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April 18, 2022
As distinctions between debt and equity are collapsing, investors may face challenges when interpreting applicable tax rules when investing into structured debt instruments. Different regimes have adopted varied approaches when classifying convertible instruments as either debt or equity. Tax authorities are increasingly resorting to the usage of GAAR to reclassify the nature of income based on an assessment of the underlying substance. Transfer pricing rules, beneficial ownership rules, and thin capitalization rules, implemented as tax-avoidance measures in recent years, have similarly disrupted conventional structuring efforts.
We examine these and other key tax considerations when structuring offshore debt investments into India including:
1. GAAR and its implications on choice of jurisdiction and choice of instrument
As a starting point, investors must gauge where they are best placed to invest from, whether directly or through intermediate entities. Apart from regulatory and exchange control factors (which we have explored in detail elsewhere), relevant tax-based determinations when choosing a jurisdiction include:
a. the ability to demonstrate commercial substance in line with GAAR and DTAA provisions; and
b. the availability of DTAAs with India.
General Anti Avoidance Rules (GAAR) play the most important role in the choice of jurisdiction since they allow tax authorities to disallow tax benefits under DTAAs in certain cases.
GAAR provisions are triggered when an arrangement is regarded as an impermissible avoidance arrangement (IAA). An IAA is an arrangement entered into with the main purpose of obtaining a tax benefit.Where an arrangement is characterized as an IAA, tax authorities inter alia have the power to disallow DTAA benefits.
It is therefore important to demonstrate that the main purpose of investing in India through a particular jurisdiction is motivated by commercial reasons and not merely to obtain tax benefits. The Indian Income Tax Act, 1961 (ITA) provides that if an arrangement does not have any significant effect on net cash flows of the parties to the arrangement or the business risks, the arrangement will be deemed to lack ‘commercial substance’. The following factors are also relevant in practice when assessing the existence of commercial substance:
Commercial Substance in DTAAs
In cases where India and its treaty partner have ratified the ‘Multilateral Instrument’ (MLI), the requirement to demonstrate commercial substance is stricter. Under GAAR, it would be sufficient to simply demonstrate that a transaction’s ‘main purpose’ is not to gain a tax benefit. Under the modified MLI position, investors are required to show that none of the ‘principal purposes’ of the transaction/arrangement is to obtain a tax benefit, known as the ‘Principal Purpose Test’ (PPT).
If it can be reasonably concluded that even one of the principal purposes of a transaction/ arrangement was to obtain a tax benefit, tax authorities may disallow benefits available where the PPT is fulfilled, GAAR provisions should not be triggered. While the PPT is not applicable in all DTAAs, it has been incorporated in India’s DTAAs with Singapore, Netherlands, Ireland, the UK, and Luxembourg, amongst others.
Certain DTAAs, such as the India-Mauritius DTAA and the India-Singapore DTAA, prescribe a ‘Limitation of Benefits’ (LOB) clause. Per the LOB clause in the treaties, residents of a state are disentitled from treaty benefits (only with respect to capital gains) if their “affairs were arranged with the primary purpose of taking advantage of the benefits …” in the DTAA or if the entities are a “shell or conduit” entity2.
Tax Rates in DTAAs
We examine the tax treatment with respect to two primary sources of income in debt instruments: (a) gains/losses from sale of securities; and (b) interest income, in each such jurisdiction:
| Jurisdiction | Interest Tax | Capital Gains Tax |
|---|---|---|
| Mauritius | Withholding tax of 7.5% Locally: Effective 3% (under the Partial Exemption Regime3). |
Exempt |
| Singapore | Withholding tax of 15% Locally: 17% (though credit for 15% tax paid in India reduces the effective tax rate to only a further 2% in Singapore). Fund managers may also take exemptions where such 2% tax may also be exempt.4 |
Exempt |
| Luxembourg | Withholding tax of 10% of the gross amount of interest. | Exempt |
| Netherlands | Withholding tax of 10% of gross amount of interest. Locally: ~ 25% (though credit for 10% tax paid in India is available). | India can tax capital gains on all debt instruments if such gains arise on a sale of 10% or more securities to an Indian resident, and if such sale does not qualify as ‘restructuring’. All other cases, capital gains to be taxed in the Netherlands. |
GAAR has also enabled tax authorities to examine the substance of the underlying transaction. As part of this power, tax authorities may disallow interest income and recharacterize it as dividend income if the relevant instrument is established to be in the nature of equity. Thus, it is critical to understand and structure instruments keeping in mind distinctions between debt and equity. While Indian jurisprudence has been limited in distinguishing between debt and equity for tax purposes, US jurisprudence provides some guidance via the Mixon Factors5 , summarized below.
The above factors can be critical when demonstrating the nature of the instrument to tax authorities, especially where investors seek to claim the benefit of tax rates applicable as per DTAAs.
Investors must be mindful when structuring hybrid instruments such that features linked to the instrument do not result in an undesirable classification under DTAAs.
Several DTAAs, such as the India-Singapore DTAA and the India-Mauritius DTAA, provide different treatment for capital gains tax payable on ‘shares’ and for capital gains tax payable on ‘instruments other than shares’.
Under these DTAAs, capital gains tax payable on ‘instruments other than shares’ are taxed in the residence state i.e., in Singapore or Mauritius, where capital gains are exempt from taxation. On the other hand, capital gains on ‘shares’ are taxed in the source state i.e., if the issuer is in India, capital gains tax in India is applicable at a rate of 10%-20%.6
Thus, instrument-holders should question how their instruments will be classified: as a share or as an instrument other than a share?
What is a ‘share’ is not expressly apparent in the OECD Model Tax Convention nor in major DTAAs signed by India, including those with Singapore, Mauritius, and the Netherlands, since the term is undefined. Thus, this is a grey area in the law.
Judicial precedence on how tax treaties and their terms should be interpreted indicate that the conventional approach of interpreting tax statutes ‘strictly’ does not apply and that the ordinary meanings of words in DTAAs can be relied on.7 Thus, investors may take guidance from the definition of the terms ‘dividends’ and ‘interest’ which are typically seen to arise in the case of shares and debt respectively:
Dividends in major DTAAs are defined as income arising from “shares or other rights not being debt-claims, participating in profits ….” 8
The terms ‘debt-claim’ or ‘debt’ are similarly undefined in these DTAAs, and reference may be had to the definition of ‘interest’ therein:
“income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor‘s profits; and in particular, income from Government securities and income from bonds or debentures …” 9 [emphasis supplied].
Thus, to classify instruments as ‘shares’, the right to participate in the profits of the company can be seen as a critical factor. To this extent, instruments such as optionally convertible preference shares may be classified as ‘shares’ post-conversion since the instrument provides the holder a right to participate in profits of the company. In the case of ‘instruments other than shares’, debt, bonds, or debentures are indicative examples of what may be included.
Since ‘interest’ also includes income from instruments which provide a right to participate in profits of the company, instruments such as compulsorily and optionally convertible debentures may be classifiable as debt-claims i.e., ‘instruments other than shares’, though this is not expressly clear since they may also provide instrument holders.
Further complexities arise in the case of hybrid instruments such as mezzanine debt i.e., subordinated debt which converts into equity on the occurrence of certain events e.g., default. Mezzanine lenders are generally senior to pure equity holders but subordinate to senior lenders. Since mezzanine debt involves elements of a ‘debt-claim’ and a right to ‘participate in profits’, it is not expressly clear whether such instruments will fall into the definition of ‘shares’ (especially since the term is to be interpreted broadly as per judicial precedence discussed above). Similarly, in the case of securitized debt instruments, where underlying debt receivables are re-packaged into securities (usually through an intermediary entity), the character of the instrument is not expressly apparent.
Considering the above, when structuring specific rights into instruments, investors may find comfort in relying on the Mixon Factors discussed above.
When investing through entities or through other jurisdictions to reach India, investors should note that tax rates applicable under DTAAs are available only to the ‘beneficial owners’ of a return (being interest, dividend, royalty, or fees for technical services).
‘Beneficial ownership’ is a test commonly applied in tax treaties to identify the economic beneficiary in a particular transaction, i.e., the party entitled to use and enjoy the benefits which arise from a transaction. The term originates from the OECD Model Tax Convention which forms the basis for several DTAAs.10
The OECD’s Commentary on its Model Tax Convention states:
“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.”11
Simply put, the beneficial owner is the party which substantively receives the benefit or return in the transaction, such that treaty benefits on interest/dividends are generally available only to the beneficial owner (or at least to a greater extent). In the structured finance context, the beneficial owner is typically the recipient of interest payments though this may not necessarily be the immediate instrument-holder. However, there are certain exceptions to this rule: the OECD Model Tax Convention provides that in cases where an agent, nominee or conduit company acting as a fiduciary or administrator is the direct recipient of the interest, then such direct recipient will not be considered as the ‘beneficial owner’.
For example, an investor may consider investing through a Singaporean entity to claim a beneficial tax rate in Singapore vis-à-vis Cayman (see diagram above). Although the Singapore Co. is the instrument holder, it has a back-to-back arrangement with the Cayman Co., which has the actual right to decide what it wants to do with the interest income, thus the Cayman Co. may be considered as the beneficial owner. The Singapore Co. will not be able to claim the interest tax rate applicable under the India-Singapore DTAA.
Per the rule, agents, nominee or conduits are denied the benefit of the DTAA tax rate. This is because the direct recipient is under a contractual or legal obligation to pass on the payments received to another entity/person (the obligation may be substantively demonstrated where there is no express contractual obligation). This should not be confused with the concept of beneficial ownership used in other contexts which is usually demonstrated by ultimate control over entities or assets. Rather, the test assesses who has the right to use and enjoy the interest/dividend without any contractual/legal/ substantive obligation to transfer such payment onwards.
The concept has been aptly examined in the Indian case of M/s Golden Bella Holdings, involving an intra-group, convertible debt securities issuance12. Golden Bella Holdings (GBH), a Cyprus-based entity received funds from its Mauritius-based parent entity (M Co) to partially finance the acquisition of compulsorily convertible debentures (CCDs) issued by an Indian entity. The assessing tax officer (AO) in India held that GBH would have to pay the full domestic tax rate of 40% (as opposed to the beneficial interest tax rate of 10% under the India-Cyprus DTAA) on the interest income from the CCDs since GBH was not the beneficial owner of the income. The AO relied on the fact that the GBH was not the beneficial owner of the income. The AO relied on the fact that the assessee was a 100% subsidiary of M Co and that M Co’s funds were used to finance the acquisition. Thus, GBH was held to be a ‘conduit’ for M Co, and not the beneficial owner of the income.
In appeal, the Appellate Tribunal, when considering whether GBH could be considered as the beneficial owner of the interest income examined the following key considerations:
Since GBH fulfilled the above criteria, the Tribunal considered GBH to be the beneficial owner of the interest. The Tribunal noted that GBH was not a conduit company – it possessed a tax residency certificate and was undertaking business activities of its own accord. The partial financing of CCDs by a shareholder would also not affect GBH’s status as the beneficial owner of the interest income.
The following are some structural considerations when demonstrating beneficial ownership:
What are some practical challenges and mitigants which investors should be aware of?
How can investors demonstrate control over income received?
Investors should be wary of transfer pricing (TP) provisions – an enabling mechanism under Indian law to ensure that related parties in international transactions deal with each other on an arm’s length basis i.e., as if the parties were independent and unrelated. TP provisions apply to ‘international transactions’ between ‘associated enterprises’.19 The following elements must be present in a transaction to be identified as an ‘international transaction’: (a) two or more associated enterprises (where either one or both the parties are non-residents); and (b) an effect on the profit, income, loss, or assets of the enterprises involved and includes purchases, sales, leases, etc.20
‘Associated enterprises’ exist where one enterprise is directly or indirectly involved in the management or control of the other enterprise, or if there is common management or control between the two enterprises. Enterprises which are deemed to be ‘associated enterprises’ include (amongst others), (a) shareholders with more than 26% voting power, (b) enterprises who have advanced loans having a value greater than 50% of the other recipient’s assets, or (c) enterprises having the power to nominate majority of the board on other enterprises, etc.21
In context of debt, thin capitalisation rules become important inasmuch as they limit the interest deduction on borrowings from associated enterprises (as defined above). The rules aim to prevent investors transferring debt to related entities in tax friendly jurisdictions in order to maximize interest deductions and erode the borrower’s Indian tax base. Thus, the rules provide that any interest expenses/similar expenditures payable by the borrower (in excess of INR 1 crores) to associated enterprise lenders which are in excess of: 30% of the borrower’s EBIDTA in the previous year; or the interest paid/payable by the borrower to associated enterprises in the previous year, whichever is less, will be disallowed (i.e., the excess cannot be claimed as a deduction)22. Disallowed interest expenses can however be ‘carried forward’ i.e., the excess interest expenses may still deductible in the 8 assessment years following the year in which the interest expenditure was first computed. Investors who are looking to infuse debt into group entities in India should therefore account for the present value of interest which can be disallowed and the interest which can be carried forward and set off against future profits as per the rules, when computing returns on investments. Borrowers in highly leveraged sectors such as real estate and infrastructure face a greater disallowance risk, especially when relying on significant amounts of intragroup debt. Borrowers in these sectors may consider: (a) restricting the extent of intra-group loans to the threshold prescribed in the rules (taking into account the carry forward allowances); (b) taking on a greater proportion debt from non-related parties, (c) ensuring that lenders do not hold significant governance rights which could classify the lender as an ‘associated enterprise’.
Borrowers may also consider that the disallowance under the rules is only applicable to interest payments on ‘debt’.23 As a consequence, payments which are classifiable as royalties or fees for technical services may not be included within the scope of ‘debt’.
Disallowance Risk for Early-Stage Development Projects
The 30% – EBITDA threshold in thin capitalization rules may be challenging for early-stage development projects where there are little to no earnings early-on, though interest payments may still be required if no moratorium has been provided to borrowers. Such borrowers are more likely to cross the threshold, especially when required to pay in excess of 30% interest per year and may consider the mitigants discussed above
Where a premium is payable on redemption of debt instruments, it may appear to be in the nature of an interest earning and therefore liable to interest income tax. However, where a debt instrument is held as a capital asset, any income on its redemption could invite capital gains tax if the redemption premium is considered to arise from the ‘alienation’ of a capital asset (for DTAA purposes) or the ‘extinguishment’ of the capital asset (for ITA purposes). From a treaty standpoint, it is tax optimal, in many cases, to classify this premium as capital gains, which are tax exempt in several jurisdictions including Singapore and Mauritius.
Whether redemption premium is to be taxed as ‘interest’ or as ‘capital gains’ rests squarely on the meaning and interpretation of the terms.
Interest in the ITA has been defined to mean “interest payable in any manner in respect of any moneys borrowed or debt incurred and includes any service fee or charge in respect of moneys borrowed.” 24
Section 45 of the ITA provides that profits or gains arising from the ‘transfer’ of a capital asset25 is subject to capital gains tax. “Transfer” as defined in Section 2(47) the ITA and includes, inter alia, “….the sale, exchange or relinquishment of the asset; or … the extinguishment of any rights therein…”26. Courts have previously held that a specific income can fall only under one head of income27, thus redemption premium will not be subject to both capital gains tax and interest income tax simultaneously
“Extinguishment of right in an asset would mean the end of right in the asset either by operation of law or by contractual agreement. When capital bonds are redeemed, then after the date of redemption, they do not remain bonds but certainly what remains is an asset with the assessee. It cannot be denied that there was a right in the asset with the assessee, which was later encashed by the by surrender to the competent authority and receiving cash thereon. Thus, after the date of redemption, there was an extinguishment of right by operation of contract and also a relinquishment of right in the asset in lieu of which, the assessee received cash from the competent authority. In either of the situations, the case is covered within the definition of Section 2(47)” [emphasis supplied].
In making its decision, the Tribunal relied on precedent which clarified that ‘extinguishment’ in Section 2(47) includes extinguishment of any right, such that even if the underlying instrument is still in existence, extinguishment of one right in the instrument would be considered as a ‘transfer’ resulting in a ‘capital gain’ (the case in reference involved partial reduction in the face value the shares).29
A similar approach was adopted in Seth Gwaldas Mathuradas Mohata30 in the context of premium on redemption of preference shares wherein the Bombay High Court held:
“The assessee by virtue of his being a holder of redeemable cumulative preference shares had a right in the profits of the company, if and when made, at a fixed rate of percentage. Quite obviously, this was a valuable right and this right had come to an end by company‘s redemption of shares. Thus, the transaction also amounted to ‘extinguishment‘ of right. Under the circumstances, viewed from any angle, there is no escape from the conclusion that section 2(47) was attracted…”
Therefore, under Indian law, gains realized on the redemption of the debt instruments at the time of maturity or the sale of the debt instruments before the completion of the maturity period are likely to be characterized as capital gains in India.
However, most DTAAs (including the India-Singapore, India-Luxembourg, IndiaMauritius DTAAs) include redemption premium within the definition of ‘interest’, and therefore subject to withholding tax in India at applicable rates, in addition to any taxes that may be payable in the resident state.
For instance, article 11 (3) of the India-Singapore DTAA defines ‘interest’ as:
“The term „interest“ as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor‘s profits; and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures.” [emphasis supplied]
There is however scope for uncertainty in some DTAAs, such as the India-Mauritius DTAA, which may also include redemption premium within the scope of capital gains. Article 13 of the India-Mauritius DTAA provides for the taxation of capital gains arising on the “alienation” of instruments. Paragraph 5 of Article 13 defines ‘alienation’ to include “extinguishment of any rights therein”:
“For the purposes of this article, the term „alienation“ means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States”.
The issue has been examined in the case of In re. XYZ/ABC Equity Fund31, where the Authority for Advance Rulings (AAR) has held, in the context of income from investments made in India by a collective investment vehicle resident for tax purposes in Mauritius, that income such as premium from redemption of debentures should be treated as capital gains, where the assessee has not been carrying on the business of lending money, and should therefore fall within the ambit of Article 13 of the IndiaMauritius DTAA.
Notably, the definition of “alienation” as above is not expressly stated in all DTAAs, thus the above judicial interpretation may not be simply imported into the context of such other DTAAs which India has entered into. In these cases, redemption premium is more likely to be classified as ‘interest’.
The classification in DTAAs vis-à-vis the ITA should not impact offshore investors, i.e., there should not be a situation where an offshore investor is liable to pay both capital gains tax in India and interest tax on the redemption premium as per the DTAAs. This is because it is an accepted principle that the main purpose of Section 90 of the ITA and the applicable DTAAs is to grant relief and not to impose any additional fresh liability that is not provided under the ITA32; and therefore, the provisions of the ITA should supersede the provisions under the DTAA to the extent that they are more beneficial to the assessee.
When assessing the tax payable on redemption premium, the taxpayer should undertake an assessment under both the ITA and the DTAA, separately, in order to determine which head will apply. Even if the applicable heads are different under the ITA and the DTAA (e.g., if redemption premium is classified as capital gains under the ITA and interest under the relevant DTAA), the taxpayer should be entitled to avail of the more beneficial tax treatment. Though some tribunals have since taken a view that the preferred approach would be to assess the applicable head under the DTAA and then compare tax rates applicable under that head in the ITA and DTAA respectively, this approach may not necessarily be seen to be in consonance with the approach to Section 90 of the ITA.
Can borrowers still claim redemption premium as a deductible expense?
Even though redemption premium is likely to be classified as ‘capital gains’ in the hands of the investor/instrument-holder under the ITA, redemption premium may still be classifiable as an ‘interest expense’ for a borrower, with differing treatments existing for borrowers and investors.
Section 37 of the ITA permits deductions for expenditures which are not in the nature of a capital expenditure and which are exclusively for the purposes of business or profession33. Various judgements, such as Raymond Ltd., have clarified that payment of premium on redemption is a revenue expense.34 In Raymond, the Bombay High Court held that the since redemption premium was a liability incurred by the assessee to obtain use of the funds for the purposes of its business, it would be classified as a revenue expenditure.
Courts have clarified that the character of the expense in the hands of the borrower may not necessarily determine the character of the income in the hands of the investor. In Madras Industrial,35, the Court held that: “… the character of payment in relation to the payer can be different from the character of that payment in the hands of the recipient.” Thus, assessments of the character of redemption premium should be made considering who the taxpayer is.
1 The MLI is a multilateral tax treaty entered into between countries to set out minimum standards and a framework for amending DTAAs to curb tax avoidance and treaty abuse. Where the MLI has been ratified by two contracting states, their DTAA is required to be modified as per the minimum standards set out therein. Article 7 of the MLI and the Action 6 Report which requires countries to implement at least one of the following anti-abuse measures in their treaties – (i) a principal purpose test (“PPT”) only, which is a general anti-abuse rule based on the principal purpose of transactions or arrangements (ii) a PPT supplemented with either a simplified or a detailed limitation on benefits (“LOB”) provision, or (iii) a detailed LOB provision, supplemented by a mutually negotiated mechanism to deal with conduit arrangements not already dealt with in tax treaties.
2 See Part (b) of Annexure A for the definition of a ‘shell or conduit’ entity under the India-Singapore DTAA.
3 Partial exemption is available to a company subject to the following conditions:
a. It must carry out its core income generating activities in Mauritius;
b. It must employ directly or indirectly, an adequate number of suitably qualified persons to conduct its core income generating activities; and
c. It must incur a minimum expenditure proportionate to its level of activities.
4 Singapore tax authorities have introduced key exemptions for funds set up in Singapore and managed by a Singapore-based manager (and which are thus liable to be taxed in Singapore) where subject to certain conditions (and a min. S$200,000 in expenses) entire income of the Singapore fund could be tax exempt.
5 Estate of Mixon v. United States, 464 F.2d 394 (5th Cir. 1972).
6 Per Article 13 of the India-Singapore DTAA, “Gains from the alienation of shares acquired on or after 1 April 2017 in a company which is a resident of a Contracting State may be taxed in that State,” while “Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4A and 4B of this Article shall be taxable only in the Contracting State of which the alienator is a resident”.
7 In Linklaters LLP v. ITO, it was held that: „… To find the meaning of words employed in the tax treaties, we have to primarily look at the ordinary meanings given to those words in that context and in the light of its objects and purpose…” [2010] 40 SOT 51 (Mum.). See also: Dy. CIT v. Boston Consulting Group Pte. Ltd. [2005] 94 ITD 31 (Mum.); New Skies Satellites N.V. v. Asstt. DIT (International Taxation) [2009] 121 ITD 1 (Delhi) (SB); Ensco Maritime Ltd. v. Dy. CIT [2004] 91 ITD 459 (Delhi).
8 Article 10, India-Singapore DTAA.
9 Article 11, India-Singapore DTAA
10 The term is also used in the UN Model Tax Treaty
11 Para 10.2 of the OECD Commentary (2017) on Article 11 (Interest) of the ‚Model Tax Convention‘
12 M/s Golden Bella Holdings vs Deputy Commissioner of Income Tax, ITA No. 6958/Mum/2017.
13 In HSBC Bank (Mauritius) Limited [TS-460-ITAT-2018(Mum)], the ITAT relied on the Circular 789 of 2000 issued by the CBDT as evidence that tax residency certificates should be considered as proof of beneficial ownership. The Tribunal noted that though the circular was in the context of dividends and capital gains, it could be applied here since there was a need to prove beneficial ownership; See also:
14 DIT vs Universal International Music B.V, [2013] 31 taxman.com 223 wherein a tax residency certificate was relied on by the Tribunal to demonstrate beneficial ownership over royalty income received.
15 Hyundai Motor India Ltd. vs DCIT [2017] 81 taxmann.com 5.
16 In the case of Bharti Airtel Limited [TS-141-ITAT-2014(DEL)], the ITAT held that interest paid by Airtel to ABN Amro Bank’s Sweden Branch would not mean that ABN Amro Sweden is the beneficial owner since it was only a conduit for ABN Amro Bank Netherlands which was the original lender. Moreover, ABN Amro Bank was actually a tax resident of the Netherlands. Thus, it was the ABN Netherlands which was the beneficial owner.
17 Prévost Car Inc. v. The Queen, Federal Court of Appeal, Canada, 2008 TCC 231.
18 [TS-757-FC-2020(KOR)].
19 Please refer to Annexure B for the OECD guidance on arm’s lengths transactions.
20 Per Section 92B of the ITA, similar transactions include purchase, sale or lease of tangible or intangible assets, provision of services, borrowing or lending of money.
21 Please refer to Part (a) of Annexure A for the definition of ‘associated enterprises’ provided in the ITA.
22 The rule will also apply to interest paid to third-party lenders if an associated enterprise provides an implicit or explicit guarantee to the lender or if it deposits a corresponding amount of funds with the lender..
23 Per Section 94B(5), ITA, ‘debt’ in the context of thin capitalisation rules has been defined as „any loan, financial instrument, finance lease, financial derivative, or any arrangement that gives rise to interest, discounts or other finance charges that are deductible in the computation of income chargeable under the head „Profits and gains of business or profession.“
24 As per Section 2(28A) of the ITA, “interest” means “interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or charge in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized”.
25 Section 2(14) of the ITA provides that the definition of capital asset includes “property of any kind” and “property” has been defined as „property“ is deemed to include “any rights in or in relation to an Indian company”. Thus, debt instruments will be classified as capital assets.
26 Section 2(47) of the ITA.
27 Clifford Chance v. Deputy CIT, 2002 82 ITD 106 Mum.
28 Mrs. Perviz Wang Chuk Basi v. Joint Commissioner of Income-tax, Spl. Range 7, [2006] 102 ITD 123 (Mum).
29 Kartikeya v. Sarabhai v. CIT [1997] 228 ITR 163.
30 [1987] 165 ITR 620 Bom.
31 [2001] 250 ITR 194.
32 ACIT v. Clough Engineering Ltd (2011) 9 ITR (Trib.) 618.
33 Section 37 of the ITA states as follows: “Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession.”
34 CIT v. Raymond Ltd., [2012] 209 Taxman 65 (Bombay). See also: CIT v. First Leasing Company of India Ltd., [2007] 292 ITR 110 (Mad); CIT v. Shree Rajasthan Syntex Ltd., [2004] 269 ITR 461 (Raj); Madras Industrial Investment Corporation v. CIT, [1997] 225 ITR 802 (SC).
35 Madras Industrial Investment Corporation v. CIT, [1997] 225 ITR 802 (SC),
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