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Gains From The Sale of Debentures Now Liable to Tax

12 Apr 2012

The Authority of Advance Ruling in a recent ruling has held that gains arising from sale of Compulsorily Convertible Debentures ie, the appreciation in the value of CCDs, is in the nature of interest and hence, liable to tax in India under Article 11 of the India-Mauritius Tax Treaty. Taxand India takes a look at this case and discusses how the outcome is likely to affect business between India and Mauritius.

In this ruling, the AAR held that the consideration received by the Applicant on sale of CCDs would qualify as interest under the provision of the Act and the India-Mauritius Tax Treaty notwithstanding the arguments of the Applicant that CCDs would qualify as capital asset and the gain on sale should be treated as capital gains. In order to arrive at this conclusion, the AAR has relied upon the definition of interest which includes 'income from debt-claims of every kind'.

Taxand India discusses the case in more detail

Taxand's Take

The interesting feature of this ruling is that the AAR, in the absence of anti-abuse rules under the extant laws, has applied the 'look at' provisions to disregard the legal form of the transaction. While concluding the AAR also seems to suggest that the exemption under the India-Mauritius Tax Treaty would not be available in case of capital gains that arise on sale of equity shares. Businesses with interests between India and Mauritius should keep informed of progress on this issue to make sure that their tax position is in order.

Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010

Taxand's Take Author