Interest on convertible debentures is taxable

In a recent judgment passed by the Authority of Advance Ruling (AAR) in the matter LMN India Limited (AAR No. 769 of 2007), it was held that payment made to a foreign company (LMCC US) in the form of interest until the conversion of bonds into equity shares, is considered as interest paid on the debt incurred by the applicant (LMN).

It is thus liable to be taxed as income of LMCC US under section 2 (28A) of the Income Tax Act, 1961, (ITA) and under article 11.2 of the double tax avoidance agreement (DTAA).

Case background

In this case, LMN, a non-banking financial company incorporated in India, for the purpose of funding its business activities, proposed to borrow money from LMCC US by issuing fully convertible bonds under the foreign direct investments scheme.

Sumes Dewan is a partner and Shradha Puri is a senior associate at KR Chawla & Co Advocates & Legal Consultants. The firm is headquartered in New Delhi and has offices in Chennai and Bangalore as well as a representative office in Singapore.