Article 11 of India-Cyprus DTAA – Interest earned by Cyprian company from investment in CCDs which were funded by parent company qualified for lower rate under Article 11 of India-Cyprus DTAA since, on facts, the Cyprian company had indicia (marks or signs) of beneficial owner of interest income

Article 11 of
India-Cyprus DTAA – Interest earned by Cyprian company from investment in CCDs
which were funded by parent company qualified for lower rate under Article 11
of India-Cyprus DTAA since, on facts, the Cyprian company had indicia
(marks or signs) of beneficial owner of interest income

FACTS

The assessee, a limited liability company resident in Cyprus, was an
investment holding company. During the year under consideration, the assessee
earned interest income from investment in CCDs of an Indian company (ICo),
which was offered to tax in India @ 10% in terms of Article 11 of the
India-Cyprus DTAA. The source of funds for investment in CCDs was equity
capital and interest-free funds from the Mauritian parent (MauCo) of the
assessee.

The AO held that the investment in CCDs was made by
the assessee out of a back-to-back loan taken from MauCo and hence the Assessee
did not qualify as the beneficial owner of the interest income. Hence, the
Assessee was not eligible to avail the lower tax rate under Article 11 of the
DTAA.

Aggrieved, the assessee appealed before the DRP which affirmed the order
of the AO and held that the assessee’s role was limited to merely routing the
funds from MauCo and acting as a conduit for passage of funds of MauCo, as an
agent / nominee of MauCo. Hence, the assessee was not the beneficial owner of
interest income.

The Assessee went in appeal before the Tribunal.

HELD

(i) The assessee had invested in CCDs and received interest for its own
exclusive benefit and not for or on behalf of MauCo;

(ii) As per the OECD Commentary on the Model Convention 2017 on Article
11, beneficial owner is an entity having right to use and enjoy the interest
income unconstrained by contractual / legal obligation to pass it on;

(iii) The mere fact that the investment was funded
using certain interest-free loans and share capital infused by MauCo did not
affect the assessee’s status as the beneficial owner of the interest income,
since the entire interest income was the sole property of the assessee who had
absolute control over the funds received from MauCo;

(iv) Further, the assessee also wholly assumed and maintained the
foreign exchange risk and the counter-party risk on interest payments arising
on the CCDs. Thus, there was no back-to-back transaction lacking economic
substance;

(v) Besides, the AO had failed to prove that:

(a) The assessee did not have exclusive possession and control over the
interest income received;

(b) The assessee was required to seek the approval or obtain consent
from any entity to invest in ICo or to utilise the interest income received;

(c) The assessee was not free to utilise the interest income received at
its sole and absolute discretion, unconstrained by any contractual, legal or
economic arrangements with any other third party;

(vi) Thus, interest income from investment in CCDs qualified to be taxed
@ 10% under Article 11 of the DTAA .