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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.

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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.

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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.

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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”.

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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:

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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

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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

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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

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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

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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,

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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

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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

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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

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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

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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

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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),

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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

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