TaxTMI 
TaxTMI 
2019 (8) TMI 554
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.... 2. The grounds raised by the revenue for Assessment Year 2009-10 in IT(TPA) No. 2060/Bang/2016 are as under: - "1. The Ld. CIT(A) has erred in not appreciating the fact that Compulsory Convertible Debenture (CCD) are in the nature of equity and not debt. 2. The Ld. CIT(A) has erred in not appreciating the fact and circumstances brought out by the TPO to arrive at the conclusion that CCDs are in the nature of equity and not debentures. 3. The Ld. CIT(A) has erred in allowing the interest expenditure incurred for CCDs without acknowledging the TPO's conclusion that CCDs are equity in nature." 3. The grounds raised by the assessee for Assessment Year 2009-10 in C.O. No. 83/Bang/2017 are as under: - "1. That the contention in the appeal filed by the revenue is bad in law while stating that the Learned Commissioner of Income-tax (Appeals) ["Learned CIT(A)"] erred in not appreciating the fact that compulsorily convertible debentures ("CCD") are in nature of equity and not debt. 2. That the contention in the appeal filed by the revenue is bad in law while stating that the Learned CIT(A) has erred in not appreciating the fact and circums....
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....ts) so as to increase the degree of comparability and to alienate differences on the interest rates adopted/ paid by comparables. 4. On the facts and circumstances of the case and in law, the learned AO/learned Panel erred in applying 12 month average of LIBOR rates in determining the arm's length price of international transaction with respect to interest paid on CCDs by the Appellant to its AEs. Further, adopting 12 month LIBOR rates was completely ad-hoc, as the learned AO/learned Panel did not undertake suitable adjustments thereby failing to align the LIBOR rates to the prevalent interest rates for CCDs. 5. On the facts and circumstances of the case and in law, the learned AO/learned Panel erred in not appreciating the Appellant's argument that the CCDs should be benchmarked only in the year of issue and that the terms and conditions prevalent at the time of issue continues to hold good until the redemption/ conversion of CCDs. 6. On the facts and circumstances of the case and in law, the learned AO/learned Panel erred in not appreciating that the CCDs were issued in INR and therefore the Prime Lending Rate ("PLR") followed by the Indian Publ....
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....udice to the above, the Hon'ble DRP erred in considering the average LIBOR rates of 2009 at 1.599% instead of 1.2848% which is the average LIBOR rate during the period. 9. For that the Hon'ble DRP erred in law as well as on facts, in directing the TPO to make an estimated 1% adjustment on account of Risk when Transfer pricing regulations in India is against any assumption in respect to any adjustment and further when there is also no reliable method to convert the qualitative difference into quantitative difference for making adjustment on account of risk level. 10. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. 11. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above." 6. The grounds raised by the assessee for Assessment Year 2011-12 in IT(TP)A No. 599/Bang/2016 are as under:- "Each of the grounds and/ or sub-grounds of the appeal are independent and without prejudice to the others. 1. On the facts and in the circumstances of the cas....
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.... interest payments on CCDs. The Appellant prays that the PLR should be considered for benchmarking the interest payments. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal." 7. The grounds raised by the assessee for Assessment Year 2012-13 in IT(TP)A No. 2178/Bang/2016 are as under:- "Each of the grounds and/ or sub-grounds of the appeal are independent and without prejudice to the others. 1. On the facts and in the circumstances of the case and in law, the learned Dispute Resolution Panel (learned "Panel") erred in confirming the action of the learned Deputy Commissioner of Income-tax, Circle - 1(1)(2), Bangalore (learned "Transfer Pricing Officer" or learned "TPO")/ learned Deputy Commissioner of Income-tax, Circle - 2(1)(1), Bangalore (learned "Assessing Officer" or "AO") in making an adjustment of Rs. 16,54,49,610/- to the income of the Appellant in respect of international transaction for payment of interest on compulsorily convertible debentures ("CCDs") by the Appellant to its Associated Enterprise ("AEs"). ....
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.... Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal." 8. The grounds raised by the revenue for Assessment Year 2013-14 in ITA No. 2006/Bang/2017 are as under:- "1) In the fact of circumstances of the case, the CIT(A) has erred in allowing interest expenses of Rs. 15,68,93,828/- on compulsory convertible debentures (CCDs) which are actually Equity capital in nature of FDI as per RBI guidelines." 9. The grounds raised by the assessee for Assessment Year 2013-14 in C.O. No. 09/Bang/2018 are as under:- "1. That the contention in the appeal filed by the Revenue is bad in law in stating that the Learned Commissioner of Income-tax (Appeals) ["Learned CIT(A)"] erred in not appreciating the fact that Compulsorily Convertible Debentures ("CCD") are in the nature of equity and not debt. 2. That the contention in the appeal filed by the Revenue is bad in law in stating that the Learned CIT(A) has erred in allowing the interest expenditure of INR 156,893,828 incurred for CCDs which are actually Equity capital in nature of FDI as per RBI gui....
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....debt. If the nature of funds received is determined as 'Debt' then only one may proceed to determine the arm's length price of the interest paid/payable on the borrowed capital by the Company. 2.1 In a third-party scenario no entity would lend any funds to a Company if its debt-equity ratio is skewed as evident on perusal of its balance sheet. In such circumstances the intention of the assessee for funding the Company will be that of an investor and not a lender. The arm's length principle focuses on determining the true nature and effect of each constituent of the arrangement and the arrangement as a whole, allowing due weight to the legal form of each constituent to the arrangement, the business context in which they occur and any relationship between different elements of the arrangement. Where, an investment in an associated enterprise may be structured in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. Depending on the facts and circumstances of the particular case, it may be appropriate for tax administr....
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....ything), • as a separate entity • from a third-party lender unconnected with the borrower, and • without guarantees or other forms of comfort from any party connected with the borrower. There are two main ways of looking at the borrowing: what the lender would do and what the borrower would do if the circumstances were as outlined above, and these are expressed as: • the "could" argument - what a lender would have lent and therefore what a borrower could have borrowed - and • the "would" argument - what a borrower acting in the best interests of their own business would have borrowed." "60. In the context of applying Australia's transfer pricing rules, the principal factors that will be taken into account in determining whether a particular loan agreement should be treated as equivalent to a contribution to equity It should be noted herein, that no where it is mentioned that all the conditions mentioned below should be met collectively for the recharecterisation of loan to equity. are detailed below. (a) The legal effect of the transaction A loan would ordinarily create the lega....
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....uity may be made in the form of loans to ensure that the percentage of the shareholding of domestic investors is not diluted. (f) Written loan agreement The absence of a written loan agreement in relation to the supply of funds will not be taken as determinative that the funds are a contribution to equity. (g) Ability to obtain finance from an unrelated third party Representations have been made that interest should not be attributed in the case of a loan if the circumstances of the borrower were such that an independent lender would not have provided credit to that borrower." As can be seen from the extracts of the Ruling, there are several clauses contained within the said Ruling which would apply to treat the loan provided as an equity contribution. 3.0 Further, the concept of thin capitalisation itself stems from the arm's length principle and therefore, it will not be right to argue that thin capitalization rules are not applicable. Therefore, in Transfer Pricing Analysis a debt may be characterized as equity investment, if under the conditions existing in related party transaction no third party would have given loan. ....
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.... to the borrower. 3.2 The current norms do not allow ECBs in the sector except for projects with a minimum size of 100 acre and, therefore, treating CCDs as debt will amount to circumventing external commercial borrowing (ECB) guidelines applicable for the real estate sector. Still I could have treated CCD as debt if there had been buy back provisions in the contractual agreements. This is because in many cases there are contractual agreements allowing Indian realty players to buy back the shares from foreign investors at a fixed price after conversion. In other words, the foreign investor has a put option. Thus, for the foreign investor, a CCD is similar to a debt instrument with a fixed rate of return rather than an equity investment. For instance, a local property firm raising $30 million by issuing CCDs will give an undertaking that it will buy back the securities after two years for $33 million. 3.3 While real estate companies are barred from tapping debt through ECBs (except for the 100-acre or more projects), there is no restriction on pure equity investment, subject to certain conditions such as minimum capital requirement and a three-year lock-in. CCDs ar....
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....BI had banned debt structures like partially convertible preference shares. The regulator said only compulsory convertible preference shares (CCPS) and compulsory convertible debentures (CCDS) would be permitted since these are equity instruments. (http://www.moneycontrol.com/news/cnbc-tv18-comments/ccpsccds-cannot-have-fixed-exit-prices-rbi_402506.html 8. The TPO holds the view that amount Rs. 76826983/- is in the nature of interest because CCDs issued by the Assessee are not debt. Interest arises on debt i.e. on borrowed capital and not on investment in the share capital. On perusal of the balance sheet it is found that share capital of the Assessee Company is 12.73 Crores whereas the unsecured loans are 110.29 Crores. Thus, the balance sheet of the Assessee Company as at 2009 is highly skewed. This position of the Company is after taking amount from AEs through CCDs. The ratio of debt (if for a time being CCDs are considered as debt) and equity capital is 8.1 In this highly skewed balance sheet the operating revenue is very small compared to expenditures. The operating revenue is only 7.73 Crores whereas the expenditures are 28.41 Crores. It includes interest on debentu....
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....t of Arm's Length Price of international transactions determined in this case. 11. In A. Y. 2009 - 10, the assessee carried the matter in appeal before CIT (A), who held that CCDs are debt and not equity and hence, interest on it is allowable but he also held that as against the claim of interest @ 15%, interest should be allowed @ 12.62% being ALP of interest. The revenue is in appeal against this finding of CIT (A) that CCDs are Debt and not Equity. The assessee has filed CO for A. Y. 2009 - 10 but the grounds raised by the assessee are merely in support of the order of CIT (A) and apart from that, there is no ground or grievance. 12. In A. Y. 2010 - 11, the assessee carried the matter in appeal before DRP against the Draft Assessment order passed by the AO in line with the order of TPO by holding that no interest on CCDs is allowable and made adjustment of Rs. 16,54,49,612/-. DRP in this year held that CCDs are Debt and not equity. DRP also held that Thin Capitalisation principle is not applicable. Having held this, DRP also held that ALP for interest on CCDs has to be worked out at LIBOR Plus rate and directed the AO to adopt ALP of interest on CCDs at 1.559%. DRP als....
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....d CO for this year also but the grounds raised by the assessee are merely in support of the order of CIT (A) and apart from that, there is no ground or grievance. 17. Hence, it is seen that there are two C. Os. filed by the assessee for A. Y. 2009 - 10 & 2013 - 14 and both these C. O are liable to be dismissed straight away as these are merely in support of the order of CIT (A). Now we are left with three appeals of the revenue one each in A. Ys. 2009 - 10, 2010 - 11 & 2013 - 14 and three appeals of the assessee for A. Y. 2010 - 11, 2011 - 12 & 2012 - 13. 18. The issues to be decided can be listed as under:- (a) First and most important issue to be decided by us is this that whether CCDs are Debts or equity and interest on it is allowable or not? For deciding this issue, we should also examine and decide the applicability Thin Capitalisation Principle invoked by the TPO/AO. (b) If we come to this conclusion that it is equity and interest on it is not allowable than nothing remains to be decided further but if we come to this conclusion that it is Debt and interest on it is allowable then we have to decide this second issue as to what should be the amount to ....
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....Kier Dabhol, SA vs. DCIT (I Tax), Circle-3(2), Mumbai in their order in ITA.No.4249/Mum/07 dated 20.11.2010. The learned AR also placed reliance on this decision of Mumbai ITAT and another decision of AAR in the case of M/s GE Strategic Investment India (at page 286 of the PB). 4. Arguing against the CIT(A)'s finding that the ALP adjustment was made by the TPO invoking thin capitalisation rules, the undersigned drew the attention of the Hon'ble Bench to the fact that though there was discussion on thin capitalisation rules, the TPO has ultimately applied Arm's Length Principle to make the adjustment by arguing that a company like assessee would not have been able to borrow such a huge amount from an independent lender without offering any security by way of floating CCDs. This is evident from the discussion on page 9 of the TPO's order. 5. In support of the TPO's conclusion that the money collected through CCDs is in the nature of equity, reliance was placed on the decision of the Hon'ble ITAT, Special Bench in the case of Ashima Syntex Ltd. vs ACTT, Central Circle-2(3) reported at (2006) 100 lTD 247 (AHD.)(SB) and a copy of the same was su....
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....nvertible preference shares and laid down a policy that only compulsory convertible preference shares (COPS) and compulsory convertible debentures (CCDs) would be permitted since these are equity instruments. Keeping in view of this policy, the issue of CCDs post 2007 should be treated differently and therefore, reliance has been wrongly placed on the decision of the AAR in the case of GE Strategic Investment India. Further, in this decision, the policy aspects have not been considered. For better appreciation by the Hon'ble Members, a copy of the Press Release of the RBI dated 8.6.2007 and RBI Master Circular on Foreign Investment in India dated 02.07.2007, are annexed herewith highlighting the relevant portions. Even in Master Circular issued by the RBI on 01.07.2008, there is no change in the policy in so far as the CCDs are concerned . A copy of this Circular is also enclosed. 8. As the assessee issued CCDs pursuant to Convertible Debentures subscription agreement with the subscribers entered into on 24.12.2008 (kindly see page 250 of PB), the above RBI Circulars shall apply. Therefore, the TPO has rightly relied on these policy circulars to treat CCDs as equity ca....
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....ated Compulsorily Convertible Debentures issued to them. 2.2. Facts and points in question are pellucid from the Assessment Order for the lead Assessment Year 2009-10. The Assessee paid interest at the rate of 15% upon issue of Compulsory Convertible Debenture to its three respective associated enterprises namely, Flight Training Mauritius, Emirates Dubai and CAE Hungary. These three international transactions, in respect of such interests paid, were referred by the Assessing Officer to the Transfer Pricing Officer for mere determination of their respective arm's length prices within the meaning, scope and purpose specific provisions of Chapter - X of the Income Tax Act. (Kindly refer to Paras- 1 & 2 on Pages- 1 & 2 of the Transfer Pricing Order for AY: 2009-10). 2.3. Upon reference, the Transfer Pricing Officer first rejected the Assessee's adoption of the comparables selected under Comparable Uncontrolled Price (CUP) method. The argument of the Transfer Pricing Officer for this rejection was that the comparables selected by the Assessee were for dissimilar periods and were in the context of Non-convertible Debentures whereas the Assessee's internatio....
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.... the statutorily prescribed methods for computation of arm's length price under section 92C of the Income Tax Act the Transfer Pricing Officer, while dealing with the matter further, has gone beyond the limits and boundaries set in Indian Tax Jurisprudence. 4.2. The Transfer Pricing Officer has misdirected the process completely by invoking the concept of Thin Capitalization which has not yet seen the light of the day in the Indian Tax Laws and Jurisprudence. The Transfer Pricing Officer has drawn all strengths from the Tax Laws of other foreign countries like United Kingdom and conceptualizations of OECD in the context of Thin Capitalization. There is no reference or reliance on any Indian Tax Law because obviously there is none. (Kindly refer, Sub-para- 2.2 of Para- 7 to Sub-para- 3.0 of Para- 7on Page- 5 to & of the Transfer Pricing Order for AY: 2009-10). 5.1. Further justification in this regard has been sought by saying that under section 36(iii) of the Income Tax Act interest is payable and deductible only in respect of a debt and in the subjective opinion of the Transfer Pricing Officer the status of the Assessee was such that no third party would have....
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....nly to arrive at the real income earned i.e. the correct price of the transaction which is the interest paid to the associated enterprises on Compulsory Convertible Debenture in the instant case, shorn of the price arrived at between the parties on account of their relationship, viz. associated enterprises. The Transfer Pricing Officer has confused this measure with a charge and has tried to notionally tax the interest that the Assessee paid to its associated enterprises. This has been tried to be achieved by way of treating its value at Nil and thus by denying its claim as expense. This impermissible predetermined objective has been attempted to be accomplished in the instant case by way of another impermissible act of re-characterization of debenture as equity based on presumption of Thin Capitalization concept. 6.4. Finance Act 2017 introduced Section 94B in the Income Tax Act w.e.f. 01.04.2018. This provision was introduced with the sole purpose of limiting interest deduction in certain cases. Indian statute thus for the first time addressed the concerns thrown up in Thin Capitalization concepts abroad. Here too the Indian statute confined itself to only limit the exte....
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....ntures are concerned, the Government Policy accepted and allowed it to be used for fund inflow from abroad even as a debt, as at a later appointed date it will compulsorily and unambiguously be converted in to equity. Therefore the Government clarified that till such time its conversion in to equity happens and till such time it continues its identity as a debenture, it shall continue to be a valid form of fund infusion from abroad. The Government Policy only defined non-admissibility and non-validity of Optionally or Partially Convertible Debentures and other Hybrid Instruments as means of fund infusion vis a vis admissibility and validity of Compulsory Convertible Debentures as an instrument and means of fund infusion from abroad. This was the need and requirement in a Regulatory environment and for Regulatory purposes. Nowhere did the Government Policy redefined or recharacterized the nature of a Compulsory Convertible Debenture as equity. 7.5. As far as need and requirement under the Income Tax Act is concerned it is enough to understand that the Government nowhere said in the given situation that a Compulsory Convertible Debenture is equity even at the time of its inc....
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....ons 36(1)(iii) and 37 of the Income Tax Act. 8.2. It is also not the case of the Assessing Officer that nature of the transaction was something different than what has been shown by the Assessee and the same has been done to defraud the revenue or avoid due payment of tax. The Assessing Officer did not feel the need to re-characterize the nature of the transaction though it is legally not permissible otherwise. 8.3. Obviously, the Assessing Officer was satisfied with the genuineness and nature of the transaction and therefore was satisfied with the admissibility of the interest paid on Compulsory Convertible Debentures as genuine expense. The Assessing Officer referred the matter to the Transfer Pricing Officer only to determine the genuine extent of the claimable interest by way of arm's length determination exercise as prescribed under law and rules. The transactions were not referred to the Transfer Pricing Officer to determine the genuineness and nature of the transaction and to re-characterize it. The Transfer Price Officer exceeded his statutorily prescribed role and jurisdiction. 9.1. Hon'ble ITAT, Mum bai, in the case of Besix Kier Dabhol,....
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....is important to mention that this order of Hon'ble ITAT 'L' Bench, Mumbai in the case of Besix Kier Dabhol, SA vs. DCIT (ITA No.-4249/M um/2007) has been confirmed by Hon'ble Bombay High Court in the Director of Income - Tax vs Besix Kier Dabhol in ITA No.- 776 of 2011. The Hon'ble Bombay High Court in this case decided the questions of law directly applicable on the facts and circumstances of the present set of appeals under consideration. 10.1. The revenue placed reliance on two case laws namely Ashima Syntex Ltd. in ITA No.- 831 (AHD) of 1998 by Hon'ble ITAT Ahmedabad 'B' Special Bench and Narendra Kumar Maheshwari vs Union of India and others (1989 AIR 2138) of Hon'ble Supreme Court. This was to emphasize the point that in the case of convertible debentures it is nothing but raising capital by way of equity shares increasing the capital base, via media being, issue of convertible debentures. 10.2. Reliance placed on these two case laws by the Revenue are misplaced as they do not lay down good law and they stand in isolation amidst various other case laws that hold the issue differently. First of all the Revenue has missed th....
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....s Ltd. vs CIT (1966 AIR 1053) Honbl. Supreme Court has clearly given the ruling that it is irrelevant to consider the object with which the loan was obtained. Admittedly, the debentures when issued is a loan, and therefore, whether it is convertible, or non-convertible, does not militate against the nature of the debenture, being loan and therefore the expenditure thus incurred would be admissible as revenue expenditure. v. In the case of CIT vs. ITC Hotels Limited (190 Taxmann 430), the Honble. Karnataka High Court has also concluded that even if the debentures were to be converted into shares at a later date the expenditure incurred on such convertible debentures has to be treated as revenue expenditure. vi. In the case of DCIT vs. Modern Syntex India Limited (95 TTJ JP 161), the Honble ITAT Jaipur, has also very clearly held that debenture is nothing but just another form of loan on which interest is payable. The debentures cannot be equated with shares. As regards convertible debentures, the company may also issue other debentures in which case the option is given to the debenture holders to convert them into equity or preferential shares at stated rate of exc....
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....ble ITAT Delhi in the case of First Blue Home Finance Limited vs. DCIT in ITA No. 3072/DEL/2013; ii. Order of the Honble ITAT Mumbai in the case of Aegis Limited vs. ACTT in ITA No. 1213/Mum/2014; iii. Order of the Honble ITAT Delhi in the case of Bharati Airtel Limited vs. ALIT (161 TTJ 428); iv. Order of the Honble ITAT Delhi in the case of Unitech Limited vs. DCIT in ITA No. 6585/Del/2015. 12. Thus, all the positions taken by the Revenue have been met both on facts and law and the Honble Bench may kindly consider them favorably, both in terms of the arguments made during hearing and in this Notes on Arguments. 13. Besides the above, there is an issue emanating from the applicability of LIBOR vs. PLR rate, to determine the rate of interest to be paid to the associated enterprises. In the instant cases, debentures have been raised in INR, therefore the interest benchmarking has to be done in PLR and not in LIBOR. This is a very well settled issue for which copies of case laws have been submitted before the Honble Bench before the commencement of the hearing. Some of the case laws for ready reference are as below - i. CIT Vs. Co....
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.... to this capitalisation. Holding this, the amount of Rs. 7,68,26,983 was held to be not in the nature of 'interest' and ALP of the transaction by CUP method was held as Nil and adjustment of Rs. 7,68,26,983 was determined u/s 92 CA (3) of Income tax Act, 1961. As grounds No. 1 and 2 are general in nature these do not require adjudication. The relevant grounds of appeal raised by the appellant are "3. That on the facts and in the circumstances of the case, the Learned AO/Learned TPO erred in making adjustment to the transfer price of the Appellant' international transactions with related parties by INR 7,68,26,983 for interest on debentures and considering the same to be nil. 4. That the Learned AO/Learned PO erred in rejection of comparability analysis undertaken in the Transfer Pricing documentation by the Appellant in accordance with the provisions of the Act read with the Income tax Rules, 1962 ((the Rules"). 5. That the Learned AO/Learned TPO erred in reclassifying the debenture issued by the appellant form CCD to equity. The Learned YPO during the course of the hearing had not contended on the nature f the intercompany funding and ha....
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....e funds which have been raised by the appellant through CCDs and have been utilised for the business of the appellant. The appellant has paid 15% as the rate of interest to its AEs for this purpose. It is been that PLR for A.Y.2008-09 as seen from SBI corporate website varies from 12.25% as on 1.1.2009 to 13.00% as on 10.11.2008. At an average, the same can be taken at 12.6% as against 15% claimed by the appellant. Under such facts, the interest paid of Rs. 7,68,26,983/- at @ 15% is certainly not at arm's length and is also evidently in excess of the +/- 5% margin allowable. The AO/TPO is therefore required to rework the ALP taking into account, 12.62% rate of interest as the Arm's Length rate of interest on the borrowing i.e. CCDs and rework the addition made u/s 92CA accordingly. It is held accordingly." 22. As per above para, it is noted that it is noted by CIT (A) that as per the tribunal order of Mumbai Bench rendered in the case of Besix Kier Dabhol, SA vs. DDIT as reported in 131 ITD 299 in which the issue was decided in favour of the assessee on this basis that in the absence of specific Thin capitalization Rules in India, recharacterization of Debt Capital as equity....
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....its). That is how tax considerations at times do result in a company being too thinly capitalized, or, to put it differently, financed by a disproportionate ratio of debts. In order to protect themselves against such erosion in their legitimate tax base, several tax jurisdictions enact rules to counter this vulnerability and these rules are termed as 'thin capitalization rules'. 20. It is for this background that many jurisdictions take several legislative anti-abuse measures including limiting deduction on interest when the company is considered to be too highly geared under applicable tax regulations. India has woken up now to neutralize this kind of manoeuvring and the Direct Taxes Code Bill, 2010, does seek to provide a legislative framework for remedial measures to counter erosion of tax base by thin capitalization. Under s. 123(1)(f) of the proposed Direct Taxes Code Bill, 2010 (Bill No. 11 of 2010 as introduced in the Parliament on 30th Aug., 2010) as a part of the general anti-avoidance rule, "any arrangement entered into by a person may be declared as an impermissible avoidance arrangement and the consequences, under this Code, of the arrangement may be determined....
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....debt/equity ratio is exceeded. Article 18, 4° BITC belongs to second group of aforementioned rules; it recharacterizes certain interest payments into dividends both for corporate tax purposes of debtor and for withholding tax purposes, while curiously it does not recharacterize debt into equity (neither for corporate tax, nor for capital duty purposes). In certain circumstances, the Belgian GAAR may have the potential to recharacterize purported debt into equity. In that case, it also belongs to the second set of rules." 22. It is thus only under the Belgian tax laws, which inter alia restrict the interest deductions only to the extent of debt capital ratio of 1:7 in sharp contrast to the debt ratio in the present case which is 1:248, that the mode of borrowings, i.e. via GE or via PE, may have some tax implication even though at somewhat superficial level. That perhaps explains as to why the borrowings are claimed to have been resorted to by the Indian PE and not the Belgian GE directly. If these borrowings were resorted to by the Belgian GE directly, prima facie the thin capitalization rules would have restricted the interest disallowance in excess of borrowings exce....
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....se may be based on UN/OECD Model or other best global practices.' 112. In para 3.3.2 the working group recommended introduction of anti-abuse provisions in the domestic law. 113. Finally, in para 3.3.3 it is stated 'the working group recommends that in future negotiations, provisions relating to anti-abuse/limitation of benefit may be incorporated in the DTAAs also.' 114. We are afraid that the weighty recommendations of the working group on non-resident taxation are again about what the law ought to be, and a pointer to the Parliament and the executive for incorporating suitable limitation provisions in the treaty itself or by domestic legislation. This per se does not render an attempt by resident of a third party to take advantage of the existing provisions of the DTAC illegal. (Emphasis, by underlining, italicized in print, supplied by us) 25. It is thus clear that merely because a suitable limitation provision in the treaty or the domestic legislation is considered desirable, and attempts are being made to legislate the anti-abuse provisions subsequently, it would not render the effort to take advantage of existing provisions of the treat....
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.... Revenue authority to disregard the CBDT circular even if it deviates from the law-as long as it is beneficial to the assessee. Thus, where a DTAA provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the IT Act. Where there is no specific provision in the agreement, it is the basic law, i.e., the IT Act, that will govern the taxation of income. When no such limitations on benefits or anti-abuse provisions are set out in the tax treaty, it cannot be open to the Revenue authorities to apply the anti-abuse provisions based on the Judge made law in India-which is essentially to be treated as a part of the IT Act as it is based on the interpretation of provisions under the IT Act and apply the same. As observed by this Tribunal, in the case of Motorola Inc. vs. Dy. CIT (2005) 96 TTJ (Del)(SB) 1 : (2005) 95 ITD 269 (Del)(SB), a tax treaty is an alternative tax regime. It has to be treated as a complete code in itself, in that sense. There are thus no legally sustainable merits in learned Departmental Representative's passionate plea for invoking principles laid down by Hon'ble Supreme Court in McDowell & Co. Ltd. vs. CTO ....
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....4(5) which provides that, "enterprises of a Contracting State, the capital of which is wholly or partly-owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other, or more burdensome, than the taxation and connected requirement to which other similar enterprises of that first-mentioned State are or may be subjected in the same circumstances and under the same conditions". In this view of the matter, it cannot be open to the Revenue authorities to put any limitation on deduction of interest, in respect of funds borrowed by the PE, while computing income in accordance with the provisions of art. 7 of Indo-Belgium tax treaty, when no such limitations are placed on the domestic enterprise. 30. For the reasons set out above, we are of the considered view that the assessee is indeed justified in claiming deduction on account of interest paid on borrowings from its shareholders/joint venture companies. The international consensus that the AO has referred to is for the need of thin capitalization rules, but....
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....sue still remains because, the objections of AO/TPO are not merely on the basis of Thin capitalization Principle. Their basic objection is this that since the interest is paid on CCDs, this is not an interest on debt but on equity and hence, not allowable. On page 11 of his order for A. Y. 2009 - 10, the TPO has reproduced certain comments of RBI in 2007 Policy on convertible debentures in which it is stated that fully and mandatorily convertible debentures into equity within a specified time would be reckoned as equity under FDI policy. In view of this RBI Policy, the TPO concluded that these CCDs are equity and not debt and therefore, interest on it is not allowable u/s 36 (1) (iii). This finding of TPO is not by invoking Thin Capitalisation principle and therefore, it has to be decided independently. We find that the decision of TPO is bases on RBI policy of FDI. We all know that RBI policy of FDI is governed by this that what will be future repayment obligation in convertible foreign currency and since, CCDs does not have any repayment obligation, the same was considered by RBI as equity for FDI policy. Now the question is that such treatment given by RBI for FDI policy can be ....
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....has to be considered as expenses incurred for issue of shares because it was found that first part of the debentures was to be converted into shares on the date of allotment itself and the second part was to be converted after expiry of 15 months from the date of allotment of debenture and therefore it was held that expenses incurred were actually incurred for issue of shares and not issue of debentures. In the present case, the issue is not regarding expenses incurred on issue of shares. In the present case, the dispute is regarding interest on CCDs for a period before conversion. Hence in our considered opinion, this decision of special bench of the Tribunal is not applicable in the facts of present case because the issue in dispute is different. In that case the issue in dispute is regarding expenditure incurred on issue of convertibles whereas in the present case the issue is regarding allowability of interest expenditure on convertible debentures for the pre-conversion period. Hence we hold that the revenue does not find any support from this decision of Special Bench of the Tribunal in that case. 25. Apart from relying on this decision of Special Bench of the Tribunal, the....