SILVERPLASS HOLDINGS LTD.,MUMBAI vs. ACIT, CIRCLE- 3(1)(2), INTERNATIONAL TAXATION, NEW DELHI
Before: SHRI VIKAS AWASTHY & SHRI NAVEEN CHANDRA
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order dated
10.09.2018 u/s 143(3) r.w.s.144C(13) of the Income-tax Act, 1961 [the Act, for short] pertaining to A.Y 2015-16. ITA No. 7396/DEL/2018 [A.Y 2015-16]
2. Grounds raised by the assessee read as under:
“1:0 Draft assessment order is bad in law, non- est, invalid and void ab initio
1:1 The learned ACIT erred in passing draft assessment order under section 144C(1) read with section 143(3) of the Act even though no variation in the income or loss returned by the assessee is proposed in the draft assessment order.
2:0 The Ld. AO erred in denying the benefit of the lower tax rate as per the Double Tax Avoidance Agreement entered into and subsisting between India and Cyprus ('DTAA') by considering the assessee as not the beneficial owner and a mere conduit company
2:1 The Ld. AO has, vide draft assessment order dated 26
December 2017 passed under section 144C(1) r.w.s 143(3) of the Act, denied the DTAA benefits and proposed to tax the interest income earned by the assessee at the rate of 20 percent under section 115A (1)(a)(ii) of the Act.
2:2 The Ld. AO erred in rejecting the assessee's contention that the assessee is the beneficial owner of interest income. The Ld.
AO failed to consider the assessee's contention that it holds the valid TRC issued by tax authorities in Cyprus and is the beneficial owner of interest income
2:3 The learned AO has erred in considering that the assessee is a conduit company and that its main purpose is not investment holding but to obtain DTAA benefit merely because the assessee has made investment only in one company which is its deemed associated enterprise as per section 92A(2)(b) of the Act.
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3:0 The Ld. AO erred in denying the DTAA benefit of lower tax rate on interest income of the assessee, which ware allowed in earlier year
3:1 The AO erred in disallowing the DTAA benefit of lower tax rate on interest income of the assessee, which has been allowed in earlier year
4:0 Interest Income not receivable
4:1 The Appellant has earned interest income of INR 13,02,25,833
during AY 2015-16 on compulsory convertible debentures ("CCDs") from its associated enterprise ("AE") - Amrapali Princely Estate
Private Limited ("APEL"). However, the Appellant has received INR
6,07,03,916 during AY 2015-16. The balance INR 6,95,21,918 is considered as bad debts by the Appellant as the AE is insolvent.
5:0 Initiation of penalty proceedings under section 271(1)(c) of the Act
5:1 The learned AO/TPO/ DRP has erred, both in laws and on facts, in initiating penalty proceedings under section 271(1)(c) of the act against the Appellant.”
None appeared on behalf of the assessee. We find from the records that that initially the case was being represented by one or the other representatives of the assessee and the case was adjourned for eleven time on the written request of the representatives of the assessee. Further, we find that since last eight occasions, there is no representation from the assessee side. We therefore decided to proceed
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4. Brief facts of the case are that the assessee filed its return of income on 27.11.2015 declaring total income of Rs. 13,02,25,833/-. The assessee is a non-resident company incorporated and registered in Cyprus and engaged in the business of investment in shares and debentures of other companies and earns income through interest, dividend and appreciation in the value of investment. In past, the assessee had invested in 66,030 compulsory convertible debentures
(CCD) of Rs. 10,000/- each in its Indian AE M/s Amrapali Princely Estate
Pvt. Ltd (APEPL), an Indian company. The CCDs carried an interest rate of 17.75% per annum. The assessee, during the relevant previous year, has earned interest of Rs.13,02,25,834/- on these CCDs and offered the same to tax on gross basis to be taxed @10% as per the provisions of Article 11 of the DTAA between India and Cyprus.
5. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has only earned interest income on CCDs from M/s APEPL which implies that the assessee company has made only one investment since its incorporation despite being an investment company. Therefore, the assessee company was asked to justify that the principal purpose of the company, conduct of ITA No. 7396/DEL/2018 [A.Y 2015-16]
its business and the acquisition or maintenance by it of the shareholding or other property from which income in question has been derived are motivated by sound business principals/ reasons and they do not have a primary purpose of obtaining Treaty benefits. It was also asked to provide following additional details:
"(a) Is the company engaged in substantial business operation in the state (Cyprus) where it is a resident and the relief which is been claimed from the other state (India) is with respect to Income which is connected to such operations. Details of all the investments date wise made by the company during the relevant financial year in India and abroad.
(b) Details whether its principal class of shares are listed on the recognized stock exchange in the contracting state (Cyprus) or if it is owned by company which is resident of such state (Cyprus)or any other state then the details whether its shares are listed in recognized stock exchange in Cyprus or anywhere else in the world.
(c) Details of the documents to prove that it is the legal entity in Cyprus including details of Directors their residential status, management system, total numbers of employees or its pay-roll."
In response, the AR of the assessee company vide its submission dated 10.11.2017 submitted as under: - "the main business purpose of the assessee company is investment holding. The assessee has invested in CCDs of its AE - M/s Amrapali Princely Estate Pvt. Ltd (APEPL). The assessee only source of income in India is interest earned from such CCDs. As per the ITA No. 7396/DEL/2018 [A.Y 2015-16] erstwhile regulation of section 94A of the Act, the 30% tax was to be deducted on such income of Cyprus entity. Accordingly, the AE deducted 30% tax on the assesee's interest income. The primary purpose of the assessee is to earn income from holding investment and not of obtaining any Treaty benefits."
The Assessing Officer perused the reply of the assessee and found it not tenable in view of the fact that vide submission dated 27.10.2017, the assessee has furnished details of investment made during the year. The assessee has stated that it has not made any investment during the relevant year under consideration i.e. AY 2015-16. However, the assessee has invested Rs. 1,98,60,00,000/- in the Compulsory Convertible Debentures of M/s Amrapali Princely Estate Pvt. Ltd (APEPL) in AY 2013-14. So it clearly shows that it has made only one investment since its incorporation and that too in AY 2013-14 in APEPL which is further an AE of the assessee company. Besides this one investment, the company has not made any investment either in India or abroad during the relevant year. It clearly shows that the main intent of the assessee was to avail treaty benefits. 8. Further, with regard to the details of whether its shares or the shares of its shareholding company i.e. IL&FS India Realty Fund II LLC (IIRF II) are registered in any recognized stock exchange in Cyprus or in any other state. The assessee stated that:
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"the assessee is a private limited liability company registered under Cyprus Companies Law, CAP-113. It shares are owned by IL&FS
India Realty Fund II LLC (IIRF II) a Mauritius entity. Further, it submitted that assessee share are not listed on the stock exchange on the contracting state. Neither the shares of the holding company of the assessee are listed on the stock exchange of the contracting state."
After perusal of the submissions of the assessee, the Assessing Officer came to the conclusion that there are glaring contradictions in the submission of the assessee. First, it states that the assessee company solely enjoys benefit of interest on the CCDs and is responsible for risk associated with its investment in CCDs. But it has not submitted the shareholders agreement to substantiate its claims. The shareholders agreement is the legal document which is important for the following reasons: (i) It sets out the right and obligations of the shareholders. (ii) It regulates on how and to whom the company's shares are to be sold and transferred. It sets restriction on transfers and ownership of shares. In other words, in the absence of shareholders agreement which addresses what will happen to a shareholder's share upon death. A compulsory buy back provision if included in the shareholders agreement provides that if a shareholder dies, the remaining share holders or the business will be forced to buy the deceased shares and the executors or the administrator of the ITA No. 7396/DEL/2018 [A.Y 2015-16] estate would be required to sell the shares. In addition to the buy- sell provisions, a mechanism for valuing the shares at the time of shareholders death can also be agreed on and included. Other restriction on transfer of ownership can be included the shareholders agreement including an obligation for employee shareholders to sell their shares in the event that a key shareholder become disabled and is no longer able to work or provide the appropriate support to the business, the insolvency of a shareholder or upon retirement or termination as an employee of the business. (iii) It decides on the method of valuing the business / shares of the company. (iv) It describes how the company is going to be run. (v) It defines the duties and responsibilities of its shareholders (vi) It ensures how the minority shareholders are protected. te (vii) It decides how company. the shareholders have to do. on important aspects to the (viii) It set out how the corporation will access funds and whether the shareholders are responsible for contributing such funds in accordance with the relative interest in the business. (ix) Further, where not all the shareholders are willing or able to contribute funds when needed, a shareholders agreement can set out preferential interest rates for those shareholders who do contribute, or restrict the board of directors for declaring any dividends until the shareholders loans have been repaid unless the consent of the shareholders have been obtained. (x) In the event that the corporation will be accessing debt financing from a bank or a third party lender, a shareholders agreement can deal with whether shareholders are obligated to give personal
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10. The Assessing Officer further observed that it is the shareholder agreement which provides for whether the attributes of beneficial ownership i.e. use, enjoyment, risk and control will be vested in the assessee company or in the shareholders company i.e. IL&FS India Realty
Fund II LLC (IIRF II). Moreover, the assessee company is 100% subsidiary of IL&FS India Realty Fund II LLC (IIRF II) company. In the absence of shareholders agreement between the assessee company and its holding company, the contention of the assessee that it is the beneficial owner of the interest income cannot be accepted.
11. Further, the Assessing Officer observed that the assessee has admitted vide its submission dated 10.11.2017 at point no. 10 that "the shareholder of the assessee which is IIRF II is the beneficial owner of the interest income earned on CCDs. It assumes all the attributes of ownership namely use, enjoyments, risk and control." Since here the assessee company has admitted in its submission that the shareholder of the assessee i.e. IL&FS India Realty Fund II LLC (IIRF II) is the beneficial owner of the interest income under India-Cyprus DTAA, so it established
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of India- Cyprus DTAA.
12. In view of the above detailed discussion, the Assessing Officer held that the assessee is not eligible for benefits under India-Cyprus DTAA.
Hence, the benefit of India-Cyprus DTAA was disallowed and the income was taxed @ 20% u/s 115A of the Act, proposed to be assessed at the total income of Rs. 13,02,25,830/- taxable 20% as per provisions of Section 115A of the Act.
13. Aggrieved, the assessee went in appeal before the DRP who taking support from similar kind of arrangement in another company named
Silber Bella Holding Ltd having same address as that of the assessee also investing in only one company having no employees, held that the assessee is only an entity created to take advantage of lower tax rate under the DTAA and decline to interfere with the findings of the Assessing Officer.
14. Now the assessee is in appeal before us against this action of the DRP upholding the findings of the Assessing Officer.
15. We have heard the submissions of the ld DR and have carefully perused the relevant materials on record. We are of the considered view that, in the factual matrix of the instant case as discussed above,
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Accordingly, we sustain the decision of the AO to disallow the benefit of India-Cyprus DTAA and to tax the income @ 20% u/s 115A of the Act. The grounds of appeal are dismissed.
16. In the result, the appeal of the assessee in ITA No. 7396/DEL/2018
is dismissed.
The order is pronounced in the open court on 08.07.2025. [VIKAS AWASTHY]
[NAVEEN CHANDRA]
JUDICIAL MEMBER
ACCOUNTANT MEMBER
Dated: 26th SEPTEMBER, 2025. VL/