7/2012 dated 21 9 2012
Circular No. 07/2012 was issued by the Central Board of Direct Taxes on 21 September 2012. Its subject is 7/2012 dated 21 9 2012.
Conveys the Central Government's approval in general terms for section 194LC, so that Indian companies need not seek case by case approval. Section 194LC, introduced by the Finance Act, 2012, gives a 5 per cent withholding rate on interest paid by an Indian company on money borrowed in foreign currency from a source outside India, for borrowings made or bonds issued between 1 July 2012 and 30 June 2015, and requires the Central Government to approve both the borrowing and the rate of interest. A loan agreement qualifies if it complies with the external commercial borrowing regulations under the automatic or approval route, carries a Loan Registration Number from the Reserve Bank of India, saw no drawdown before 1 July 2012, is not a restructuring of an existing foreign currency borrowing done solely to get the lower rate, and observes the end use and other conditions throughout its term. A bond issue qualifies if it is authorised under those regulations, has a Loan Registration Number, has an original maturity of three years or more, and its proceeds are used only in the infrastructure sector as the Reserve Bank defines it. Any rate within the Reserve Bank's all-in-cost ceilings for that borrowing and tenure is approved.
A large number of overseas borrowings and bond issues were expected, and requiring approval in every case would have put an avoidable compliance burden and hardship on borrowers and issuers.
CIRCULAR NO. 07/2012
F.No. 142/17/2012-SO(TPL)
Government of India
Ministry of Finance
Department of Revenue
(Central Board of Direct Taxes)
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Dated: September 21, 2012
Subject: Approval of loan agreements/ long term infrastructure
bonds and rate of interest for the purpose of Section
194LC of the Income-tax Act, 1961- regarding.
The Finance Act, 2012 has introduced section 194LC in the
Income Tax Act. This section provides for lower withholding tax at
the rate of 5% on interest payments by Indian companies on
borrowings made in foreign currency by such companies from a
source outside India. There are principally two modes of borrowing
(referred to as "monies borrowed" in the said section) which are
covered, subject to approval of the Central Government:
a. Monies borrowed under a loan agreement
b. Long term Infrastructure Bonds
2. It is further provided that the rate of interest on such
borrowings, for the purpose of eligibility under the section 194LC,
shall be as approved by the Central Government.
3. The lower rate of withholding tax is for monies borrowed or
bonds issued during the period from 1.7.2012 to 30.6.2015.
4. Therefore, the approval of the Central Government is required
in respect of both the loan agreement or bond issue and the rate of
interest to be paid on such borrowings.
5. Considering the fact that there would be a large number of
cases of overseas borrowings or bond issues to be undertaken by
Indian companies, providing a mechanism involving approval in each
and every specific case would entail avoidable compliance burden on
the borrower/issuer of bond. In order to mitigate the compliance
burden and hardship, the Central Board of Direct Taxes [with the
approval of Central Government] hereby conveys the approval of
Central Government for the purposes of section 194LC in respect of
the loan agreements and issue of long term infrastructure term bond
by Indian companies which satisfy the conditions mentioned in
paras A, B and C below: -A. In respect of agreements for loan
a. The borrowing of money should be under a loan
agreement.
b. The monies borrowed under the loan agreement by the
Indian company should comply with clause (d) of sub
section (3) of section 6 of the Foreign Exchange
Management Act, 1999 read with Notification No.
FEMA3/2000-RB viz. Foreign Exchange Management
(Borrowing or Lending in Foreign exchange) Regulations
2000, dated May 3, 2000, as amended from time to time,
(hereafter referred to as "ECB regulations"), either under
the automatic route or under the approval route.
c. The borrowing company should have obtained a Loan
Registration Number (LRN) issued by the Reserve Bank
of India (RBI) in respect of the Agreement.
d. No part of the borrowing has taken place under the said
agreement before 1st July, 2012.
e. The agreement should not be restructuring of an
existing agreement for borrowing in foreign currency
solely for taking benefit of reduced withholding tax rates.
f. The end use of the funds and other conditions as laid
out by the RBI under ECB regulations should be
followed during the entire term of the loan agreement
under which the borrowing has been made.B. In respect of issue of Bonds
a. The bond issue by the Indian company should be
authorized under ECB regulations either under the
automatic route or under the approval route.
b. The bond issue should have a loan Registration Number
issued by the RBI.
c. The term "long term" means that the bond to be issued
should have original maturity term of three years or
more.
d. The bond issue proceeds should be utilized in the
"infrastructure sector" only.
e. The term "infrastructure sector" shall have same
meaning as is assigned to it by RBI under the ECB
regulations.C. Rate of interest
Further, the Central Government has also approved the
interest rate for the purpose of section 194LC as any rate of
interest which is within the All-in-cost ceilings specified by the
RBI under ECB regulations as is applicable to the borrowing
by loan agreement or through a bond issue, as the case may
be, having regard to the tenure thereof.6. In view of the above, any loan agreement or bond issue, which
satisfies the above conditions, would be treated as approved by the
Central Government for the purposes of section 194LC.
7. In the case of other long-term Infrastructure Bonds where the
Indian company receives subscription of such Bonds in foreign
currency and such bond issue is not covered under ECB regulations,
the approval, for purpose of section 194LC shall be on case to case
basis.
8. The Indian company, for the purpose of obtaining the
necessary approval u/s 194LC in respect of such long-term bond
issue, may, therefore, apply in writing to Member (IT), Central Board
of Direct Taxes with the relevant details of the purpose, period and
rate of interest.(Ashish Kumar)
Director (Tax Policy & Legislation)Copy to:-
1. PS to FM/OSD to FM/OSD to MoS(R).
2. PS to Secretary (Revenue)/OSD to Advisor to FM.
3. The Chairman, Members and all other officers in CBDT of the
rank of Under Secretary and above.
4. All Chief Commissioners/Director General of Income-tax – with a
request to circulate amongst all officers in their regions/charges.
5. DGIT (Systems)/ DGIT (Vigilance)/ DGIT (Admn.)/ DG (NADT)/
DGIT (L&R).
6. Media Co-ordinator and Official spokesperson of CBDT.
7. DIT(IT)/DIT(RSP&PR)/DIT(Audit)/DIT(Vig.)/DIT(Systems)/
DIT(O&MS)/ DIT(Spl. Inv.).
8. The Comptroller and Auditor General of India (30 copies).
9. Joint Secretary and Legal Advisor, Ministry of Law and Justice, New
Delhi.
10. The Institute of Chartered Accountants of India, IP Estate, New
Delhi.
11. All Chambers of Commerce as per usual mailing list.(Ashish Kumar)
Director (Tax Policy & Legislation)
At the time of remitting interest to an offshore lender, in the Form 15CB certification and in a short-deduction proceeding where 5 per cent was applied and the department questions whether the borrowing was approved.
It mentions. Circular No. 07/2012
Source: the Income Tax Department’s own published text — its page for this instrument.
