Income Tax Appellate Tribunal

Interest Paid on Convertible Debentures - Income Tax Law

The recent Income Tax Appellate Tribunal (ITAT) Order in CAE Flight Training (India) Pvt. Ltd. (TS-440-ITAT-2019 (Bang)) clarifies how Compulsorily Convertible Debentures (CCDs) are to be treated under Income Tax Laws.

Before delving into the Order and what the ITAT said in making it, it is important to understand the legal context in which this question arose in the first place. To do this, we first need to understand the nature of a CCD. A debenture is a debt-based security that may or may not be secured against the assets of the company. Although debentures are undisputedly debt instruments, CCDs are debentures that are mandatorily converted into equity according to pre-determined terms at a pre-defined time. In the pre-conversion stage, the CCD holder is considered as a debtor by the company and is required to be paid interest on its investment. Post-conversion, the debt becomes equity capital in the company, which results in such investor earning dividends from its holdings.
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Insurance Compensation Outside India for Loss of Interest in Indian Subsidiary Not Taxable in India

In M/s Adidas India Marketing (P.) Ltd. v. Income Tax Officer,[1] the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that the insurance compensation received by the foreign parent due to loss of financial interest in its Indian subsidiary is not the subsidiary’s income as alleged by the tax officer and, therefore, is not taxable in India.

Facts

Adidas India Marketing (P.) Ltd. (Assessee) is an Indian company engaged in the business of sourcing, distributing and marketing products of the brand ‘Adidas’. Nearly all (98.99 %) of the Assessee’s equity is held by another Indian company, Adidas India Private Ltd. (Adidas India), which, in turn, is a subsidiary of a German company, Adidas AG, Germany (Adidas Germany).
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 Are the Assets or monies distributed to retiring partners taxable

Disputes involving whether capital gains taxes are leviable on sums/assets paid to retiring partners has been a subject matter of litigation for several decades now. In order to bring clarity, the legislature introduced a new provision (i.e. section 45(4)) into the Income tax Act, 1961 (IT Act), which provided that capital gains tax should be levied in the hands of the partnership firm at the time of distribution of assets. This seems, however, to have further complicated the situation.

Bangalore Income Tax Appellate Tribunal (ITAT) in the case of Savitri Kudur[1] and the Madras High Court (HC) in the case of National Company[2] have delivered noteworthy decisions recently. The Bangalore ITAT held that the cash consideration paid to the retiring partner on the basis of the amount lying in his/her capital account would not be subject to capital gains tax under the IT Act by relying on the decision of the Supreme Court (SC) in the case of Mohanbhai Pamabhai[3]. The Madras HC, on the other hand, held that even the allotment of immovable properties to the retiring partners would not be subject to capital gains tax by relying on the same SC decision in the case of the Mohanbhai Pamabhai (supra).
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AT&T Communications Services (India) Pvt. Ltd. v. Deputy Commissioner of Income Tax

With increasing globalisation of the world economy, the continuous movement of people from one jurisdiction to another has become imminent. However, such decisions have also created a significant amount of uncertainty, not only because of the social impact of such movement, but also because it creates tax complexities.

In a recent case, the Income Tax Appellate Tribunal (ITAT) had the occasion to examine the tax implications of reimbursement of salaries and other expenses in the case of AT&T Communications Services (India) Pvt. Ltd. v. Deputy Commissioner of Income Tax[1]. The ITAT held that reimbursement made by AT&T Communication Services (India) Pvt. Ltd. (AT&T India) for salary and other costs to AT&T World Personnel Services Inc., USA (AWPS) for the seconded employees working in India did not constitute fees for technical services (FTS) or fees for included services (FIS) under section 9(1)(vii) of Income Tax Act, 1961 (IT Act) or Article 12 of India-US Double Tax Avoidance Agreement (DTAA). Hence, AT&T India was not required to withhold taxes under section 195 of the IT Act.
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