January 2012
Poonawalla Aviation Private Limited, in re (Unreported) AAR No. 953 of 2010 Article 12(3)(b) of India-France DTAA; Section 195 of Income-tax Act Dated: 5-12-2011 Counsel for assessee/revenue: Rajan Vora, Rahul Kashikar, Siddharth Kaul, Arijit Charkravarty/Mukundraj M. Chate
By Geeta Jani, Dhishat B. Mehta
Chartered Accountants
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(i) Although ‘insuring’ of the loan is not equivalent to ‘endorsing’, having regard to the MFN clause and corresponding provision in other DTAAs, exemption under Article 12(3)(b) would apply.
(ii) Exemption under Article 12(3)(b) would apply even if the interest was paid into a bank account outside France since the interest was beneficially owned by a French resident.
Facts:
The applicant was an Indian company. It entered into an agreement with a French company (‘FrenchCo’) for purchase of aircraft for which price was deferred and was to be paid over 6 years’ time. Subsequently, COFACE (an agency of France Government) agreed to insure credit facility to be extended by FrenchCo. The applicant executed promissory notes covering principal and interest in favour of FrenchCo. FrenchCo irrevocably and unconditionally assigned the promissory notes to a French bank. Thereafter, the applicant made payments into the account of the PE of the French bank in the USA. The issues before AAR were as follows:
(i) Whether interest payable to FrenchCo was taxable in view of Article 12(3)(b) of the DTAA?
(ii) Whether interest payable to the French bank (after assignment of promissory note by FrenchCo to French bank) would be taxable in view of Article 12(3)(b) of the DTAA?
(iii) Whether the applicant was required to withhold tax u/s.195 of the Income-tax Act in respect of the interest paid to FrenchCo or French bank?
The applicant contended that Article 12(3)(b) of the DTAA provides for exemption in respect of interest beneficially owned by a French resident in connection with a loan or credit extended or endorsed by COFACE. Hence, the applicant contended that the interest paid, was exempt since the loan was insured by COFACE. The word ‘endorse’ was of wide amplitude and also covered providing of insurance cover on loan. The applicant also claimed benefit of MFN clause in the Protocol to the DTAA.
The tax authority contended that the interest was not derived in connection with a loan or credit intended by or endorsed by COFACE, but COFACE had only provided export credit insurance and further, as the instalments were payable in the USA and not in France, the DTAA was not applicable.
Held:
AAR observed and ruled as follows:
(i) Mere fact of COFACE having ‘insured’ the credit extended to the applicant does not mean ‘endorsement’ of credit. The DTAA between France and other countries mentioned ‘guaranteed or assured’ or ‘guaranteed or insured’ by COFACE. However, the DTAA with India has not used such expression. Accordingly, mere extending of insurance cover by COFACE does not amount to ‘extending or endorsing’ the loan or credit by COFACE as required in Article 12(3)(b) to quality for exemption.
(ii) India’s DTAA as with Canada, Hungary, Ireland (which were entered into after the DTAA) include loans or credits ‘insured’ for the purpose of exemption. Therefore, based on MFN clause, the protection is understood as extended to loan or credit ‘insured’ by COFACE and hence, it would come within the purview in exemption of Article 12(3)(b). Accordingly, payment of interest to FrenchCo is exempt under Article 12(3)(b).
(iii) The beneficial ownership of the French bank is not endorsed or assigned to its branch in the USA. Accordingly, interest payable to French bank pursuant to the endorsement of the promissory note by FrenchCo is exempt under Article 12(3)(b) as interest beneficially belongs to French resident.
(iv) In view of the exemption of interest, withholding obligation u/s.195 will not arise.
