MORGAN STANLEY MAURITIUS COMPANY LTD,MUMBAI vs. DDIT (IT) 4(1), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER RAJENDRA, AM- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order of the Assessing Officer(AO) dated,28.3.2013 passed in pursuance of the directions of the Dispute Resolution Panel-I,Mumbai,dated,19.12.2013,the assessee has raised the present appeal raising five Grounds of Appeal. Assessee-company,incorporated in Mauritius,was registered with SEBI as a sub-account of Morgan Stanley and Company International Ltd.(MSCIL).It filed its return on 17.10.2007 declar -ing total income of Rs.5.24 lakhs.The Assessing Officer (AO) completed the assessment on 30. 11.2009, u/s. 143(3) of the Act, accepting the income of the assessee. On 30.3.2012 a notice u/s. 148 was issued by the AO to initiate re- assessment proceedings. In response to the notice, the assessee informed that the return filed on 17.12.2007 could be treated as return filed in compliance to the notice issued by him.During the re-assessment proceedings,the assessee raised objections about re-opening of the assessment as well as on merits.The AO completed the assessment u/s. 144C(1) r.w.s. 143(3) and 147 of the Act,determining the income of the assessee at Rs.2,26,02,228/-. Facts of the case: 2.On perusal of the record,after completing the original assessment proceedings,the AO found that the assessee had tendered Rs.13,79,979/- shares of I-flex Solution Ltd. held by it to Oracle Global (Mauritius) Ltd.(Oracle)under the open offer, that it had received additional consideration of Rs.2.20 crores from Oracle for 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., Oracle had deducted TDS,that the ITA/1625/M/14,AY.07-08-Morgan Stanley deduction of tax proved that it was not part of sales consideration,that the ‘penal interest’ had to be taxed @41.82 %. 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).

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: “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 4 ITA/1625/M/14,AY.07-08-Morgan Stanley 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 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 5 ITA/1625/M/14,AY.07-08-Morgan Stanley 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."