As a result, five days' worth of accrued interest was embedded in the sale consideration.
The investor treated the entire amount as capital gains and claimed an exemption under the India-Singapore tax treaty.Tax authorities, however, declined to grant an exemption on the entire amount.The tax department carved out the portion attributable to the five-day period and taxed it separately, arguing that the amount represented interest income taxable under the India-Singapore tax treaty.
The ITAT agreed with this position.Tax experts said the ruling could also renew focus on how cross-border investors structure and time exits from Indian debt instruments.“Also, the ITAT decision does not provide detailed reasoning for arriving at this conclusion and has not considered the relevant jurisprudence on this aspect.
The ruling also introduces complexity around withholding obligations and income characterisation, areas that have historically seen divergent positions between taxpayers and tax authorities.“While the longstanding dispute on the deductibility of broken period interest in the hands of purchasers has seen clarity, the taxability in the hands of sellers remains less settled, and this ruling is among the first to address the issue,” PwC said, adding that the tribunal did not examine in detail the treaty-based characterisation under the India-Singapore agreement, leaving scope for further litigation.For foreign investors, the ruling underscores the need to reassess pricing, documentation and tax positions in secondary debt trades.
