Law:

Section:

â- Section 2(28A) of the Income-tax Act, 1961 read with Article 11 of the Double Taxation Avoidance Agreement between India and Mauritius (Interest) - Interest - S and V are two Indian companies - S is a subsidiary of V - Applicant is a Mauritius based company - As per shareholders Agreement (SHA) and Securities Subscription Agreement (SSA) entered into among applicant, V and S, applicant made investment in equity shares and zero per cent Compulsory Convertible Debentures (CCDs) of S - Applicant states that as per terms of SHA, CCDs are to be fully and mandatorily converted into equity shares after expiry of 72 months from investment date - Prior to mandatory conversion date, applicant was given put option to sell specific number of shares and CCDs on specified dates to V - V exercised said option and proposes to purchase entire stake held by applicant in S - Applicant contends that capital gains arising to it from transfer of securities held in S are exempt from tax in India under article 13.4 of Indo-Mauritius DTAA - Revenue, on other hand, submits that to compensate normal interest income from debentures, concept of optional conversion rate has been incorporated, which, in truth, is loan and two agreements are entered into to camouflage true character of income from that of loan and interest, to capital gains - Whether CCD creates or recognizes existence of a debt, which remains to be so, till it is repaid or discharged - Held, yes - Whether since facts reveal that relationship between S and V as a parent and subsidiary is on paper only and they are in fact one and same entity and V has paid a fixed predetermined return to applicant depending upon period of holding CCDs, amount paid by V is clearly towards debt that was taken by S from applicant and, hence, gains arising on sale of CCDs are interest within meaning of section 2(28A) and article 11 of DTAC and are taxable as such - Held, yes [In favour of revenue] FACTS S and V are two Indian companies. S is a subsidiary of V, whereby, V got 9999 shares and its nominee 1 share. The applicant is a Mauritius based company. As per Shareholders agreement (SHA) and Securities Subscription Agreement (SSA)…

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