Authority For Advance Rulings
X Ltd., In Re
Section 245N(A)
Asst. Year 2003-04
Syed Shah Mohammed Quadri, J., Chairman & A.S. Narang, Member
AAR No. 639 of 2004
25th February, 2005
Counsel Appeared
P.J. Pardiwalla, for the Applicant : Yashwant Y. Chavan, for the CIT concerned
Ruling
Syed Shah Mohammed Quadri, J., chairman :
In this application under s. 245Q(1) of the IT Act, 1961 (for short the ‘Act’), X-Ltd., the applicant, is a company incorporated under the laws of Netherlands and is a tax resident of Netherlands. The applicant seeks ruling of the Authority on the following questions :
(1) Whether the loan advanced would be taxable as the applicant’s income by way of deemed dividend on account of the fictional provisions of s. 2(22)(e) of the Act ?
(2) Whether the applicant is entitled to claim relief under the provisions of the DTAA in determining the tax liability in India in respect of such ‘deemed dividend income’ ?
(3) Whether such ‘deemed dividend income’ would be taxable as ‘dividend’ as per the provisions of art. 10 of the DTAA ?
(4) If the answer to question (3) above is in negative, given the fact that the applicant does not have a permanent establishment in India within the meaning of art. 5 of the DTAA, would the applicant be liable to tax in India in respect of such deemed dividend, in light of the provisions of the DTAA?
2. The applicant has been carrying on a systematic and organized course of activity in the matter of holding shares. It claims to be engaged in the business of holding shares of various companies. ‘A’ Ltd. and ‘B’ Ltd. are Indian companies, which are wholly-owned subsidiaries of the applicant. During the financial year 2002-03, ‘A’ Ltd. granted interest-bearing loans to ‘B’ Ltd. amounting to Rs. 36,30,23,497. The date of disbursement of the loan, the quantum of loan and the rate of interest are given in the following table : At all material time, the applicant held 100 per cent of the equity shares capital of the aforementioned subsidiaries. At the time when the loans were granted by ‘A’ Ltd. to ‘B’ Ltd., the former had accumulated profits exceeding the amount of loan advanced to ‘B’ Ltd. It may be noted that ‘A’ Ltd. is not a company in which the public are substantially interested. Reference is made to cl. (e) of s. 2(22) of the Act, defining ‘dividend’ and it is added that as per Explanation to s. 115Q, the provisions of s. 115-O do not apply to sums deemed as ‘dividend’ under s. 2(22)(e) as s. 115O of the Act was not operative in the financial year 2002-03, when the dividend would be deemed to be declared by ‘A’ Ltd. By 31st March, 2003 (financial year 2002-03), the entire loan of Rs. 36,30,23,497, advanced by ‘A’ Ltd. together with interest due, was repaid by ‘B’ Ltd.
On 21st Jan., 1989, the Government of the Republic of India and the Kingdom of the Netherlands have entered into an agreement for avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, which was notified on 27th March, 1989 (hereinafter referred to as the ‘treaty’). The treaty came into effect in India on 1st May, 1990 (asst. yr. 1991-92). The applicant states that it is not a resident even within the meaning of art. 4 of the treaty. It does not have any place of management, branch, office, etc. or a permanent establishment within the meaning of art. 5(2) of the treaty. The profits of the applicant, it is submitted, are not taxable in India as per the provisions of art. 7 of the treaty.
The Commissioner of Income-tax (International Taxation), Bangalore (hereinafter referred to as the ‘CIT’), submitted his comments to the application. It is stated that both the parties to the transactions of the loan are Indian companies. There is no transaction between the applicant, a non-resident and the resident companies. Under s. 245N(a) of the Act, an advance ruling may be given only in respect of tax liability of a non-resident arising out a transaction undertaken or is proposed to be undertaken by it. Reliance is placed on the ruling of the Authority in Hindustan Power Plus Ltd., In re (2004) 189 CTR (AAR) 390 : (2004) 267 ITR 685 (AAR). After the amendment of s. 245N(a)(ii), any determination by the Authority should relate to taxability of nonresident arising out of a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with such non-resident. Though the applicant holds 100 per cent equity shares in the Indian companies, the transaction cannot be said to be between a resident and non-resident. The applicant is not entitled to the benefit of the ruling of the Authority under s. 245N of the Act. It is submitted that even on merits, it is not entitled to any relief and the application is liable to be rejected.
Mr. Yashwant Y. Chavan, who appeared for the CIT, contended that the application is not maintainable and the question of maintainability be taken up first. Mr. P.J. Pardiwalla, advocate for the applicant, on the other hand contended that whether the transaction is between the applicant, a non-resident, and the resident companies will become clear only when the Authority would decide the matter on merits. He has, therefore, requested that the questions be answered and the issue of maintainability be decided along with questions set-forth by the applicant in the application.
In our view, as the question of maintainability goes to the very root of the jurisdiction of the Authority to pronounce ruling on the aforementioned questions, it would be apt to decide the issue of maintainability of the application before embarking upon any discussion on merits.
The expression ‘advance ruling’ is defined in para (a) of s. 245N of the Act. For a proper appreciation of the issue involved, it would be necessary to extract the aforementioned provisions here : “Sec. 245N of the Act 245N. In this Chapter, unless the context otherwise requires,— (a) “advance ruling” means— (i) a determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant; or (ii) a determination by the Authority in relation to the tax liability of a non-resident arising out of a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with such non- resident, and such determination shall include the determination of any question of law or of fact specified in the application; (iii) a determination or decision by the Authority in respect of an issue relating to computation of total income which is pending before any IT authority or the Appellate Tribunal and such determination or decision shall include the determination or decision of any question of law or of fact relating to such computation of total income specified in the application : Provided that where an advance ruling has been pronounced, before the date on which the Finance Act, 2003, receives the assent of the President, by the Authority in respect of an application by a resident applicant referred to in sub-cl. (ii) of this clause as it stood immediately before such date, such ruling shall be binding on the persons specified in s. 245S;” A perusal of the aforementioned definition of ‘advance ruling’ shows that it has three clauses. The first clause speaks of a determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant. The second clause relates to a determination by the Authority in relation to the tax liability of a non-resident arising out of a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with (such) non- resident. Clause (ii) was amended by Finance Act, 2003, with retrospective effect from 1st June, 2000. The proviso appended to para (a) is concerned with advance rulings that have been pronounced before the said Finance Act received the assent of the President. The determination referred to in the aforementioned two clauses covers any question of law or of fact specified in the application. The third category of determination, mentioned in cl. (iii), pertains to an issue relating to computation of total income which is pending before any IT authority or the Appellate Tribunal and such determination or decision also includes a decision on any question of law or of fact relating to computation of income. Clause (iii) of para (a) was added along with cl. (iii) of para (b)—definition of applicant—and it relates to a resident falling within the notified class or category.
The amendment of cl. (ii) of para (a), referred to above, cl. (iii) of the definition of ‘advance ruling’ and the proviso are not relevant for the present discussion.
The issue needs to be resolved with reference to cls. (i) and (ii) of para (a) of s. 245N of the Act. We have noticed above that cl. (i) has two ingredients—(1) a transaction which has been undertaken or is proposed to be undertaken by a non-resident, and (2) such non-resident is the applicant. From the facts stated above, it is evident that the applicant is a non-resident but the transaction of loans is between ‘A’ Ltd. and ‘B’ Ltd. which are resident in India. Here obviously, the first requirement is not satisfied. Therefore, the determination would not fall under cl. (i). In Connecteurs Cinch, S.A., In re (2004) 189 CTR (AAR) 497 : (2004) 268 ITR 29 (AAR), this Authority ruled that where the determination under cl. (i) is sought and its requirements are not fulfilled, the application is not maintainable.
The germane parts of cl. (ii) are : (1) a transaction has been undertaken or is proposed to be undertaken by a resident who is the applicant; (2) the determination by the Authority should relate to the tax liability of such non- resident. Obviously, the applicant here is a non-resident and further in this case the transaction of loan was undertaken by two resident companies of which the applicant is the holding company. But this makes no difference as they are independent legal entities. On the facts of this case, the question of tax liability of non- resident does not arise though the questions are crafty and appear to relate to the tax liability of the non-resident which in reality do not relate to the applicant. It follows that no determination under cl. (ii) can be made.
In Hindustan Powerplus Ltd., In re (supra), this Authority observed, “A comparison of the provision before the amendment and after the amendment shows that whereas before the amendment, a determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with a non-resident, was within the meaning of the expression ‘advance ruling’, after the amendment a determination should relate to taxability of a non-resident arising out of a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with such non-resident. Thus, it is evident that the advance ruling has to be in relation to the tax liability of a non-resident.” (emphasis, italicized in print, supplied)
For the aforementioned reasons, the application is not maintainable and it is accordingly rejected.
[Citation : 275 ITR 327]
