ROCKWOOL INDIA LTD Vs. STATE

JUDGEMENT

(1.) 1. The applicant, M/s. Rockwool (India) Ltd. (RIL), a company resident in India and having its registered office at Hyderabad is engaged in the manufacturing of resin bonded thermal insulation material since 1990. It suffered heavy losses and filed an application with the Board for Industrial and Financial Reconstruction (BIFR). The BIFR declared RIL as a sick unit on January 3, 1996, and appointed the Industrial Finance Corporation of India as the operating agency. With the permission of the BIFR and the Reserve Bank of India (RBI), Alghanim Industries (Mauritius) Ltd. (AIM) were inducted as co-promoters in May, 1997. As on March 31, 2002, AIM held 77.7 per cent. equity in RIL. AIM is a company registered in Mauritius and as such is a non-resident for the purposes of the Income-tax Act, 1961 (the Act). The proposed loan from AIM will be in the form of External Commercial Borrowing (ECB) to be taken under the automatic route of approval currently in vogue as notified by the Ministry of Finance, Government of India. The proposed loan will have the following terms and conditions in compliance with ECB guidelines :

(2.) Based on the above facts, the applicant has sought advance ruling on the following question :

(3.) THE Commissioner of Income-tax II, Hyderabad, is the jurisdictional Commissioner in this case. In the comments received vide his letter dated January 31, 2003, it is stated that under Article 11(4) of the DTAA read with Section 10(15) of the Act, the exemption from taxing interest in a Contracting State shall be available to the extent approved by the Government of that State, if the transaction giving rise to the debt claim relationship has been approved in this regard by the Government of that Contracting State. According to the Commissioner of Income-tax there is no specific approval in the present case from the Government of India regarding the transaction as also regarding the extent of tax exemption. It is stated that a harmonious construction of these provisions clearly implies a specific approval of the transaction from the Government of India. In the present case, this requirement has not been satisfied. THE Commissioner has also mentioned that under Article 11(8) of the said DTAA read with Section 10(15) of the Act, the arm's length cost needs to be ascertained wherever any special relationship between the taxpayer and the recipient exists. THE proposed lender holds 77.7 per cent. equity in the capital of the applicant.