Interest paid to foreign co on convertible debentures taxable in India

The Authority for Advance Rulings (AAR) has ruled that the interest paid to a foreign company on convertible debentures constitutes the foreign company’s income and is liable to be taxed in India. Indian companies raise foreign currency denominated funds in the form of external commercial borrowings (ECBs), which are considered as pure loan and the borrowings through foreign currency convertible bonds (FCCBs) have option to convert them into equity of the company upon their maturity. Now that will be considered as income and to be taxed in India. Indian companies are expected to redeem around $45 billion of foreign debt by December 2009, which they had borrowed for domestic expansion and overseas acquisitions, according to media reports.