If thin capitalization rules are not in the domestic law/Treaty, there can be not be artificial disallowance of interest paid on borrowings

Court: Mumbai Tribunal

Citation: Besix Kier Dabhol, SA Vs. DDIT

Brief- This is an important decision of the Tribunal, which brings out the importance of a Double Taxation Avoidance Agreement (Treaty), that where thin capitalization rules are not in the domestic law/Treaty, there can be no artificial dis allowance of interest paid on borrowings.

Facts:

Besix Kier, Dabhol (assessee), a company registered under the laws of Kingdom of Belgium, was engaged in the business of carrying out project of construction of fuel jetty and a backwater near Dabhol, India, pursuant to a contract entered into by the asses see with Lingtec Constructors LP .The assessee company had issued 2,500 shares , at the relevant point of time, of Belgian Francs (BEF) 1,000 each amounting to BEF 2,500,000 , out of which, 60% equity shares, i.e. 1,500 shares, were held by N V Besix SA, Belgium, and the remaining 40% equity shares, i.e. 1000 shares, were held by Kier International (Investments) Limited, United Kingdom. The total share capital was thus approximately US $ 83,334 or Rs. 3 8,20,000.

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