TMI Blog2019 (9) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... trol over the interest income received, (ii) the appellant was required to seek approval or obtain consent from any entity to invest in ABPL, or to utilize the interest income received at its own discretion and (iii) the appellant was not free to utilize the interest income received at its sole and absolute discretion, unconstrained by any contractual, legal, or economic arrangements with any other third party. The transaction between the appellant and ABPL cannot be considered a mere back-to-back transaction lacking economic substance. Therefore, we direct the AO to accept the return of income filed by the appellant for the impugned assessment year disclosing a total income from interest on CCDs in ABPL, wherein it has offered such interest to tax @ 10%. - Decided in favour of assessee - ITA No. 6958/MUM/2017 - - - Dated:- 28-8-2019 - Shri Saktijit Dey (Judicial Member) And Shri N.K. Pradhan (Accountant Member) For the Assessee : Mr. Rajesh Simhan, AR For the Revenue : Mr. Samuel Darse, DR ORDER PER N.K. PRADHAN, AM This is an appeal filed by the assessee. The relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted on the instructions of GWDL. v. The AO wrongly disregarded all facts furnished by the Appellant to demonstrate the independence of the Appellant company in Cyprus and wrongly concluded that the Appellant is a mere conduit without supporting such finding with any proof, particularly when the burden of furnishing such proof is on the revenue. vi. The AO has incorrectly distinguished the reliance on Circular No. 789 issued by the CBDT on a mere technicality and has denied treaty relief under the DTAA to the Appellant. vii. The conclusions of the AO are contrary to the Income Tax Act and the DTAA. The denial of treaty benefits sought to be made by the AO is contrary to Section 90 of the Income Tax Act and Article 11 of the Treaty. viii. The AO has not discharged the burden of proof and has made incorrect findings based on surmises and conjecture. ix. The AO has disregarded the fact that the board of directors of the Appellant had the requisite expertise and knowledge to take informed business decisions and that the decision to make investments were made unanimously thereby demonstrating substance a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... World Development Ltd. (GWDL) of Mauritius. Further, GWDL had remitted a sum of USD 2,15,00,000 to the assessee on 20.10.201. And on 27.10.2011 the appellant invested a sum of USD 2,01,450,000 in the CCDs of ABPL. As per the AO this back-to-back receipt and investment indicates that the investment made in ADPL had actually been made by GWDL. The DRP thus observed that the AO was correct in his finding that the appellant only served as a mere conduit for the passage of funds and an agent or nominee or a conduit company acting as a fiduciary on behalf of the interested party and therefore cannot be regarded as a beneficial owner. During the course of assessment proceedings, the assessee filed before the AO an organization chart stating that GWDL holds 100% equity in the assessee-company and it also holds 99.5% equity in M/s ABPL. The AO held that the routing of funds from GWDL to ABPL through the assessee is only a device. The AO further observed that GWDL is itself 100% subsidiary of M/s Mapletree Mauritius Ltd. which is 100% subsidiary of M/s Mapletree Hinjewadi (Mauritius) Ltd. and which in turn is 100% subsidiary of M/s Mapletree India China Fund Ltd. based in C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the details of the ultimate beneficiary, the DRP confirmed the finding of the AO that the assessee is not the beneficial owner of the interest received on CCDs and therefore, denied the benefit of the provisions of Article 11 of the Cyprus Treaty. The DRP further observed that Circular 789 issued by CBDT does not apply to Cyprus treaty and as per the case-laws Tax Residency Cerificate(TRC) is not the final answer to the question of beneficial ownerships. Following the direction of the DRP, the AO assessed the interest on CCDs at normal rates i.e. without benefit of DTAA i.e. @ 40% + surcharge + education cess. 4. Before us, the Ld. counsel of the assessee submits 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. 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. It is stated that the appellant is a tax resident of Cyprus and has been issued a TRC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue in support of its claim that the appellant is not the beneficial owner of interest income received ; that the mere fact that the investment in CCDs was partly funded using an interest-free shareholder loan and share capital does not ipso facto mean that the appellant s corporate status may be disregarded so as to consider the appellant s immediate shareholder to be the beneficial owner of the appellant s assets, including the interest income earned by the appellant ; the revenue has failed to prove even a single fact showing that the appellant did not exercise full dominion and control over the interest income. In these circumstances, it is submitted by him the appellant should be considered the beneficial owner for the purposes of Article 11 of the Cyprus treaty. The Ld. counsel submits that in the present case, the appellant has been duly incorporated as a limited liability company in Cyprus, and holds a TRC issued by the tax authorities of Cyprus certifying it to be tax resident in Cyprus. Relying on Circular No. 789 dated 13.04.2000 issued by CBDT, the Ld. counsel argues that a mere TRC will constitute sufficient evidence for accepting the status of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s length by the Revenue itself, and no adjustment was proposed to the investment by the Appellant in Adamas. 5. Per contra, the Ld. Departmental Representative (DR) explains that the AO had made inquiries from the assessee and had also obtained bank statement thereof ; the assessee is a 100% subsidiary of GWDL of Mauritius and GWDL had remitted a sum of USD 2,15,00,000 to the assessee on 20.10.2011 and thereafter on 27.10.2011, the assessee invested a sum of USD 2,01,450,000 in the CCDs of ABPL ; this back-toback receipt and investment indicates that the investment made in ABPL has actually been made by GWDL ; therefore, the AO was correct in observing that the appellant has only served as a mere conduit for the passage of the funds. The Ld. DR further relies on the order of the DRP and submits that the appellant does not possess the CCDs in one s own right and its power of disposal is also not unhindered; the investment has been made by the appellant without considering the FMV of the CCDs or the financials of ABPL, which is a clear indicator that the decisions have been taken somewhere else; the assessee has not given the details of the ultim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan 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 details were filed by the assessee before the AO. We find that the appellant invested in CCDs and received interest income thereon for its own exclusive benefit, and not for or on behalf of any other entity. The mere fact that the investment was funded using a portion of an interest-free shareholder loan and share capital does not affect the appellant s status as the beneficial owner of interest income, as the entire interest income was the sole property of the appellant. In this context, we may refer to para 10.2 of the OECD Commentary (2017) on Article 11 (Interest) of the Model Tax Convention to appreciate the meaning of beneficial owner and the same reads as under : Where the recipient of interest does have the right to use and enjoy the interest unconstrained by a contractual or legal obligation to pass on the payment received to another person, the recipient is the beneficial owner of that interest . ..... X X X X Extracts X X X X X X X X Extracts X X X X
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