FORT CANNING INVESTMENTS PTE. LTD. ,SINGAPORE vs. ASSISTANT COMMISSIONER OF INCOME-TAX (INTERNATIONAL TAXATION) - 2(3)(1), MUMBAI, MUMBAI

6. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld. AO erred in computing the 'total interest and fee payable' at point 42 of the computation sheet attached to the assessment order at Rs. 9,23,22,483 instead of Rs. 9,20,69,620 as mentioned at point 38.

7. On the facts and in the circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 270A of the Act, against the Appellant.”

2.1 Grounds taken by assessee in are reproduced as under: “1. On the facts and in the circumstances of the case and in law, the order dated 28 January 2025 passed by the Ld. AO under section 144C(13) read with section 143(3) of the Act is barred by limitation, without jurisdiction, bad in law and is liable to be quashed. 2, On the facts and in the circumstances of the case and in law, the Ld. AO/Hon'ble DRP, erred in treating the 'capital gains' to the extent of Rs. 10,88,45,422 arising on settlement of NonConvertible Debentures and Masala Bonds as 'interest' and not giving the benefit of exemption under Article 13(5) ofthe India-Singapore Double Taxation Avoidance Agreement ('DTAA") 3. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld. AO erred in determining the 'Income chargeable to tax under normal rates' as Rs. 10,88,45,427 and 'Income chargeable at special rates' as Rs. 17,48,22,923 in the computation form attached to the assessment order, instead of Rs. 28,36,68,345 as 'Income chargeable to tax at special rates' determined by the Ld. AO himself in the assessment order.

4. On the facts and in the circumstances of the case and in law, the Ld. AO erred in levying interest under section 234B of the Act.

5. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld. AO erred in computing the 'total interest and fee payable' at point 42 of the computation sheet attached to the assessment order as Rs. 1,60,12,716 instead of Rs. 1,59,29,748 as mentioned at point 38.

6. On the facts and in the circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 270A of the Act, against the Appellant.

and 2104/MUM/2025 Fort Canning Investments Pte. Ltd. and Fort Canning Credit Investments Pte. Ltd. AY 2022-23 4.1. Pursuant to assessment proceedings, a draft assessment order was passed u/s.144C(1) whereby following proposals were made by the ld. Assessing Officer: i) Re-characterisation of part of capital gains earned by the assessee on settlement of NCDs and Masala Bonds of DHFL amounting to Rs.30,83,52,242/- as interest to bring it to tax under Article 11 of India-Singapore DTAA. ii) Re-characterisation of capital gains arising out of renouncement of rights entitlement of Bharti Airtel Ltd. amounting to Rs.31,62,26,442/- by treating it as capital gains arising out of equity shares so as to bring it to tax under Article 13(4B) of India-Singapore DTAA.

4.2. Upon objections filed by the assessee before the ld. DRP, the same were dismissed, endorsing the findings of ld. Assessing Officer, pursuant to which final assessment order was passed u/s. 144C(13) r.w.s. 143(3) making the additions as proposed in the draft assessment order. Aggrieved, assessee is in appeal before the Tribunal.

and 2104/MUM/2025 Fort Canning Investments Pte. Ltd. and Fort Canning Credit Investments Pte. Ltd. AY 2022-23 of DHFL. Calculation of capital gain/loss on settlement of NCDs and Masala Bonds of DHFL is tabulated below:

5.1. On the above details, ld. Assessing Officer observed that assessee had received consideration in respect of NCDs and Masala Bonds of DHFL, as certain percentage of its claim admitted by ld. National Company Law Tribunal (NCLT) and such claim included not only the principal outstanding but also interest outstanding, though assessee has treated whole of the consideration as receipt against principal outstanding to calculate capital gain/loss, claiming it as not taxable in India under Article 13(5) India-Singapore DTAA. According to ld. Assessing Officer, consideration received by the assessee in the form of cash and NCDs of Piramal are against two claims, one being for principal amount outstanding and the second for interest/default interest of DHFL NCDs and Masala Bonds. Thus, ld. Assessing Officer after taking into consideration various submissions made by the assessee, apportioned the total pay-out between principal and interest component, so as to bring to tax the interest component. On the stated factual matrix, the short point involved on this issue for our adjudication is, whether part of the pay-out for settlement of DHFL NCDs and Masala Bonds can be characterised as interest for its taxability in India by apportioning the total pay-out between principal and interest component.

6. Before we delve into the issue, certain factual matrix of the transaction undertaken by the assessee are worth taking note of. Assessee being engaged in portfolio investment activity in India, acquired NCDs and Masala Bonds of DHFL spread over a period from June 2019 to July 2021. It is important to note here that acquisition of NCDs and Masala Bonds by the assessee are from the secondary market and not by way of allotment at the time of issuance by DHFL itself. Since June 2019, DHFL started defaulting on interest payments on NCDs on account of financial distress which resulted into degrading of its rating of “AAA” at the time of issuance of these NCDs to rating of “B” in June, 2019. This resulted into trading of the said NCDs in the market at considerably lower prices, lesser than its face value. At the time of default by DHFL on servicing of interest on its NCDs, the same were trading at approximately 40% of their face value, reflecting concerns over recovery of principal amount of the said debt instruments. These facts are brought out from the status report issued by the debenture trustee, i.e., Catalyst Trusteeship Ltd. (CTL) placed on record along with the written submission filed by the assessee. Assessee, looking at opportunity to earn potential capital gains in such distressed assets, took commercial decision to make investment in the same and thus, acquired the NCDs and Masala Bonds of DHFL staggered over period from June 2019 to July 2021. In the meanwhile, a petition for initiation of CIRP against DHFL under the provisions of IBC was moved by Reserve Bank of India (RBI) before the ld. NCLT on 20.11.2019, which was admitted on 03.12.2019 by the ld. NCLT for resolution. Assessee has furnished a timeline chart for various milestones and the quantum of investment made by it, which highlights the chronology of various events relating to the transaction under consideration. The same is reproduced for ready reference.

6.1. After the initiation of CIRP, all the creditors of DHFL submitted their claim against DHFL. Under the plan for resolution of DHFL, Piramal was selected as successful resolution applicant by the committee of creditors, who offered the resolution of amount of Rs.37,250 crores comprising of Rs.17,700 crores as cash and Rs.19,550 Crores as debts securities, i.e., NCDs to be issued by Piramal. As part of the resolution plan, NCDs and Masala Bonds of DHFL held by the assessee were to be transferred to Piramal and in turn would be paid the allocated resolution amount. In respect of assessee’s claim towards its holding of NCDs and Masala Bonds of DHFL, a ratio of 43.29% was admitted against its claim which was to be paid partly in cash and partly by way of NCDs of Piramal, details of which is tabulated below: and 2104/MUM/2025 Fort Canning Investments Pte. Ltd. and Fort Canning Credit Investments Pte. Ltd. AY 2022-23 Admitted claim 100% Consideration: -Gross cash 19.67% -NCDs of Piramal 23.62% Total consideration 43.29% 6.2. Upon this settlement by Piramal, assessee computed capital gains of Rs.110,77,18,060/- on NCDs and Rs.11,83,33,344/- on Masala Bonds. Details of this calculation are already tabulated above. It is important to note here that the admitted claim in relation to NCDs and Masala Bonds was computed by aggregating the total outstanding of principal and interest amount for the purpose of settlement. From the above table, it is noted that total claim on the two instruments was of Rs.966,46,80,447/- which included Rs.895,24,14,000/- towards principal and Rs.71,22,66,447/- towards interest. This total claim, after being admitted in the resolution plan was settled at 43.29%, amounting to Rs.418,40,04,310/-. This settlement amount was discharged in two components, namely, cash (19.67% of Rs.190,13,97,310/-) and NCDs of Piramal (23.63%) amounting to Rs.228,26,07,000/-. Assessee had acquired these instruments from the secondary market spread over a period amounting to Rs.295,79,52,906/-. Thus, the difference between the recovery amount and the cost of acquisition was computed as capital gain which the assessee claimed as not chargeable to tax under Article 13(5) of the India-Singapore DTAA. However, ld. Assessing Officer took a divergent view by apportioning the total recovery of Rs.418,40,04,310/- into principal and interest component. According to him, this total recovery comprises of interest component of Rs.30,83,52,242/- chargeable to tax in India under Article 11 of India- Singapore DTAA.

6.3. The sole contention of the assessee towards its claim is that the entire consideration received on settlement of NCDs and Masala Bonds of DHFL is only towards principal component and no part of it can be considered towards interest. According to the assessee, at the time of making investment, it neither intended nor envisaged earning any interest income since recovery of principal itself was in jeopardy. The sole intention at the time of making investment was to recover principal to the extent possible and earn potential capital gain since it made a conscious commercial decision of investing in distressed asset. Assessee relied on the circular issued by Central Board of Direct Taxes (CBDT) vide circular No.6/2016 and circular No.4/2007 to highlight that CBDT itself had accorded significance to the intention of assessee at the time of making an investment while determining the character of income as capital gain or business income, as the case may be. The whole thrust of argument from the assessee lies upon the settled position under the law that in cases where recovery of principal component of a debt itself is in jeopardy then, any re-payment is to be first apportioned towards recovery of the principal component and only the balance can be treated towards interest recovery. For this, assessee evidently demonstrated fact of which is publically acknowledged that recovery of principal amount of NCDs and Masala Bonds of DHFL were in jeopardy when assessee was making investments therein. Also, it is evident from the factual position verifiable from records that what assessee could ultimately recover from these distressed debt instruments was only 46.88% and 45.59% of the outstanding principal amounts of NCDs and Masala Bonds, respectively.

6.4. Reference was made to the decision of Hon'ble Jurisdictional High Court of Bombay in the case of Akay Organics Ltd. vs. ITO [2013] 38 and 2104/MUM/2025 Fort Canning Investments Pte. Ltd. and Fort Canning Credit Investments Pte. Ltd. AY 2022-23 taxmann.com 202 (Bom), wherein assessee had claimed deduction of interest on proportionate basis, where it had entered into one time settlement (OTS) under which a sum of Rs.91 lakhs was payable by it as full and final settlement of term loan. Assessee claimed that the amount received by creditors first be adjusted towards interest and then towards principal. However, the same was declined by the Hon'ble High Court, more particularly, when the assessee had not produced any evidence to indicate the true nature of the transaction in respect of the said OTS. Thus, the claim of the assessee to treat its pay-out as interest and not the principal was declined, holding it to be payment towards principal.

6.5. In the present case before us, the basis adopted by the ld. Assessing Officer for treating part of the recovery as interest instead of capital gain is based on claim admitted under the resolution plan by the committee of creditors before the ld. NCLT. Before the ld. NCLT, the claim admitted comprised of principal and interest both. Thus, ld. Assessing Officer applied the recovery ratio on the two components so as to bring to tax, part of it as interest. However, there is no cogent material placed on record to evidently demonstrate such proportionate bifurcation of the settlement consideration between principal and interest.

5. The Custodian SCB has reported receipt of Funds in r/o DHFL. The details of amount received on 29.09.2021 are as follows: Category EPF Scheme EPS EDLI Principal Interest Principal Interest Principal Interest Amount 882.85 121.18 264.72 37.83 14.20 1.38 due (in Cr) Amount 189.29 -- 56.98 -- 2.98 -- received in cash (in Cr) New 227.42 -- 68.46 -- 3.58 -- Securities Received

and 2104/MUM/2025 Fort Canning Investments Pte. Ltd. and Fort Canning Credit Investments Pte. Ltd. AY 2022-23 (Amt. in Cr) Balance 466.14 121.18 139.29 37.83 7.64 1.38 Remaining (in Cr)

and 2104/MUM/2025 Fort Canning Investments Pte. Ltd. and Fort Canning Credit Investments Pte. Ltd. AY 2022-23 achieve would be in the form of potential capital gains on sale/settlement of these distressed financial instruments. It was only for the purpose of arriving at a resolution plan in the IBC that assessee had put forth its claim, which had to be bifurcated into the principal and interest component of the instrument, it had acquired in the secondary market. What was resolved under the CIRP by ld. NCLT was discharge of liability of DHFL against its creditors at certain agreed settlement ratios of the total claim admitted for each of the creditors. Thus, the settlement consideration received in toto by the assessee indicate resolution plan approved by ld. NCLT and had to be looked at holistically against the investment made by the assessee while acquiring these instruments.

10.1. At the inception itself, assessee made a conscious decision whereby it was aware of the fact that the principal component is at jeopardy for its realisation. This fact is borne out from the ultimate outcome when the settlement consideration received by the assessee both, including cash and the NCDs of Piramal, does not even meet the principal component, details of which are already tabulated above. Thus, in this special/peculiar condition, assessee had the option to treat the receipt of settlement consideration towards principal first and balance, if any, towards interest component. Since the settlement consideration received by it could not even meet the principal component, the entire receipt was consumed against the total principal component, leaving nothing to offset the interest component. Accordingly, we agree with the stand taken by the assessee to compute capital gain on the said transaction to arrive at capital gains. Assessee being non-resident and having furnished all the necessary documents to claim treaty benefit, resorted to provisions contained in Article 13(5) of India – Singapore DTAA. Accordingly, apportionment of settlement and 2104/MUM/2025 Fort Canning Investments Pte. Ltd. and Fort Canning Credit Investments Pte. Ltd. AY 2022-23 consideration towards interest component by the ld. Assessing Officer is not tenable and therefore, addition so made in this regard is deleted.

10.2. While holding so, we find our force from the decision of Hon'ble High Court of Madras in the case of CIT(A) vs. Pondicherry Industrial Promotion Development and Investment Corporation Ltd. [2000] 245 ITR 859 (Madras) which upheld the decision of Coordinate Bench of ITAT, Chennai, wherein the Coordinate Bench had summarised the rule of appropriation, affirming the creditors right to allocate payments in a manner most beneficial to itself when the recovery of the principal is in jeopardy. Relevant extracts from the decision of the Coordinate Bench reported in Pondicherry Industrial Promotion Development and Investment Corporation Ltd. vs. DCIT [1994] 49 ITD 190 (Chennai) is reproduced as under: "46. In its application to transactions between a creditor and his debtor involving open payments, the rule of appropriation may be summarised as follows: (a) The ordinary rule is that it is first applied to interest and the balance, if any, to the principal: and (b) in cases where the recovery of the principal amount itself is in jeopardy, and where it is a question between a taxpayer and the revenue, the special rule is that the taxpayer is entitled to appropriate payments as between capital and interest in the manner least disadvantageous to himself.

and 2104/MUM/2025 Fort Canning Investments Pte. Ltd. and Fort Canning Credit Investments Pte. Ltd. AY 2022-23 12. Ground no.3 relates to re-characterisation of capital gain on renouncement of rights entitlement in respect of equity shares held by the assessee of Bharti Airtel Ltd. (Bharti). In this regard, relevant facts are that assessee acquired equity shares of Bharti between February, 2017 and October 2021. Subsequently, right offerings was announced by Bharti shareholders in the ratio of 1:14. Assessee sold its rights entitlement on these shares held by it, giving rise to short term capital gains of Rs.3,62,26,442/- which was claimed as exempt under Article 13(5) under India-Singapore DTAA. Contrary to the treatment adopted by the assessee, ld. DRP and ld. Assessing Officer equated rights entitlement with shares alleging that the right to subscribe to new shares is embedded with existing equity shares and the value of rights shares is nothing more than the value carved out from the existing equity shares. It was thus, held that short term capital gains on sale of right entitlement would not be covered under Article 13(5), instead would be covered under Article 13(4B) of the India-Singapore DTAA and hence would be taxable in India.

12.1. In this regard, it is worth taking note of contents of Article 13 for our ready reference: “[4A. Gains from the alienation of shares acquired before 1 April 2017 in a company which is a resident of a Contracting State shall be taxable only in the Contracting State in which the alienator is a resident. 4B. Gains from the alienation of shares acquired on or after 1 April 2017 in a company which is a resident of a Contracting State may be taxed in that State. 4C. However, the gains referred to in paragraph 4B of this Article which arise during the period beginning on 1 April 2017 and ending on 31 March 2019 may he taxed in the State of which the company whose shares are being alienated is a resident at a tax rate that shall not exceed 50% of the tax rate applicable on such gains in that State.

5. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4A and 4B of this Article shall be taxable only in the Contracting State of which the alienator is a resident.”

and 2104/MUM/2025 Fort Canning Investments Pte. Ltd. and Fort Canning Credit Investments Pte. Ltd. AY 2022-23 12.2. From the above, it is noted that Article 13(4B) deals with gains arising on alienation of shares acquired on or after 01.04.2017. Article 13(5) is a residuary clause and applies to any property other than, inter alia, shares. The issue before us is no longer res integra as held by Hon'ble Supreme Court in the case of Navin Jindal vs. ACIT [2010] 320 ITR 708 (SC). Hon'ble Supreme Court held that rights entitlement are totally distinct from shares. In this regard, in para-7 of the said judgement, it noted that right to subscribe for additional offer of shares comes into existence when the company decides to come out with rights offer on rights basis on the strength of existing shareholding in the company. Though the right to subscribe for such additional offer of shares is embedded in the original share holding but remains inchoate and the same crystallises only when the rights offer is made by the Company. Hon'ble Court concluded that the right to subscribe for additional share is a distinct, independent and separate right, capable of being transferred independently of the existing share holding, on the strength of which such rights are offered.

12.3. This issue was dealt by the Coordinate Bench of ITAT, Mumbai in the case of Vanguard Emerging Markets Stock Index Fund vs. ACIT [2025] 172 taxmann.com 515. In this case, relevant provisions from the India-Ireland DTAA was taken into consideration which are in pari materia to the provisions contained in India-Singapore DTAA. The Coordinate Bench took note of provisions of section 2(42A) and section 55(2)(aa) of the Act, wherein the right entitlement is considered distinct as compared to the shares in the company. Further, it took note of para- 30 of OECD Model Tax Convention on Income and on Capital, 2017, wherein it has been brought that gains from alienation of capital assets not covered elsewhere are taxable in the country of residence. It also took note of para-17 of UN Model Double Tax Convention, 2017, which and 2104/MUM/2025 Fort Canning Investments Pte. Ltd. and Fort Canning Credit Investments Pte. Ltd. AY 2022-23 reiterates the same OECD commentary. Coordinate Bench also took note of the domestic legislation, more particularly definition of shares given in section 2(84) of the Companies Act, 2013 to differentiate between rights entitlement and shares. Under the domestic law, we also refer to section 2(14) of the Act, whereby the term capital asset means among other things, any security held by FPI in accordance with the FPI Regulations made under the SEBI Act, 1992. Explanation 2 to section 2(14) of the Act mentions that “Security” has the meaning assigned in section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA). In this regard as per section 2(h) of SCRA, the term securities has been defined as follows: "2. (h) 'securities' include - (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or a pooled investment vehicle or other body corporate; (ii) rights or interest in securities;' 12.4. From the above, it is noted that SCRA makes a distinction between shares and rights or interest in securities and recognises them independently. It was thus, concluded that right entitlement being a distinct asset, would fall in the residuary clause of Article 13 of India- Ireland DTAA, whereby the taxability is with resident state, i.e., Ireland.

12.5. In the present case before us, assessee has earned short term capital gain on transfer of rights entitlement which is claimed as exempt under Article 13(5) of India-Singapore DTAA which is pari materia to Article 13(6) of India-Ireland DTAA and hence the taxability remains with resident state, i.e., Singapore.

and 2104/MUM/2025 Fort Canning Investments Pte. Ltd. and Fort Canning Credit Investments Pte. Ltd. AY 2022-23 of Navin Jindal (supra), capital gains on alienation of rights entitlement under the residuary clause of Article 13(5) of India-Singapore DTAA as any property other than that referred to in para-1,2,3,4 and 4B of the said Article and therefore, can be brought to tax only in Singapore and not in India. Accordingly, direction of ld. DRP and its effect given by ld. Assessing Officer to bring to tax short term capital gain on transfer of right entitlement by the assessee is deleted. Ground no.3 raised by the assessee is allowed.

and 2104/MUM/2025 Fort Canning Investments Pte. Ltd. and Fort Canning Credit Investments Pte. Ltd. AY 2022-23 16.1. Since the factual position except for variation in the quantum and the position of law as well as jurisprudence remains the same, which has been elaborately dealt by us in the appeal in ITA, No.2103/Mum/2025 above, the same applies mutatis mutandis to this appeal also. Accordingly, appeal of this assessee is also allowed.