INCOME TAX
INSTRUCTION NO. 5056/1991
Dated: August 7, 1991
Section 10(15)(iv)(c) of the I.T. Act, 1961 provides for exemption from income-tax in respect of interest payable by an industrial undertaking in India on any moneys borrowed or debt incurred by it in a foreign country in respect of the purchase outside India of raw materials or components or capital plant and machinery, to the extent to which such interest does not exceed the amount of the interest calculated at the rate approved by the Central Government in this behalf, having regard to the terms of the loan or debt and its repayment. The purpose of granting this exemption from income-tax is to enable the Indian entrepreneurs to secure loans on such terms of repayment as would minimise the pressure on our balance of payments.
2. According to the present procedure for obtaining the Central Government's approval to the rate of interest on such loans for the purposes of section 10(15)(iv)(c), the Indian enterprise is required to submit the form of application prescribed in this respect along with its application for approval of the foreign credit arrangement, to the administrative Ministry concerned. The administrative Ministry is required to consult the Department of Economic Affairs and finally issue the order of approval of both the loan credit agreement as also the rate of interest on such loan/credit for purposes of section 10(15)(iv)(c) of the I.T. Act, 1961.
3. The procedure mentioned above has adversely commented upon by the Public Accounts Committee. They have opined that a procedure should be evolved under which the Ministry of Finance (Department of Revenue) should invariably be involved before the sanction order granting exemption from payment of income-tax u/s.10(15)(iv)(c) of the I.T. Act, 1961, is accorded. On reference the Attorney General has also expressed the view that the Department of Revenue (Ministry of Finance) should issue the order granting exemption u/s.10(15)(iv)(c) of the I.T. Act, 1961. Consequently, there will be a change in the procedure mentioned in para 2 above. Henceforth, the applications for both the loan agreement as well as for approval of the rate of interest for purposes of section 10(15)(iv)(c) of the I.T. Act will continue to be filed by the industrial undertakings before the administrative Ministry concerned. However, while the order of approval of the loan agreement would be issued by the administrative Ministry, the approval of rate of interest for purposes of section 10(15)(iv)(c) of the Act would be issued by the Department of Revenue in the Ministry of Finance. In respect of tax exemption sought u/s.10(15)(iv)(c) of the Act, the procedure will be that the administrative ministry would process the application in consultation with the Department of Economic Affairs, and then refer only the question of such approval to the Foreign Tax Division of the Department of Revenue in the Ministry of Finance alongwith their recommendations in each case.
4. The above procedure will come into force w.e.f. 1st September, 1991. Where applications for approval u/s.10(15)(iv)(c) of the Act are pending with the administrative Ministry as on 31st August, 1991, the same will be issued by the Foreign Tax Division of the Department of Revenue in the Ministry of Finance from 1st September, 1991. Approval u/s.10(15)(iv)(c) of the I.T. Act issued prior to 1st September, 1991 by the administrative Ministries would, however, continue to be valid.
5. The guidelines/clarifications issued in the past by this Department in various Office Memoranda, except in respect of procedure outlines in para 3 above regarding grant of income-tax exemption on interest payable on foreign loans u/s.10(15)(iv)(c) of the I.T. Act, will continue to remain in force.
F. No. 463/5/86-FTD