The recent Income Tax Appellate Tribunal (ITAT) Delhi Bench decision in Amplus Energy Solutions Pte Ltd[1] provides a comprehensive summary of the tax treatment of interest income earned on Compulsorily Convertible Debentures (‘CCDs’) and Optionally Convertible Debentures (‘OCDs’) by foreign portfolio investors (‘FPIs’) in India. The ruling clarifies the applicability of the concessional tax rate under Section 194LD of the Income Tax Act, 1961 (‘the IT Act’), and relies on several key case laws and statutory interpretations.
Facts of the Case
- The appellant, a foreign company and Category II FPI registered with SEBI, invested in NCDs, CCDs, and OCDs issued by its Indian associated enterprises.
- The appellant earned substantial interest income, offering part of it at the concessional rate of 5.46% (including surcharge and cess) under Section 194LD for NCDs, and the balance at 15% under the India-Singapore Tax Treaty for CCDs and OCDs.
- The Assessing Officer (‘AO’) denied the concessional rate for CCDs and OCDs, arguing that Section 194LD applies only to rupee-denominated bonds, not debentures.
- The Dispute Resolution Panel (‘DRP’) directed the AO to consider an internal letter from the Principal Chief Commissioner of Income Tax (International Tax), which clarified that debentures should be treated as bonds for Section 194LD purposes, provided the conditions are met.
Key Arguments and Findings
- The appellant contended that CCDs and OCDs are debt instruments until conversion and thus qualify as rupee-denominated bonds under Section 194LD.
- The Tribunal agreed, noting that the terms “bond” and “debenture” are used interchangeably in the Companies Act, 2013, and that both are instruments evidencing debt.
- The Tribunal relied on the decision in Heidelberg Cement AG[2], where it was held that in the absence of a specific definition of “bonds” in the IT Act, the term should include NCDs and, by extension, CCDs and OCDs.
- The Tribunal also cited Shree Visheshwar Nath Memorial Public Ch. Trust[3], where the Delhi High Court held that debentures can be considered bonds for Section 194LD purposes, referencing the Companies Act definition.
- The Supreme Court in R.D. Goyal[4] clarified that debentures are instruments of debt, distinct from shares, and retain their debt character until conversion.
Conclusion
The Tribunal ruled in favor of the appellant, holding that CCDs and OCDs, being debt instruments until conversion, qualify as rupee-denominated bonds under Section 194LD. The concessional tax rate should apply to interest earned on these instruments, provided all other conditions are satisfied. This decision aligns with the purposive interpretation of the law and the precedents set by higher courts, ensuring that foreign investors are not unfairly denied the benefits intended by the legislature.
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[1] Amplus Energy Solutions Pte Ltd. vs. ACIT (ITA No. 2417 & 3370/Del/2023)
[2] Heidelberg Cement AG, vs. ACIT, International Taxation, [2022] 143 taxmann.com 79 (Delhi – Trib.)
[3] Shree Visheshwar Nath Memorial Public Ch. Trust [2010] 194 Taxman 280 (Delhi)
[4] R.D. Goyal v. Reliance Industries Ltd.: 113 Comp. Cas. 1/ 40 SCL 503
