2024 (5) TMI 953 - AT - Income Tax

Cyprus company wins beneficial ownership test for interest income from Indian debentures under DTAA Article 11

The ITAT Delhi held that a Cyprus-incorporated company, wholly owned by a Mauritius-based entity, was the beneficial owner of interest income from ... Denial of Benefit under Article 11 of the India-Cyprus DTAA - Right to receive the income - Whether Appellant is not the beneficial owner of the interest income earned by it on Compulsory Convertible Debentures ('CCDs')? - assessee was incorporated in Cyprus and is tax resident of Cyprus and is wholly owned subsidiary of IL & FS India Reality Fund-II, LLC which is based in Mauritius - HELD THAT:- We hold that the assessee is tax resident of Cyprus and has complete right to receive the interest income on CCDs and that there is no compulsion or contractual obligation to simultaneously pass on the same to another entity. The foreign currency risk as well as counter party risk in relation to the interest income was completely borne by the assessee herein. All these facts categorically go to prove that the assessee is indeed the beneficial owner of the interest income on CCDs from the Indian entity. When it is held to be beneficial owner of the income, it is entitled for the taxability at a concessional rate as provided under Article 11(2) of India-Cyprus Treaty. Hence, the action of the AO in taxing the interest income @ 40% as per domestic law by denying the treaty benefit is not upheld and same is hereby reversed. We hold that the interest income on CCDs would be taxed @10% as per Article 11 of the India Cyprus DTAA Treaty. Accordingly, grounds raised by the assessee are allowed. Issues Involved:1. Delay in filing the appeal.2. Denial of benefit under Article 11 of the India-Cyprus DTAA.3. Determination of beneficial ownership of interest income.4. Consistency in the approach of the Assessing Officer (AO).5. Denial of Treaty benefit and imposition of tax at 40%.6. Levy of interest under Section 234B of the Income-tax Act.7. Initiation of penalty proceedings under Section 270A of the Income-tax Act.Detailed Analysis:1. Delay in Filing the Appeal:The appeal was delayed by 32 days. The assessee argued that they did not receive any email or computer intimation about the passing of the appellate order. The Tribunal found the delay justifiable and condoned it, admitting the appeal for adjudication.2. Denial of Benefit under Article 11 of the India-Cyprus DTAA:The Tribunal examined whether the assessee, a tax resident of Cyprus, was entitled to the benefits under Article 11 of the India-Cyprus DTAA. The Tribunal noted that the assessee had complete control over the interest income from Compulsory Convertible Debentures (CCDs) and was not obligated to pass it on to any other entity. Therefore, the assessee was deemed the beneficial owner of the interest income, making it eligible for the concessional tax rate of 10% under Article 11(2) of the Treaty.3. Determination of Beneficial Ownership of Interest Income:The Tribunal scrutinized the nature of the interest income earned by the assessee from CCDs issued by M/s Indiabulls Infraestate Ltd. It was established that the assessee had the right to receive and enjoy the interest income without any contractual obligation to pass it on to another entity. The Tribunal concluded that the assessee was the beneficial owner of the interest income, thereby qualifying for the concessional tax rate under the DTAA.4. Consistency in the Approach of the Assessing Officer (AO):The assessee argued that the AO was inconsistent in their approach compared to the assessment for AY 2014-15, where no addition was made to the returned income. The Tribunal did not find this argument compelling enough to affect the outcome of the case.5. Denial of Treaty Benefit and Imposition of Tax at 40%:The AO had denied the treaty benefit and imposed a tax rate of 40% under domestic law. The Tribunal found this action unjustified, as the assessee met all the conditions stipulated in Article 11(2) of the India-Cyprus DTAA. Consequently, the Tribunal reversed the AO's decision, allowing the interest income to be taxed at the concessional rate of 10%.6. Levy of Interest under Section 234B of the Income-tax Act:The Tribunal noted that the levy of interest under Section 234B was consequential in nature and did not require a separate adjudication.7. Initiation of Penalty Proceedings under Section 270A of the Income-tax Act:The Tribunal found that the initiation of penalty proceedings under Section 270A was premature for adjudication at this stage and dismissed this ground.Conclusion:The Tribunal allowed the appeal partly, granting the benefit of the concessional tax rate under Article 11 of the India-Cyprus DTAA and reversing the AO's decision to tax the interest income at 40%. The appeal was partly allowed, with specific grounds being dismissed or deemed consequential. The order was pronounced in the open court on 15/05/2024.