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Recent capital gains ruling by High Court
The Delhi High Court has disposed of a petition against the ruling by the Authority for Advanced Ruling. Taxand India takes a look at this decision and why it is so important.
The decision which has come after a Mauritian company established an Indian subsidiary held that the gains arising on transfer of Compulsorily Convertible Debenture (CCD) does not partake the nature of the interest and should be treated as capital gains.
Certain important aspects of commercial contracts are highlighted with this ruling especially in the context of investments made in the real estate sector. The HC has recognised that CCDs are opted for in real estate projects as raising funds through an ECB route has conditions attached to it. The HC has also categorically held that any gain arising from the transfer of CCDs cannot be considered as interest.
It is now recognised that Call and Put options are commercial agreements and also approves of the fixed rate of return implicit in the pricing for the transfer of shares. It is a well settled practice that such options have in-built mechanism for the financial investor to achieve a certain targeted rate of return on their investment.
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Also published in Thomson Reuters' Taxnet Pro, 7 August 2014
The HC examined the commercial justification for the arrangement before holding in favour of the taxpayer. It would be even more important for arrangements to carry commercial substance and rationale once the General Anti Avoidance Rules (GAAR) become applicable with effect from 1 April 2015.