IN RE: YU BO INVESTMENT CO. (P.) LTD. Vs. STATE

JUDGEMENT

(1.) THE applicant is a closely -held private limited company incorporated in India and is engaged in the business of development of properties and allied activities. The applicant has allotted 43500 partly convertible debentures of Rs. 1000 each to Weststar Investment Holdings Ltd., a company incorporated in Mauritius. The debentures have been issued with the approval of the Reserve Bank of India. As per the approval given by the Reserve Bank of India, the applicant company can pay interest on these debentures at a rate not exceeding 14% p.a. and only to the extent of profit available. It is also stated that Weststar Investment Holdings Ltd. is not having any place of business or a permanent establishment in India. The applicant -company made profits during the year ended 31st March, 2002 and the interest liability being more than the profits available, entire profit will be paid by way of interest to the foreign company. The applicant has filed this application under section 245Q(1) of the Income -tax Act, 1961 ('the Act') and based on the above facts has sought the ruling of this Authority on the following question: -

(2.) THE applicant admits that under domestic law, payment of interest to a non -resident on borrowings utilized in India, is deemed to accrue or arise in India under section 9(1)(v) of the Act and the liability for tax is attracted under section 9(1)(v)(c) of the Act. The amount of interest being interest on debentures treated as securities, requires tax deduction at source under section 193 of the Act.

(3.) INTEREST arising in a Contracting State shall be exempt from tax in that Contracting State to the extent approved by the Government of that State if it is derived and beneficially owned by any person [other than a person referred to in paragraph 3] who is a resident of the other Contracting State provided that the transaction giving rise to the debt -claim has been approved in this regard by the Government of the first mentioned Contracting State.