Check the DTAA with Country before taking ECB

There are few countries like  South Africa, Sweden, Switzerland, Oman, Newzealand, Norway etc where there is no WHT on interest paid. Kindly keep this in record as same may be useful in future for any kind of financial arrangements. Also keep in mind about the provisions of GAAR. The summary of the case law Idear is given below:

S. 195 : Deduction at source –Non‐resident – Other sums ‐ Interest‐ Interest payment to Swedish company is not taxable in India hence the assessee has no obligation to with hold the tax .

The assessee is engaged in the business of providing telecommunication services across different circles in India . During course of its business, it entered in to a contract with Ericsson India (P) Ltd. and Ericsson AB for procuring cellular telecommunication equipment, soft ware services and documentation. To facilitate the financing for such procurements, the assessee availed the of a loan facility from ABN Amro Bank Stockholm Branch and NORDEA Bank AB Sweden. Loans taken from Swedish Banks guaranteed by Swedish Export Credits Guarantee Board. The assessee approached the Authority for advance ruing on the plea that all the agreements relating to the transaction were negotiated and concluded outside India. It takes the stand that loan having been guaranteed by EKN , the interest paid under the transactions is not liable to charge to tax in India under the income‐tax Act in view of article 11(3) of Double Taxation Avoidance Convention Between India and Sweden. The Authority held as under

(i) That guaranteeing a loan is not the same as extending a loan or endorsing a loan. Thus, on the

basis of article 11(3) of the DTAA between India and Sweden, the applicant could not claim that the

interest paid or payable could not be taxed in India.

(ii) That in view of the Protacol to the DTAA in which there was a most favoured nation clause covering interest dealt with in article (11)(3) of the DTAA , even a loan or credit guaranteed by EKN would come within the purview of the exemption contained in article 11(3) of the DTAA. Therefore, the payment of interest by the applicant to SEK through NORDEA Bank AB was not taxable in India under article 11 (3) of the Double Taxation Avoidance Agreement between India and Sweden.

(iii) That since it was claimed that SEK had no permanent establishment in India, there would be no

obligation on the applicant to with hold taxes under section 195 of the Income‐tax Act, 1961, on the

interest payable on the transaction.

Idea Cellular Limited (2012) 343 ITR 381 (AAR)