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TMI Blog2019 (9) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... t the beneficial owner of the interest income. 2. The findings of the AO on the facts and in law are erroneous based on the following grounds and hence the order of the AO is liable to be set aside: i. The AO erred in concluding that the Appellant was not the beneficial owner of INR 15,16,43,836 received as interest income from ADAMAS Builders Private Limited ("ABPL") on compulsorily convertible debentures ("CCD")issued by ABPL to the Appellant and has thereby erred in denying the Appellant relief under Article 11 of the India- Cyprus DTAA. ii. The AO erred in fact and in law in holding that the Appellant was not the beneficial owner of the interest income by arbitrarily concluding that the Appellant did not have 'dominion and control' over the interest income, despite failing to prove that had any contractual or legal obligation to pass on the interest income to another person. iii. The AO erred in fact and in law in concluding that the Appellant was merely set up as a shell or a conduit company for the passage of funds between Green World Developments Ltd ("GWDL") and ADAMAS Builders Private Limited ("ABPL") and therefore not entitled to claim benefits under Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Briefly stated, the facts are that the appellant is a company incorporated on 01.08.2011 under the laws of Cyprus with the objective of undertaking business activities of an investment holding company. It filed its return of income for AY 2013-14 on 29.11.2013 showing a total income of Rs. 15,16,43,840/- from interest on Compulsorily Convertible Debentures (CCDs) in Adams Builders Private Limited (ABPL), an Indian private limited company and such interest was duly offered to tax @ 10% in accordance with the beneficial provisions of Article 11 of the DTAA between India and Cyprus ("Cyprus Treaty"). The AO has denied the benefit of the Cyprus Treaty on the basis that the appellant was not the "beneficial owner" of interest income and brought to tax the interest income earned at the rates in force (approximately 42%). The AO held that the investment in CCDs is a mere back-to-back loan transaction. Accordingly, the AO passed a draft assessment order u/s 144C(1) of the Act denying the benefit of the Cyprus Treaty on the basis that the appellant was not the "beneficial owner" of interest income and sought to tax the interest income earned by the appellant at the rates in force (app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 of the Cyprus Treaty. The AO also noted that the Fair Market Value(FMV) of share of ABPL was Rs. 1,17,717/- and the CCDs were issued for Rs. 1,99,900/- which is 70% higher than the FMV. The assessee also went into liquidation in the subsequent year and CCD of Rs. 100 crores were sold for nearly Rs. 77.71 crores to one of its affiliated concern namely M/s Mapletree BG Pte Ltd. Considering the above facts, the AO held that the assessee is not the beneficial owner of the interest on the CCDs and the interest was sought to be taxed under the domestic law @ 40% along with applicable surcharge and education cess. The DRP observed that the financials did not indicate that the assessee was doing anything else other than merely routing the funds from GWDL to ABPL. Incidentally GWDL owns 100% shares in the assessee-company and 99.5% share in ABPL. The investment by the assessee in ABPL as per the DRP is a back-to-back transaction which leaves no doubt that the legal control over the investment is with GWDL. It further held that the assessee did not possess the CCDs in its own right and its power of disposal is also not unhindered. Further observing that the investment has been made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents or evidence has been put forth by the AO to show otherwise, other than making vague and unsubstantiated allegations and statements. The Ld. counsel submits that neither the Act nor the Cyprus treaty defines the term "beneficial owner". It is stated that internationally, the term is used to mean the entity which is the legal owner of a property (in this case, being interest income) and who has dominion and control over the property (i.e. an owner who holds the property for its own benefit and not as an agent, trustee, or nominee for some other person, who has the right to deal with the property as its own). Thereby it is stated by him that the appellant in the present case invested in CCDs and received interest income thereon for its own exclusive benefit, and not for or on behalf of any other entity, in that sense, the appellant is the 'true' owner of the interest income as it had complete control on the application or use of the income it received. In that sense the appellant did not exercise any agency or mandate over the CCDs or the interest income other than for its own exclusive benefit. The Ld. counsel submits that there are no facts or documents that have been produce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the interest free shareholder loan was denominated in USD, the CCDs and the interest income thereon were denominated in INR, thereby further illustrating that the Appellant was not acting as a mere conduit for the passage of funds between its immediate shareholder and Adamas but was actually a risk bearing entity.; (iv) while the interest free shareholder loan received by the Appellant was repayable on demand, the CCDs in Adamas were in effect blocked capital since they could not be repaid but only be converted into equity shares, and was therefore not repayable on demand. For this reason also, the transaction was not a mere back-to-back arrangement; (v) the Appellant was the sole owner of the interest income received on CCDs, and was under no contractual, legal, or economic obligation to pass on the interest income received by it to its immediate shareholder, or to its ultimate parent, or to any other entity; (vi) the Appellant earned interest income from the CCDs; and finally, (vii) the rate of interest payable on the CCDs was accepted to be at arm's length by the Revenue itself, and no adjustment was proposed to the investment by the Appellant in Adamas. 5. Per co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objective was to undertake business activities of an investment holding company. As at 31.03.2012, the appellant's capital base consisted of equity share capital of USD 7,200 and debt capital of USD 21,500,000 in the form of unsecured interest-free shareholder loans from its immediate shareholder. The appellant has been issued a TRC by the tax authorities in Cyprus. The appellant applied for 5000 CCDs in ABPL, an Indian Pvt. Ltd. company, each having a face value of Rs. 10 at a premium of Rs. 1,99,990/- per CCD, and carrying a coupon of 15% on the face value, for an aggregate consideration of Rs. 100,00,00,000/-. The premium at which the appellant proposed to apply for such CCDs was determined based on a valuation report dated 21.10.2011 obtained by ABPL valuing its equity shares at Rs. 1,17,717/- per share using DCF method. The appellant applied for such CCDs on its own account, using a portion of the share capital and the interest-free shareholder loan raised from its immediate shareholder. Even after, the investment was made, the appellant continued to have cash balance of USD 1,354,761 available to it. The said CCDs were allotted to the appellant w.e.f. 28.03.2012. The above de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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