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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI O.P. KANT & SHRI K.N. CHARY
ORDER PER O.P. KANT, AM:
This appeal by the assessee is directed against order dated 05/07/2019 passed by the learned CIT(Appeals)-42, New Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2016-17 raising following grounds: 1 That on the facts and in the circumstances of the case and in law, the order passed by the Id. CIT(A) dismissing the appeal filed under section 246A(l)(a) of the Act is wrong and bad in law and should be quashed.
2 That on the facts and in the circumstances of the case and in law, learned CIT(A) has erred in holding that the Appellant is not the ‘beneficial owner’ of interest income and thus denying it the benefit of lower tax rate of 10% provided in India-Cyprus Double Taxation Avoidance Agreement (DTAA). 3 That on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the interest income is chargeable to tax in India on accrual basis irrespective of its receipt by the Appellant and thus denying benefit of Article 11 of the DTAA, which provides taxation of interest income upon its receipt by the non-resident. 4 That on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the legal precedents wherein treaty benefits have been granted basis Tax Residency Certificate (‘TRC’) are not applicable to the Appellant’s case. 5 That on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not following the Rule of Consistency as laid down by the Hon’ble Supreme Court in the case of Radhasoami Satsang vs. CIT (1992) 193 ITR 321. 6 The above grounds of appeal are independent and without prejudice to one another.
7. The appellant prays for leave to add, alter, amend and/or modify any of the grounds of appeal at or before the hearing of the appeal.
2. Briefly stated facts of the case are that, the assessee, is a company registered under the laws of the Cyprus and tax resident of the Cyprus. For the year under consideration, the assessee filed its return of income on 26/07/2016, declaring total income of ₹ 3,27,36,055/-, on which tax at the rate of 10% was paid in terms of ‘Double Tax Avoidance Agreement’ (DTAA) between the India and the Cyprus. In the scrutiny assessment completed under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’), on 27/12/2018, the learned Assessing Officer taxed the income @ 40%. The Ld. CIT(A) also upheld the finding of the Assessing Officer. Aggrieved, the assessee is before the Income- Tax Appellate Tribunal (in short ‘the Tribunal’) raising the grounds as reproduced above.
3. Before us, the parties appeared through Video Conferencing facility and filed paper-book and other electronically.
We have heard rival submission of the parties on the issue in dispute and perused the relevant material on the record, including paper-book filed by the assessee. The assessee is a company registered under the laws of Cyprus and is tax resident of Cyprus. The main activity of the assessee has been claimed as providing financial services. The assessee subscribed to 11% Compulsorily Convertible Debentures (CCDs) issued by an Indian company, namely, M/s Eden Private Limited during the period from 2007 to 2009. During the year under consideration, the assessee earned interest of ₹ 3,27,36,055/- on those CCDs and in the return of income filed on 26/07/2016, the assessee offered the same at the tax rate of 10% under Article 11 of India Cyprus Double Tax Avoidance Agreement (DTAA). This benefit of lower rate of tax of 10% is available if an assessee is beneficial owner of the interest. During assessment proceeding, the Assessing Officer asked the assessee to demonstrate the beneficial owner-ship of the interest and documentary evidence in support of possession, use, risk and control of interest demonstrating beneficial ownership of interest. After considering the documents/information filed by the assessee, the Assessing Officer held that the beneficial ownership of the interest lies with the holding company of the assessee, i.e., Myddleton Holdings Ltd, Gibraltor and the assessee is merely a conduit company and, therefore he denied the lower rate of the tax provided under section 11(2) of the DTAA and taxed such interest income at the rate of 40 % along with surcharge and cess. The Ld. CIT(A) has summarized the basis of finding of the Assessing Officer as under: “6.9 find that the AO has not considered the appellant company as beneficial owner of the interest so accrued based on following observations: a) As per the shareholders information, assessee has mentioned that 100% beneficial ownership of the shares is with Myddleton Holdings Limited which is a Gibraltar based company. b) The balance sheet of the assessee is NIL. There is neither any asset nor liability. Even the investment in CCDs of Eden Estates Private Limited has not been mentioned. c) The main director of the assessee company who files returns, replies and any other statutory filings Mr. Maurice Moses Benady is based in Gibraltar. d) All the filings in respect of the company are done by him from the IP addresses at Gibraltar. e) Moreover, the assessee has no funds or assets of its own. f) The bank account of the company is based in Gibraltar International Bank which is the only account as per the return of income.”
4.1 The Ld. CIT(A) concurred with the finding of the Learned Assessing Officer observing as under:
“6.10 It is noted that the appellant has failed to showcase that how a company with nil assets and liabilities in the balance sheet took decision to invest in CCDs. Further, it is a fact that no interest was received in this case by the appellant company as per its claim. Accordingly, the appellant company filed an application with National Company Law Tribunal {'NCLT'), to initiate corporate insolvency resolution process under Insolvency and Bankruptcy Code 2016. It is interesting to note that if the appellant company has taken recourse to the legal action against the borrower then, why in turn, the financier of the appellant company has not taken any legal action against the appellant company. Any independent party would surely take action for recovery of its money. This clearly highlights that the appellant company was acting as an agent of its main financier in this case. Furthermore, the findings of the AO as discussed above, clearly point out that the appellant company was a conduit company. It is noteworthy that the fact of maintaining back office in Gibraltar and filing of company from IP address at Gibraltar are quite critical findings to hold the appellant as Conduct Company.”
4.2 The issue in dispute involved in the instant case is whether the assessee is entitled to the beneficial provisions of Article 11(2) of the India Cyprus Double Tax Avoidance Agreement (DTAA), which provides, lower tax rate of 10% on interest income arising in India. For ready reference, said Article is reproduced as under:
Cyprus Double Taxation Avoidance Agreement 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 recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest.
Notwithstanding the provisions of paragraph 2: a. interest arising in a Contracting State shall be exempt from tax in that State provided it is derived and beneficially owned by: i. the Government, a political sub-division or a local authority of the other Contracting State; or ii. the Central Bank of the other Contracting State or any agency or instrumentality (including a financial institution) wholly owned by the other Contracting State or political sub-division or local authority thereof; a. b. interest arising in a Contracting State shall be exempt from tax in that Contracting State to the extent approved by the Government of that State if it is derived and beneficially owned by any person other than a person referred to in sub-paragraph (a), who is a resident of the other Contracting State provided that the transaction giving rise to the debt claim has been approved in this regard by the Government of the first mentioned Contracting State.
4. 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, through 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 15, as the case may be, shall apply.
6. Interest shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the interest, whether he is a resident of Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtness 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 Contracting 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 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.
4.3 Thus, for requirement of eligibility of lower tax rate of 10%, the recipient should be beneficial owner of the interest. The Tribunal in the case of Golden Bella Holdings Ltd Vs. DCIT (International taxation) in for assessment year 2013-14 in identical circumstances has allowed the benefit of lower rate of tax of 10%. The relevant part of the order of the Tribunal (supra) is reproduced as under: “We find that the appellant invested in CCDs and received interest income thereon for its own exclusive benefit, and not for or on behalf of any other entity. The mere fact that the investment was funded using a portion of an interest-free shareholder loan and share capital does not affect the appellant's status as the "beneficial owner" of interest income, as the entire interest income was the sole property of the appellant. In this context, we may refer to para 10.2 of the OECD Commentary (2017] on Article 11 (Interest) of the 'Model
Tax Convention' to appreciate the meaning of "beneficial owner" and the same reads as under : “Where the recipient of interest does have the right to use and enjoy the interest unconstrained by a contractual or legal obligation to pass on the payment received to another person, the recipient is the 'beneficial owner' of that interest" The issue is simple because the mere fact that the CCDs were funded using monies received by the appellant from its immediate shareholder does not make the arrangement a back-to-back transaction. The appellant had the absolute control over the funds received from its immediate shareholder. Further, in the instant case the appellant wholly assumed and maintained the foreign exchange risk on the CCDs (as they were INR denominated), and the counter party risk on interest payments arising on the CCDs. In the instant case, the AO/DRP have failed to prove that (i) the appellant did not have exclusive possession and control over the interest income received, (ii) the appellant was required to seek approval or obtain consent from any entity to invest in ABPL, or to utilize the interest income received at its own discretion and (iii) the appellant was not free to utilize the interest income received at its sole and absolute discretion, unconstrained by any contractual, legal, or economic arrangements with any other third party. In view of the above factual scenario, the transaction between the appellant and ABPL cannot be a mere back-to-back transaction lacking economic substance. Therefore, we direct the AO to accept the return of income filed by the appellant for the impugned assessment year disclosing a total income of Rs.15,16,43,840/- from interest on CCDs in ABPL, wherein it has offered such interest to tax @ 10%.”
4.4 Thus, for holding that the assessee is not the beneficial ownership of the interest, the Learned Assessing Officer was required to establish that the assessee has failed in the tests as laid down in the decision of the Tribunal above. 4.5 Before us, the learned Counsel of the assessee referred to the financial statements including balance-sheet and profit and loss account for the year under consideration available on page 55 onwards of the paper-book. On page 61 of the paper-book, details of assets and liabilities at the year and have been mentioned. The assessee has shown investment in subsidiaries of US dollar 22,133,635 on 31/03/2016. Details of the investment in subsidiaries have been mentioned in note-8 to the balance- sheet, which is reproduced as under:
INVESTMENTS IN SUBSIDIARIES
2016 2015 US$ US$ Balance at 1 April 22,133,635 22,133,635 Balance at 31 March 22,133,635 22,133,635 The details of the subsidiaries are as follows: Country of Principal 31/03/2016 31/03/2016 incorporation activities Holding Holding 31/03/2016 31/03/2015 % % US$ US$ Skyngelor Cyprus Holding of 100 100 1,466 1,466 Limited India investments Airwat Construction 75 75 19,460,000 19,460,000 Developers Private Ltd 19,461,466 19,461,466 As at 31 March 2016, the Company holds 2.976.005 11% Fully Compulsory Convertible Debentures (FCCDs) of Rs.100 with a maturity of 10 years (i.e. 3 April 2017 and 23 April 2019) in Eden Real Estate Private Limited the details of which are as follows:
Name of issuer Country of Interest 31/03/2016 31/03/2015 incorporation rate Number of Number of debentures 31/03/2016 31/03/2015 debentures US$ US$ Eden Real Estates Private Limited India 11% 2,976,005 2,976,005 2,672,169 2,672,169 2,672,169 2,672,169 Eden Real Estates Private Limited carrys on a business of property development in India.
The Fully Compulsory Convertible Debentures can be converted into redeemable preference shares or into equity shares at the maturity date. Post conversion, such shares may either be redeemed at par value or converted into a different class of equity shares.”
4.6 In the balance-sheet for the year ended on 31/03/2016, the assessee has shown share capital of USD 2230 and reserve and surplus USD 3,516,512. The assessee has shown borrowings of USD 16,052,011/-, details of which available on page 72 of the paper-book are reproduced as under:
“12. LOANS AND BORROWINGS 2016 2016 US$ US$ Balance at 1st April 15,793,053 15,575,152 Interest charged 258,958 217,901 Balance on 31st March 16,052,011 15,793,053 31/03/2016 31/03/2015 US$ US$ Non-current liabilities - 9,840,000 Loan from parent company {note 15(v)} - 9,840,000 Current Liabilties 16,052,011 5,953,053 Other Loans 16,052,011 5,953,053 Total 16,052,011 15,763,053
In 2008 the parent company advanced a short term unsecured loan to the Company for the amount of US$5,009,214 which is repayable on demand. As of 30 November 2011 the loan bears interest at the rate of 4.35% per annum.
According to a deed of assignment dated 25 January 2017, the previous lender Myddleton Holdings Limited transferred the rights and obligations of the loan amounting to US$5,953,053 and the loan amounting to US$9,840,000 to Tapir Holdings Partners LP, effective from 31 March 2015.
The exposure of the Company to interest rate risk in relation to financial instruments is reported in note 16 to the financial statements.”
4.7 Thus, according to the assessee investment in CCD has been made out of funds provided by the holding company.
Whereas the Assessing Officer and the Ld. CIT(A), has relied on the details of assets and liabilities shown in the relevant column of the return of income. The learned Counsel has furnished a copy of the return of income filed for the relevant year before us along with the revised synopsis. In the return of income the amount of assets and liabilities in Part A-BS, have been shown as nil. In view of these details of assets and liability, both the learned Assessing Officer and the Ld. CIT(A) concluded that, how a company with nil assets and liability decided to invest in CCDs. 4.8 It is evident from the order of lower authorities that they have decided the issue of beneficial ownership of interest only on the basis of information of assets and liabilities provided in the return of income, which mistakenly reported by the assessee as Nil and the financial statements including, balance-sheet and Profit and Loss Accounts have not been considered. In such circumstance, we feel it appropriate to set aside the order of Ld. CIT(A) and restore the matter back to the file of the Assessing Officer to decide the issue of beneficial ownership of interest afresh in the light of financial statement of the assessee and documents. The Assessing Officer may examine all the tests laid down in the decision in case of Golden Bella Holdings Ltd. (supra). The ground no. 2 of the appeal of the assessee is accordingly allowed for statistical purposes.
5. The remaining grounds were not pressed by the assessee. Moreover, when the assessee itself has declared the income on accrual basis, the assessee now cannot take the argument that said income should be taxed only on receipt basis. Thus, the remaining grounds are dismissed as infructuous.
In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on 2nd March, 2021