The assessee is a company incorporated in Luxembourg and a registered Foreign Portfolio Investor (FPI) under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014. The company subscribed to Non-Convertible Debentures (NCDs) issued by an Indian company.

The revenue contended that the interest income received by the assessee from NCDs was mischaracterized and that the transaction was structured to evade tax by recharacterizing what should have been dividend payments as interest payments.  That the funds, although taken out in the form of interest payments, were in fact liable to be declared as dividends and subjected to DDT under section 115-O. 

The assessee contended that the interest income was correctly offered to tax under section 194LD at the prescribed rate. That they were merely the recipient of the interest income and not the entity that declared or paid any dividend.  Therefore, even if the payments were to be assumed as dividends, the liability to pay DDT could only be imposed on the company that declared, distributed, or paid the dividend, which in this case would not be the Assessee.

The Hon’ble High Court quashed the reassessment notice and the consequential orders under sections 148A(b) and 148A(d) on the premise that the revenue lacked valid basis for recharacterizing the interest income as dividend income.  The Hon’ble High Court further held that the interest income was correctly taxed under section 194LD and could not be recharacterized as dividends subject to DDT under section 115-O. 

Moreover, the Hon’ble Court emphasized that DDT liability could only be imposed on the company that declared, distributed, or paid the dividend, which was not the case with the assessee.   Court also observed that an ineffaceable connect must exist between the reasons initially disclosed proposing reassessment under section 147 of the Act and the basis which  constituted formation of opinion with respect to escapement of income and the final decision to commence reassessment proceedings. Notice and order disposing the objection  were quashed.   (AY. 2018-19)