Income Tax Appellate Tribunal - Delhi
Mondon Investment Ltd., New Delhi vs Dcit Circle-2(2)(1), New Delhi on 30 November, 2022
1 ITA No. 8076/Del/2019
Mondon Investment Ltd., ND
IN THE INCOME TAX APPELLATE TRIBUNAL
[ DELHI BENCH : "I" NEW DELHI ]
BEFORE DR. B. R. R. KUMAR, ACCOUNTANT MEMBER
AND
SH. YOGESH KUMAR US, JUDICIAL MEMBER
I.T.A. No. 8076/DEL/2019 (A.Y 2012-13)
M/s. Mondon Investment Ltd., DCIT,
C/o. M/s. Khiwani & Co., Vs.
23/26, 2nd Floor, Main Market, Circle : 2 (2) (1)
East Patel Nagar,
New Delhi-110 008. New Delhi.
PAN No. AAFCM8386H
(APPELLANT) (RESPONDENT)
Appellant by Shri Somil Aggarwal, Adv.&
Dr. Rakesh Gupta, Adv.;
Respondent by Shri Rajesh Kumar,
[CIT] - D. R.;
Date of Hearing 16.11.2022
Date of Pronouncement 30.11.2022
ORDER
PER YOGESH KUMAR US, JM
The present appeal is preferred by the assessee for the Assessment Year 2012-13 against the final assessment order dated 18/04/2016 passed by the 2 ITA No. 8076/Del/2019 Mondon Investment Ltd., ND DCIT, Circle-2 (2)(1), New Delhi u/s 143(3) r/w Section 144C of Income tax Act, 1961,( 'the Act' for short).
2. The assessee has raised the following substantive grounds of appeal:-
"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.26,58,12,530/- as income in the hands of assessee company on account of notional interest and that too by recording incorrect acts and findings and without observing the principles of natural justice.
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.26,58,12,530/- as income in the hands of assessee company on account of notional interest, 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 considering/appreciating the following submissions of the assessee.
• That the return filed for the year under consideration has not been treated as non-est/nullity in the eyes of law. • That the assessee company is incorporated outside India and no income accrued or arose or deemed to accrues or arise in India to the assessee company and thus the assessee company is not liable to file Income Tax Return in India.
• That no interest was 'paid' to the assessee company. • That the impugned interest income is not taxable in view of the provisions of DTAA between India and Cyprus as the amount was 3 ITA No. 8076/Del/2019 Mondon Investment Ltd., ND never paid by AE's. Therefore, the reference made to TPO was illegal, the adjustment proposed by the TPO is illegal and consequently the addition made by Ld. AO is also illegal.
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 rejecting the analysis followed by the appellant and in determining the price of the impugned transaction on the basis of TPO's order.
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 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.
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 computing the arm's length price of the international transaction of the appellant by applying the internal comparable uncontrolled price method.
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 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.4 ITA No. 8076/Del/2019
Mondon Investment Ltd., ND
8. 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 charging the interest u/s 234A, 234B, 234C and 234D of the Income Tax Act, 1961."
3. Brief facts of the case are that, the assessee is a company incorporated in Cyprus. The assessee on 30/11/ 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. The debentures were converted into 0% fully convertible debentures w.e.f. 01/01/2009. Subsequently, on 23/12/2019 in addition to conversion of 15% fully convertible debentures into 0% FCDs, the assessee has subscribed to 0% fully convertible debentures of face value of Rs. 100 each issued by the above AE's. The Ld. TPO has passed order u/s 92C(3) of the Act wherein held that 15% of the FCDs have been converted into 0% FCDs without assigning any reason. Therefore, by applying internal CUP as most appropriate method. Further, the TPO charged the interest on FCDs as the same rate of 15% as was being charged prior to 01/01/2009. The income generated during the year under consideration was only interest income on FCDs which was offered to tax at the treaty rate of 10%. Thus, the TPO has determined the Arms Length Price and made adjustment of Rs. 26,58,12,530/- in following manners:-
5 ITA No. 8076/Del/2019Mondon Investment Ltd., ND Name No. of FCD Face Value Date of No of Interest Total interest of the Issue days @15% charged ALP of A.E interest on FCD Openin 10891745 1089174500 365 1633761 163376175 g 75 Balanc e ARVPL 22247 2224700 29.08.2012 213 194737 194737 ERVPL 8238045 823804500 02.06.2011 297 1005492 100549289 89 ERVPL 174400 17440000 30.08.2011 212 1519430 1519430 SRVPL 14359 1435900 06.06.2011 293 172989 172898 Total Adjustment 265812530
5. The assessment order came to be passed on 18/04/2016 u/s 143(3) r.w.s 144C(3) of the Act in continuation with the order passed by the TPO. Aggrieved by the assessment order dated 18/04/2016, the assessee has preferred an appeal before the CIT(A). The Ld.CIT(A) vide order dated 31/07/2019 has confirmed the action of the A.O. in making adjustment of Rs. 26,58,12,530/- on account of notional interest.
6. Aggrieved by the order dated 31/07/2019 the assessee has preferred the present appeal.
7. The Ld. Counsel for the assessee has contended that the issues involved in the present appeal has been decided in favour of the assessee for the Assessment Year 2009-10 in ITA No. 3303/Del/2016 vide order dated 02/09/2021, since there is no change of circumstances, the Ld. Counsel for the assessee submitted that the present appeal deserves to be allowed by following the order made in assessee's own case.
6 ITA No. 8076/Del/2019Mondon Investment Ltd., ND
8. Per contra, the Ld. DR has not disputed the above fact and could not bring any contrary judicial pronouncements and further relied on the order of the Ld.CIT(A).
9. We have heard the parties, perused the material on record and gave our thoughtful consideration. The similar issue involved in the present appeal has been dealt and decided by the Co-ordinate Bench of the Tribunal in ITA No. 3303/Del/2016 and vide order dated 05/07/2021 the Co-ordinate Bench of the Tribunal has held as under:-
"9. This le ads to us to ad jud icate the moo t issue " whe ther as per Ar ticle 11( 1) in teres t paid includes interes t payable or no t"
10. The Ar ticle 11 of agreemen t be twe en the Governme nt of Republic of Ind ia and the Governmen t of Republic of Cyprus f or the avo id ance of double tax ation and the prevention of f iscal evas ion with respe ct to taxes on inco me re ads as under:
ART ICLE 11 INTE REST
1. Interes t ar is ing in a Con tr ac ting State and paid to a res ident of the o ther Contr ac ting S tate may be taxed in that o ther S tate.
2. Ho wever, such interes t may also be taxed in the Contr ac ting S tate in which it ar ises, and accord ing to the laws of that S tate, bu t if the benef icial owner of the in teres t is a res ident of the o ther Contr acting S tate, the tax so charged shall no t exceed 10 percent of the gros s amoun t of the interes t.
3. No twiths tand ing the prov is io ns of paragr aph 2, in teres t ar is ing in a Contr acting S tate shall be exe mpt f rom tax in that S tate, prov ided that it is der ived and benef icially o wned by:7 ITA No. 8076/Del/2019
Mondon Investment Ltd., ND
(a) the Governmen t, a po litical sub-d iv is ion or a lo cal author ity of the o ther Con tr acting S tate; or
(b) in the case of Ind ia, the Reserve Bank of Ind ia, th e Expor t- Impor t bank of Ind ia, the Natio nal Hous ing bank; and
(c) any o ther ins titu tion as may be agreed upon f rom time to time be twe en the Co mpe tent au tho r ities of the Contracting S tates through exchange of le tters.
4. The ter m "in teres t" as used in this Ar ticle me ans inco me f rom de bt claims of every kind, wh e ther or no t secur ed by mor tg age and whe ther or no t carrying a r igh t to particip ate in the debtor 's prof its , and in par ticular, inco me f rom governmen t secur ities and inco me f rom bonds or debentures, includ ing pre miums and pr izes attaching to s uch secur ities, bo nds or debentures. Penalty charges f or late payment shall no t be regarded as in terest f or the pur pose of this Ar ticle.
5. The prov is ions of par agr aphs 1 and 2 shall no t apply if the benef icial o wner of the in teres t, be ing a res ident of a Contr ac ting S tate, carr ies on bus iness in the o ther Con tr acting S tate in which the in teres t ar ises , "Trough a per manen t es tablishment s ituated there in, or perf orms in that o the r S tate independen t personal serv ices f rom a f ixed base situated there in, and the d ebt claim in respect of which the inte res t is paid is ef f ectiv ely connec ted with such permanen t es tablishment or f ixed base. In such case the prov is ions of Ar ticle 7 or Ar ticle 14, as the case may be, shall apply.
6. Interes t shall be dee med to ar ise in a Con tr ac ting S tate when the payer is a res ident of that S tate. Where, ho we ver, the person paying the in teres t, whe ther he is a res ident of a Contr ac ting S tate or no t, has in a Contr acting S tate a per manent es tablis hmen t or a f ixed base in connection with 8 ITA No. 8076/Del/2019 Mondon Investment Ltd., ND wh ich the indeb te dness on which the in teres t is paid was incurred, and such in teres t is bor ne by such per manen t es tablishment or f ixed base, then such interes t shall be dee med to ar ise in the S tate in which the per manen t es tablishment or f ixed base is s ituate d.
7. Where, by re ason of a special re latio nship be twe en the payer and the benef icial o wner or be twe en bo th of the m and so me o ther person, the amo unt of the interes t, hav ing regard to the deb t claim f or wh ich it is paid, exceeds the amoun t which wo uld have been agreed upon by the payer and the benef icial o wner in the absence of such relatio nship, the prov is io ns of th is Ar ticle shall apply only to the las t me ntioned amount. In such case, the excess par t of the payments shall re main tax able accord ing to the laws of each Contr ac ting State, due regard be ing had to the o ther prov is ions of this Agree men t."
11. The Hon'ble Bo mbay H igh Cour t in CIT v. Pramer ica ASPF II Cyprus Hold ing Limite d ( IT A No. 1824 of 2016) had f ramed the f ollo wing ques tion of law:
"Whe ther on the f acts and circums tances of the case and in law, the ITAT is correct in d irecting the Assess ing Off icer to accep t the interes t inco me re tur ned by the assessee on cash bas is where as the A. O. has made add itio ns on the g round that in teres t inco me was liable to be assessed on accrual bas is ?".
12. The Hon'ble Bo mbay H igh Cour t d is missed the appe al f iled by the revenue depar tment and held that f ollo wed its ear lier decis ion in DDIT v. S ie mens Aktiengese llschaf t (2009) tax mann.co m 1019 to ho ld that tax ability in a case where the ar ticle is worded in the af oresaid manner, tax abil ity can only 9 ITA No. 8076/Del/2019 Mondon Investment Ltd., ND be f astened on re ce ipt of paymen t. Relev an t Par agr aph has been reproduced:
"8 . T h u s, wh il e i n ter pre ti n g s i mil ar cl au s e of In do- Ge rm an DT AA i n rel ati o n to t ax i n g r o y al ty o r f ees f or tec h n ic al se rv ic es, th i s C o ur t h ad co nf irme d th e d eci si o n of tr ib u n al h ol di n g th at s uc h s er v ice c an be tax e d o nl y o n re cei p t. T h is dec is io n was l ate r o n f ol l owe d i n In c om e T ax App e al N o. 1 0 3 3 / 1 1 d ate d 2 0/ 1 1 / 2 0 1 2 an d th e re af ter i n In c om e T ax A ppe a l N o. 2 3 5 6 / 1 1 an d c on n ec te d Ap pe al s vi de th e or de r d ate d 0 7/ 0 3/ 2 0 1 3.
9. O n th e s am e p ri n c ipl e, th e App e al i s di sm iss ed ."
13. We have also gone through the order of the Co -ord inate Bench of ITAT in the case of DCIT Vs. TMW ASPF i Cyprus Hold ing Co mpany Ltd. in IT A No. 879/Del/2016 dated 09.08.2019.
14. In the appe al f iled by the revenue agains t the order of the ld. DRP re ads as under:
"( i) Whe ther on the f acts and in the circums tances of the case, the DRP erred in hold ing that as per Ar ticle 11(1) and (2) of Indo- Cyprus DTAA, interes t inco me is charge able to tax on paid bas is when the usage of the wor d 'paid ' al ways includes 'payable ' and v ice versa.
( ii) Whe ther on the f acts and in the cir cums tances of the case, the DRP erred in observ ing that it has been jud ic ially held in var ious case laws relied upon by the assessee that as per Ar ticle 11(1) and (2) of Indo - Cyprus DTAA, interes t inco me is charge able to tax on paid bas is whe n there are no such f ind ings in any decis ion cited by the assessee bef ore the Hon'ble DRP. "
15. While adjud icatin g the core issue, it was held as under:
10 ITA No. 8076/Del/2019Mondon Investment Ltd., ND Ind ia Cyprus DTAA Ar ticle 11(1) of Ind ia-Cyprus DTAA:
"In teres t ar is ing in a Con tr ac ting S tate and paid to a re s ident of the o ther Con tr acting S tate may be taxed in that o ther S tate."
20. The af oresaid par a env is ages that f or tax ing the interes t inco me in the hand s of a non-res ident, it is necess ary that the in teres t should ar ise in a con tr acting s tate , i.e., twin cond itions of accr ual as we ll as the payment are to be satisf ied. If there is no accr ual or actual paymen t re ce ived then same is to be decided with in the scope of Ar ticle 11(1). What the TPO/AO have sought to tax is that, ass essee was supposed to rece ive in teres t of 18% , if the contingent event would have ar isen, i.e., if in the event, the optio n was exercised by the assessee to sell its conver ted shares to the pro mo ters of inves tee company at an option pr ice then it wo uld have g iven the re turn of 18% . Thus, entire ed if ice of the TPO/AO was bas ed on f ixation of contingent even t which assessee was supposed to rece ive. It is also matte r of record no such convers ion was actual ised and assessee remaine d inves ted even dur ing the ye ar under cons ider ation. The tr ansf er pricing ad jus tmen t has been made on this hypo the tical amo unt of in teres t re ce iv able. Whe ther such no tio nal inco me can be brought to tax even under the tr ansf er pr icing prov is ion, has been de alt by the Hon'ble Bo mbay H igh Cour t in the case o f Vodaf one Ind ia S erv ices (P) L td. vs. Unio n of Ind ia (supr a), where in the ir Lordships have he ld that even inco me ar is ing f rom international tr ansaction mus t s atisf y the tes t of inco me und er the Ac t and mus t f ind its ho me in one of the charg ing provis ions. Here in this case, no wher e the TPO/AO has be en able to establish that notional in teres t s atisf y the tes t of inco me ar is ing or received under the charg ing prov is ion of Inco me T ax Act. If inco me is no t tax able in ter ms of section 4, then chapter X canno t be made applicable, becaus e sectio n 92 provides f or computin g the inco me ar is ing f rom international tr ansactions with regard to the ALP. Only the in teres t inco me charge able to tax can be subje ct matte r of tr ansf er pr icing in Ind ia. Making any tr ansf er pr icing ad jus tme nt on interes t which has ne ither been rece ived nor accr ued to the assessee canno t be held to be charge able in ter ms of the Inco me Tax Ac t re ad with Ar ticle 11(1) of DTAA. Here it canno t be the case of accrual of in teres t also, because none of the inves tee co mpanies hav e ackno wledge that any in teres t paymen t is due, albe it they have been reques ting f or waiv ing of interes t of even coupon rate of 4%, leave alo ne the re turn of 18% which was depend ent upon so me f uture contingencies. Assessee despite all its ef f orts has acce ded to 11 ITA No. 8076/Del/2019 Mondon Investment Ltd., ND such reques t. Fur ther, in the Ind ia Cyprus DTAA where in s imilar phr ase has been used per tain ing to FTS and Royal ty in Ind ia Cypr us DTAA, Hon'ble Bo mbay H igh Cour t he ld that assess men t of royal ty or FTS should be made in the year in wh ich amoun t hav e ac tually rece ived and no t o ther wis e. The coord inate bench of Mumbai IT AT in the case of Pramer ica ASPF II Cypr us Hold ing Ltd. vs. DCIT ( supr a) on exactly s imilar se t of f acts, add itio n on account of no tional in teres t was made; the Tr ibunal has held that the interes t inco me in ques tio n can only be taxed on paymen t /rece ipt bas is. The relev an t observation has alr eady been incorpor ated above. The Hon'ble Bo mbay H igh Cour t has conf ir med the said f ind ing. Similar v ie w has been taken by the IT AT Chennai Bench in the case of DCIT vs. Inz i Control Ind ia Limite d (supr a). Thus, in v ie w of Ar ticle 11(1) we hold that, only the interes t wh ich has actually been rece ived can only be subje ct matte r of taxatio n and no TP ad jus tmen t can be mad e on so me hypo the tical rece iv able amount which was con tingent upon cer tain event wh ich has ac tually no t been take n place during the ye ar. Thus, the order of the Dir ectio n of the DRP is upheld and the grounds raised by the revenue are d is missed.
16. Since, the matte r stands adjudic ated by v arious orders of the T ribunal and Hon'ble Courts that the word "paid" c annot be extended to "payable" in respect of in teres t under Ar ticle 11 of Indo-Cyprus treaty, we hereby allo w the appeal of the assessee."
10. By respectfully following the order of the Co-ordinate Bench in assessee's own case for Assessment Year 2009-10 (supra), we are of the opinion that the appeal of the assessee deserves to be allowed in terms of the order made in ITA No. 3303/Del/2017.
11. In view of the above other grounds of appeal of the assessee would be academic in nature hence, not being adjudicated.
12 ITA No. 8076/Del/2019Mondon Investment Ltd., ND
12. In the result, appeal of the assessee is allowed.
Order pronounced in the Open Court on : 30 .11.2022.
Sd/- Sd/-
(B. R. R. KUMAR) (YOGESH KUMAR U.S.)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 30/11/2022
*MEHTA/R.N Sr. PS*
Copy forwarded to :
1. Appellant
2. Respondent
3. CIT
4. CIT (Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI