Case nº A.A.R. No. 964 of 2010 of Authority for Advance Rulings, May 09, 2014 (case In Re: The Royal Bank of Scotland Vs)

JudgeFor Appellant: Mr. Girish Dave, Advocate and Mr. Amit Phulwani of SRBC and For Respondents: Mr. Rajeev P. Singh, CIT-DR(AAR), ND and Mr. Vijay Kumar, DIT(IT), Kolkata
PresidentDr. Arijit Pasayat, J. (Chairman) and T.B.C. Rozara (Member)
Resolution DateMay 09, 2014


  1. The applicant has filed this application for obtaining an advance ruling u/s. 245Q(1) of the Income-tax Act, 1961 (in short "the Act").

  2. The factual position highlighted by the applicant is as follows:

    The Applicant is a Bank incorporated in Netherlands with limited liability and it has branches in India. The Indian branch of the Applicant constitutes a permanent establishment ('PE') in India as per Article 5 of the Double Taxation Avoidance Agreement between India and the Netherlands, (which is referred hereinafter as the Treaty).

    The Indian branch of the Applicant has established a superannuation scheme ('the Scheme') for the purpose of providing pension to its eligible employees. The aforesaid Scheme, which is a defined benefit plan has been approved by the Commissioner of Income-Tax under Rule 2(1) of the Part B of the Fourth Schedule of the Act, on 26 December 1975. Employees who have joined the Applicant up to 31 December 2004 are eligible for the pension benefit under the aforesaid Scheme. Employees, who have completed 10 years of continuous services, are eligible for pension on resignation/retirement.

    Superannuation schemes adopted by various enterprise are categorized as "defined contribution schemes" and "defined benefit schemes". Both these types of superannuation schemes are provided by various insurance companies.

    Accounting Standard 15 ('AS-15') on Employee Benefits issued by the Institute of Chartered Accountants of India which provides the accounting treatment for employment benefits defines the "defined contribution scheme" and "defined benefit scheme" as follows:

    Defined contribution scheme

    AS-15 defines 'defined contribution schemes' as post-employment benefit plans, under which an enterprise pays fixed contributions into a fund and has no obligation to pay further contributions, if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.

    Defined benefit Scheme

    As per AS-15, a defined benefit scheme should be a plan in which the benefits to be received upon retirement are clearly defined in the rules of the scheme. The amount of contribution is invested in order to earn some returns. But irrespective of the kind of returns generated by the investment, the employees are assured of their pensions as per the pre-defined formula, which means that the risk of generating enough return lies with the employer.

    Further, AS-15 also states that accounting for defined benefit plans is complex because actuarial assumptions are required to measure the obligation and the expense and there is a possibility of actuarial gains and losses. In addition, the obligations are measured on a discounted basis because they may be settled many years after the employees render the related service. The actuarial valuation is typically based on several actuarial factors such as discounting rate, salary escalation rate, attrition rate, average mortality rate, etc., in order to provide for the future liabilities that could arise to the applicant out of the aforesaid scheme. It may be pertinent to note that the aforesaid actuarial factors are variable in nature, and may change from year to year for the same enterprise.

    In the Applicant's case, a lump sum contribution is made into the Scheme in respect of the pension for all eligible...

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