Article
Compulsorily Convertible Debentures: Debt or Equity?
By Neha Sharma
Compulsorily Convertible Debentures (‘CCDs’) are hybrid instruments, being debt at the time of issue along with a certainty to get converted into equity. Since the guidelines on FDI treat CCDs as equity for the purposes of reporting to the RBI, a question arises as to whether they are to be regarded as equity capital under all other laws as well. The article in this issue of Direct Tax Amicus discusses the question from the perspective of income-tax law, observing that the return on debt and equity have distinct treatment, both in the hands of the lender/ investor and the borrower/ issuer. Discussing various case law, the article also explores as to whether the basic character of CCDs as being a debt instrument till the date of their conversion, can be re-characterised as equity under the income-tax laws. According to the author, since with effect from 1 April 2018, GAAR and thin capitalisation rules have been implemented in India vide Chapter X-A and Section 94B of the Income Tax Act respectively, one must be mindful of the implications...
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Ratio decidendi
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- Re-sellers margin is not akin to commission, not liable to deduction of tax under Section 194H – ITAT Mumbai
- Consideration paid for acquisition of technical know-how, even if termed as annual royalty payment, is capital expenditure – Karnataka High Court
- Reimbursement of salary expense of deputed employee is not a consideration for rendition of technical services – Karnataka High Court
