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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI RAMIT KOCHAR
आदेश ORDER अिमत शु�ला : �या. स.: PER AMIT SHUKLA, JM: The aforesaid appeal has been filed by the assessee against impugned order dated 08.02.2012, passed by CIT(A)-24, Mumbai, for the quantum of assessment passed under section 143(3) for the assessment year 2005-06. In the grounds of appeal, the assessee has mainly raised following grounds:
“(i) On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) [‘CIT(A)’] has erred in confirming the order dated 28 December, 2007 passed by Deputy Director of Income- tax (International Taxation), Range 2(1), Mumbai (‘AO’)
2 Reliance Industries Limited 143(3) of the Income-tax Act, 1961 (‘the Act’).
(ii) On the facts and circumstances of the case and in law, Ld. CIT(A) erred in upholding the action of the AO in not allowing exemption under section 10(15)(iv)(f) of the Act on the interest paid on refinancing loan agreement.
(iii) On the facts and circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that original loan agreement is already approved by the Government of India (GOI) and as per press release on External Commercial Borrowing dated 1 September 2000 the appellant was not required to approach Government of India / Reserve Bank of India (‘RBI’) for any fresh approval and the original approval granted by GOI would also be applicable to refinancing loan agreement.
(iv) On the facts and circumstances of the case and in law, Ld. CIT(A) erred in not appreciating the fact that upon refinancing of approval loan, refinancing agreement will step into the shoe of the earlier approval loan”.
2. The whole issue revolves around, whether the exemption of withholding tax under section 10(15)(iv)(f) on the interest paid on refinancing of the loan of the earlier ECB loan taken for industrial purpose, the agreement of which was approved by the Govt. of India before sunset clause date of 1.06.2001 would be allowed or not.
Brief facts qua the issue involved are that, Reliance Industries Limited (RIL) has raised foreign currency loan of USD 500 Million from consortium of Banks vide agreement dated 22.05.2001 having regard to the need for industrial development in India. As per the terms of the Agreement, the applicable margins, that is, the interest was LIBOR + 09% which was applicable for the 3 Reliance Industries Limited 12 months from the weighted average draw down date; LIBOR + 1.75% for the second period and LIBOR + 1.40% for the third period. The applicable margin as appearing in agreement dated 22nd May, 2010, for the sake of reference is reproduced hereunder: “Applicable Margin” means: (i) in respect of the period commencing on the Signing Date and ending on (but excluding) the date falling 12 months form the Weighted Average Drawdown Date 0.90 per cent per annum; (ii) in respect of the period commencing on the date falling 12 months after the Weighted Average Drawdown Date and ending on (but excluding) the date falling 24 months from the Weighted Average Drawdown Date, 1.05 per cent per annum, and (iii) in respect of the period commencing on the date falling 24 months after the Weighted Average Drawdown Date and ending on the date the Loan is repaid in full, 1.40 per cent per annum”.
The rate of interest applicable was the rate per annum, which was a sum of applicable margin plus LIBOR on the quotation date. This loan agreement was approved by the Government of India, Ministry of Finance vide letter dated 30.05.2001. By virtue of such an approval by the Central Government, the payment of Interest, Commitment Fee, Arrangement Fee and Agency Fee in respect of said loan was exempted from withholding tax under section 10(15)(iv)(f). The copy of said approval is appearing in the paper book filed by the assessee from pages 156 to 159. Later on, RIL entered into another agreement dated 21st September, 2004 for USD 62 Million Facility Agreement in order to refinance the part of the USD 500 Million facility loan taken earlier to reduce the interest burden. The “Facility Agreement” was defined in the following manner:-
“$500,000,000 Facility Agreement” means the $500,000,000 facility agreement between the Borrower and the financial institutions named therein dated 22
4 Reliance Industries Limited May, 2001 as amended and restated by an amendment and restatement agreement between agreement between the Borrower and the financial institutions named therein dated 24 February, 2003”.
The “Purpose” of the facility was stated in the following manner:-
The Facility is intended to refinance part of the principal amount outstanding under the $500,000,000. Facility Agreement and, accordingly the Borrower shall apply all amounts raised by it under the Facility in or towards meeting such purposes Margin, that is, interest rate in this agreement was approximately LIBOR + 0.60%. Thus, the later Loan Agreement was purely refinancing the part of the earlier loan taken on a lower interest. However, the RIL deducted the withholding tax at source for the total USD 372,000/- paid to the Standard Chartered Bank on behalf of the non-resident lenders and Note holders during the previous year 2004-05, that is, on the interest payment to the lenders of second Refinancing Facility Agreement. RIL filed return of income on 31.12.2007 as an agent of Standard Chartered Bank under section 163 (on behalf of non-resident lenders and note- holders in respect of any interest payment made to the Standard Charted Bank), declaring “Nil” income. In the return of income, following note to the computation was made:-
“1. Reliance Petroleum Limited, now merged into Reliance Industries Limited with effect from 01/04/2001, had availed of a USD 500 million syndicated term loan dated 22/05/2001. This loan was approved by the Government of India as laid down under section 10(15)(iv)(f) of the Income-tax Act,1961 vide approval number 6(19)2001-ECB dated 30/05/2001, 21/06/2001 and 29/06/2001. This approval is still in good standing.
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2. Payments of interest under the above Facility Agreement are net of withholding taxes in India Since the withholding tax is to be borne by Reliance Industries Limited, the amount of interest income has been grossed up as per the provisions of section 195A of the Act.
3. The Department of Economic Affairs, vide its Press Release dated 01/09/2000, has amended External Commercial Borrowings (ECB) guidelines to place all refinancing under existing ECBs under the automatic route. Accordingly, corporate are not required to obtain any prior approval from the Ministry of Finance or the Reserve Bank of India for refinancing of an existing ECB in respect of which the agreement has been approved by the GOI, provided it is in compliance of the ECB guidelines framed by the Ministry as well as the regulations / directors / circulars issued by the RBI in this regard. As per the guidelines and regulations, refinancing of an existing ECB will fall under the automatic route if the purpose and the period of maturity for which the ECB was raised has not changed in the refinancing and the rate of interest of the refinancing loan agreement is lower than the rate of interest under the original loan agreement.
Accordingly, Reliance Industries Limited has entered into the USD 62 million facility agreement dated 21/09/2004, in order to refinance part of the USD 500 million facility issued by Reliance Petroleum Limited earlier. The original facility was taken under approval 6(19)/2001-ECB dated 30/05/2001, 21/06/2001, 28/06/2001 and 29/06/2001 of the Department of Economic Affairs, Ministry of Finance, Government of India and interest payable on the said Notes was exempt from tax in India under section 10(15)(iv)(f) of the Act.
5. Therefore, since the above refinancing has been done by Reliance Industries Limited in compliance of the ECB guidelines framed by the Ministry and the regulations / directions / circulars of RBI, the refinancing is under the agreement approved by the Central Government. Refinancing is under the agreement approved by the Central Government. Refinancing is flowing out of the abovementioned GOI approval for the original agreement. Accordingly, interest paid on the above refinancing loans is also exempt from tax in India under section 10(15)(iv)(f)”.
6 Reliance Industries Limited
4. The Ld. AO after analyzing the provisions contained in section 10(15)(iv)(f) observed that, all the pre-conditions mentioned therein has to be satisfied for the grant of exemption from withholding tax. These pre-conditions are as under:-
a) The borrowing should be made by an industrial undertaking; b) It borrows money in foreign currency form a source outside India; c) There should be an agreement for the loan; d) The agreement for loan should be made before 1.6.2001 and should be approved by the Central Government having regard to the need for the industrial development in India; and e) The payment of interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf AO held that, in the present case, the second Loan Facility Agreement dated 21.09.2004 does not fulfill the condition mentioned at serial no. (d).
On the other hand, assessee’s case has been that, RIL has merely refinanced the already approved loan in compliance of ECB regulations/directions issued by Circular of RBI. The refinancing under the Agreement is flowing from the already approved Original Agreement by Government of India. Accordingly, the interest payment is purely on re-financing of loan and not on any fresh loan taken for any industrial purpose/development. It was also submitted that, for clarification purpose Press release was issued by Ministry of Finance, Department of Economic Affairs, wherein, it was clearly stated that, for refinancing of existing ECB, no prior approval is required. Similar Circular was issued by RBI vide Circular dated 5th September, 2000. Further, it was specifically clarified in the Press release of Finance Ministry that for the 7 Reliance Industries Limited 10(15)(iv)(f) will continued to be granted by the Ministry of Finance.
However, the AO held that he has not required to get guided, whether the borrowing of the ECB is as per the Finance Ministry guidelines or RBI Policy. He is only required to examine the conditions mentioned under section 10(15), which here in this case is not applicable, because the second loan agreement has been entered into after 1st June, 2004. His relevant observations for rejecting the assessee’s claim for exemption and finding on this issue are as under:-
“Borrowing and lending of foreign capital is made on several considerations and it is purely a commercial decision whether to do it or not. Tax exemption of the interest may be an attractive consideration to the lenders. However that cannot be the only consideration for them. On the basis of the ECB press note and the RBI circular, copies of which has been submitted by the assessee, they are at liberty to enter into the transaction. However, unless the IT Act provide for the exemption from taxation to the interest arising on such lending, it will not be eligible for such exemption. The extension, automatic or otherwise, of the approval granted for availing/making a fresh loan for the purpose of refinancing the existing original borrowing will not necessarily grant tax exemption to the interest arising on the fresh loan, unless specifically provided for in the IT Act. Accordingly, I find that the interest arising on the borrowing is not eligible for the exemption.
It is pertinent to note here that the term “before the 1st day of June, 2001” in section 10(15)(iv)(f) was introduced by Finance Act 2001 as a sunset clause to do away with the exemption. It means that no new borrowings made after this date are eligible for the exemption. It means that no new borrowings made after this date are eligible for the exemption. The argument that the sunset clause is not applicable to borrowings made for refinancing of existing borrowings which had been granted approval before the cutoff date is unacceptable since acceptance of the argument will result in an inequitable situation since commercially there is no difference between a new borrowing and the borrowing made for financing an existing borrowing and a special treatment for the latter is not supported by the law”.
8 Reliance Industries Limited Accordingly he worked out the taxable income in India at Rs.23,99,447/-.
Before the CIT(A), same facts and submissions were reiterated and was specifically pointed out that, no new loan has been availed by the RIL in addition to the existing loan already approved by the GOI. The refinancing agreement is akin to stepping into the shoes of earlier approved loan and was in compliance of ECB Guidelines framed by the Finance Ministry and regulations /circulars of RBI. Thus, assessee’s case is not covered by restrictive clause of approval obtained before 1st June, 2004 as given in section 10(15)(iv)(f). Accordingly, interest earned from refinancing of USD 62 million was also exempt from tax in India, not requiring withholding of tax in India.
The Ld. CIT(A) upholding the reasoning of the AO held that, merely because the refinancing has been done in respect of original approved loan, would not make it same transaction. The loan of USD 62 million may be in relation to the loan of USD 500 million, but, it cannot be considered as part and parcel of the same Loan Agreement, which was entered into in respect of USD 500 millions. The prerequisite condition for eligibility of exemption under section 10(15)(iv)(f) is that, ‘Loan Agreement’ should have been approved by the Central Government before the 1st Day of June, 2004. He further held that the Circular issued by RBI is dated 05.09.2000, that is, before the sunset clause date prescribed under section 10(15)(iv)(f), that is 01.06.2001 and thus, the said Circular will not apply to the second Loan Agreement dated 21.09.2004. He also rejected the assessee’s contention that, refinancing of loan is merely extension of the existing loan. Accordingly, he affirmed the order of the AO determining the tax liability of Rs.23,99,447/-.
Before us, the Ld. Counsel, Shri F. V. Irani after explaining the entire facts as narrated above, pointed out that, the RIL has taken external commercial borrowing for industrial development
9 Reliance Industries Limited USD 500 million, vide agreement dated 21st May, 2001, which has been admittedly approved by Government of India in the prescribed manner prior to 01.06.2001. The interest paid on such loan was otherwise duly eligible for exemption from withholding of tax u/s 10(15)(iv)(f). The interest rate paid on such loan was far higher on which assessee was getting exemption. Later on, a part of the said loan was re-financed at a lower interest rate which is clearly evident from the Facility Agreement which clearly mentions that, it pertains to 22nd May, 2001. This second loan was not for any fresh application of industrial development or purpose. In support, he referred to the relevant clauses as given in second agreement and drew our specific attention to the definition of ‘Facility Agreement’ and the purpose of the Facility Agreement. The only difference he submitted now is that, instead of ABN Amro Bank and ANZ Investment Bank and others the assessee has taken a refinance loan from other consortium lead by Standard Chartered Bank. The original purpose for which the loan was taken remains the same. Such a refinancing has been duly permitted not only by the RBI but also by the Government of India, which is evident from the Circular of RBI and Press release of Ministry of Finance stating that, for refinancing of the existing ECBs, no prior approval is required and exemption u/s 10(15)(iv)(f) would continue to be granted. What is the contemplated of the cutoff date of 1st Day of June, 2001 in sub-clause (f) of clause (iv) of section 10(15) is that, the industrial undertaking in India should not borrow in foreign currency from sources outside India under a ‘Loan Agreement’ which is after 1st Day of June, 2001 having regard to the need for industrial development in India. In other words, any loan taken after 1st Day of June, 2001 should be in a nature of a fresh loan for the fresh need of industrial development/ industrial purpose. The refinancing of the same loan by which the second banker steps into the shoes of the first banker cannot be equated with taking of a fresh loan, as contemplated in clause (f). This is more so in the present facts of the case when the second
10 Reliance Industries Limited refinancing loan is on much lower rate of interest. If assessee is entitled for exemption of interest as per the first agreement, whereby assessee was getting higher exemption from taxes as compared to second loan by which the assessee is getting lesser amount of exemption, because interest paid is lower, then how can it lead to denial of exemption on a lesser amount. Interpretation of the CIT(A) regarding RBI Circular not applicable from 01.06.2001 is wholly misplaced, because the said Circular clarifies that, refinancing of existing ECBs can be taken without any prior approval. There is nothing in the circular to support the observation of the CIT(A), because here in this case, admittedly, the loan has been taken prior to 01.06.2001 and second loan is refinancing only for which no approval is required and this hence this circular would cover the refinancing post 01.06.2001. Thus, second refinancing is nothing but substitution of original loan. As an analogy, he relied upon the CBDT Circular No. 28 dated 20-08- 1969 on the provision of section 24(1)(vi), whereby CBDT has clarified that, if the first loan has been taken for construction of the property and second borrowing has been used to repay the original loan then the interest payable on the second loan would also be admissible for deduction under section 24(1)(vi). Lastly, he submitted that the interpretation of the Department goes contrary to the intention and purpose of the provision, specifically when in this case exemption would have been available on the higher rate of interest and same would be denied on a lower rate of interest burden for the same loan.
On the other hand, Ld. DR submitted that, admittedly in this case the Refinancing Loan Agreement was made on 21.09.2004 and section 10(15)(iv)(f) clearly specifies the cutoff date as 1st June, 2004. Therefore, any loan even if for refinancing would be clearly hit by the sunset clause. The legislature purposely chose to do away with the provisions, therefore, a cutoff date was brought in the statute. The order of the AO as well as CIT(A) is legally and factually correct which needs to be upheld.
11 Reliance Industries Limited
In the rejoinder, the Ld. Counsel submitted that the cut-off date here applies to a principal loan and not for refinancing of the principal loan.
We have heard the rival submissions, considered the entire gamut of facts and the relevant finding given in the impugned orders. It is an undisputed fact that, the RIL(since merged with RIL) has raised loan in foreign currency of USD 500 million vide Agreement dated 22.05.2001 from sources outside India having regard to the need for industrial development in India. The interest payment on such loan is exempted from withholding tax under section 10(15)(iv)(f). To this extent, there is no dispute that the Loan Agreement dated 22.05.2001 has been duly approved by the Government of India before 1st June, 2001. Accordingly, the assessee, (Standard Chartered Bank, through agent in India) was given exemption from payment of tax on the Interest, Commitment Fee and Agency Fee. That is, no tax was required to be withheld by the payer in India. The rate of interest for such loan (as already discussed above), was LIBOR + 0.90% for the first period; LIBOR + 1.05% for the second period; and LIBOR + 1.40% for the third period. Accordingly, the RPL(since merged with RIL) was entitled for exemption from withholding tax for payment of any such interest within the terms of section 10(15)(iv)(f). The merger of RPL with RIL was effective from 01.04.2001. Later on, the assessee, RIL entered into another Term Loan Facility Agreement dated 21st September, 2004 for USD 62 million which was on margin of LIBOR plus 0.60%, which was purely for refinancing the part of original loan of 22nd May 2001. The ‘Facility Agreement’ as defined in the second loan agreement refers to USD 500 million only, that is, loan agreement of 22nd May, 2001. In other words, this second agreement pertains to and refers to the same agreement only. There is no other purpose, except for paying part of the earlier loan. The “purpose” of the said loan has been clearly defined to 12 Reliance Industries Limited 500 million Facility Agreement” and there was clear cut mandate or the restrictive covenant on the borrower that amount raised by it under this ‘Facility Agreement’ was towards meeting of the said purpose, that is, to repay the principal amount. From such a mandate given in the ‘Second Agreement’ it is clearly culled out that it is not a fresh loan per se for any need of industrial development or industrial purpose. It was purely for repayment of ‘principal loan’ of earlier Facility Agreement of USD 500 million. The sunset clause for exemption of interest on ECB in terms of section 10(15)(iv)(f) was brought by the Finance Act, 2001 applicable from the assessment year 2002-03 for withdrawing the exemption of interest for any foreign currency loan agreement entered after 1st Day of June, 2001 having regard to the need for industrial development in India, that is, any fresh loan taken for the industrial development/purpose after the date of 01.06.2001 will not now enjoy any exemption of withholding tax. The reason for which amendment was brought was that the interest received by the lender in any way was taxable in the country of its resident and if such an interest is taxed in the source country then the lender will get the credit on such taxes paid. Because of this provision India was losing the credit of any taxes paid on interest accrued and it was also not really in the benefit of the lender as it has to any way pay the taxes in its resident country. This only reduces the tax revenue in India. What was contemplated by bringing the cutoff date was there should be no loan agreement post sunset clause date for industrial purpose. However, if already a loan agreement which has already been approved by the Government of India prior to sunset clause date, then any facility or loan taken for repayment of full or part of that loan, that is, the ‘principal amount’, same would not be reckoned as a fresh loan albeit it is a superseding of the same loan. It is akin to the stepping into the shoes of the earlier lender. The only difference now will be that, the payment of interest which was earlier made to X Bank
13 Reliance Industries Limited Z Bank. This fact is clearly borne out from the terms of refinancing facility agreement dated 21.09.2004. The relevant clauses have been already reproduced above. Accordingly, we hold that, the second refinancing agreement is not a loan agreement, as contemplated in sub-clause (f) of clause (iv) of section 10(15).
Moreover, as pointed out by the Ld. Counsel, the Ministry of Finance as well as the RBI have categorically clarified that, if for the purpose of refinancing of the existing ECB is undertaken, then, no prior approval is required and exemption from withholding tax will continue. This clarification clearly clinches the issue, because intention of the Government of India is absolutely clear that refinancing does not require any formalities and the withholding tax exemption on such refinancing of existing ECBs will continue. The relevant press releases by Ministry of Finance and RBI Circular have been placed before us in the paper book from pages 136 to 139. We also agree with the contention of the Ld. Counsel that, here in this case, assessee would have continue to get the exemption for a payment of higher rate of interest and will lose same exemption on lower rate of interest simply because RIL has chosen a path of refinancing route to repay the principal amount so as to reduce the interest burden. Thus, on these facts, we do not agree with the contention of the Department that, second refinancing loan agreement should be reckoned as a fresh loan agreement post cut-off date of 01.06.2001 so as to deny the exemption of withholding tax.
14. Thus, on principle we agree with the contentions of the assessee. However on a perusal of the loan agreements and material referred before us, we find that so far as following points are concerned there is no proper clarity and we direct the AO as under to verify before granting exemption from withholding taxes
14 Reliance Industries Limited 21.09.2004: 1. That the exemption from withholding taxes on interest payments under the new loan agreement dated 21.09.2004 will run concurrently up-to the period of approval granted by Government of India for exemption from withholding taxes on interest payments with respect to the original loan agreement dated 22.05.2001 and shall end/terminate concurrently with the expiry of the period of repayment of the loan as stipulated under the loan agreement dated 22.05.2001 as approved by Government of India for grant of afore- stated exemption or the expiry of the period of repayment under the loan agreement dated 21.09.2004 whichever is earlier.
That the entire proceeds of the loan of USD 62 million raised under the new agreement dated 21.09.2004 was strictly utilized by the RIL for repayment of loans raised by the RPL(now merged with RIL) vide agreement dated 22.05.2001 in accordance with clause 3.1 of part 2 of loan agreement dated 21.09.2004 and the proceeds of loan under agreement dated 21.09.2004 has not been diverted for any other purposes as are stipulated under clause 3.2 of part 2 of loan agreement dated 21.09.2004 Accordingly, as per above directions, we direct the AO to grant exemption on withholding tax on the interest paid on second refinancing loan of USD 62 million under section 10(15)(iv)(f). Accordingly, grounds raised by the assessee are, treated as allowed, subject to our aforesaid findings. We order accordingly.
In the result, appeal of the assessee stands allowed.
15 Reliance Industries Limited Order pronounced in the open court on 5th May, 2016.
Sd/- Sd/- (रिमत कोचर) (अिमत शु�ला) लेखा सद�य �याईक सद�य (RAMIT KOCHAR) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 5th May, 2016. ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT(A) -24, Mumbai. 4) The Commissioner of Income Tax(LTU)/Concerned__, Mumbai. 5) िवभागीय �ितिनिध “डी”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “D” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /