Z, the applicant and an Indian Company V (hereinafter referred as "V") invested in equity shares and
CCDs of Company S (hereinafter referred as "S"), wholly owned subsidiary of V.Under the investment
agreement executed between S, V and Z, the CCDs were mandatorily convertible into equity shares
upon the expiry of 72 months from the investment date; additionally, prior to the mandatory conversion
date, Z had a put option to sell specific number of equity shares and CCDs to V and V had the call
option to purchase the said shares and CCDs from Z. V exercised the call option and purchased the
CCDs from Z. The tax officer however rejected the application and asked V to deposit the withholding
tax on this transaction. Z subsequently approached the AAR for a ruling on the issue.
AAR held that CCD was in the nature of a debt instrument and the obligation to repay the principal and
an interest component were embedded in the concept of debt. The AAR further concluded that 'interest'
denotes any type of income that become payable on a debenture. On review of the investment
agreement the AAR concluded that S had no power to exercise any management control over its
business and that for all practical purposes V and S were a single entity.Additionally, V was required to
share with Z, its financial statement, debt servicing status etc.
In light of such provisions, the AAR observed that on a close reading of the investment agreements, it
was apparent that the commitment to repay the debt was on V, the parent of S and not S and therefore,
the purchase of CCDs by V from Z should be considered repayment of the debt such that income
arising to Z should be treated as interest income.
Z, In re (2012) 69DTR 329(AAR)
CCDs of Company S (hereinafter referred as "S"), wholly owned subsidiary of V.Under the investment
agreement executed between S, V and Z, the CCDs were mandatorily convertible into equity shares
upon the expiry of 72 months from the investment date; additionally, prior to the mandatory conversion
date, Z had a put option to sell specific number of equity shares and CCDs to V and V had the call
option to purchase the said shares and CCDs from Z. V exercised the call option and purchased the
CCDs from Z. The tax officer however rejected the application and asked V to deposit the withholding
tax on this transaction. Z subsequently approached the AAR for a ruling on the issue.
AAR held that CCD was in the nature of a debt instrument and the obligation to repay the principal and
an interest component were embedded in the concept of debt. The AAR further concluded that 'interest'
denotes any type of income that become payable on a debenture. On review of the investment
agreement the AAR concluded that S had no power to exercise any management control over its
business and that for all practical purposes V and S were a single entity.Additionally, V was required to
share with Z, its financial statement, debt servicing status etc.
In light of such provisions, the AAR observed that on a close reading of the investment agreements, it
was apparent that the commitment to repay the debt was on V, the parent of S and not S and therefore,
the purchase of CCDs by V from Z should be considered repayment of the debt such that income
arising to Z should be treated as interest income.
Z, In re (2012) 69DTR 329(AAR)
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