Beneficial ownership of interest income upheld for a Cyprus resident under the India-Cyprus DTAA treaty rate.

A Cyprus tax resident receiving interest on compulsorily convertible debentures in its own name, directly through banking channels, was treated as the beneficial owner of that interest for Article 11(2) relief under the India-Cyprus DTAA. The decisive factors were unfettered control over the income, no contractual obligation to pass it on, and the bearing of foreign currency and counterparty risks. Independent management through the board and local arrangements supported treaty residence, and the absence of substantive business operations in Cyprus, or ownership by a Mauritius parent, did not displace beneficial ownership. Treaty protection therefore applied and domestic-rate taxation was not warranted.

---

---

Issues: Whether the assessee was the beneficial owner of interest income earned on compulsorily convertible debentures and, as a Cyprus tax resident, was entitled to treaty protection under Article 11(2) of the India-Cyprus DTAA at the concessional rate instead of taxation under domestic law.

Analysis: The assessee held the debentures in its own name and received the interest directly through banking channels. It had no contractual obligation to pass the income on to any other entity, bore the foreign currency and counterparty risks, and was independently managed through its board of directors and local administrative arrangements in Cyprus. Its tax residency certificate established Cyprus residence, and the treaty benefit under Article 11(2) applied where the recipient was the beneficial owner of the interest. The absence of substantive business operations in Cyprus and the fact that the assessee was a subsidiary of a Mauritius entity did not displace beneficial ownership of the interest income.

Conclusion: The assessee was held to be the beneficial owner of the interest income and was entitled to taxation at the concessional rate under Article 11(2) of the India-Cyprus DTAA. Denial of treaty benefit and taxation at the domestic rate was set aside.

Ratio Decidendi: Where a Cyprus resident receives interest on debentures in its own name, enjoys unfettered control over the income, and bears the associated financial risks, it is the beneficial owner for purposes of treaty relief under Article 11(2) of the India-Cyprus DTAA.

---