Income Tax Appellate Tribunal - Delhi
M/S. Mondon Investments Ltd., New Delhi vs Ddit, New Delhi on 2 September, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'D', NEW DELHI
Before Sh. Amit Shukla, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
(Through Video Conferencing)
ITA No. 3303/Del/2016 : Asstt. Year : 2009-10
M/s Mondon Investments Ltd., Vs DCIT,
C/o-Khiwani & Co., CA, Circle-3(1),
23/26, 2nd Floor, East Patel Nagar, New Delhi
Main Market, New Delhi-110008
(APPELLANT) (RESPONDENT)
PAN No. AAFCM8386H
Assessee by : Dr. Rakesh Gupta, Adv.
Revenue by : Sh. Umesh Takyar, Sr. DR
Date of Hearing: 05.07.2021 Date of Pronouncement: 02.09.2021
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order passed by the ld. CIT(A)-44, New Delhi dated 06.01.2016.
2. Following grounds have been raised by the assessee:
"1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making an adjustment of Rs.4,02,72,970/- as income in the hands of assessee company on account of deemed interest income and that too by recording incorrect facts and findings and without observing the principles of natural justice.2 ITA No. 3303/Del/2016
Mondon Investments Ltd.
2. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of Ld. AO in making an adjustment of Rs.4,02,72,970/- as income in the hands of assessee company on account of deemed interest income is bad in law and against the facts and circumstances of the case.
3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in rejecting the analysis followed by the appellant and in determining the price of the impugned transaction on the basis of TPO's order.
4. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in not giving due cognizance to the fact that the appellant had to undertake stewardship activities by financial supporting their group companies and reducing their financial burden.
5. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in not giving due cognizance to the fact that it was a case of business exigency and commercial expediency that associated enterprises had to convert and issue fresh FCD at 0% especially considering that the AEs had not remitted the interest accrued earlier as well.
6. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making the adjustment in contravention of circular 14/2001 issued by the CBDT and have failed to take into cognizance that charging of interest by the appellant would lead to an overall reduction of tax base in India.
7. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in computing the arm's length price of the international transaction of the 3 ITA No. 3303/Del/2016 Mondon Investments Ltd.
appellant by applying the internal comparable uncontrolled price method.
8. Without prejudice to the above, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in not treating the investment made by the appellant in the debenture as non performing assets and has accordingly erred in recognizing income on such non performing assets.
9. Without prejudice to the above, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in application of DTAA between India and Cyprus for computing income chargeable to tax and not appreciating the fact:-
• That the words used in Article 11(1) were "paid to a resident of other contracting state" i.e. the interest income is taxable only on receipt basis.
• As per the words used in Article 11(7), the provision of DTAA is applicable on the interest amount which would have been agreed upon by the payer and the beneficial owner in the arm's length scenario.
10. That having regards to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld. AO in charging the interest u/s 234A, 234B, 234C and 234D of the Income Tax Act, 1961."
3. The assessee is a company incorporated in Cyprus. The assessee on 30 t h November 2007 subscribed to 15% Fully Convertible Debentures (FCDs) of face value of Rs.100/- each issued by the following Indian entities:
A. Apogee Reality Ventures Pvt. Ltd.
B. Perigee Reality Ventures Pvt. Ltd.
C. Symmetree Realty Ventures Pvt. Ltd.
D. Energy Realty Ventures Pvt. Ltd.4 ITA No. 3303/Del/2016
Mondon Investments Ltd.
4. The debentures were converted into 0% FCDs w.e.f. 01.01.2009. Further, on 23 r d December 2009, in addition to the conversion of 15% FCDs into 0% FCDs, the assessee has subscribed to 0% FCDs of face value of Rs.100/- each issued by the above AEs.
5. The TPO held that 15% of the FCDs have been converted into 0% FCDs without assigning any reason, therefore by applying internal CUP as MAM. The TPO charged the interest on FCDs as the same rate of 15% as was being charged prior to 01.01.2009. It has further been submitted that the income generated during the subject year was only interest income on FCDs which was offered to tax at the treaty rate of 10%.
6. Thus, the TPO made adjustments on the interest earned from various investee entities of Rs.4,02,72,970/- which is as under:
Name No. Of Face Value of Interest(A) Fresh 0 % Face Value of Interest(B) Total Interest of the FCD (15 % FCD FCD FCD Charged (A+B) AE FCD) ARVPL 13,34,140 13,34,14,000 49,34,490.4 9,648 9,64,800 39252.8 49,73,743.23 PRVPL 62,19,847 62,19,84,700 2,30,04,913.6 NIL NIL NIL 2,30,04,913.56 SRVPL 16,74,830 16,74,83,000 61,94,576.7 14,94,971 14,94,97,100 60,82,279.3 1,22,76,855.99 .
ERVPL NIL NIL NIL 4,291 4,29,100 17,457.9 17,457,90 Total 3,41,33,980.7 61,38,990.00 4,02,72,970.68
7. Aggrieved the assessee filed appeal before the ld. CIT (A) who held that the word "interest paid" includes "interest payable".
5 ITA No. 3303/Del/2016Mondon Investments Ltd.
8. The verbatim of the order of the ld. CIT (A) is as under:
Decision "I have conside red the arguments of the ld. AR and had go ne thro ugh the provisions o f Article 11( 1). Ld. AR is arguing only on the basis of the word "paid" to resident in A rticle 11( 1) . If the conte nts of Article 11(1) is examined it appe ars that the word paid includes payable which has been clarified in Article 11(2) where it is written that such interest may be taxable in the contracting state in which it arises. T he ve ry purpose of the world arises is to be include receivable also. Therefo re, I do no t agree with the arguments o f the ld. AR that as per Article 11( 1) actual interest received can only be taxe d under DTAA."
9. This leads to us to adjudicate the moot issue "whether as per Article 11(1) interest paid includes interest payable or not"
10. The Article 11 of agreement between the Government of Republic of India and the Government of Republic of Cyprus for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income reads as under:
ARTICLE 11 INTEREST
1. Interest arising in a Contracting State and paid to a reside nt of the o the r Co ntracting State may be taxe d in that other State.
2. However, such interest may also be taxe d in the Co ntracting State in which it arises, and acco rding to the laws o f that State , but if the bene ficial owner of the inte rest is a resident of the othe r Contracting State, the tax so charge d shall no t excee d 10 pe rcent of the gross amount of the interest.6 ITA No. 3303/Del/2016
Mondon Investments Ltd.
3. Notwithstanding the provisions of paragraph 2, inte re st arising in a Contracting State shall be exempt from tax in that State , provide d that it is derived and bene ficially owned by:
(a) the Go vernme nt, a political sub-divisio n o r a local authority of the o ther Co ntracting State; o r
(b) in the case o f India, the Reserve Bank of India, the Export-
Import bank o f I ndia, the National Housing bank; and
(c) any other institution as may be agreed upo n from tim e to time between the Competent autho rities o f the Contracting States thro ugh exchange of le tters.
4. The term "interest" as used in this Article means inco me from debt claims of every kind, whe the r or not secured by mortgage and whethe r or no t carrying a right to participate in the debtor's pro fits, and in particular, income from go vernment securities and income from bonds or de bentures, including premiums and prizes attaching to such securities, bonds or debentures. Pe nalty charges fo r late payment shall no t be re garded as interest for the purpose of this Article .
5. The provisio ns of paragraphs 1 and 2 shall not apply if the beneficial owne r of the inte rest, being a resident of a Co ntracting State , carries on business in the o ther Contracting State in which the inte rest arises, "Trough a pe rmanent establishment situated the rein, or performs in that other State inde pendent personal services from a fixed base situate d therein, and the debt claim in re spect o f which the interest is paid is effective ly connecte d with such permane nt establishment or fixed base . In such case the provisio ns of Article 7 or Article 14, as the case may be , shall apply.
6. Interest shall be deemed to arise in a Contracting State when the payer is a re sident o f that State. Where , howe ver, the pe rson 7 ITA No. 3303/Del/2016 Mondon Investments Ltd.
paying the interest, whethe r he is a resident of a Contracting State or not, has in a Contracting State a permane nt establishment or a fixed base in connectio n with which the inde btedness on which the inte rest is paid was incurred, and such inte rest is borne by such permanent establishment or fixe d base, then such interest shall be deemed to arise in the State in which the pe rmanent establishment or fixed base is situate d.
7. Where, by reason of a special relationship be tween the paye r and the be neficial owne r o r be twee n bo th of them and some o the r person, the amount of the interest, having regard to the debt claim for which it is paid, e xceeds the amount which wo uld have bee n agree d upon by the payer and the beneficial owner in the abse nce of such relatio nship, the pro visions of this A rticle shall apply only to the last mentio ne d amount. In such case, the exce ss part of the payments shall remain taxable according to the laws of each Contracting State , due regard be ing had to the other pro visions of this Agreement."
11. The Hon'ble Bombay High Court in CIT v. Pramerica ASPF II Cyprus Holding Limited (ITA No. 1824 of 2016) had framed the following question of law:
"Whether on the facts and circumstances of the case and in law, the ITAT is correct in directing the Assessing Officer to accept the interest income returned by the assessee on cash basis whereas the A. O. has made additions on the ground that interest income was liable to be assessed on accrual basis ?".
12. The Hon'ble Bombay High Court dismissed the appeal filed by the revenue department and held that followed its earlier decision in DDIT v. Siemens Aktiengesellschaft (2009) taxmann.com 1019 to hold that taxability in a case where the 8 ITA No. 3303/Del/2016 Mondon Investments Ltd.
article is worded in the aforesaid manner, taxability can only be fastened on receipt of payment. Relevant Paragraph has been reproduced:
"8 . Th u s, wh i l e i n t e rp r et i n g si m i l a r cl au s e o f In d o- G e r m an D TA A i n r el at i on t o t a xi n g r oy al t y o r fe e s f o r t e ch n i cal s e rvi c e s , t h i s C ou r t h ad c on f i r m ed t h e d e ci si on of t r i b u n al h o l d i n g t h at s u ch s e r vi c e c an b e t ax ed on l y o n r e c eip t . Th i s d e ci si on wa s l at e r on fo l l o w ed i n In c om e Ta x A p p eal N o . 1 0 3 3/ 1 1 d at ed 2 0 / 1 1/ 2 0 1 2 an d t h e r e aft e r i n In c om e Ta x A p p e al No .2 3 5 6 / 1 1 an d c on n e ct e d A p p e al s vi d e t h e o rd e r d at e d 0 7/ 0 3/ 2 0 1 3 .
9 . On t h e sa m e p r i n cip l e , t h e A p p e al i s d i s m i ss e d . "
13. We have also gone through the order of the Co-ordinate Bench of ITAT in the case of DCIT Vs. TMW ASPF i Cyprus Holding Company Ltd. in ITA No. 879/Del/2016 dated 09.08.2019.
14. In the appeal filed by the revenue against the order of the ld. DRP reads as under:
"(i) Whether on the facts and in the circumstances of the case, the DRP erred in holding that as per Article 11(1) and (2) of Indo- Cyprus DTAA, interest income is chargeable to tax on paid basis when the usage of the word 'paid' always includes 'payable' and vice versa.
(ii) Whether on the facts and in the circumstances of the case, the DRP erred in observing that it has been judicially held in various case laws relied upon by the assessee that as per Article 11(1) and (2) of Indo- Cyprus DTAA, interest income is chargeable to tax on paid basis when there are no such findings in any decision cited by the assessee before the Hon'ble DRP."9 ITA No. 3303/Del/2016
Mondon Investments Ltd.
15. While adjudicating the core issue, it was held as under:
India Cyprus DTAA Article 11( 1) o f I ndia-Cyprus DTAA :
"Inte rest arising in a Co ntracting State and paid to a reside nt of the other Contracting State may be taxe d in that o ther State ."
20. The aforesaid para envisages that for taxing the inte rest income in the hands o f a non-reside nt, it is necessary that the inte rest sho uld arise in a co ntracting state , i.e., twin conditions of accrual as well as the payment are to be satisfie d. If there is no accrual or actual payment re ceived then same is to be decided within the scope of Article 11(1) . What the TPO/AO have sought to tax is that, assessee was suppo sed to receive interest of 18%, if the co ntingent e vent wo uld have arisen, i.e ., if in the event, the optio n was exercised by the assesse e to sell its co nve rted shares to the promoters o f inve stee company at an option price the n it would have given the return of 18%. Thus, entire edifice of the TPO/AO was based on fixatio n of continge nt eve nt which assessee was suppose d to rece ive. I t is also matter o f record no such conversion was actualise d and assessee remained inve sted even during the year under co nsideratio n. T he transfer pricing adj ustment has been made on this hypothe tical amount o f intere st rece ivable. Whether such no tional income can be brought to tax even under the transfer pricing provisio n, has been de alt by the Ho n'ble Bombay High Court in the case of Vodafone India Services (P) Ltd. vs. Union o f India (supra), wherein their Lordships have held that even income arising from international transactio n must satisfy the test of income under the Act and must find its home in one of the charging pro visions. Here in this case , nowhere the TPO/AO has been able to establish that no tional inte rest satisfy the test o f income arising or received unde r the charging pro vision of Income Tax Act. If income is not taxable in terms of sectio n 4, then chapter X cannot be made applicable , because se ction 92 provides for computing the income arising from inte rnatio nal transactio ns with regard to the ALP. Only the inte rest income charge able to tax can be subject matter of transfe r pricing in India. Making any transfe r pricing adjustment on interest which has neither bee n rece ived nor accrued to the assessee cannot be held to be chargeable in terms of the Income Tax Act read with A rticle 11( 1) of DTAA. He re it canno t be the case of accrual of interest also, because none of the inve stee 10 ITA No. 3303/Del/2016 Mondon Investments Ltd.
companies have acknowle dge that any inte rest payment is due, albe it they have been re questing for waiving of inte rest of e ven coupon rate o f 4%, leave alone the return of 18% which was dependent upo n some future contingencies. Assessee despite all its efforts has acceded to such re quest. Furthe r, in the India Cyprus DTAA where in similar phrase has bee n used pertaining to FTS and Ro yalty in India Cyprus DTAA, Hon'ble Bombay High Court held that assessment of royalty or FTS should be made in the year in which amount have actually rece ived and not o the rwise. The coo rdinate bench o f Mumbai ITAT in the case of Pramerica ASPF II Cyprus Holding Ltd. vs. DCIT (supra) on exactly similar se t of facts, additio n on account o f notio nal interest was m ade; the T ribunal has held that the inte rest income in question can only be taxed on payment /receipt basis. The relevant observation has alre ady been incorporate d abo ve. The Hon'ble Bo mbay High Co urt has confirmed the said finding. Similar view has been taken by the ITAT Chennai Bench in the case of DCIT vs. Inzi Control I ndia Lim ited (supra). Thus, in view of Article 11( 1) we ho ld that, o nly the interest which has actually bee n received can only be subject matter of taxation and no TP adjustment can be made on some hypo thetical rece ivable amount which was contingent upon certain e vent which has actually not been take n place during the year. Thus, the order o f the Direction of the DRP is uphe ld and the grounds raised by the re venue are dismisse d.
16. Since, the matter stands adjudicated by various orders of the Tribunal and Hon'ble Courts that the word "paid" cannot be extended to "payable" in respect of interest under Article 11 of Indo-Cyprus treaty, we hereby allow the appeal of the assessee.
17. In view of the above, the other grounds taken up by the assessee would be academic in nature and hence not being adjudicated.
11 ITA No. 3303/Del/2016Mondon Investments Ltd.
18. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 02/09/2021.
Sd/- Sd/-
(Amit Shukla) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 02/09/2021
*Subodh*
Copy forwarded to:
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