IN RE: LMN INDIA LTD. Vs. STATE

JUDGEMENT

(1.) THE applicant is a non -banking financial company incorporated in India. It makes investments in various businesses in India and abroad in the form of securities including shares, stocks and debentures. For the purpose of funding its business activities in India, the applicant proposes to borrow money from LMCC USA by issuing fully convertible bonds under the foreign direct investments schemes. A "bond subscription agreement" was, therefore, entered into between the applicant and LMCC (referred to as 'investor'). As per the agreement, the bonds (with the face value of Rs. 10 each) are convertible into equity shares at the end of 5 years from the date of the issue unless extended for a further period of 5 years in which case the conversion would take place at the end of 10 years. Applicant submits that by virtue of conversion there will be constructive payment of borrowed money to the bondholder. The interest on the bonds is payable by the applicant in rupee currency in cash on half yearly basis irrespective of the fact that the applicant makes profits or not. The rate of interest is specified in the amended agreement. The applicant further submits that as per the agreement, the bonds are treated as debt instruments till their conversion into equity shares. Until conversion the bonds will rank in priority to equity shares in the event of a winding up or liquidation of the applicant -company. Moreover, upon conversion of bonds, the equity shares issued will rank pari passu with the existing equity shares. The applicant further submits that LMCC does not have a PE or fixed base in India.

(2.) THESE are broadly the facts. The applicant seeks advance ruling to "ascertain the precise nature of interest payments" under the IT Act and to know whether the applicant is obliged to deduct tax at source. The following questions were formulated for consideration vide orders dt. 13th March, 2008 and 25th April, 2008;

(3.) WE shall now refer to the relevant Clauses in the bond subscription agreement. In the recital, it is stated that the company is in need of working capital/funds for the purposes of its business in India and the investor (LMCC) has expressed its willingness to extend financial assistance by subscribing to bonds in the nature of promissory notes of the face value of Rs. 10 each. The maximum amount of investor's subscription to the bonds is stated to be Rs. 8,000 crores.