Beneficial ownership of interest income upheld where the recipient controlled the income and had no obligation to pass it on.

A Cyprus-incorporated assessee held a valid tax residency certificate, invested in compulsorily convertible debentures on its own account, and retained control over the interest received. On these facts, it was treated as the beneficial owner because there was no contractual, legal, or economic obligation to pass the income to another person, and shareholder funding alone did not negate beneficial ownership. The revenue also failed to show any lack of exclusive possession, control, or economic substance. Treaty relief under Article 11 of the India-Cyprus DTAA was therefore available, and denial of the beneficial rate was unsustainable.

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Issues: Whether the assessee was the beneficial owner of the interest income from compulsorily convertible debentures and entitled to treaty benefit under Article 11 of the India-Cyprus Double Taxation Avoidance Agreement.

Analysis: The assessee was incorporated in Cyprus, held a tax residency certificate, invested in the debentures on its own account, and retained cash balances after the investment. The interest income was received for its own benefit, and there was no material to show any contractual, legal, or economic obligation to pass on the income to another person. Mere funding of the investment through shareholder loans and share capital did not by itself establish that the assessee lacked beneficial ownership. The revenue also failed to prove absence of exclusive possession and control over the interest income or that the transaction lacked economic substance.

Conclusion: The assessee was the beneficial owner of the interest income and was entitled to the beneficial rate under Article 11 of the India-Cyprus Double Taxation Avoidance Agreement.

Final Conclusion: The denial of treaty relief was unsustainable, and the assessee's return of income reflecting interest taxed at 10% was to be accepted.

Ratio Decidendi: A recipient of interest is the beneficial owner where it has the right to use and enjoy the income without any contractual or legal obligation to pass it on to another person, and mere shareholder funding does not by itself negate beneficial ownership.

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