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Income Tax Appellate Tribunal, [ DELHI BENCH : “I” NEW DELHI ]
Before: DR. B. R. R. KUMAR & SH. YOGESH KUMAR US
The present appeal is preferred by the assessee for the Assessment Year 2012-13 against the final assessment order dated 18/04/2016 passed by the DCIT, Circle-2 (2)(1), New Delhi u/s 143(3) r/w Section 144C of Income tax Act, 1961,( ‘the Act’ for short).
2. The assessee has raised the following substantive grounds of appeal:-
“1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making an adjustment of Rs.26,58,12,530/- as income in the hands of assessee company on account of notional interest and that too by recording incorrect acts and findings and without observing the principles of natural justice.
2. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of Ld. AO in making an adjustment of Rs.26,58,12,530/- as income in the hands of assessee company on account of notional interest, is bad in law and against the facts and circumstances of the case.
3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in considering/appreciating the following submissions of the assessee.
• That the return filed for the year under consideration has not been treated as non-est/nullity in the eyes of law. • That the assessee company is incorporated outside India and no income accrued or arose or deemed to accrues or arise in India to the assessee company and thus the assessee company is not liable to file Income Tax Return in India. • That no interest was 'paid' to the assessee company. • That the impugned interest income is not taxable in view of the provisions of DTAA between India and Cyprus as the amount was never paid by AE’s. Therefore, the reference made to TPO was illegal, the adjustment proposed by the TPO is illegal and consequently the addition made by Ld. AO is also illegal.
4. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in rejecting the analysis followed by the appellant and in determining the price of the impugned transaction on the basis of TPO’s order.
5. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making the adjustment in contravention of circular 14/2001 issued by the CBDT and have failed to take into cognizance that charging of interest by the appellant would lead to an overall reduction of tax base in India.
6. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in computing the arm’s length price of the international transaction of the appellant by applying the internal comparable uncontrolled price method.
7. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in not treating the investment made by the appellant in the debenture as non-performing assets and has accordingly erred in recognizing income on such non-performing assets.
8. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in charging the interest u/s 234A, 234B, 234C and 234D of the Income Tax Act, 1961.” 3. Brief facts of the case are that, the assessee is a company incorporated in Cyprus. The assessee on 30/11/ 2007 subscribed to 15% Fully Convertible Debentures (FCDs) of face value of Rs.100/- each issued by the following Indian entities:
A. Apogee Reality Ventures Pvt. Ltd. B. Perigee Reality Ventures Pvt. Ltd. C. Symmetree Realty Ventures Pvt. Ltd. D. Energy Realty Ventures Pvt. Ltd.
4. The debentures were converted into 0% fully convertible debentures w.e.f. 01/01/2009. Subsequently, on 23/12/2019 in addition to conversion of 15% fully convertible debentures into 0% FCDs, the assessee has subscribed to 0% fully convertible debentures of face value of Rs. 100 each issued by the above AE’s. The Ld. TPO has passed order u/s 92C(3) of the Act wherein held that 15% of the FCDs have been converted into 0% FCDs without assigning any reason. Therefore, by applying internal CUP as most appropriate method. Further, the TPO charged the interest on FCDs as the same rate of 15% as was being charged prior to 01/01/2009. The income generated during the year under consideration was only interest income on FCDs which was offered to tax at the treaty rate of 10%. Thus, the TPO has determined the Arms Length Price and made adjustment of Rs. 26,58,12,530/- in following manners:-
Name No. of FCD Face Value Date of No of Interest Total interest of the Issue days @15% charged ALP of A.E interest on FCD Openin 10891745 1089174500 365 1633761 163376175 g 75 Balanc e ARVPL 22247 2224700 29.08.2012 213 194737 194737 ERVPL 8238045 823804500 02.06.2011 297 1005492 100549289 89 ERVPL 174400 17440000 30.08.2011 212 1519430 1519430 SRVPL 14359 1435900 06.06.2011 293 172989 172898 Total Adjustment 265812530
5. The assessment order came to be passed on 18/04/2016 u/s 143(3) r.w.s 144C(3) of the Act in continuation with the order passed by the TPO. Aggrieved by the assessment order dated 18/04/2016, the assessee has preferred an appeal before the CIT(A). The Ld.CIT(A) vide order dated 31/07/2019 has confirmed the action of the A.O. in making adjustment of Rs. 26,58,12,530/- on account of notional interest.
6. Aggrieved by the order dated 31/07/2019 the assessee has preferred the present appeal.
7. The Ld. Counsel for the assessee has contended that the issues involved in the present appeal has been decided in favour of the assessee for the Assessment Year 2009-10 in vide order dated 02/09/2021, since there is no change of circumstances, the Ld. Counsel for the assessee submitted that the present appeal deserves to be allowed by following the order made in assessee’s own case.
Per contra, the Ld. DR has not disputed the above fact and could not bring any contrary judicial pronouncements and further relied on the order of the Ld.CIT(A).
We have heard the parties, perused the material on record and gave our thoughtful consideration. The similar issue involved in the present appeal has been dealt and decided by the Co-ordinate Bench of the Tribunal in and vide order dated 05/07/2021 the Co-ordinate Bench of the Tribunal has held as under:-
9. This leads to us to adjudicate the moot issue “whether as per Article 11(1) interest paid includes interest payable or not
10. The Article 11 of agreement between the Government of Republic of India and the Government of Republic of Cyprus for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income reads as under:
ARTICLE 11
INTEREST
Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 percent of the gross amount of the interest.
Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be exempt from tax in that State, provided that it is derived and beneficially owned by:
(a) the Government, a political sub-division or a local authority of the other Contracting State; or (b) in the case of India, the Reserve Bank of India, the Export-Import bank of India, the National Housing bank; and (c) any other institution as may be agreed upon from time to time between the Competent authorities of the Contracting States through exchange of letters.
The term "interest" as used in this Article means income from debt claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article.
The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, "Trough a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.
Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.
Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.”
11. The Hon'ble Bombay High Court in CIT v. Pramerica ASPF II Cyprus Holding Limited (ITA No. 1824 of 2016) had framed the following question of law:
Whether on the facts and circumstances of the case and in law, the ITAT is correct in directing the Assessing Officer to accept the interest income returned by the assessee on cash basis whereas the A. O. has made additions on the ground that interest income was liable to be assessed on accrual basis ?
12. The Hon'ble Bombay High Court dismissed the appeal filed by the revenue department and held that followed its earlier decision in DDIT v. Siemens Aktiengesellschaft (2009) taxmann.com 1019 to hold that taxability in a case where the article is worded in the aforesaid manner, taxability can only be fastened on receipt of payment. Relevant Paragraph has been reproduced:
"8. Thus, while interpreting similar clause of Indo-German DTAA in relation to taxing royalty or fees for technical services, this Court had confirmed the decision of tribunal holding that such service can be taxed only on receipt. This decision was later on followed in Income Tax Appeal No. 1033/11 dated 20/11/2012 and thereafter in Income Tax Appeal No.2356/ 11 and connected Appeals vide the order dated 07/03/2013.
9. On the same principle, the Appeal is dismissed."
We have also gone through the order of the Co-ordinate Bench of ITAT in the case of DCIT Vs. TMW ASPF i Cyprus Holding Company Ltd. in dated 09.08.2019.
In the appeal filed by the revenue against the order of the ld. DRP reads as under:
(i) Whether on the facts and in the circumstances of the case, the DRP erred in holding that as per Article 11(1) and (2) of Indo- Cyprus DTAA, interest income is chargeable to tax on paid basis when the usage of the word 'paid' always includes 'payable' and vice versa. (ii) Whether on the facts and in the circumstances of the case, the DRP erred in observing that it has been judicially held in various case laws relied upon by the assessee that as per Article 11(1) and (2) of Indo- Cyprus DTAA, interest income is chargeable to tax on paid basis when there are no such findings in any decision cited by the assessee before the Hon'ble DRP.
While adjudicating the core issue, it was held as under:
India Cyprus DTAA Article 11(1) of India-Cyprus DTAA:
Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
The aforesaid para envisages that for taxing the interest income in the hands of a non-resident, it is necessary that the interest should arise in a contracting state, i.e., twin conditions of accrual as well as the payment are to be satisfied. If there is no accrual or actual payment received then same is to be decided within the scope of Article 11(1). What the TPO/AO have sought to tax is that, assessee was supposed to receive interest of 18%, if the contingent event would have arisen, i.e., if in the event, the option was exercised by the assessee to sell its converted shares to the promoters of investee company at an option price then it would have given the return of 18%. Thus, entire edifice of the TPO/AO was based on fixation of contingent event which assessee was supposed to receive. It is also matter of record no such conversion was actualised and assessee remained invested even during the year under consideration. The transfer pricing adjustment has been made on this hypothetical amount of interest receivable. Whether such notional income can be brought to tax even under the transfer pricing provision, has been dealt by the Hon'ble Bombay High Court in the case of Vodafone India Services (P) Ltd. vs. Union of India (supra), wherein their Lordships have held that even income arising from international transaction must satisfy the test of income under the Act and must find its home in one of the charging provisions. Here in this case, nowhere the TPO/AO has been able to establish that notional interest satisfy the test of income arising or received under the charging provision of Income Tax Act. If income is not taxable in terms of section 4, then chapter X cannot be made applicable, because section 92 provides for computing the income arising from international transactions with regard to the ALP. Only the interest income chargeable to tax can be subject matter of transfer pricing in India. Making any transfer pricing adjustment on interest which has neither been received nor accrued to the assessee cannot be held to be chargeable in terms of the Income Tax Act read with Article 11(1) of DTAA. Here it cannot be the case of accrual of interest also, because none of the investee companies have acknowledge that any interest payment is due, albeit they have been requesting for waiving of interest of even coupon rate of 4%, leave alone the return of 18% which was dependent upon some future contingencies. Assessee despite all its efforts has acceded to such request. Further, in the India Cyprus DTAA wherein similar phrase has been used pertaining to FTS and Royalty in India Cyprus DTAA, Hon'ble Bombay High Court held that assessment of royalty or FTS should be made in the year in which amount have actually received and not otherwise. The coordinate bench of Mumbai ITAT in the case of Pramerica ASPF II Cyprus Holding Ltd. vs. DCIT (supra) on exactly similar set of facts, addition on account of notional interest was made; the Tribunal has held that the interest income in question can only be taxed on payment /receipt basis. The relevant observation has already been incorporated above. The Hon'ble Bombay High Court has confirmed the said finding. Similar view has been taken by the ITAT Chennai Bench in the case of DCIT vs. Inzi Control India Limited (supra). Thus, in view of Article 11(1) we hold that, only the interest which has actually been received can only be subject matter of taxation and no TP adjustment can be made on some hypothetical receivable amount which was contingent upon certain event which has actually not been taken place during the year. Thus, the order of the Direction of the DRP is upheld and the grounds raised by the revenue are dismissed.
Since, the matter stands adjudicated by various orders of the Tribunal and Hon’ble Courts that the word “paid” cannot be extended to “payable” in respect of interest under Article 11 of Indo-Cyprus treaty, we hereby allow the appeal of the assessee.”
By respectfully following the order of the Co-ordinate Bench in assessee’s own case for Assessment Year 2009-10 (supra), we are of the opinion that the appeal of the assessee deserves to be allowed in terms of the order made in ITA No. 3303/Del/2017.
In view of the above other grounds of appeal of the assessee would be academic in nature hence, not being adjudicated.
In the result, appeal of the assessee is allowed.
Order pronounced in the Open Court on : 30 .11.2022.