CITI GROUP GLOBAL MARKETS MAURITIUS P.LTD,MUMBAI vs. ASST DIT (IT) 1(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य, राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार/ Per Rajendra, A.M.- अनुसार Challenging the order,dated 31/10/2013,of the CIT (A)-10,Mumbai the assessee has filed the present appeal.Assessee-company,incorporated in Mauritius,was registered with SEBI as a sub-account of Citi Group Global Markets Ltd.,London(CGGML).It filed its return on 24. 10. 2007,declaring total income of Rs.3.48lakhs.The Assessing Officer (AO) completed the assessment on 21.02. 2011,u/s.143(3) r.w.s.144C(3)of the Act,determining the income of the assessee at Rs.1,64,14,014/-. Facts of the case: 2.On perusal of the record,the AO found that an offer was made by Oracle Global (Mauritius)Ltd. to the shareholders of the shares of I-flex solutions Ltd.@Rs.1,475/-per-share along with an additional consideration of Rs.11.35 for the delay in the open offer as per the SEBI Regulations,that it had received additional consideration of Rs.1.60 crores or delay in making payment of sales consideration.He held that the additional consideration was not linked to original consideration and hence it was to be treated separately,that amount received by the assessee was penal in nature,that while making the payment of additional consideration the deductor i.e., OGML had deducted TDS,that the deduction of tax proved that it was not part of sales consideration,that the ‘penal interest’ had to be taxed as interest income.

3.During the course of hearing before us, the Authorised Representative (AR) stated that identical issue was decided by the Tribunal in the case of Morgan Stanley Mauritius Company Ltd. (ITA/1625/Mum/2014-AY. 29/01/2016, assessment year 2007 – 08). The Departmental Representative (DR) left issue to the discretion of the Bench.

4.We have heard the rival submissions and perused the material before us. We find that in the case of Morgan Stanley (supra), the Tribunal has deliberated upon and decided the issue as under: 3.Before us,the Authorised Representative (AR) argued that the additional consideration was not received in respect of any monies borrowed or that incurred or for use of money by Oracle, that the additional consideration was also not a service fee/charge in respect of money borrowed/ credit facility which was not utilized by Oracle,that the amount in question would not fall within the definition of interest as per section 2(28A) of the Act, that for a receipt to be taxed as interest existence of a debtor/creditor relationship was a must as per Article-11 of the DTAA,that there was no Debtor/Creditor relationship between the assessee and Oracle,that the assessee had not made available any capital/funds to Oracle,that the money received by it constituted an integral part of the sales receipts of the shares,that the consideration and sale price arose from the same source i.e.,the shares transferred to Oracle under the open offer.Alternatively,it was argued that the additional consideration could not be taxed as capital gains under Article-13 of the Treaty, that it was also not covered under any of the specific Articles of the Treaty, that it would fall under the head ‘income from other sources’ under Article-22 of the Treaty, that the assessee had no Permanent Establishment (PE) in India, that the income from other sources would not be taxable in India as per the provisions of the Act.He further made one more alternative argument with regard to rate of tax to be levied.He contended that AO had erred in not taxing the additional consideration in accordance with the provisions of section 115AD of the Act, that he should have applied the rate of 20.91% as against the rate of 41.82%. The AR referred to page No.29,87,118 and 119 of the paper book and stated that original and revised schedule proved that additional compensation @ Rs.16 per share was for a period upto Jan.2007, that there was delay in making the offer and not in making payment, that it was not interest.He relied upon the order of the Tribunal dt.14.8.2013 in the case of Genesis Indian Investment Company Ltd.(ITA/2878/Mum/2006).He referred to the cases of Sainiram Doomgarmal(42 ITR392) ; Sahani Steel Works & Press Works Ltd. (152 ITR 39); K.G. Subramaniam (195 ITR 199) and Hindustan Conducors P.Ltd.(247ITR 762). XXXXXX The Department Representative (DR) contended that additional consideration was received for delay in making the payment of sales consideration, that it could not be taken as part of total sale value, that Oracle had deducted TDS while making payment to the assessee, that deduction of tax at source indicated that the amount was not part of sale consideration but represented the interest portion for delayed payments, that same had to be treated as income 2593/M/14-Citi Group from other sources, that the letter of offer made by Oracle talked about interest payment of Rs.11.35 per share, that the assessee had accepted the open offer, that there was debitor/creditor relationship between the assessee and Oracle,that the buyer of the share should have paid the whole amount as per the scheduled dates of payments, that the nature of all consideration received by assessee was in the nature of interest that it was governed by Article-11 of the India Mauritius DTAA Treaty,that it could not be taxed under Article-22 of the treaty under the head “other income’, that the additional consideration was interest for late payment of the sale proceeds, that the interest income taxable in the hands of the assessee could not be treated as income from securities,that the provisions of section 115AD were not applicable in the case under consideration. XXXXX 4.We have heard the rival submissions and perused the material placed before us. We find that an open offer was made by Oracle to the share holders of I-flex at the price of Rs.1,475/- per share, that the open offer indicated that additional offer of Rs11.35 per share was to be payable to the share holders,that as per the letter of open offer the additional consideration per share was to be paid due to delay in making the open offer and dispatch the letter of the offer based on the time line prescribed by SEBI,that later on the consideration of open offer was revised to Rs.2,084/- per share,that the additional consideration for delay was revised to Rs.16/- per share,that the open offer letter and public announcement indicated that a revised offer of Rs.2,100/- per share (including additional consideration of Rs.16/-)was to be payable for the shares tendered by the share holders under the open offer,that in response to the open offer the assessee tendered its holding of 13,97,879 shares of I-flex, that it received Rs.2,89,77,45,900/-, that the said sum included additional consideration of Rs.2.20 crores. In our opinion,thebasic issue to be decided is to determine as to whether the amount of Rs.2.20 crores received by the assessee as additional consideration is taxable or not ?While going through the page Nos. 117 and 119 of the Paper Book,we find that the offer letter contains two schedules original and revised, that the revised schedule contains the details of additional consideration to be paid by Oracle.In our opinion, it cannot be treated as penal interest or interest for late payment of consideration by Oracle.We find that initially the additional consideration was fixed at Rs.11.35 per share,but,because of the delay in making the open offer and dispatch the letter of the offer,same was later enhanced to Rs.16.00 per share.Thus,there was increase in the offer price of the shares.It is a fact that the regulatory authority i.e.SEBI had approved the transaction,that the transaction could not be completed in due time because of certain reasons,that Oracle had revised the offer price.Considering all these factors,we are of the opinion that additional consideration received by the assessee is part and parcel of the total consideration. It cannot be segregated under the heads ‘original sale consideration’ and ‘penal interest received from Oracle’.The business world is governed by its own rules and conventions.If considering the time factor Oracle decided to increase the share price in the offer letter it has to be taken as a part of original transaction.It is noteworthy that in the original offer interest @ Rs.11.35 per share was offered by Oracle.After considering the delay in dispatch letter and other relevant factors if it decided to increase the interest @ of 16 per share it was a business decision.The assesse had no control over the decision making process of Oracle.If we see the transaction from the debtor/creditor angle it is clear that there was no such relationship between the assesse and Oracle.The assesse owned shares of I-flex and in response to the open offer by Oracle it decided to sell the shares-it was a pure and simple case of selling of shares.The assesse had not entered in to any negotiations with Oracle and transferred the shares as per a scheme that was approved by SEBI.The assesse had not advanced any sum to Oracle and had not received any interest from it for delayed repayment of principal amount.In short,the additional consideration received by the assesse from Oracle was not penal interest and was part of the original consideration.Hence,same is not taxable.Ground no. is decided in favour of the assesse. We find that in the case of Genesis Indian Investment Company Ltd.(ITA/2878/Mum /2006 / dated 14.08.2013)similar issue has been decided by the Tribunal.We would like to reproduce the facts of the case that are narrated at paragraph 3 of the order and same reads as under: 3 2593/M/14-Citi Group “Ground No. 1 regarding taxing the additional amount of Rs. 7,07,76,547/- received by the assessee as per the order of SEBI being 15% interest for delay in payment of proceeds of shares tendered under the open offer of Castrol UK. The assessee is a company incorporated in Mauritius and has obtained registration with the Securities & Exchange Board of India (SEBI) as a sub-account of Genesis Asset Managers Ltd., registered Foreign Institutional Investor (FII). The assessee was holding the shares of Castrol India Ltd. which is a subsidiary of Castrol Ltd. UK. Due to Global Acquisition of Burmah Castrol Plc by the British Petroleum through the press announcement of its intention to acquire the entire share capital of Burmah Castrol Plc on 14.3.2000, the consequential open offer was announced for acquisition of 20% of the issue capital of Castrol India Ltd. On 10.7.2000 B.P. Plc approached the SEBI seeking exemption from the requirement of making a public offer for acquisition of upto 20% of the shares of Castrol India Ltd. The said exemption application was disposed of by the SEBI vide order dated 7.8.2000 by granting exemption subject to certain conditions which was not acceptable to the holding company. Accordingly, the request for exemption was withdrawn on 6.12.2000 and the holding company proceeded to take steps to make public offer to the shareholders of Castrol India Ltd. On 11.12.2000 Castrol UK made open offer for acquisition of 20% of the issued capital of Castrol India Ltd. with SEBI indicating the offer price of Rs. 311.91 per equity share based on the market price as on 7.7.2000. Thereafter on 16.2.2001 the SEBI inter alia directed the Castrol UK to revise the minimum offer price taking 14.3.2000 as the relevant date and the price as on that date is Rs. 350.02. The holding company challenged the order of SEBI by filing an appeal before the Securities Appellate Tribunal (SAT). The Securities Appellate Tribunal upheld SEBI's directions vide order dated 27.4.2001 against which the holding company filed an appeal before the Hon'ble Jurisdiction High Court. In the mean time, on 23.7.2001 the SEBI directed the merchant banker to proceed with the offer formalities and pay interest @ 15% per annum on offer price period from 14.3.2000 till the actual date of payment of consideration. The Hon'ble High Court upheld the SEBI directions to revise the offer price based on the price on 14.3.2000 @ Rs. 350.02 per equity share vide its decision dated 8.8.2001. The holding company also challenged the direction of the SEBI to pay interest @ 15% before the Securities Appellate Tribunal but could not succeed. The Tribunal held that Castrol UK is liable to pay interest to the successful offer at 15% per annum on open offer price however from 8.8.2000 till the actual date of payment of consideration instead of 14.3.2000 directed by the SEBI. The holding company again filed an appeal before the Hon'ble High Court against the Securities Appellate Tribunal order upholding payment of interest @ 15%. The Hon'ble High Court upheld the orders of the SAT regarding payment of interest. Subsequently, Castrol UK posted offer letter to shareholders of Castrol India Ltd. on 21.9. 2001. The assessee tendered 2053552 equity shares on 17.10.2001 under the open offer however 1042518 equity shares of the assessee were accepted by the Castrol UK on 23.11. 2001.Thus, the assessee received additional amount of Rs. 7,07,76,547/- and net amount after deduction of TDS at Rs. 4,10,50,397/- on account of interest @ 15% per annum. The Assessing Officer while completing assessment treated the said amount of Rs. 7,07,76,547/- as interest income and taxed the same @ 48%. The assessee challenged the order of the Assessing Officer before the CIT(A) inter alia contended that the additional consideration received from Castrol UK is exempted under the provisions of Article 13(4) of Indo Mauritius Treaty because the said amount was nothing but capital gain arising to the assessee from transfer of shares. Alternatively the assessee contended that the receipt of the amount in question is not the interest under Article 11 of the Indo Mauritius Treaty because it is not an income from debt claim and there is no debtor-creditor relationship between the 2593/M/14-Citi Group assessee and Castrol UK. The CIT(A) did not accept the contention of the assessee and upheld the action of the AO.” Tribunal decided the matter in following manner: 6. We have considered the rival submissions as well as relevant material on record. The order of SEBI for payment of interest and particularly the rate of interest was challenged by the holding company before the SAT as well as Hon'ble High Court. It is clear that the payment of interest was directed by the SEBI under regulations 22 and therefore it was held that this is not a penalty but the payment of interest on account of failure to make the payment by the acquirer as per the time schedule prescribed under SEBI regulations. It is clear that this payment of interest @ 15% was not on account of any accretion in the value of the asset in question because the market price of the share is determine as per the rates prevailing on stock exchange. The consideration for acquiring the shares under open offer was determined at Rs. 350.02 which was the market price as on 14.3.2000 when the holding company made a public announcement of acquisition. However, the case in hand the interest received by the assessee is for the period prior to the tendering of shares and acceptance of the same therefore, the interest relates to the delay in completing the process of buy back of shares under open offer. There is a difference between the interest which can be treated at par of consideration and the interest which is different form compensations or consideration. If the interest is paid for delay in making the payment then it cannot be treated as part of consideration. In the case in hand the delay for which the interest has been received by the assessee is in the process of buy back of shares in the open offer after announcement of the intention of acquiring of shares. It is not a case of delay in making the payment of the determined consideration after the transaction of purchase of sale is over. Therefore, in our considered view this amount of interest which relates to the period prior to tendering and acceptance of the shares falls within the ambit of consideration received by the assessee against the shares tendered in the open offer. In the case of CIT Vs Govinda Choudhury and Sons (supra) the Hon'ble Supreme Court has decided the nature of income received as interest as under: "This brings us to a consideration of the second question. The sum of Rs. 2,77,692 was received by the assessee as interest on the amounts which were determined to be payable by the assessee in respect of certain contracts executed by the assessee and in regard to the payments under which there was a dispute between the two parties. The assessee is a contractor. His business is to enter into contracts. In the course of the execution of these contracts, he has also to face disputes with the State Government and he has also to reckon with delays in payment of amounts that are due to him. If the amounts are not paid at the proper time and interest is awarded or paid for such delay, such interest is only an accretion to thi assessee's receipts from the contracts. It is obviously attributable and incidental to the business carried on by him. It would not be correct, as the Tribunal has held, to say that this interest is totally de hors the contract business carried on by the assessee. It is well settled that interest can be assessed under the head "Income from other sources" only if it cannot be brought within one or the other of the specific heads of charge. We find it difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to him de hors the business which is carried on by him. In our view, the interest payable to him certainly partakes of the same character as the receipts for the payment of which he was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amounts granted to the assessee under the awards and treated as "income from other sources". The second question is, therefore, answered in favour of the assessee and against the Revenue." 5 2593/M/14-Citi Group