TaxTMI Login
Just a moment...
Press 'Enter' to add multiple search terms. Rules for Better Search
Use comma for multiple locations.
---------------- For section wise search only -----------------
Accuracy Level ~ 90%
of 
Press 'Enter' after typing page number.
of Press 'Enter' after typing page number.
No Folders have been created
Are you sure you want to delete "My most important" ?
NOTE:
of Press 'Enter' after typing page number.
of Press 'Enter' after typing page number.
All Case Laws
of Press 'Enter' after typing page number.
of Press 'Enter' after typing page number.
All Case Laws
Join Channel
Note
Bookmark
Share
Don't have an account? Register Here
of Press 'Enter' after typing page number.
Issues: (i) whether interest on fully compulsorily convertible debentures denominated in Indian rupees was to be benchmarked at LIBOR plus 200 basis points and treated as debt till conversion, (ii) whether the excess interest determined at arm's length could be taxed at the normal rate under Article 11(7) of the India-Cyprus Double Taxation Avoidance Agreement and not as business income, and (iii) whether surcharge and education cess could be levied over and above the 10% cap in Article 11(2) of the India-Cyprus Double Taxation Avoidance Agreement.
Issue (i): Whether interest on fully compulsorily convertible debentures denominated in Indian rupees was to be benchmarked at LIBOR plus 200 basis points and treated as debt till conversion
Analysis: The instrument was examined according to its terms, which showed compulsory conversion only at a future date, periodic interest, and treatment as debenture in the assessee's own records. On that basis, the instrument was held to be debt until conversion, and the transfer pricing benchmark adopted by the lower authorities was accepted. The argument that the instrument should be treated as equity for benchmarking purposes was rejected as inconsistent with its contractual character and economic substance.
Conclusion: The issue was decided against the assessee and the LIBOR plus 200 basis points benchmark was upheld.
Issue (ii): Whether the excess interest determined at arm's length could be taxed at the normal rate under Article 11(7) of the India-Cyprus Double Taxation Avoidance Agreement and not as business income
Analysis: The relevant treaty provisions were read together to hold that interest exceeding the amount that would have been agreed in the absence of a special relationship remained taxable under the domestic law of the source State. Since the receipt itself was admitted to be interest, its character could not be altered into business income merely to avoid the treaty consequence. The tribunal therefore upheld taxation of the excess portion at the applicable domestic rate.
Conclusion: The issue was decided against the assessee and the excess interest was held taxable in India at the normal rate.
Issue (iii): Whether surcharge and education cess could be levied over and above the 10% cap in Article 11(2) of the India-Cyprus Double Taxation Avoidance Agreement
Analysis: The treaty definition of tax and the capped rate in Article 11(2) were construed to mean that the overall levy on interest could not exceed 10% of the gross amount. On that construction, surcharge and education cess could not be added over and above the treaty rate. The view taken by the first appellate authority was affirmed.
Conclusion: The issue was decided in favour of the assessee and surcharge and education cess were held not leviable over and above the treaty cap.
Final Conclusion: The transfer pricing adjustment and the domestic taxation of the excess interest were sustained, while the assessee succeeded only on the levy of surcharge and education cess under the treaty.
Ratio Decidendi: A compulsorily convertible debenture remains debt until conversion for transfer pricing purposes, excess interest attributable to a special relationship may be taxed under domestic law under the treaty, and a treaty rate cap on tax on interest cannot be enlarged by adding surcharge or education cess.
TaxTMI 
