Interest Receipts From Non-Convertible Debentures Of Indian AE Are Not Subject To Dividend Distribution Tax: Delhi HC

While holding so, the High Court rejected the argument put forth by the Department that although the funds were taken out in the form of interest payments, they were in fact liable to be declared as dividend and was subjected to Dividend Distribution Tax (DDT).

Pointing out that the Assessee was merely the recipient of the interest income and it was clearly not the entity which had either declared or paid the dividend, the Division Bench comprising Justice Yashwant Varma and Justice Ravinder Dudeja observed that DDT is liable to be paid by the company which declares, distributes, or pays the dividend.

Facts of the case:

The Assessee, a Luxembourg based Foreign Portfolio Investor registered with SEBI subscribed to 4600 Non-convertible Debentures (NCDs) issued by Genpact India for the face value of Rs. 1 Crore each, carrying a coupon rate of 11% per annum. The Assessee filed its return declaring the interest income received from the NCDs and offered the same to tax at the rate of 5% u/s 194LD. The AO also served the Assessee with intimation u/s 143(1) where consistent with the treatment accorded to interest income in the past, the same was duly acknowledged. However, subsequently the AO issued a notice u/s 148A(b) on the ground that interest income derived from Non-convertible Debentures floated by Assessee had not been appropriately offered to tax due to mischaracterization of income. The AO also opined that although the funds were taken out in the form of interest payments, they were in fact liable to be declared as dividend and subjected to DDT. Thus, the AO passed an order u/s 148A(d).

Observation of the High Court:

The Bench observed that even if the payment were to be assumed to be dividend, the liability to pay tax thereon could have only been foisted upon the company which had declared, distributed or paid the same.

The Bench pointed that the Department during the course of assessment for previous AYs had accepted the income derived from the said NCDs in terms of Section 194LD

The Bench also pointed that the Assessee was served with intimation under Section 143(1) where consistent with the treatment accorded to interest income in the past, the same was duly acknowledged.

As far as reopening is concerned, the Bench considered the Assessee's submission that there is an evident and manifest variation between the reasons which had been originally recorded in the notice u/s 148A(b) and the final order passed by the Revenue disposing of Assessee's objections.

The Bench observed that there has to be an ineffaceable connect which must exist between the reasons initially disclosed proposing reassessment and which constitute the basis for formation of opinion with respect to escapement of income and the final decision to commence reassessment.

Hence, explaining that basis for the formation of opinion with respect to escapement of income cannot be one of changing hues or sought to be shored upon fresh reasoning, the High Court allows Assessee's petition.

Counsel for Petitioner/ Assessee: Advocates Sachit Jolly, Disha Jham, Soumya Singh, Rishabh Malhotra, Devansh Jain, Raghav Dutt and Percy Pardiwalla

Counsel for Respondent/ Department: Advocate Puneet Rai, Rishabh Nangia and Ashvini Kumar

Case Title: Genpact Luxembourg S.A.R.L. vs. ACIT

Citation: 2024 LiveLaw (Del) 906

Case Number: W.P.(C) 7784/2022

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