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ITAT grants treaty benefit to Cypriot entity being beneficial owner of interest income received on CCDs

September 11, 2019[2019] 109 taxmann.com 83 (Mumbai - Trib.)

INTERNATIONAL TAXATION : Assessee a company incorporated under laws of Cyprus being beneficial owner of interest on Compulsorily Convertible Debentures (CCDs) in an Indian private limited company would be entitled to beneficial provisions of article 11 of DTAA between India and Cyprus

Facts

• Appellant a company incorporated under laws of Cyprus filed its return of income showing income from interest on Compulsorily Convertible Debentures (CCDs) in ABPL, an Indian private limited company and such interest was duly offered to tax at the rate of 10 per cent in accordance with the beneficial provisions of Article 11 of the DTAA between India and Cyprus (Cyprus Treaty).

• The Assessing Officer held that the investment in CCDs was a mere back-to-back loan transaction and denied the benefit of the Cyprus Treaty on the basis that the appellant was not the 'beneficial owner' of interest income and brought to tax the interest income earned at the rates in force (approximately 42 per cent).

• The DRP upheld order of the Assessing Officer.

• On appeal to the Tribunal:

Held

• The assessee invested in CCDs and received interest income thereon for its own exclusive benefit, and not for or on behalf of any other entity. The mere fact that the investment was funded using a portion of an interest-free shareholder loan and share capital does not affect the assessee's status as the 'beneficial owner' of interest income, as the entire interest income was the sole property of the assessee.

• The mere fact that the CCDs were funded using monies received by the a ssessee from its immediate shareholder does not make the arrangement a back-to-back transaction. The assessee had absolute control over funds received from its immediate shareholder. Further, in the instant case the assessee wholly assumed and maintained foreign exchange risk on CCDs (as they were INR denominated), and the counter party risk on interest payments arising on the CCDs.

• Further, Assessing Officer/DRP have failed to prove that (i) the assessee did not have exclusive possession and control over the interest income received, (ii) the assessee was required to seek approval or obtain consent from any entity to invest in ABPL, or to utilize the interest income received at its own discretion and (iii) the assessee was not free to utilize the interest income received at its sole and absolute discretion, unconstrained by any contractual, legal, or economic arrangements with any other third party.

• Thus, transaction between assessee and ABPL cannot be considered a mere back-to-back transaction lacking economic substance. Therefore, Assessing Officer is directed to accept the return of income filed by assessee disclosing income from interest on CCDs in ABPL, wherein it has offered such interest to tax at rate of 10 per cent. In the result, the appeal is allowed

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