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Informist, Monday, Sept. 21, 2026

 

NEW DELHI – The New Delhi bench of the Income Tax Appellate Tribunal has ruled that non-convertible debentures cannot be treated as rupee-denominated bonds for Section 194LD of the Income Tax Act, 1961. This section requires a concessional tax deducted at source rate of 5% on interest income earned by specific non-resident investors, where the eligible payees are foreign institutional investors and qualified foreign investors. 

 

The appellate tribunal rejected Azure Power Energy Ltd.'s and Azure Power Solar Energy Pvt. Ltd's argument that various definitions of bonds and debentures treat these categories as interchangeable debt instruments. "We observe that once the legislature has incorporated the foregoing statutory expression as a 'rupee-denominated bond', the necessary inference is that it has excluded all other debt instruments categories in very terms," said the appellate tribunal.

 

It dismissed the assessee's argument that Principal Chief Commissioner of Income Tax, International Taxation, New Delhi had issued his instructions way back in 2017 that the term "bond" used in section 194LD of the Income Tax Act would be considered as inclusive of such non-convertible debentures as well. These instructions couldn't be held as governing the field decisively since they don't carry any statutory force under Section 119 of the Income Tax Act, said the appellate tribunal.

 

The appellate tribunal's verdict will have implications on foreign institutional investors and qualified foreign investors. The ruling questions the approach where interest on Indian non-convertible debentures has been offered to tax withholding by applying the concessional rate under section 194LD of the Income Tax Act.

 

Although the assessees have all along claimed an assessment of their interest income derived from non-convertible debentures section 194LD of the Income Tax Act, the same is found to be applicable in an instance of the payer or deductor of the interest income only, wherein the latter is supposed to deduct tax deducted at source at the prescribed rate, said the appellate tribunal. It is nowhere mentioned that the assessees could claim assessment of its interest income at the very rate as is the case sought to be made herein, said the appellate tribunal. 

 

Azure Power Energy had said that the assessing officer had erred in taxing interest income of INR 2.10 billion earned by it in relation to non-convertible debentures issued by its Indian group entities to the company at the rate of 20% under Section 115D read with Section 196D of the Income Tax Act. The assessing officer should not have denied benefits of Section 194LD of Income Tax Act with respect to the interest income on the ground that non-convertible debentures are not covered within the ambit of rupee denominated bonds, said the petitioner.  End

 

Reported by Surya Tripathi

Edited by Deepshikha Bhardwaj

 

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