Case Law Details
Re – Idea Cellular Limited, Mumbai – AAR held that the interest payable to Swedish resident on loan guaranteed by specified Swedish corporation is not taxable in India in view of Most Favoured Nation (MFN) clause under India-Sweden tax treaty (tax treaty).
The applicant approached this Authority with the present application seeking an Advance Ruling on a plea that all the agreements relating to this transaction were negotiated and concluded outside India. It takes the stand, that the loan having been guaranteed by EKN, the interest paid under the transaction is not liable to charge to tax in India under the Income-tax Act in view of Article 11.3 of the Double Taxation Avoidance Convention between India and Sweden. While allowing the application under section 245R(2) of the Act, this Authority framed the following questions for the ruling:
1. Whether payment of interest to AB Svensk ExportKredit (‘SEK’)[ through the Facility Agent i.e. NORDEA Bank AB(‘PUBL’) in respect of loan drawn down is exempt in India as per Article 11(3) of the Double Taxation Avoidance Agreement between India and Sweden (‘India-Sweden tax treaty’)?
2. If the answer to the question (1) is in the negative then what percentage of interest would be chargeable to tax in India?
3. In view of the facts stated in Annexure III, and also in the light of the declaration provided by SEK that it does not have a Permanent Establishment in India in terms of Article 5 of the India – Sweden tax treaty, whether the interest to be paid by the Applicant to SEK will be chargeable to tax in India as business profits under Article 7 of the India-Sweden tax treaty and would be subject to deduction of taxes at source under section 195 of the Act?
5. It is the case of the applicant that the loan facility having been guaranteed by EKN, the interest sourced from India is liable to be exempted from taxation in India under paragraph 3 of Article 11 of the India-Sweden Tax Convention. According to the applicant, guaranteeing a loan is the same as ‘extending or endorsing’ a loan. The Revenue has submitted that guaranteeing a loan is not the same as extending or endorsing a loan and hence the claim for exemption is unsustainable.
6. In our Ruling in Poonawalla Aviation Private Limited (AAR NO. 953 of 2010), an application which was heard along with the present application, we have ruled that guaranteeing a loan is not the same as extending a loan or endorsing a loan. It is not necessary to repeat the reasons here. We may notice that the same representative argued both the applications before us. That is all the mere reason for thinking that it is only necessary to adopt reasons given by us in our Ruling in AAR No. 953 of 2010 in this behalf. We adopt the reasoning therein.
7. Thus, on the basis of paragraph 3 of Article 11 of the Tax Convention between India and Sweden, the applicant cannot claim that the interest paid or payable cannot be taxed in India.
8. Alternatively, it is contended on behalf of the applicant that in the Protocl to India-Sweden DTAC entered into on 24.6.1997, there is a Most Favored Nation Clause covering interest dealt with in Article 11 of the Tax Convention and going by it and going by the Convention entered into by India with Ireland, even a loan or credit guaranteed by EKN would come within the purview of the exemption contained in paragraph 3 of Article 11 of the Convention. We have upheld such plea in our Ruling in AAR No. 953 of 2010 referred to earlier. Again, it does not appear to be necessary to repeat the reasons for that conclusion. Suffice it to say, that we adopt that part of the reasoning in the Ruling in AAR No.953 of 2010 also.
In the light of what is stated above, we rule on question No.1 that the payment of interest by the applicant to SEK through NORDEA Bank AB is not taxable in India under Article 11.3 of the India-Sweden Double Taxation Avoidance Convention in view of and only in view of the Most Favoured Nation Clause in the India-Sweden Protocol which has to be taken as part of the Convention. In view of the ruling on Question No.1, Question No.2 does not arise. Since it is claimed that SEK has no Permanent Establishment in India, there will be no obligation on the applicant to withhold taxes under Section 195 of the Income-tax Act, on the interest payable on the transaction.
AUTHORITY FOR ADVANCE RULINGS (INCOME TAX)
28th Day of February, 2012
A.A.R. No. 967 of 2010
PRESENT
Re- Idea Cellular Limited, Mumbai
RULING
The applicant is a company incorporated under the Indian Companies Act. It is a tax resident of India. It is engaged in the business of providing telecommunication services across different circles in India. During the course of its business, it entered into a contract with Ericsson India (P) Ltd and Ericsson AB for procuring cellular telecommunication equipments, software, service and documentation. To facilitate the financing for such procurements, the applicant availed of a loan facility for $ 300 million from ABN Amro Bank NV Stockholm Branch and NORDEA Bank AB Sweden under a facility agreement dated 30.12.2009. That agreement was amended and restated on 28.1.2010.
2. The loan under the facility agreement was guaranteed by the Swedish Export Credits Guarantee Board (EKN)to the extent of 95% in respect of risk arising due to political and commercial events. The guarantee is provided in respect of the actual amount drawn down by the applicant from time to time. On 10.12.2010, the Royal Bank of Scotland NV, the successor of ABN Amro Bank and NORDEA transferred all their rights and obligations under the Loan Facility Agreement to AB SVENSK Export Kredit (SEK), a company incorporated in Sweden. SEK is a tax resident of Sweden.
3. It is the case of the applicant and SEK, which has filed a statement before the Authority endorsing the stand taken by the applicant, that SEK is the sole lender of the overall loan facility entitled to receive the interest from the applicant due on the transaction and that the guarantee issued by EKN for the loan facility continues to remain in force. The interest is payable on a semi-annual basis. NORDEA will act as the facilitator to collect the interest payment on behalf of SEK.
4. The applicant approached this Authority with the present application seeking an Advance Ruling on a plea that all the agreements relating to this transaction were negotiated and concluded outside India. It takes the stand, that the loan having been guaranteed by EKN, the interest paid under the transaction is not liable to charge to tax in India under the Income-tax Act in view of Article 11.3 of the Double Taxation Avoidance Convention between India and Sweden. While allowing the application under section 245R(2) of the Act, this Authority framed the following questions for the ruling:
1. Whether payment of interest to AB Svensk ExportKredit (‘SEK’)[ through the Facility Agent i.e. NORDEA Bank AB(‘PUBL’) in respect of loan drawn down is exempt in India as per Article 11(3) of the Double Taxation Avoidance Agreement between India and Sweden (‘India-Sweden tax treaty’)?
2. If the answer to the question (1) is in the negative then what percentage of interest would be chargeable to tax in India?
3. In view of the facts stated in Annexure III, and also in the light of the declaration provided by SEK that it does not have a Permanent Establishment in India in terms of Article 5 of the India – Sweden tax treaty, whether the interest to be paid by the Applicant to SEK will be chargeable to tax in India as business profits under Article 7 of the India-Sweden tax treaty and would be subject to deduction of taxes at source under section 195 of the Act?
5. It is the case of the applicant that the loan facility having been guaranteed by EKN, the interest sourced from India is liable to be exempted from taxation in India under paragraph 3 of Article 11 of the India-Sweden Tax Convention. According to the applicant, guaranteeing a loan is the same as ‘extending or endorsing’ a loan. The Revenue has submitted that guaranteeing a loan is not the same as extending or endorsing a loan and hence the claim for exemption is unsustainable.
6. In our Ruling in Poonawalla Aviation Private Limited (AAR NO.953 of 2010), an application which was heard along with the present application, we have ruled that guaranteeing a loan is not the same as extending a loan or endorsing a loan. It is not necessary to repeat the reasons here. We may notice that the same representative argued both the applications before us. That is all the mere reason for thinking that it is only necessary to adopt reasons given by us in our Ruling in AAR No.953 of 2010 in this behalf. We adopt the reasoning therein.
7. Thus, on the basis of paragraph 3 of Article 11 of the Tax Convention between India and Sweden, the applicant cannot claim that the interest paid or payable cannot be taxed in India.
8. Alternatively, it is contended on behalf of the applicant that in the Protocl to India-Sweden DTAC entered into on 24.6.1997, there is a Most Favored Nation Clause covering interest dealt with in Article 11 of the Tax Convention and going by it and going by the Convention entered into by India with Ireland, even a loan or credit guaranteed by EKN would come within the purview of the exemption contained in paragraph 3 of Article 11 of the Convention. We have upheld such plea in our Ruling in AAR No. 953 of 2010 referred to earlier. Again, it does not appear to be necessary to repeat the reasons for that conclusion. Suffice it to say, that we adopt that part of the reasoning in the Ruling in AAR No. 953 of 2010 also.
In the light of what is stated above, we rule on question No.1 that the payment of interest by the applicant to SEK through NORDEA Bank AB is not taxable in India under Article 11.3 of the India-Sweden Double Taxation Avoidance Convention in view of and only in view of the Most Favored Nation Clause in the India-Sweden Protocol which has to be taken as part of the Convention. In view of the ruling on Question No.1, Question No.2 does not arise. Since it is claimed that SEK has no Permanent Establishment in India, there will be no obligation on the applicant to withhold taxes under Section 195 of the Income-tax Act, on the interest payable on the transaction.
Accordingly this ruling is pronounced on this day of 28th February, 2012.
