GE HEALTHCARE FINLAND OY(FORMERLY KNOWN AS INSTRUMENTARIUM CORPORATION LTD,BANGALORE vs. DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION -1(1), KOLKATA

Without prejudice, the CIT(A) erred in upholding the action of the AO in benchmarking the alleged international transaction of interest payable on loan on the basis of prime lending rate of SBI as opposed to LIBOR which has been applied in the Appellant's own case by this Hon'ble Tribunal. 5. That the CIT(A) erred on the facts and in law in upholding the action of the AO in charging interest under Section 234A and 234B of the Act. The appellant craves leave to add, amend, alter or vary from the aforesaid grounds of appeal

We find that the issue is squarely covered by the decision of the Special Bench dated 15.07.2016 and common decision of the Coordinate Kolkata Bench of the Tribunal in assessee’s own case of Instrumentarium Corporation Ltd. vs. DDIT in and 2058/Kol/2010 for A.Y 2003-04/2004- 05 and 2006-07 wherein it has been held inter alia as under: “9.3. Be it as it may, without prejudice to our above finding and as we have heard the case at length, for the sake of completeness, we consider the issue on merits also. We extract the relevant articles of the agreement between Indian and Finland for avoidance of double taxation and prevention of fiscal abuse with respect to taxes on income. Article 9 ASSOCIATED ENTERPRISES “1. Where (a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or (b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.”

However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services.” 9.4. Article 9 is attracted in this case. The transfer prising adjustment on account of interest is to be taxed by including the same in the profits of the assessee as it is not accrued by reason of conditions made and imposed between the Associate Enterprises. 9.5 Article 11, does not apply, as no interest accrues or arises in this case and the question of ‘payment’ of such interest simply does not arise. What is sought to be taxed is a Transfer Pricing adjustment which is permitted under Article 9 which talks about accrual and not payment. In the OECD commentary on the provisions of the Article 11 the term “paid” in context of interest is as follows: – “5. …The term “paid” has a very wide meaning, since the concept of payment means the fulfilment of the obligation to put funds at the disposal of the creditor in the manner required by contract or by custom.” In this case there is no obligation to pay interest. The learned counsel for the assessee projects a scenario which would never ever arise in the facts of this case and claims that, interest can be taxed only on payment, in view of Article 11. Such an argument is flawed. Hence, the interpretation sought to be placed by the ld. Counsel for the assessee on Article 11, by relying on the interpretation given by different Benches of the Tribunal while considering Article 12, does not help the case of the assessee. This view is supported by the order of a coordinate bench of the Mumbai ITAT in the case of PMP Auto Components (P.) Ltd. v. DCIT, Mumbai [2014] 50 taxmann.com 272 (Mumbai – Trib.). The Tribunal in this above-mentioned case at para 10 & 11 has observed: “10. Therefore, it is clear that the transaction of loan given to the AE is an international transaction and subjected to ALP as per the transfer pricing provisions of Income Tax Act. The assessee has raised an alternative plea that even in case the transfer pricing provisions are applicable in respect of the non charging of interest on loan given to AE, it is not taxable in India as per the provisions of Article 11 of Indo-Mauritius DTAA because the said interest was not paid to the assesse. We note that the provisions of Article 11 are applicable in the case of interest arising in the contracting state and paid to the resident of another contracting state.

It is contemplated under Article 11 of DTAA that the payment is a condition for taxing the interest only in circumstances when the interest is arising in the contracting state and accrued to the resident of another contracting state and, therefore, the same is subjected to tax in the other state when it is paid. In other words, the provisions of Article 11 defers the taxability of the interest arising but not received and therefore, it is taxed only when it is received. Article 11 does not exempt the interest arising in a contracting state and accrue to a resident of other contracting state but it makes the same taxable on the event of payment. In the case in hand, when the assessee has not even admitted the interest arisen and accrued to the assessee on the loan given to the AE for the assessment year under consideration, therefore, the provisions of Article 11 of Indo- Mauritius treaty cannot be pressed into service.”

Respectfully following the above decisions, we hold that the matter being squarely covered and decided against the assessee, no interference is called for and the addition confirmed by the learned CIT is upheld.

Ground No.4 –The issue involved in Ground no.4 is whether SBI prime lending rate has to be applied or whether LIBOR has to be applied. We find that the issue is squarely covered by the common decision of the Coordinate Kolkata Bench of the Tribunal in the case of Instrumentarium Corporation Ltd. vs. DDIT (supra) i.e. assessee itself wherein it has been held as under: “11.1. This issue relates to computation of the Arm's Length Price. The special bench has remitted this issue of quantification of Arm's Length Price adjustment to the division bench. The issue whether SBI Prime Lending Rate has to be applied or whether LIBOR has to be applied is an issue where no fresh investigation into facts is required. Under these facts and circumstances we are of the opinion that this Ground No. 4A has to be admitted. Hence, we admit the same. 12. We now consider, the issue on merits. The ld. D/R, relies on the judgment of the Hon’ble Bombay High Court in the case of TATA Autocomps Systems Ltd. (supra). The assessee on the other hand relies on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Cotton Naturals (I)(P) Ltd. (supra). The loan in question in this case has been given in US Dollars. Though the loan has been consumed in India, the repayment has to be made in US Dollars. Under these facts and circumstance of the case, we prefer to follow the decision of the Hon’ble Delhi High Court in the case of CIT vs. Cotton Naturals (I)(P) Ltd. (supra), wherein it has been held as follows:- 39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters.

Respectfully following the above decision, the matter is decided in favour of the assessee with a direction to the Assessing Officer to recompute the ALP accordingly.

Ground No.5 : The assessee has contested charging of interest u/s 234A and 234B of the Act on the ground that it was not liable to pay advance tax. Reliance has been placed on the decision of Hon’ble Supreme Court in the case of Director of Income Tax vs. Mitsubishi Corporation reported in 438 ITR 174(SC). We have considered the issue in hand and find the ratio of above decision squarely applicable to the facts of the case. Accordingly, we hold that the assessee is not liable to any interest chargeable u/s 234A and 234B of the Act. This ground of appeal is, therefore, allowed.

In the result, all the two appeals of the assessee are allowed in part.