position appears to be that discounting of a bill
amounts to purchase of the negotiable instrument and it does not
involve any relationship of debtor and creditor between the endorser
and the endorsee. As a general rule, an endorsement of a
13
promissory note does not also result in an assignment of the original
debt.
11. In the case before us also, it is not disputed that what governs
the quantum of discount is the libor rate and/ or the prevailing rate of
interest. But what is contended on behalf of the applicant is that
merely because of that fact, a discount given cannot be treated as
payment of interest by the person who gets the instrument discounted
with a view to have immediate payment and the nature of the
payment remains merely a discount. It cannot be said to satisfy the
definition of „interest‟ in the Act or the general perception of interest
as known in commercial or debt transactions.
12. Section 2(28A) of the Income-tax Act reads:
“Interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.
As per the definition, for any interest to accrue, there must be a
borrowing, debt, deposit or obligation to repay. In the absence of
any of those elements present, it is difficult to postulate accumulation
of interest or its payment. When a promissory note is discounted, no
doubt keeping in mind the prevailing rate of interest, no obligation is
14
incurred for repayment of the money by the person who discounts the
instrument or the person who gets it discounted, except that in the
case of a discounting with recourse, the person who gets it
discounted continues to be liable to the endorsee. In a case of
endorsement without recourse, even that possibility does not arise.
Of course, the person who gets the instrument discounted pays for
getting present payment on an instrument that becomes due for
payment at a later date. But that consideration cannot be treated as
payment of interest upfront in the context of the Law Merchant and
the Negotiable Instruments Act and the commercial and legal
implications of a discounting of an instrument.
13. The decision of the High Court of Madras in Viswapriya
Financial Services and Securities Ltd. v. CIT (258 ITR 496) while
dealing with the definition of interest in the Act, after taking note of the
expanded nature of the definition, concluded “even in cases where
there is no relationship of debtor and creditor or borrower and lender,
if payment is made in any manner in respect of any monies received
as deposits or on money claims or rights or obligations incurred in
relation to money, such payment is, by the statutory definition,
regarded as interest”. The decision of the Privy Council in Bennison
15
v. Shiler (AIR 1946 PC 145) and that of the Supreme Court in Radha
Kissen Chanria v. Keshardeo Chanria [AIR 1957 SC 743] show that
as a matter of contract, amounts that are not otherwise loans could
be held to be treated as loan by the parties and could also generate
interest as known to law.
14. But in a simple transaction of discounting of a bill of exchange
and prompt payment, there is no contract implied or express to deem
the amount involved as a deposit or loan. In the contract put forward
in the case on hand also it cannot be said that the parties intended
the amount involved as a loan or as money owed. It was purely a
discounting of a promissory note payable at a future date and making
of immediate payment on taking a discount. On the basis of the
above decisions it cannot be held that any payment of interest is
involved in the proposed transaction. The promissory note to be
discounted is also not to bear any interest on the purchase price
covered by the note for the delayed payment.
15. Article 11 of the DTAA deals with taxation of interest. Sub-
article (4) defines „interest‟ for the purpose of the convention. It
reads:
16
Article 11
“4. The term “interest” as used in this Convention means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from Government securities, and income from bonds or debentures, including premiums or prizes attaching to such securities, bonds, or debentures. Penalty charges for late payment shall not be regarded as interest for the purposes of the Convention. However, the term “interest” does not include income dealt with in Article 10 (Dividends).”
The underlying element that can give rise to interest is the
existence of a debt claim. In other words, a debt has to exist for
interest to be generated. Only if we are able to hold that discounting
of a promissory note involves the creation of a debt or the coming into
existence of a debtor-creditor relationship, we would be justified in
holding that the discount given represents interest paid upfront by the
resident company when it gets the note discounted. We have already
indicated that it is not possible to take such a view. Hence, the
discount given could not be held to be interest within the meaning of
Article 11 of the DTAA.
16. We may notice once again that the purchase price payable for
the goods is represented by the promissory note executed by the
purchaser and it is payable in future without interest. So, all that the
discounting achieves is that it enables the seller to realize the price of
17
the goods then and there or prematurely but at a cost. That cost
cannot be termed as interest paid by the seller.
17. According to the applicant, discount charges are in the nature
of business income that are earned outside India. It cannot be taxed
in India unless the applicant has a business connection in India or the
income is earned from or through any property in India or through or
from any asset or source of income in India or through the transfer of
any capital asset situated in India. It is submitted that the applicant
does not have any presence or agent in India and the income earned
is outside India.
18. The promissory note taken by the seller, an Indian tax resident
in lieu of the price to be paid, is a promissory note payable on
demand. This is clear from the facsimile of the promissory note
produced by the applicant. No place of payment is specified, nor is it
put forward that the purchaser, the debtor, would apply to the seller to
specify the place of payment. Hence applying the normal rule that
the debtor must seek the creditor‟, the payment is to be made in India
to the Indian entity. It is this promissory note payable in India that is
discounted by the applicant. The discounted amount is sent to India
as can be seen from the Discounting Agreement produced. On
18
discounting, the income accrues or is deemed to accrue. An amount
can accrue or arise if a legal right to receive it is acquired. On
discounting the promissory note, the legal right to receive the
proceeds accrues to the applicant. If so, the income to the applicant
accrues in India. It is not disputed that it is the business income of
the applicant. That business income accrues in India, though
realized later. Such business income is taxable in India under the
Income-tax Act subject to the rights conferred by or the protection
afforded by the DTAA.
19. Under Article 7 of the DTAA, the profits of an enterprise of a
contracting State shall be taxable only in that State unless the
enterprise carries on business in the other contracting State through
a permanent establishment situated therein. It is the case of the
applicant that it has no permanent establishment in India. We have
assumed for the purpose of this ruling that the applicant has no
permanent establishment in India as clarified while answering
question no.3 set out for ruling. Since we have held that the income
is not interest income, Article 11 of DTAA is not attracted. Thus, it
has to be ruled that the income of the applicant from discounting
19
would not be taxed in India, on the case set out by the applicant in
the light of Article 7 of DTAA..
20. It is true as pointed out by learned counsel for the Revenue that
the transactions are among ABC entities. The original seller of the
goods is a ABC entity which is a non-resident. The goods sold are
outside the country. They are purchased by the Indian ABC entity.
The goods are then sold by the Indian entity to another non-resident
ABC entity. For the price, the promissory note in favour of the Indian
ABC entity is then executed by the non-resident ABC entity. Then
the bill is discounted by the Indian ABC entity with the ABC entity in
USA which is the applicant before us. Learned counsel summits that
a process has been evolved to take away the income from India
without payment of tax on it here and such an attempt should not be
countenanced. We do see some force in this submission. He also
submits that proviso (iii) to Section 245R(2) of the Act gives us ample
jurisdiction to see thorough the transaction and not to give a ruling on
the questions posed.
21. Counsel for the applicant countered the argument by pointing
out that the proviso (iii) to section 245R(2) of the Act comes into play
20
only when the question of admitting the application is taken up for
consideration under section 245R(2) of the Act and that the proviso
cannot be applied once the application is allowed under that
provision or admitted for a ruling. He also submits that the
jurisdiction to enquire under proviso (iii) to Section 245R(2) of the Act
is very limited and it is only to take a prima facie view at the stage of
admission and it must be a patent or obvious case of attempt at
avoidance of tax that attracts the provision. A detailed inquiry into
such a question is not contemplated. He also cited the decision of
the Supreme Court in Union of India v. Azadi Bachao Andolan [2003
(363) ITR 706] to contend that we are precluded from trying to pierce
the veil while interpreting the effect of DTAAs in terms of the relevant
provisions of the Income-tax Act.
22. This Authority has jurisdiction to see whether the transaction is
designed prima facie for avoidance of Income-tax. We think that
Section 245R(2) of the Act must receive a purposive interpretation.
We are pronouncing on an activity or a proposed activity as projected
by the applicant before us. The proviso to section 245R though
placed in the context of the initial allowing of the application (really,
admitting for consideration) for consideration and for giving a ruling,
21
its object is clear. It seeks to prevent the obtaining of a ruling when
the question is already in the seisin of the regular authorities under
the Act, when it involves a determination of fair market value of any
property or when it relates to a transaction or issue that is designed
prima facie for the avoidance of income-tax. It is true that at the stage
of allowing the application under Section 245R(2) of the Act, the
Authority can and should consider all these questions. But does that
fact prevent the Authority from considering the question when the
application is taken up for rendering a ruling under sub-section (4) of
Section 245R of the Act? We do not think so. After all, the object of
the proviso to Section 245R(2) is very clear. It is to tell the Authority
to decline a ruling if any one of those aspects is involved. If after the
order under section 245R(2) is made and while the application is
being considered under section 245R(4), it becomes apparent that
one of the provisos is attracted, it behoves this Authority to decline a
ruling. After all, section 245R is an integrated section not only
dealing with the admission of an application but also its final disposal
and the mere fact that the disabilities are placed at the earlier stage,
cannot lead to the position that the disabilities should be ignored even
22
when they become discernible when the application is taken up for
final disposal.
23. The decision of Supreme Court in Azadi Bachao Andolan, is
obviously binding on all courts and Tribunals in this country. But as
far as this Authority is concerned, it seems to have a little leeway in
considering for itself the questions concluded by that decision.
Proviso (iii) to Section 245R(2) of the Act gives us the jurisdiction to
test the transaction projected before us to see whether it is designed
prima facie for the avoidance of income-tax. Azadi Bachao Andolan
did not have occasion to consider the scope of this proviso. That
decision was concerned with a public interest challenge to circulars
issued by the Income-tax Department on the binding nature of the
evidence of incorporation of a company or Corporation under foreign
laws, the effect of the grant of certificate by the Tax Authorities on the
residential status of the company or corporation and the general right
of court to pierce the veil to find out the real nature of the company or
transaction. Proviso (iii) to Section 245R(2) enables this Authority to
test the transaction or issue for finding out whether as put forward, it
was designed for the avoidance of income-tax. This power conferred
on this Authority cannot be said to be taken away by the decision in
23
Azadi Bachao Andolan. It is one thing to say that the said decision
is binding on the Authority. But that is different from saying that the
said decision precludes us from independently considering the nature
of the transaction put forward before us in the context of proviso (iii)
to Section 245R(2) of the Act.
24. What is the effect of the use of the expression prima facie in
the provision? According to the P. Ramanatha Aiyar‟s Law Lexicon,
prima facie means, „at first sight, on the first appearance, on the face
of it; so far as can be judged from the first disclosure, presumably; a
fact presumed to be true unless disproved by some evidence to the
contrary, arising at first sight, based on the first impression‟. We may
notice that the expression used is not ex-facie, meaning, in the light
of what is apparent. The use of the expression prima facie thus, gives
a little leeway to this Authority to consider the question of avoidance
of tax, but still, it gives to this Authority only the jurisdiction to
consider the question prima facie. This seems to suggest that this
consideration can only be at the initial stage of the application. But
as we have observed earlier, to confine it to that stage would really
defeat the purpose of the introduction of the proviso. But since the
intention appears to be not to confer on this Authority the jurisdiction
24
to thoroughly examine the facts and circumstances to come to a
definite conclusion as to whether a scheme for avoidance of tax is
involved, the inquiry in this regard can only be of a limited nature.
Thus, considered on the facts of this case, it is difficult to say prima
facie that there is a scheme for avoidance of income-tax. Counsel for
the applicant pointed out that in terms of the Treaty, the income
would be the „business income‟ of the applicant and would be taxable
under the Statute in the USA. We have also to notice that all ABC
entities involved have separate corporate identities and legal
existence. It is one thing to say that one can pierce the corporate veil
in an appropriate case but quite another to say that we can ignore the
existence of a series of legal entities validly incorporated under the
relevant laws. There is also nothing illegal in one subsidiary dealing
with another subsidiary. There is no case here that the transactions
leading to the discounting of the promissory note are sham or illegal.
When it is so, we have to test the transaction in the light of Law
Merchant wherever apt and the provisions of statute law wherever
they apply. So, tested, we cannot say that the well-known concept of
discounting of a bill of exchange should be understood differently for
the purpose of testing the transaction put forward in the anvil of the
25
Indian Income-tax Act with particular reference to this Authority‟s
jurisdiction. It for the executive Govt. and the legislature to decide
whether it is necessary or feasible to change the position. It is not for
this Authority to make any suggestions in that regard.
25. Discounting of a bill of exchange or promissory note being a
purchase of the instrument as it were and especially when it is
discounted without recourse, we are constrained to rule in favour of
the applicant. We, therefore, rule on question no. 1 that the applicant
is not liable to tax in India in view of the Double Taxation Avoidance
Agreement between India and USA.
26. On question no.2, there was controversy on when the income
would accrue, when the bill is discounted or when the proceeds of the
bill are realised by the endorsee. We have held while answering
question no. 1 that the income accrues on discounting the promissory
note, even though the proceeds are realised later. Queston no. 2
relates to the method of determining that income and the point of its
collection. Since we have taken the view, accepting the case of the
applicant as put forward that it has no PE in India, that the income is
not taxable in India, this question is academic. We do not think it
26
necessary to give a ruling on that question in this case. We leave it
open.
27. As regards question no.3, the applicant has asserted that it has
no permanent establishment in this country. On behalf of the
Revenue, it is contended that the necessary facts are not set out in
the application and it is not possible for the Revenue to answer the
question. We therefore assume for the purpose of this ruling that the
applicant has no permanent establishment in this country. We make
it clear that it would be open to the Revenue to gather the necessary
facts to enable it to come to a definite conclusion on this question.
28. The ruling on question no. 4 is that the applicant will not be
subject to withholding of tax under section 195 of the Act in view of
our ruling on question no.1.
29. Question no. 5 is also answered in the negative in the light of
the ruling on question no.1.
30. Since there is a liability on the applicant under the Income-tax
Act for being taxed on the income, being its business income and its
liability is warded off only by the terms of the DTAA, we rule,
consistent with our ruling in VNU International BV (AAR/871/2010),
27
that the applicant is liable to file a return of income under the Income-
tax Act. Question no. 6 is thus answered in the affirmative.
Accordingly, the ruling is pronounced on this the 3rd day of May,
2011.
Sd/- Sd/- Sd/- (J.Khosla) (P.K. Balasubramanyan) (V.K. Shridhar) Member Chairman Member
F.No. AAR/840/2010 Dated …………………. This copy is certified to be a true copy of the Ruling and is sent to:
1. The applicant 2. The Director of Income-tax (International Taxation-I), New Delhi.
(Nidhi Srivastava) Addl. Commissioner of Income-tax, AAR