(i) There being no debt claim, ‘discount’ is not ‘interest’ under India-USA DTAA.
(ii) Income from discounting is business income and accrues in India and is taxable under Income-tax Act. However, in absence of PE, it would not be taxable in terms of DTAA.
(iii) Income accrues on discounting though the proceeds are realised later.
(iv) Since income is not liable to tax in India, transfer pricing documentation/report not required.
(v) As income is taxable under Income-tax Act, but extinguished under DTAA, return of income should be filed.
Facts:
The applicant was an American Company, which was tax resident of the USA. The applicant provided various financial services to its group companies as well as to other companies. As part of its business, it was drawing, making, accepting, endorsing, discount, executing and issuing Promissory Notes (PN), bills of exchange, etc.
ABC India Private Limited was a group company. The applicant proposed to purchase bills of exchange drawn by ABC India on its customers. It also proposed to purchase the PNs issued by the customers of ABC India from ABC India on ‘without recourse’ basis. The applicant has stated that it:
(a) may hold PNs till maturity, or
(b) sell them to another buyer, or
(c) may accept prepayment if the issuer is desirous of prepaying the amount.
The applicant raised the following issues before the AAR for its ruling:
(1) Whether the income earned from discounting bills of exchange or PNs pertaining to its Indian group entities was liable to tax in India under the Income-tax Act or under DTAA?
(2) If it was taxable, whether it would be taxable at the time of discounting, or on maturity, or on re-discounting?
(3) Whether the applicant would have PE in India? If yes, whether profits from discounting could be attributed to such PE?
(4) Whether income of the applicant would be subject to withholding tax u/s. 195 even if it was held not taxable in India?
(5) Whether transfer pricing documentation was required to be maintained and report was required to be filed, even if income was held not liable to tax in India?
(6) Whether the applicant was required to file a return of income even if it did not have any income chargeable to tax in India?
The applicant contended as follows:
The discount is the business income of the applicant. The applicant has no PE in India. Hence, the business income should be accessed outside India.
The discounted margin is not ‘interest’ u/s. 2(28A) of the Income-tax Act read with section 9(1)(v) of the Income-tax Act. Discounting is a mercantile practice and it does not create a loan or debt. The Revenue contended as follows:
The proposed transaction was a case of merchanting trade. The percentage of discount was really the interest on money advanced by the applicant to ABC India. It was a ruse to avoid taxation in India. Hence, such payment would be ‘interest’ u/s. 2(28A) of the Incometax Act.
Proceedings on similar questions were pending before the High Court and the Tax Authority in case of other group companies of applicant. Hence, advance ruling should not be given in this case.
Ruling:
The AAR ruled as follows:
(i) The bar of proviso (i) to section 245R(2) of the Income-tax Act is not attracted since the transaction in respect of which the ruling was sought was different from that in which other group entities were involved.
(ii) Discounting of bill is distinguishable from a pledge on deposit of security. If amounts to purchase of negotiable instrument and does not involve debtor-creditor relationship between endorser and endorsee, nor does it result in assignment of original debt. For ‘interest’ to arise, existence of a debt claim is necessary. Hence, ‘discount’ is not ‘interest’ under Article 11 of DTAA.
(iii) Applying the normal rule that ‘the debtor must seek the creditor’, the payment is to be made in India. Hence, the income accrues in India. Such income is business income taxable in accordance with provision of the Incometax Act, but subject to the rights conferred under DTAA. As applicant did not have PE in India, in terms of Article 7 of DTAA, it would not be taxable in India.
(iv) Income accrues on discounting even though the proceeds are realised later.
(v) The applicant would not be subject to withholding of tax u/s. 195.
(vi) Transfer pricing documentation were not required to be maintained and the report was not required to be filed since the income was not liable to tax in India.
(vii) As the income of applicant was liable to tax under the Income-tax Act and as such liability is extinguished only under DTAA, consistent with the ruling in VNU International BV (2011) 198 Taxman 454 (AAR), the applicant is liable to file a return of its income.
