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Income Tax Appellate Tribunal, MUMBAI BENCH “L”, MUMBAI
Before: SHRI G.S.PANNU & SHRI PAWAN SINGH
The captioned appeal by the assessee is directed against the directions of the DRP-III, Mumbai dated 22/12/2014 pertaining to the Assessment Year 2010-11, which in turn has arisen from the order passed by the Assessing Officer dated 28/03/2014 under section 143(3)r.w.s. 144C(1) of the Income Tax Act, 1961 (in short ‘the Act’) .
(Assessment Year : 2010-11) 2. In this appeal the assessee has raised the following Grounds of appeal:-
1. On the facts of the case and in law, the Learned Assessing Officer/ Dispute Resolution Panel ('Ld. Assessing Officer/DRP') erred in assessing the income of the Appellant at Rs 23,93,98,904 as against the returned income of Rs 15,56,49,334.
2. On the facts of the case and in law, the Ld. Assessing Officer/DRP has erred in holding that the interest income earned by the Appellant is taxable at the rate prescribed under the Act, instead of a lower/ beneficial rate prescribed in India-Cyprus Double Taxation Avoidance Agreement ('DTAA'). 2.1 The Ld. Assessing Officer/DRP has erred in holding that the Appellant has itself not claimed the benefit of the DTAA, merely on the ground of Appellant's inadvertence of not filling Schedule 'SI' (Special Income) of the Income-tax Return Form. 2.2 The Ld. Assessing Officer/ DRP has erred in denying the Appellant from claiming the benefits of DTAA, merely due to non-filing of a revised return and disregarding judicial precedents and CBDT Circular, casting an obligation upon the Revenue to not to take an advantage of Appellant's bonafide mistake or ignorance. 2.3 The Ld. Assessing Officer/DRP also erred in ignoring the fact that the Appellant has been consistently claiming the benefits of the beneficial provisions of DTAA, which have been accepted by the Revenue either in scrutiny assessments or under section 143(1) of the Act. 2.4 The Ld. AO, while framing the draft assessment order, has erred in disregarding the order of the Ld. CIT(A) - 11, wherein, the latter had already adjudicated the impugned issue in favour of the Appellant. 2.5 Without prejudice to the above, the Appellant prays before this Hon'ble Tribunal to exercise its inherent powers and grant the Appellant its bonafide claim of charging its income to tax at the beneficial rates prescribed in the DTAA. Prayer The Appellant prays that it is entitled to claim the beneficial provisions of India-Cyprus DTAA and accordingly, its income ought to be taxed at the lower/ beneficial rate prescribed therein. 3· On the facts of the case and in law, the Ld. Assessing Officer/DRP erred in making addition to the returned income on account of interest of Rs.8,37,49,570/-, on accrual basis as against receipt basis , adopted by the Appellant.
(Assessment Year : 2010-11) 3.1 The Ld. AO/DRP has erred in law by disregarding the provisions of DTAA, which provide for taxation of only those interest income, which were paid to the non-resident. 3.2 The Ld. AO/DRP has erred in law by ignoring that as per section 145 of the Act, the Appellant has an option to opt, either cash or mercantile system of accounting and to follow the same on a consistent and regular basis. 3.3 The Ld. AO/DRP erred in disregarding the fact that the method of accounting adopted by the Appellant has been followed by it regularly and consistently over the years and cannot be discarded on account of an inadvertent solitary error. 3.4 Without prejudice to the foregoing, the Ld. AO be directed not to tax the said interest income offered to tax on receipt basis in subsequent year(s). Prayer The Appellant prays that it should be entitled to offer its income to tax in the year in which it is received by it.
4. On the facts and in the circumstances of the case, the Ld. AO has erred in not granting credit of Tax Deducted at Source, to the extent of Rs 1,41,76,878, claimed by the Appellant in the return of income.
5. On the facts and in the circumstances of the case and in law, the Ld. AO/DRP erred in levying interest of Rs 6,31,86,832 under Section 234B and Rs 32,49,671 under Section 234C of the Act.
On the facts and in the circumstances of the case and in law, the Ld. AO erred in initiating the penalty proceedings under section 271(1)(c) of the Act.“
2.1 Although in the memo of appeal, the assessee has raised multiple Grounds of appeal, but the dispute is essentially on two issues, which we shall with hereinafter in seriatim.
3. Briefly put, the relevant facts are that the appellant assessee was incorporated in Cyprus and is a tax resident of Cyprus. It is engaged in the business of making investment in real estate development companies in India and is eligible to claim the benefit of India-Cyprus Double Taxation Avoidance Agreement ('DTAA'). For assessment year 2010-11, it filed a return of income declaring interest income earned from Compulsory Convertible Debentures (CCDs) of the investee
(Assessment Year : 2010-11) companies in India engaged in the business of development of real estate. The said income was offered to tax @10% purportedly in line with the provisions of Article-11(2) of the India-Cyprus Double Taxation Avoidance Agreement (DTAA). The Assessing Officer, however, taxed the income on the normal rate of 43.23% on the ground that the assessee company did not fill up the ‘Special Income’(SI) schedule in the return of income filed. In other words, the Assessing Officer did not allow the benefit of the lower rate of tax prescribed in the India-Cyprus Double Taxation Avoidance Agreement (DTAA). This is the first area of difference between the assessee and the Revenue.
3.1 Secondly, the interest income earned from CCDs was declared by the assessee for taxation on receipt basis, whereas the Assessing Officer taxed it on accrual basis. This is the second area of difference between the assessee and the Revenue before us.
3.2 In so far as, the first issue relating to the applicable rate of tax is concerned, there is no dispute to the fact that the rate of tax prescribed in the India-Cyprus Double Taxation Avoidance Agreement (DTAA) with respect to the stated income is 10%, and the Assessing Officer denied the claim of the assessee on the ground that the S.I Schedule in the form of return of income was not filled up by the assessee and, therefore, the income was taxed at the normal rate of 43.23%. The assessee has been consistently pointing out that non filling-up of the schedule for S.I in the form of return of income was an inadvertent mistake. In this context, assessee had explained that the computation of income filed contained a note to the effect that assessee was a tax
(Assessment Year : 2010-11) resident of Cyprus and was thus, entitled to the beneficial provisions of India-Cyprus Double Taxation Avoidance Agreement (DTAA). Furthermore, such note also made a reference to Article 11(2) of the India-Cyprus Double Taxation Avoidance Agreement (DTAA), whereby the interest income was taxable @10%.
Before us, Ld. Representative for the assessee has annexed copies of the relevant portion of the form of return of income, as also the computation of income filed with the Assessing Officer. It was also pointed out before us that in the preceding assessment year of 2009- 10, wherein assessment was finalized under section 143(3) of the Act, the assessee has been allowed the benefit of the lower rate of tax prescribed in the India-Cyprus Double Taxation Avoidance Agreement (DTAA). The Ld. Representative for the assessee asserted that similar situation has prevailed even in the subsequent assessment years of 2011-12 and 2012-13, wherein the return of income was accepted in the processing done under section 143(1) of the Act.
In this background, the Ld. Departmental Representative for the Revenue has merely reiterated the stand of the lower authorities which is to the effect that the benefit of the lower rate of tax prescribed in India-Cyprus Double Taxation Avoidance Agreement (DTAA) could not be allowed since assessee has failed to file any revised return to show that the non-filling of the schedule of S.I in the return of income was an inadvertent mistake.
(Assessment Year : 2010-11) 6. We have carefully considered the rival submissions. The material on record clearly establishes that the appellant is a tax resident of Cyprus, which is further supported by the ‘Tax Residency Certificate’, issued by the Competent Authority of Cyprus, copy of which has been placed on record. Consequently, it is eligible to claim the benefit of India-Cyprus Double Taxation Avoidance Agreement (DTAA) and such claim of the assessee has been accepted by the Assessing Officer in scrutiny assessment in the preceding assessment year of 2009-10 and also in the subsequent assessment years of 2011-12 and 201213 in the intimation made under section 143(1) of the Act. Even otherwise, we find that in the orders of the authorities below there is no contravention of assessee’s claim for taxation @ 10% on merits. The fact that assessee did not fill-up Schedule-SI in the form of return of income has singularly prevailed with the lower authorities in denying the benefit of the concessional rate of tax prescribed in the India- Cyprus Double Taxation Avoidance Agreement (DTAA). The assertions of the assessee that such non filing-up of the Schedule-S.I in the form of return of income is an inadvertent omission has been rejected. In our considered opinion, the lower authorities have completely misdirected themselves in refusing assessee’s claim for being taxed at the concessional rate of 10% prescribed in the India-Cyprus Double Taxation Avoidance Agreement (DTAA). Notably, the accepted history of the case depicted by the assessment under section 143(3) for assessment year 2009-10, as well as the manner of drawing up computation of tax on income furnished by the assessee before the Assessing Officer reflects that such an omission was indeed an inadvertent mistake. Notably, the statement of total income including
(Assessment Year : 2010-11) the computation of tax on income as furnished by the assessee is contained in a Note, which is reproduced hereunder:- “5. The company is a tax resident of Cyprus and is entitled to beneficial provisions of India- Cyprus tax treaty. The company has made investments in Compulsorily Convertible Debentures in Indian companies engaged in real estate development. During the previous year relevant to the A.Y 2010-11, the Company has earned interest of Rs.155,649,334/- from such investments.
As per article 11(2) of the India-Cyprus tax treaty, interest is taxable in India @ 10%. The company has accordingly paid taxes on interest income @ 10%.”
6.1 Notably, the tax liability on the total income has also been computed at 10%. In view of the aforesaid material which was very much before the lower authorities, in our view, the insistence of the Revenue on filing of the revised return of income to claim lower rate of tax reflects an over-technical approach, which is untenable. Once on facts and in law it is discernible that assessee is entitled to the benefits of the India-Cyprus Double Taxation Avoidance Agreement ('DTAA') and its income is liable to be taxed at the lower rate of 10% as per India- Cyprus Double Taxation Avoidance Agreement (DTAA), mere technical error would not defeat the claim of the assessee, which is otherwise in accordance with law. On this proposition, the Ld. Representative for the assessee had relied upon the judgment of the Hon’ble Rajasthan High Court in the case of CIT vs. Rajasthan Fasteners (P) Ltd., [2014] taxmann.com 175 (Rajasthan). In the case before Hon’ble Rajasthan High Court, the assessee’s claim for exemption under section 10B of the Act was sought to be denied by the Revenue on the ground that while E-filing the return of income, the claim was wrongly mentioned as being under section 80IB of the Act, which was sought to be explained by the assessee as a mere typographical error. The Hon’ble High Court
(Assessment Year : 2010-11) affirmed the stand of the Tribunal, whereby the claim of the assessee for exemption under section 10B of the Act was allowed considering that a mere typographical error in mentioning section 80IB of the Act in the return of income would not disentitle the assessee’s claim for exemption under section 10B of the Act.
6.2 In our considered opinion, in the present case, having regard to the facts and evidence on record and in law, the claim of the assessee for taxation @ 10% following India-Cyprus Double Taxation Avoidance Agreement (DTAA) deserves to be allowed. We hold so.
6.3 In the result, so far as the first issue is concerned, assessee succeeds.
In so far as second issue is concerned, relevant facts are that assessee had invested Rs.606.50 crores in the CCDs of seven real estate companies in India and interest earned thereon to the extent of Rs.15,56,49,334/- was offered to tax in the return of income. Instead, the Assessing Officer assessed the income at Rs.23,93,98,904/-, thereby making an addition of Rs.8,37,49,570/-. This addition was made on the ground that interest income was liable to be assessed on accrual basis. The relevant details in this regard are enumerated in Para- 4.1 of the assessment order. The assessee company resisted such action of the Assessing Officer in the course of assessment proceedings as also in the course of the hearing before us. The main point raised by the appellant is that having regard to Article 11 of the India-Cyprus Double Taxation Avoidance Agreement (DTAA) interest income in question is liable to be taxed in India on the basis of payment. In support of such proposition,
(Assessment Year : 2010-11) the Ld. Representative for the assessee has placed reliance on the following decisions:-
1. 1. DIT v. Siemens Aktiengesellschaft (Bom HC) (ITA No.124 of 2010) 5. DCIT v. Uhde Gmbh (1996) 54 TTJ 355 (Mum ITAT) 6. National Organic Chemical Industries Ltd. vs. DCIT [2006] 5 SOT 317(Mum ITAT).
7. Johnson & Johnson v. ADIT [2013] 32 taxmann.com 123(Delhi ITAT) 7. CSC Technology Singapore Pte. Ltd. vs. ADIT[2012] 19 taxmann.com 123 (Delhi ITAT)
On the other hand, Ld. Departmental Representative for the Revenue submitted that the interest in question became due to the assessee on every 15th March and 15th September and thus, income was liable to be assessed on accrual basis.
We have carefully considered the rival submissions. The assessee company made investments in CCDs in Indian companies engaged in real estate development and the interest earned on such investment is sought to be offered to be taxed on receipt basis. The crucial plea of the assessee is based on Article -11(1) of the India-Cyprus Double Taxation Avoidance Agreement (DTAA), which read as under:- “1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.”
9.1 On the said basis, the claim of the assessee is that the interest income can be assessed on fulfilment of twin conditions i.e. accrual as well as payment. It was therefore, contended that the interest income in question be assessed on receipt basis. In this context, the Ld.
(Assessment Year : 2010-11) Representative for the assessee had relied on the judgment of the Hon’ble Bombay High Court in the case of Siemens Aktiengesellschaft (supra), wherein having regard to the DTAA between India & Federal Germany Republic, the assessment of royalty or fee for technical services was held to be taxable on receipt basis. In the case of National Organic Chemical Industries Ltd. (supra), the Tribunal was concerned with payment made to non-residents i.e. a Swiss company, for acquiring some material safety data sheets. It was held that since the payment was covered by the scope of Article 12(4) of the Double Taxation Avoidance Treaty with Switzerland, it was liable to be taxed on the basis of payment. Similarly, in the case of Johnson& Johnson (supra) in the context of the DTAA between India and USA, wherein also expression “paid” used in Article 12(1) was interpreted to mean that the royalty was to be taxed on “paid” basis and not on accrual basis. The aforesaid precedents support the understanding of the expression paid used in Article 11(1) of the India-Cyprus Double Taxation Avoidance Agreement (DTAA) to mean that the interest income in question is liable to be taxed on payment/receipt basis and not on accrual basis, as sought to be made out by the Assessing Officer. Thus, in principle, we uphold the plea of the assessee.
9.2 Before parting, we may also refer to the point made out by the Revenue that assessee itself is inconsistent in offering to tax such interest income in as much as Rs.4,38,356/- receivable from Park Development Pvt. Ltd. has been offered to tax on accrual basis in the return of income filed. Therefore, according to the Revenue, the plea of the assessee that interest income has been offered by the assessee on receipt basis consistently, is not so. In this context, the plea of the (Assessment Year : 2010-11) assessee was that by an inadvertent error such amount has been included as income on accrual basis. It has been further canvassed that such solitary error cannot be construed to mean that assessee has not been following the cash basis of accounting regularly. In our considered opinion, the plea of the assessee is quite justified, and in any case, the applicable legal position on any point has to be arrived at by keeping in mind the relevant provisions of law and not merely by the conduct of the parties. Ostensibly, Article 11(1) of India-Cyprus Double Taxation Avoidance Agreement (DTAA), which covers the instant situation provides for taxation of interest income on payment/receipt basis and not on accrual basis.
9.3 For all the aforesaid reasons, we, therefore, deem it fit and proper to direct the Assessing Officer to accept the interest income returned by the assessee on cash basis. Thus, on this aspect also assessee succeeds.
In the result, the appeal of the assessee is allowed as above.
Order pronounced in the open court on 29/02/2016