The Income Tax Appellate Tribunal, Delhi Bench, has ruled that a Mauritius-resident entity holding a Category-I Global Business License and registered as an FPI with SEBI qualifies as the beneficial owner of interest income derived from external commercial borrowings extended to its Indian group companies, thereby entitling it to treaty benefits under Article 11 of the India-Mauritius DTAA. However, the Tribunal declined to extend the concessional TDS rate under section 194LD to interest on non-convertible debentures, holding that the statutory expression "rupee denominated bond" excludes NCDs under the principle of expressio unius est exclusio alterius.
Background & Facts
The Dispute
The appellants, M/s Azure Power Energy Limited (a Mauritius-incorporated company) and M/s Azure Power Solar Energy Private Limited, filed twin appeals against assessment orders dated 06.01.2026 passed by the Assistant Commissioner of Income Tax, Circle (International Taxation) 1(1)(1), Delhi. The orders arose from directions dated 27.12.2025 of the Dispute Resolution Panel-2, New Delhi, under section 144C(13) read with section 143(3) of the Income Tax Act, 1961 for Assessment Year 2023-24.
Key Facts
- Azure Power Energy Limited is incorporated under the laws of Mauritius and is a wholly owned subsidiary of Azure Power Global Limited, Mauritius
- The company holds a Category-I Global Business License (GBL) issued by the Financial Services Commission, Mauritius
- It was registered as a Foreign Portfolio Investor (FPI) with SEBI on 30.04.2019 for investing in debt instruments in India
- The company raised funds by issuing "solar green bonds" listed on the Singapore Exchange Securities Trading Limited (SGX-ST)
- Interest income from ECBs: Rs. 1,53,16,25,333 derived from external commercial borrowings extended to group companies in India
- Interest income from NCDs: Rs. 75,07,89,141 on non-convertible debentures
- The assessee claimed assessment of ECB interest income at 7.5% under Article 11 of the India-Mauritius DTAA and NCD interest income at 5.6% under section 194LD
- The Assessing Officer rejected both claims, contending the assessee failed the "beneficial owner" test (lacking possession, use, risk, and control over funds) and that NCDs are not "rupee denominated bonds" under section 194LD(2)(a)(i)
- The DRP upheld the AO's findings
Procedural History
- 06.01.2026: Assessment orders passed by ACIT(IT) 1(1)(1), Delhi in DINs ITBA/AST/S/143(3)/2025-26/1084502496(1) and ITBA/AST/S/143(3)/2025-26/1084507074(1)
- 27.12.2025: DRP-2, New Delhi directions under section 144C(13)
- 28.07.2026: Hearing before ITAT Delhi Bench 'D'
- 09.09.2026: Order pronounced in open court
The Parties' Positions
For the Appellants: The assessee demonstrated through its paperbook (pages 28-67) that it satisfied all four parameters of beneficial ownership - possession, use, risk, and control - over the ECB funds and interest income. The green bond scheme clauses evidenced self-exhaustive risk and control. For section 194LD, counsel argued that bonds and debentures are interchangeable debt instruments under Companies Act definitions, and relied on PCCIT (International Taxation) instructions dated 30.11.2017 treating NCDs as bonds.
For the Respondent: The Revenue contended the assessee was a mere conduit entity lacking beneficial ownership. On section 194LD, the Revenue supported the lower authorities' view that NCDs do not fall within "rupee denominated bond" as the statute expressly mentions only bonds.
Relief Sought
The appellants sought: (1) Allowance of DTAA benefit under Article 11 for ECB interest income of Rs. 1,53,16,25,333 at 7.5%; (2) Concessional TDS rate of 5.6% under section 194LD for NCD interest income of Rs. 75,07,89,141; (3) Alternatively, if section 194LD does not apply, assessment of NCD interest income under the relevant DTAA article.
The Legal Issue
The Tribunal had to determine two distinct questions: (1) Whether a Mauritius-resident entity with a Category-I GBL, FPI registration, and demonstrable control over ECB funds and interest income satisfies the "beneficial owner" test under Article 11 of the India-Mauritius DTAA; (2) Whether non-convertible debentures (NCDs) qualify as "rupee denominated bonds" under section 194LD(2)(a)(i) of the Income Tax Act, 1961 for the concessional 5.6% TDS rate.
Arguments Presented
For the Appellant
Senior Counsel Sh. Ajay Vohra relied on Klause Vogel's Commentary on Double Taxation Conventions defining beneficial ownership as control over both the asset and income arising therefrom. He cited CIT v. Fujitsu America Inc. (2023) 147 taxmann.com 379 (Del) holding that absence of back-to-back arrangement and presence of "dominion and control" satisfies the beneficial ownership test. For section 194LD, counsel argued that section 2(2) of the Companies Act, 1956 and section 2(30) of the Companies Act, 2013 treat debentures as inclusive of bonds, and placed reliance on PCCIT (International Taxation) instructions dated 30.11.2017 and DIT v. Shree Visheshwar Nath Memorial Public Charitable Trust (2010) 194 taxman 280 (Delhi) and Heidelberg Cement AG v. ACIT (2022) 197 ITD 791 (Delhi).
For the Respondent
Dr. Shalini Verma, CIT(DR), objected to the applicability of Fujitsu (which interpreted the India-Cyprus DTAA) to the India-Mauritius treaty. On section 194LD, the Revenue maintained that the statutory language "rupee denominated bond of an Indian company" expressly excludes NCDs, and that departmental instructions lack statutory force under section 119.
The Court's Analysis
On the beneficial ownership issue, the Tribunal rejected the Revenue's technical objection that Fujitsu was inapplicable because it concerned the India-Cyprus DTAA. The Tribunal held that the core issue - beneficial ownership - is identical across both treaties with no material exception. Examining the assessee's paperbook (pages 28-67), the Tribunal found the entity held a valid Category-I GBL, FPI registration, Mauritius Tax Residency Certificate for FY 2022-23, and Form 1DF with the Green Bond Scheme. The bond scheme clauses demonstrated "self-exhaustive risk and control on both the funds released as well as the interest income" (page 39). The Tribunal concluded:
"We further don't find any other material to arrive at the conclusion that the assessee/appellant is a mere conduit entity not having any actual control and benefit of the interest income as well as funds forming part of the external corporate borrowings. We conclude in this factual backdrop that the learned lower authorities have erred in law and on facts in rejecting the assessee's status as the 'beneficial' owner under Article-11 of the Indian-Mauritius DTAA in very terms."
On section 194LD, the Tribunal applied the stricter interpretation principle from Smt. Tarulata Shyam v. CIT (1977) 108 ITR 345 (SC) and Commissioner of Customs v. Dilip Kumar (2018) 9 SCC 1 (FB)(SC). The Tribunal held:
"We wish to reiterate here that all what the legislature has used in the aforesaid statutory provision is 'a Rupee denominated bond of an Indian Company' only. We accordingly are of the considered view that the same in no case could be held to include the assessee's non-convertible debentures in any circumstance; whatsoever going by stricter interpretation principle."
Applying expressio unius est exclusio alterius (GVVK Industries Ltd v. ITO (2011) 332 ITR 30 (SC)), the Tribunal ruled that the express mention of "rupee denominated bond" implies exclusion of all other debt instruments. The PCCIT's 2017 instructions were held not to carry statutory force under section 119 (distinguishing K.P. Varghese v. ITO (1981) 131 ITR 597 (SC) which concerned CBDT instructions). The Tribunal also distinguished Heidelberg Cement and Cochin Refineries as dealing with the reverse question (whether bonds include debentures under the Companies Act for charitable trust purposes under section 11(5)). The request for reference to a larger bench under section 255(4) was declined as no cited precedent applied stricter interpretation to form a binding precedent.
On the alternative argument, the Tribunal directed the Assessing Officer to examine afresh whether the NCD interest income qualifies for relief under the relevant article of the India-Mauritius DTAA, after affording adequate hearing opportunity.
The Verdict
The appeals are partly allowed. For IT(IT)A No. 37/Del/2026 (Azure Power Energy Limited): (1) The assessee's claim for beneficial ownership under Article 11 of the India-Mauritius DTAA for ECB interest income of Rs. 1,53,16,25,333 is allowed; necessary computation to follow as per law. (2) The claim for concessional TDS @ 5.6% under section 194LD for NCD interest income of Rs. 75,07,89,141 is rejected; NCDs are not "rupee denominated bonds" under section 194LD(2)(a)(i). (3) The AO is directed to examine afresh the applicability of the relevant DTAA article for the NCD interest income after adequate hearing. The same order applies to IT(IT)A No. 38/Del/2026 (Azure Power Solar Energy Private Limited) by consent of parties.
What This Means For Similar Cases
Beneficial Ownership Requires Substance, Not Form
The Tribunal's analysis confirms that beneficial ownership under DTAAs is a factual determination centered on actual control over funds and income. A Mauritius entity with a Category-I GBL, FPI registration, valid TRC, and demonstrable risk-bearing capacity through contractual arrangements (such as green bond schemes) can satisfy the test even as a holding company extending ECBs to group entities. Practitioners should ensure documentation evidences: (a) possession and use of funds; (b) assumption of commercial risk; (c) decision-making control over deployment; and (d) absence of back-to-back arrangements.
Section 194LD Is Strictly Confined to "Rupee Denominated Bonds"
The Tribunal has drawn a bright-line distinction between bonds and debentures for section 194LD purposes. The statutory language "rupee denominated bond of an Indian company" excludes NCDs, regardless of Companies Act definitions treating debentures as inclusive of bonds. Departmental instructions (even from PCCIT) cannot expand the statutory scope absent CBDT notification under section 119. Taxpayers issuing NCDs cannot claim the 5.6% concessional TDS rate under section 194LD; they must rely on applicable DTAA provisions or the general TDS rate under section 195.
Alternative DTAA Relief Remains Available for NCD Income
Where section 194LD is inapplicable, the Tribunal has preserved the assessee's right to seek treaty-based relief for NCD interest income. The AO must examine the relevant DTAA article (likely Article 11 for interest) afresh. This creates a two-step strategy: first argue section 194LD; if rejected, fall back on DTAA beneficial ownership analysis - which, as this judgment shows, may succeed on identical facts.
