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The Authority for Advance Rulings (AAR) recently held that interest on debentures paid to an investor, who is a resident of Mauritius, is subject to withholding tax in India, unless it is specifically exempted. Mere approval from the Reserve Bank of India (RBI) for the issue of such securities to a non-resident does not imply approval for tax exemption, the AAR said. In this case, a Chennai-based private company had allotted partly-convertible debentures to Weststar Investment Holdings, an Overseas Corporate Body (OCB) incorporated in Mauritius. The Indian company had obtained RBI approval for payment of interest on debentures at a rate not exceeding 14% and only to the extent of the profits. During the year ended March 31, '02, as the interest liability was more than the profits, the entire profits were payable as interest to the Mauritius-based investor.

The Indian company had approached the AAR to ascertain whether it would be liable to deduct tax at source for this particular year. It admitted that under Indian tax laws, payment of interest to a non-resident on borrowings utilised in India is taxable in India and the payer is required to deduct tax at source.

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