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Facts
Little Fairy Ltd, a Cyprus tax resident, earned interest income from Compulsorily Convertible Debentures (CCDs) issued by an Indian entity. The Assessing Officer and CIT(A) denied the benefit of the India-Cyprus DTAA, taxing the interest at 40% under domestic law, contending the appellant was merely a conduit and not the beneficial owner. The assessee argued for a 10% tax rate as per Article 11 of the DTAA, asserting its beneficial ownership and tax residency.
Held
The tribunal held that the assessee is a tax resident of Cyprus and the beneficial owner of the interest income from CCDs, having full control and bearing foreign currency and counterparty risks. Consequently, the interest income is taxable at a concessional rate of 10% as per Article 11(2) of the India-Cyprus DTAA, reversing the AO's decision to tax it at 40%. The ground regarding interest under section 234B was deemed consequential, and the initiation of penalty proceedings under section 270A was dismissed as premature.
Key Issues
1. Whether the appellant, a tax resident of Cyprus, is the beneficial owner of interest income from Compulsorily Convertible Debentures (CCDs) issued by an Indian entity. 2. Whether the appellant is entitled to the concessional tax rate of 10% on such interest income under Article 11(2) of the India-Cyprus DTAA, as opposed to the domestic tax rate of 40%. 3. Applicability of interest under section 234B and initiation of penalty proceedings under section 270A.
Sections Cited
Income Tax Act, 1961: 144C(3), Income Tax Act, 1961: 143(3), Income Tax Act, 1961: 282, Income Tax Act, 1961: 234B, Income Tax Act, 1961: 270A, India-Cyprus Double Taxation Avoidance Agreement (DTAA): Article 4, India-Cyprus Double Taxation Avoidance Agreement (DTAA): Article 11, India-Cyprus Double Taxation Avoidance Agreement (DTAA): Article 11(2), Circular No. 789 dated 13.04.2000
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Income Tax Appellate Tribunal, DELHI BENCH “D”: NEW DELHI
O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in AY 2017-18, arises out of the order of the Commissioner of Income Tax (Appeals)-43, New Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] in Appeal No. 10407/2019-20 dated 28.03.2022 against the order of assessment passed u/s 144C(3) r.w.s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 28.12.2019 by the Assessing Officer, ACIT, Circle-2(2)(1), International Taxation, New Delhi (hereinafter referred to as ‘ld. AO’).
2. At the outset, there is a delay in filing of appeal by 32 days by the assessee. The assessee has given detailed reasoning in its delay condonation petition. It was stated that the detailed representation was made by the ld AR before the ld CIT(A) on 09.03.2020 and thereafter, the case was refixed on 21.10.2021. Pursuant to the hearing on 21.10.2021, the assessee kept a regular track of its registered email for receipt of any intimation of passing of appellate order. However, the counsel for the assessee approached the office of the ld CIT(A) on 30.05.2022 to file an application for re-fixing the case on priority, he was informed that the appellate order had already been passed and uploaded in the income tax portal on 28.03.2022. In this regard, it was submitted that no email intimation or computer intimation about passing of appellate order was ever received by the assessee. Accordingly, it was pleaded that the order was not served on the assessee on 28.03.2022 within the meaning of section 282 of the Act. This fact came to the knowledge of the assessee only on 30.05.2022 when the ld AR approached the office of the ld CIT(A) in person. Hence, immediately the assessee on 28.06.2022 had preferred this appeal before this Tribunal with delay condonation petition. Considering the reasons stated hereinabove, we are inclined to condone the delay and admit the appeal of the assessee for adjudication.
The assessee has raised the following grounds of appeal before us:-
“1. That on facts and in circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate the terms of the DTAA with Cyprus in the correct perspective 1.1 That on facts and in circumstances of the case and in law, the Ld. CIT(A) has erred in denying the benefit of Article 11 of the India-Cyprus Tax Treaty ('the Treaty') to the Appellant. 1.2 That on facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the Appellant is not the beneficial owner of the interest income earned by it on Compulsory Convertible Debentures ('CCDs') issued by M/s Indiabulls Infraestate Ltd., without appreciating the true scope, intent and purpose of Article 11 of India- Cyprus DTAA. 1.3 That on facts and in the circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that the Appellant had complete right to receive the interest income earned from CCDs without any contractual obligation to pass on the same to any other person. 1.4 That on the facts and in circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the Appellant is not the beneficial owner of the interest income merely on the ground that it is a 100% subsidiary of a Mauritian entity. 1.5 That on the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that the shareholders and company are Page | 2 distinct and separate legal entities and that the legal personality of a company is separate and independent from the identity of its shareholders.
That on the facts and in circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that the A.O. was not consistent in his approach that was followed in concluding the assessment of AY 2014- 15, wherein no addition was made to the returned income of the Appellant and that his action was liable to be set aside on that account.
3. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in denying the Treaty benefit and levying tax at the rate of 40 percent under the domestic law, as against the applicable tax rate of 10 percent mentioned in Article 11 of the Treaty.
4. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the levy of interest under section 234B of the Act while passing the impugned appellate order.
That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in upholding of the initiation of penalty proceedings under section 270A of the Act.”
We have heard the rival submissions and perused the material available on record. The assessee was incorporated in Cyprus and is tax resident of Cyprus. The assessee is wholly owned subsidiary of IL & FS India Reality Fund-II, LLC which is based in Mauritius. The return of income for AY 2017-18 was filed by the assessee on 28.09.2017 declaring gross total income of ₹21,81,06,913/-. On 10.01.2012, the assessee entered into investment agreement with India Bulls Infra Estate Ltd for a project concerning transfer of rights in a land. As part of said agreement, the assessee subscribed 18,17,55,760 compulsorily convertible Debentures (CCDs) of India Bulls Infra Estate Ltd for ₹10 each. This investment in CCDs was done by the assessee in its own name through proper banking channels, as is evident from the foreign inward remittance certificate, which are enclosed in pages 226 and 227 of the paper book. During the year under consideration, the assessee earned interest income of ₹21,81,06,913/- on the aforesaid CCDs, which was duly subjected to deduction of tax at source. The assessee had complete right to receive and enjoy the interest income earned on CCDs without any obligation to pass on the same to any other person. In this regard, it would be relevant to mention the financial risk taken by the assessee, which is reflected in notes of accounts of the audited balance sheet as on 31.03.2017 enclosed in page 76 of the factual paper book, which reads:-
“3. Financial risk management Financial risk factors The Company is exposed to interest rate risk, credit risk, liquidity risk, currency risk and capital risk management arising from the financial instruments it holds. The risk these risks are discussed below: management policies employed by the Company to manage 3.1 Interest rate risk Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. The Company's income and operating cash flows are e substantially independent of changes in market interest rates as the Company has no significant interest-bearing assets. The Company is exposed to interest rate risk in relation to its non-current financial assets. Financial assets issued at variable rates expose the Company to cash flow interest rate risk. Financial assets issued at fixed rates expose the Company to fair value interest rate risk. The Company's management monitors the interest rate fluctuations on a continuous basis and acts accordingly. At the reporting date the interest rate profile of interest-bearing financial instruments was: 2017 US$ 2016 US$ US$ Fixed rate instruments Financial assets 5,490,557 27,400,545 5,490,557 27,400,545 5. It is pertinent to note that investment agreement dated 10.01.2012 was entered into pursuant to a Director’s meeting held at the assessee’s registered office on 09.01.2012, which is evident from the minutes of the meeting held on 09.01.2012 which is enclosed in page 94 of the factual paper book. M/s. IL&FS India Realty Fund II LLC, being the sole shareholder of the assessee company, was entitled to the interim dividend declared by the assessee. This interim dividend was remitted to the said sole shareholder on 04.07.2016 (US$ 5,68,000); on 04.10.2016 (US$ 5,28,000); 03.01.2017 (US$ 7,20,000/-). The assessee filed copy of resolutions of the Board Of Directors to prove the fact that all the board meetings of the assessee company were held in Cyprus, where all the decisions related to its operations were taken given the fact that the assessee was independently managed by its Board of Directors.
In the return of income, the assessee had submitted that the beneficial owner of the shares was IL&FS Realty Fund II LLC, which was based in Mauritius, being a registered shareholder and beneficial owner and 100% holding company of the assessee. It is well settled principle that shareholders of the company are distinct and separate from each other. IL&FS India Realty Fund II LLC is only a beneficial owner of shareholders of the assessee. It does not get any right over the assets of the assessee to such shareholder. Hence, the contention of the ld AO that IL&FC Realty Fund II LLC is also the beneficial owner of assets/ investments in CCDs held by the assessee is not sustainable in the eyes of law.
The AO had observed that on perusal of the bank statement of the assessee, there is hardly any other activity being performed by the assessee in Cyprus. In this regard, it was submitted that the assessee had already made investment in CCDs of India bulls Infra Estate Ltd in its own name through proper banking channels. The said investment would fetch either interest or capital gains to the assessee. Therefore, there was no need to undertake any business activity as is being done in the case of manufacturing and trading concerns. Therefore, the allegations of the ld AO that the assessee did not do anything to carry out a business is not sustainable.
It is a fact that the assessee on receipt of interest income on investment in CCDs had redeemed the preference shares and also paid interim dividend in various tranches to its sole shareholder, which is in Mauritius. Obviously, the bank statement of the assessee would only reveal the interest earned on investment in CCDs , redemption of preference shares and payment of interim dividends to the sole shareholder. The ld AO had observed that other companies registered at the address of the assessee in Cyprus establishes that the assessee hardly has any presence in Cyprus in terms of operation and is merely a conduit for channelizing the interest funds. We find that the assessee shares office space with Amicorp (Cyprus) Ltd, the local administrator of the assessee. The assessee reimburses the Page | 5 local administrator for use of its office space which is evident from its bank statements. As stated earlier, the assessee, being an investment company, does not require any personnel other than directors in its payroll to carry out day to day operations. The Directors of the assessee company are well qualified and competent to run the company and take its business investment decisions. Furthermore, the assessee had availed services of Amicorp(Cyprus) Ltd, the professional administrator for general administration, such as book-keeping, company secretarial services, etc, and there was no need to have any employee on its own payroll.
It is not in dispute that assessee is a tax resident of Cyprus as per Article 4 of India-Cyprus Double Taxation Avoidance Agreement (DTAA). The assessee also furnished the tax residency certificate issued by Republic of Cyprus, Ministry of Finance clearly stating that its worldwide income is liable to income tax in accordance with income tax law and Republic of Cyprus. This tax residency certificate issued for the fiscal years 2016 and 2017 are enclosed in pages 8 and 9 of the paper book. The assessee pleaded that it would be entitled for the benefit provided in India-Cyprus DTAA. The assessee had determined the taxability of the interest income arising in India to a resident of Cyprus to be taxed in India @10% of the gross amount of interest if the beneficial owner of the interest income is a resident of Cyprus. As stated in the earlier part of this order, the assessee had got complete control over the interest income on investment in CCDs and is free to enjoy the same as per its own wish. The assessee is not obliged to pass on the same to any other person. Hence, it could be safely concluded that the assessee is indeed the beneficial owner of such interest income and as per Article 11(2) of India-Cyprus treaty, the same would be taxed in India @10% as all the conditions stipulated in Article 11(2) are complied with. We find that the ld AO had denied this benefit to the assessee. We find that the ld AO had denied the benefit of applicability of Circular 789 dated 13.04.2000 in the context of India-Mauritius Treaty to the facts of the instant case. In this regard, the ld AO stated that the Circular 789 was only regarding India-Mauritius and Hon'ble Supreme Court in the case of Azadi Bachao Andolan reported in 263 ITR 706 (SC) had decided the issue in the same context, and accordingly, the benefit of the India-Mauritius Treaty cannot be made applicable to India-Cyprus Treaty. The AR placed reliance on the decision of the coordinate bench decision of Mumbai Tribunal in the case ADIT Vs. Universal International Music BV reported in 45 SOT 219 (Mum), wherein, it was held that the tax residency certificate issued by the tax authority of Netherland is sufficient evidence of the beneficial ownership as per Circular No. 789 dated 13.04.2000. This ruling of the Mumbai Tribunal was confirmed by the Hon’ble Bombay High Court which is reported in 31 taxmann.com 223 (Bombay), wherein it was held that the assessee which is incorporated under the laws of Netherland and being beneficial owner of royalty receipts in respect of music tracks given to Indian companies would be entitled to benefit of concessional rate of tax provided under Article 12 of India-Netherland DTAA. Hence, the objection made by the ld AO in respect of this issue is not sustainable.
Yet, another objection raised by the ld AO is that there was no definite rationale for the assessee to make investment in India bulls on account of CCDs that the assessee does not have any independent office/ qualified employees to carry out any business or investment activity in Cyprus ; that the directors of the assessee who are professional and not having any expertise in the field of real estate investment and that it is not possible to run the affairs of the assessee company in this manner in Cyprus. All these allegations have already been answered by us and same are not repeated herein for the sake of brevity.
To conclude, 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 ld AO in taxing the interest income @40% as per domestic law by denying the treaty benefit is not upheld and same is hereby reversed.
In view of the of the aforesaid observations, we hold that the interest income on CCDs would be taxed @10% as per Article 11 of the India Cyprus DTAA Treaty. Accordingly, grounds Nos. 1 to 3 raised by the assessee are allowed.
Ground No. 4 raised by the assessee regarding levy of interest u/s 234B of the Act is consequential in nature.
Ground No. 5 raised by the assessee is challenging the initiation of penalty proceedings u/s 270A of the Act would be premature for adjudication at this stage and hence dismissed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 15/05/2024.