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GAINS ARISING FROM SALE OF CCDs ARE CAPIAL GAINS AND NOT INTEREST INCOME: DELHI HIGH COURT REVERSES THE RULING OF AAR
 
Setting aside the ruling of Authority for Advance Ruling (“AAR”), Delhi High Court (in its judgment given on July 30, 2014) in the case ofZaheer Mauritius Limited vs. Director of Income-tax (International Taxation), has held that gains earned by a Mauritian resident entity by the sale of Compulsorily Convertible Debentures (“CCDs”) on exercise of a call option can be characterized only as ‘capital gains’ and not as ‘interest’. Therefore, in light of the provisions of India-Mauritius Double Taxation Avoidance Agreement (“DTAA”), entire gains earned by the Mauritian entity will be tax exempt in India.
 
This decision has given much needed clarity that although a debenture is a debt instrument; a transfer of a debenture to a third party can only result in ‘capital gains’ and not interest income. By reversing the judgment of AAR (given in March 2012) in which the AAR had re characterised debt into equity on the grounds of tax avoidance and sham arrangement, the Delhi High Court’s decision is a welcome move (from tax perspective) for foreign investors who have subscribed to CCDs  (with optionality clauses as exit route) of Indian companies.

You can download the update on this matter from  
Deep Shridharani & Co here.
 




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