AGR Matthey of Westerm Australia, New Delhi V. ADIT, New Delhi

ITA 1341/DEL/2010

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 6337 (ITAT-DELHI)
• Duration Of Justice: 9 year(s) 4 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 20-06-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 26-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G K DHATT
• Assessee Lawyers: S KRISHNAN SH V RAJA KUMAR
• Keywords: Business income; Business expenditure; Double taxation relief; Permanent establishment; Notional interest; Set aside
• Section: 56

Judgement Text

1 ITA NO. 1341/DEL/2010 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: A NEW DELHI SH. R. K. PANDA, ACC OUNTANT MEMBER AND MS. SUCHITRA KAMBLE, JUD ICIAL MEMBER ITA NO. 1341/DEL/ 2010, A.Y. 2005-06 AGR MATTHEY OF WESTERN AUSTRALIA THROUGH REPRESENTATIVE ASSESSEE PEC LIMITED HANSALAYA, 9 TH FLOOR 15, BARAKHAMBA ROAD, NEW DELHI-110001 PAN : AAACT0101G (APPELLANT) VS ADIT INTERNATIONAL TAXATION CIRCLE 2(1), NEW DELHI (RESPONDENT) APPELLANT BY SH. S.KRISHNAN, SH. V.RAJA KUMAR, ADV. RESPONDENT BY SH. G.K.DHATT, CIT- DR ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED AGAINST THE ORDER DATED 14.12. 2009 PASSED BY CIT(A)-XXIX, NEW DELHI FOR ASSESSMENT YEAR 2005-06. 2. THE GROUNDS OF APPEAL ARE AS UNDER :- 1) THAT THE ORDER OF THE LEARNED COMMISSIONER OF INCO ME TAX (APPEALS)- XXIX, NEW DELHI (HEREINAFTER REFERRED TO AS CIT(A)) IS WRONG ON FACTS AND BAD IN LAW. 2) THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF RS. 25,71,10,851/- BY WAY OF DISALLOWANCE OF EXPENDITURE INCURRED FOR EARNING THE INCOME FROM DATE OF HEARING 11.07.2019 DATE OF PRONOUNCEMENT 05.08.2019 2 ITA NO. 1341/DEL/2010 USANCE INTEREST. 3) THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF EXPENDITURE OF RS. 25,71,10,851/- BY NOT APPRECIATING THE PROVISIONS O F THE DTAA BETWEEN INDIA AND AUSTRALIA. 4) THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN NOT APPRECIATING THE FACT THAT GRANTING OF CREDIT (FACILITY TO PAY LATER) TO THE INDIAN BUYER AND IN TURN DISCO UNTING OF BILLS ON PAYMENT OF DISCOUNTING CHARGES RELATE TO THE SAME T RANSACTION OF SALE ON CREDIT AND HAS CONSEQUENTLY FURTHER ERRED IN NOT AL LOWING THE DISCOUNTING CHARGES INCURRED BY THE ASSESSEE AS DEDUCTION FROM THE INTEREST RECEIVED FROM THE INDIAN PARTY. 5) THAT WITHOUT PREJUDICE TO THE ABOVE MENTIONED GROUN DS, THE LEARNED CIT(A) HAS ERRED IN NOT ALLOWING THE EXPENDITURE TO EARN THE INTEREST INCOME EVEN THOUGH THE ASSESSING OFFICER HAD HELD THE EXPE NDITURE TO BE BUSINESS EXPENDITURE AND INTEREST INCOME AS INCOME FROM OTHE R SOURCES SINCE THE BUSINESS EXPENDITURE CAN BE SET OFF AGAINST THE INC OME FROM OTHER SOURCES IN THE SAME ASSESSMENT YEAR AS PER PROVISIONS OF SE CTION 71 OF THE INCOME TAX ACT, 1961. 6) THAT THE APPELLANT CRAVES LEAVE TO RESERVE TO ITSELF THE RIGHT TO ADD, ALTER AND/OR VARY ANY GROUND(S) AT OR BEFORE T HE TIME OF HEARING. 3. THE ASSESSEE IS A SELLER OF GOLD/BULLION TO PEC, A GOVERNMENT OF INDIA UNDERTAKING AND NOMINATED AGENCY FOR IMPORT OF BULL ION, AGAINST ISSUANCE OF LETTERS OF CREDIT. AGAINST SUPPLIES OF GOLD BY T HE ASSESSEE TO PEC, PEC ESTABLISHES A ISSUANCE OF LETTER OF CREDIT IN FAVOU R OF THE ASSESSEE FOR 90/180/360 DAYS CREDIT. THE ASSESSEE ACCEPTS THE LC THROUGH ITS BANKERS IN AUSTRALIA. AS PER THE TERMS OF LC THE ASSESSEE I S ENTITLED TO CHARGE INTEREST AT THE RATE OF LIBOR PLUS A MARGIN OF 0.5% PER ANNUM. IN ITS RETURN OF INCOME FILED ON 18.05.2006, THE ASSESSEE DECLARED AN AMOUNT OF RS. 25,71,10,851/- AS INTEREST INCOME. AGAINST THIS INCOME THE ASSESSEE CLAIMED EXPENSES OF AN EQUAL AMOUNT ON ACCOUNT OF D ISCOUNTING OF VARIOUS LCS RECEIVED FROM PEC AND DISCOUNTED WITH ITS BANKE RS IN AUSTRALIA WHICH 3 ITA NO. 1341/DEL/2010 HAVE BEEN DISALLOWED BY THE ASSESSING OFFICER IN TH E ASSESSMENT PROCEEDINGS. 4. BEING AGGRIEVED BY THE ASSESSMENT ORDER THE ASSE SSEE FILED APPEAL BEFORE THE CIT(A). THE CIT(A) DISMISSED THE APPEAL OF THE ASSESSEE. 5. THE LD. AR SUBMITTED THAT THE ISSUE ARISING IN T HE SUBJECT APPEAL RELATES TO AN ADDITION IN RESPECT OF USANCE INTERES T IN A SUM OF RS.25,71,10,851/-. THE CIT (APPEALS) AT PARA 5 OF T HE IMPUGNED ORDER OBSERVED THAT THE ASSESSEE IS AN AUSTRALIAN COMPANY WHICH HAS SOLD BULLION TO PEC LTD., A GOVERNMENT OF INDIA COMPANY. ITS RETURN OF INCOME STANDS FILED BY PEC LTD. IN THE CAPACITY OF REPRESE NTATIVE ASSESSEE. THUS, CLAIMS MADE IN THE RETURN ARE NOT CLAIMS OF THE ASS ESSEE, BUT MADE UNILATERALLY BY PEC LTD. THE CIT(A) FURTHER OBSERVE D THAT ON 18.10.2001 THE ASSESSEE AND PEC LTD. AGREED UPON A TRANSACTION OF SALE OF GOLD AND SILVER BARS BY THE ASSESSEE TO PEC LTD. FROM THE PERUSAL O F THE LETTER OF UNDERSTANDING ESPECIALLY FROM THE SCHEDULE THEREIN, FOLLOWING STEPS WOULD BE UNDERTAKEN TO CONSUMMATE THE TRANSACTION: DAY 0 PEC LTD. WOULD RECEIVE PROVISIONAL INVOICE FROM ASSESSEE FOR LC OPENING; DAY 1 ASSESSEE WOULD RECEIVE THE LC FROM PEC LTD. VIA ITS BANK IN AUSTRALIA FOR DISCOUNTING; DAY 3 BULLION WOULD BE DISPATCHED BY ASSESSEE TO PEC LTD. TO ARRIVE IN INDIA; DAY 4 TO 8 ASSESSEE TO DISCOUNT LC WITH ANZ BANK, AUSTRALIA AN D TO RECEIVE PROCEEDS AT THAT STAGE ITSELF; DAY 180 ASSESSEE BANK IN AUSTRALIA TO RECEIVE PROCEEDS FROM PEC LIMITED'S BANK IN INDIA AS PER LC. THUS, EVEN BEFORE THE TRANSACTION TOOK PLACE, PARTI ES WERE AD-IDEM THAT THERE WOULD BE NO EFFECTIVE CREDIT PERIOD VIS-A-VIS THE TRANSACTION AND THAT CREDIT PERIOD WAS BEING CALIBRATED BY LEVERAGING TH E SERVICES OF THE PARTIES' RESPECTIVE BANKS. THE LD. AR SUBMITTED THAT THIS IS THE RECOGNIZED MODE OF 4 ITA NO. 1341/DEL/2010 TRADING IN BULLION GLOBALLY. APART FROM OBTAINING R EQUISITE CREDIT FOR PARTIES, THE METHOD ALSO HEDGES PARTIES FROM RISK ASSOCIATED WITH SUCH HIGH VALUE TRANSACTIONS. THE LD. AR FURTHER POINTED OUT THAT O N 20.02.2006 ALSO, CONFIRMATORY DETAILS WITH REGARD TO THIS METHOD OF OPERATION WERE MADE OUT, AND FILED BEFORE THE ASSESSING OFFICER. BUT THE AUT HORITIES BELOW HAVE HELD THE NOTIONAL INTEREST INCOME AS ARISING FROM THE CR EDIT PERIOD OF 180 DAYS TO BE INCOME IN THE HANDS OF THE ASSESSEE, WITHOUT NOT ICING THAT SUCH INTEREST IS COMPLETELY NOTIONAL AND HAS NEVER BEEN RECEIVED BY THE ASSESSEE. IN FACT, PEC LTD. ITSELF CONFIRMED THE SAME IN THE COMPUTATI ON OF INCOME. THE LD. AR SUBMITTED THAT THERE IS IN FACT NO INTEREST CRED IT, SINCE WITHIN A DAY OR TWO OF USANCE OF LETTER OF CREDIT BY PEC LTD'S BANK TO THE ASSESSEE, LETTER OF CREDIT STANDS DISCOUNTED BY THE ASSESSEE WITH ANZ B ANK OF AUSTRALIA. THE COST OF DISCOUNTING LETTER OF CREDIT IS IDENTICAL A ND EQUAL TO THE NOTIONAL INTEREST IN RESPECT OF THE LETTER OF CREDIT ITSELF. THE ASSESSING OFFICER ADMITS IN HIS ORDER THAT INTEREST IN THIS CASE IS NOT INTE REST SIMPLICITOR, I.E., IT DOES NOT ARISE OUT OF A LOAN LIABILITY. IT IS, IN THE CO NTEXT OF A TRANSACTION OF HIGH- SEAS SALE OF BULLION, A PART OF THE COST OF SUCH BU LLION ITSELF. BOTH THE AUTHORITIES BELOW HAVING RETURNED CONCURRENT FINDIN G OF FACT THAT SUCH INTEREST IS IN THE NATURE OF BUSINESS EXPENDITURE A ND STANDS INCURRED PURELY TO FACILITATE THE TRANSACTION OF SALE OF BULLION, T HEY HAVE ERRED IN NOT SEEKING TO ASSESS SUCH INTEREST UNDER PROVISIONS OF BUSINES S INCOME, AND HAVE TRAVELLED ARBITRARILY AND ERRONEOUSLY TO THE RESIDU AL CHAPTER UNDER THE ACT I.E. INCOME FROM OTHER SOURCES. THUS, THE LD. AR FU RTHER SUBMITTED BOTH USANCE INTEREST AND THE DISCOUNTING CHARGES WERE PA RT OF THE SALE TRANSACTION AS DULY ENTERED INTO BY PARTIES, IT WAS NOT OPEN TO THE REVENUE AUTHORITIES TO RECKON ONE AND IGNORE THE OTHER. THE AUTHORITIES BELOW HAVE ONLY SOUGHT TO TEST THE TRANSACTION UNDER CHAPTER I V F OF THE ACT RATHER THAN IN TERMS OF CHAPTER IV D, TO WHICH THIS TRANSA CTION BELONGS. FOR THIS PURPOSE, THEY HAVE RELIED UPON THE DISCLOSURE AS MA DE IN THE RETURN DATED 18.05.2006. THE LD. AR SUBMITTED THAT THIS PREMISE IS PATENTLY INCORRECT FOR TWO REASONS; FIRSTLY, THIS IS A CASE WHERE A CLAIM IN THE RETURN HAS NOT BEEN MADE BY THE ASSESSEE AT ALL, BUT BY PEC LTD. AS REP RESENTATIVE ASSESSEE AND SECONDLY, PEC LTD. HAS FILED A RETURN OF INCOME AT 'NIL' ON THE ASSESSEE'S 5 ITA NO. 1341/DEL/2010 BEHALF, CLAIMING INTEREST PAID BY THEM TO THEIR OWN BANK ON ONE SIDE AND DEDUCTING AN IDENTICAL AMOUNT AGAINST THE SAME IN R ESPECT OF INTEREST RETAINED BY THE ASSESSEE'S BANK FOR THE PERIOD OF S UCH CREDIT. THUS, THIS IS NOT EVEN A CASE WHERE A CLAIM HAS BEEN MADE FOR INT EREST UNDER INCOME FROM OTHER SOURCES. THE LD. AR SUBMITTED THAT THE I NTEREST ITSELF IS NOTIONAL AND HAS NEVER BEEN RECEIVED BY THE ASSESSEE AND CAN BE SEEN FROM THE COMPUTATION OF INCOME WHEREIN IT IS DEMONSTRATED TH AT THE ASSESSEE HAS NEVER RECEIVED ANY INTEREST FROM PEC LTD. AT ALL - SUCH INTEREST HAS BEEN PAID BY PEC LTD. TO ITS BANK. THE LD. AR FURTHER SU BMITS THAT LIVE LINK BETWEEN INTEREST CREDIT AND DISCOUNTING COST AS PER THE MODUS OPERANDI AGREED UPON BETWEEN THE PARTIES AND DULY FOLLOWED I N THE SUBJECT CASE, THE PROCESS OF CONSUMMATING THE TRANSACTION ITSELF WAS BASED ON THE ACCEPTED AND NORMAL DEVICE OF THE SELLER DISCOUNTING LETTER OF CREDIT TO HAVE THAT TRANSACTION FINANCED BY THE PARTIES' RESPECTIVE BAN KS. THE AUTHORITIES BELOW, IN THE FACE OF EVIDENCE DEMONSTRATING THE LIVE NEXU S BETWEEN THE TWO, ERRED GROSSLY IN PICKING ONE AND IGNORING THE OTHER. THE LD. AR FURTHER SUBMITTED THAT INTEREST IN THE PRESENT CASE IS PART OF THE CO ST OF THE BULLION ITSELF - THE ASSESSING OFFICER AS WELL AS THE CIT (APPEALS) HAVE BOTH HAVE BEEN PAINS TO POINT OUT HOW THE NOTIONAL INTEREST AS WELL AS THE DISCOUNTING CHARGES WERE NOT PART OF ANY LOAN LIABILITY, BUT WERE PART OF A BUSINESS TRANSACTION. FINDINGS OF THE ASSESSING OFFICER AT PAGE 4 AND OF THE CIT (APPEALS) AT PARA 7 OF THE IMPUGNED ORDERS ARE RELIED UPON IN THIS RE GARD. IN VIEW OF THE RATIO OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. COCANADA RADHASWAMI BANK LTD. (1965) 57 ITR 306 (SC) AS WELL AS IN VIEW OF THE BINDING PRECEDENT OF THE HON'BLE DELHI HIGH COURT ON IDENTICAL FACTS IN THE CASE OF CIT VS. CARGILL GLOBAL TRADING (P.) LTD. (2011) 11 TAXMANN. COM 219 (DEL.), SUCH INTEREST PARTAKES OF THE CHARACTER OF THE PURCHASE PRICE ITSELF AND COULD NOT HAVE BEEN PUT TO TAX UNDER THE RESIDUAL HEAD OF INC OME FROM OTHER SOURCES. THE REVENUE AUTHORITIES HAVE CONVENIENTLY OMITTED T O SEEK TO TEST THE TRANSACTION UNDER PROVISIONS OF BUSINESS INCOME, BE CAUSE THEY WERE WELL AWARE THAT IN THE ABSENCE OF A PERMANENT ESTABLISHM ENT OF THE ASSESSEE IN INDIA, NO LIABILITY TO TAX COULD BE FASTENED UPON I T. THE RECITAL IN ARTICLE 7 OF THE DTAA BETWEEN INDIA AND AUSTRALIA IS CRYSTAL CLE AR IN THIS RESPECT. THE 6 ITA NO. 1341/DEL/2010 FINDINGS OF THE HON'BLE DELHI HIGH COURT AT PARAS 9 TO 12 OF THE JUDGMENT IN THE CASE OF CIT VS. CARGILL GLOBAL TRADING (P.) LTD . (SUPRA) COVER THE SUBJECT CASE TO THE HILT. THE AUTHORITIES BELOW COULD NOT H AVE TREATED THE NOTIONAL INTEREST AS ANYTHING EXCEPT BUSINESS INCOME, UNDER WHICH SUCH INCOME WAS NOT DUE TO BE TAXED IN INDIA AT ALL. THE LD. AR SUB MITTED THAT ARTICLE 11(1) HAS BEEN COMPLETELY IGNORED BY THE REVENUE AUTHORIT IES - EVEN IF THE NOTIONAL INTEREST WERE SOUGHT TO HAVE BEEN TREATED AS INTEREST SIMPLICITER, THE CIT (APPEALS) HAS ERRED IN OMITTING TO CONSIDER ARTICLE 11(1) OF THE INDO- AUSTRALIAN DTAA. AS PER ARTICLES 11(1) AND 11(2) OF THE SAID TREATY, INTEREST INCOME IS ALTERNATIVELY TAXABLE IN THE COUNTRY OF R ESIDENCE OF THE RECIPIENT PARTY, IN THE PRESENT CASE, AUSTRALIA. IN ORDER TO INVOKE ARTICLE 11(2), A HEAVY ONUS IS CAST TO ESTABLISH HOW 'ACCORDING TO THE LAW OF THAT STATE' SUCH INTEREST COULD BE TAXED IN INDIA. IN CIT VS. CARGIL L GLOBAL TRADING (P.) LTD. (SUPRA), IT HAS ALREADY BEEN HELD THAT SUCH INTERES T IS NOT INTEREST WITHIN THE MEANING OF SECTION 2(28A) OF THE ACT. THE INVOCATIO N OF ARTICLE 11(2) WITHOUT COMPLIANCE OF THE CONDITION PRECEDENT THEREIN, I.E. TO POINT OUT UNDER WHICH PROVISION SUCH INTEREST WAS TAXABLE IN INDIA HAS NE VER BEEN DONE, AND THE AUTHORITIES BELOW HAVE CONVENIENTLY RELIED UPON THE ASSESSEE'S OWN CLAIM, WITHOUT NOTING THAT THIS IS A CASE WHERE THE CLAIM STANDS MADE NOT BY THE ASSESSEE BUT BY A REPRESENTATIVE ASSESSEE. THIS IS A TRANSACTION OF SALE OF BULLION - ESPECIALLY IN THE CONTEXT OF A TRANSACTIO N OF BULLION SALE ON HIGH- SEAS BASIS, WHEREIN THE PRICE OF THE PRODUCT VARIES ON DAY TO DAY BASIS, ANY INTEREST COST OR CREDIT WOULD ONLY FORM A PART OF T HE COST OF GOODS. IN THAT VIEW OF THE MATTER, THE AUTHORITIES BELOW GROSSLY E RRED IN HOLDING THE NOTIONAL USANCE INTEREST TO BE INTEREST TO BE TAXED AS INCOME FROM OTHER SOURCES. THE LD. AR SUBMITTED THAT REFERENCE TO SEC TION 57 OF THE ACT IS MISCONCEIVED. THE CIT (A) IGNORED THE ASPECT OF DIS COUNTING COST AND HELD THAT FOR ALLOWANCE UNDER SECTION 57 OF THE ACT, THE DISCOUNTING CHARGES SHOULD HAVE BEEN PAID ONLY 'FOR THE PURPOSE OF EARN ING THE INTEREST'. THIS PREMISE ITSELF IS PALPABLY ERRONEOUS IN VIEW OF THE CIT (A)'S OWN FINDING THAT THE INTEREST CREDIT AS WELL AS THE DISCOUNTING COST HAVE ARISEN FROM A BUSINESS TRANSACTION ON SALE OF BULLION, AND NOT FR OM ANY TRANSACTION REFERRED TO IN SECTION 56 OF THE ACT. THE AUTHORITI ES BELOW HAVE EVEN FAILED TO 7 ITA NO. 1341/DEL/2010 POINT OUT HOW SECTION 56 OF THE ACT IS APPLICABLE I N THE SUBJECT CASE. IN VIEW OF THE FACTS AND AVERMENTS AS MADE HEREINABOVE, THE LD. AR SUBMITTED THAT THE REVENUE AUTHORITIES HAVE COMPLETELY FAILED TO U NDERSTAND THE TRANSACTION AS ENTERED INTO BY THE ASSESSEE WITH PEC LTD. AND M ERELY SOUGHT TO POUNCE ON ONE STRAY NOTIONAL CREDIT ONLY WITH A VIEW TO CR EATE A TAX LIABILITY. THE SAME IS MISCONCEIVED ON FACTS AND IN LAW AND MERITS TO BE REVERSED, WITH DIRECTIONS FOR RELIEF TO THE ASSESSEE. 6. THE LD. DR SUBMITTED THAT THE ASSESSEE IS A NON- RESIDENT [''STATUS- FOREIGN COMPANY' AS PER ASSESSMENT ORDER WHICH WAS NOT CHALLENGED] WHICH DOES NOT HAVE A PE IN INDIA. THE LD. DR SUBMI TTED THAT THE CLAIM OF THE LD. AR THAT PEC HAS FILED THE ROI IN THE CAPACI TY OF REPRESENTATIVE ASSESSEE WILL NOT CHANGE THE STATUS OF THE ASSESSEE FROM NON-RESIDENT TO RESIDENT. THE LD. DR SUBMITTED THAT IT HAS SOLD PRE CIOUS METALS TO PEC INDIA WHO ISSUES A LC FROM AN INDIAN BANK IN RESPEC T OF PURCHASES MADE BY IT. THE ASSESSEE ALSO CHARGES INTEREST FROM PEC WHI CH IS SHOWN IN THE COMPUTATION OF INCOME WHERE THE ASSESSEE ITSELF REC OGNIZES THE RECEIPT AS 'INTEREST'. SIMILARLY, IN PAGE-14 OF THE PAPER BOO K THE ASSESSEE ACKNOWLEDGES THAT 'AGR IS ENTITLED TO CHARGE INTERE ST' APART FROM THE SALES CONSIDERATION. THE ASSESSEE OFFERED TO TAX INTEREST RECEIVED BY IT FROM PEC UNDER ART-11 OF THE INDO- AUSTRALIAN DTAA. THE ASSE SSEE CLAIMS THE CHARGES PAID BY IT TO ANZ BANK AT AUSTRALIA AS DEDUCTIBLE E XPENSES FROM THE INTEREST IT RECEIVED FROM PEC. THE FIRST ISSUE THAT NEEDS TO BE EXAMINED IS THE NATURE OF THE INCOME OF RS. 25,71,10,851/- INCLUDED IN THE STATEMENT OF ASSESSABLE INCOME. THE FOLLOWING FACTS CLEARLY PRO VE THAT THE ABOVE INCOME IS IN THE NATURE OF INTEREST AND NOT PART OF PRO FITS AND GAINS OF BUSINESS AND PROFESSION. THE ASSESSEE ITSELF HAS CLAIMED AN D ACCEPTED THAT RS. 25,71,10,851 RECEIVED FROM PEC IS IN THE NATURE OF 'INTEREST' INCOME, THE ASSESSING OFFICER & THE CIT(A) ARE RIGHT AND JUSTIF IED IN TREATING THE SAME AS A SEPARATE AND INDEPENDENT SOURCE OF INCOME DISTINC T FROM THE BUSINESS OF THE ASSESSEE. THE LD. DR SUBMITTED THAT THE ASSESSE E IS CLAIMING BENEFIT OF DEDUCTION OF EXPENDITURE AS PER ART-11(2) OF THE DT AA BETWEEN INDIA AND AUSTRALIA, THE INTEREST MAY BE TAXED IN THE CONTRAC TING STATE (INDIA) IN WHICH 8 ITA NO. 1341/DEL/2010 IT ARISES AND ACCORDING TO THE LAW OF THAT STATE. THE LD. DR SUBMITTED THAT IT MAY NOT BE OUT OF CONTEXT THAT THE ASSESSEE HAS SELECTIVELY QUOTED THE PROVISIONS OF ART- 11(2) AND OMITTED THE REST OF TH E PROVISIONS OF THE SAID ARTICLE I.E. 'BUT THE TAX SO CHARGED SHALL NOT EXCEED 15 PER CEN T OF THE GROSS AMOUNT OF THE INTEREST'. DURING THE COURSE OF HEARING, THE LD. AR CLAIMED THAT REVENUE NEED TO ESTABLISH THE APPLICABILITY OF ART-11(1) BEFORE GOING TO ART-11(2) BUT HERE THE ASSESSEE ITSELF CLAIMS BENEF ITS UNDER ART-11(2) THEREBY ACCEPTING THE APPLICABILITY OF ART-11(1) ITSELF. MO REOVER, THE ASSESSEE HAS ACCEPTED THE TAXING RIGHTS OF THE SOURCE COUNTRY I. E. INDIA AND ITS LIABILITY TO FILE ITS RETURN OF INCOME AND OFFER THE INCOME ACCR UING AND ARISING FROM INDIA - IN THE ABSENCE OF A PE - ONLY BECAUSE OF TH E OPERATION OF ART-11(L) OF THE DTAA. THE LD. DR FURTHER POINTED OUT ANOTHER IM PORTANT FACT THAT THE ASSESSEE HAS NOWHERE ESTABLISHED AND PROVED THAT TH E SAID INCOME HAS BEEN OFFERED TO TAX IN AUSTRALIA OR FOR THAT MATTER THE EXPENSES CLAIMED AGAINST SUCH INCOME HAVE NOT BEEN CLAIMED AGAINST ITS INCOM E ACCRUING & ARISING AT THE COUNTRY OF RESIDENCE I.E. AUSTRALIA. ART-11 (1) GRANTS THE SOURCE STATE [I.E. INDIA] THE RIGHT OF TAXATION OF INTEREST. ART-11(2) PROVIDES FILE MECHANISM OF TAXATION OF SUCH INTEREST AND THE PROCEDURE FOR REL IEVING DOUBLE TAXATION. ACCORDINGLY, THE INTEREST OF A NON RESIDENT HAS TO BE TAXED ON 'GROSS AMOUNT' [I.E. WITHOUT ALLOWANCE OF ANY EXPENDITURE] AND AT A LOWER RATE [I.E. 15%] THAN THE RATE APPLICABLE TO THE DOMESTIC TAXPA YERS. HOWEVER, IF THE NON-RESIDENT HAS A PE, THE PROVISIONS OF ART-7 SHAL L BE APPLICABLE AND THE INTEREST WILL BE TAXED HIGHER RATE ON A NET BASIS. THE LD. DR POINTED OUT THAT THE ASSESSEE IS CLAIMING FOR THE DEDUCTION OF EXPEN SES INCURRED OUTSIDE INDIA. NO DOUBT THE DTAA BETWEEN INDIA & AUSTRALIA PROVIDES FOR THE ALLOWABILITY OF EXPENSES 'WHETHER INCURRED IN THE C ONTRACTING STATE IN WHICH THE PERMANENT ESTABLISHMENT IS SITUATED (INDIA) OR ELSEWHERE (OUTSIDE INDIA)'. HOWEVER, SUCH A BENEFIT IS ALLOWABLE ONLY IN THE PRESENCE AND INVOLVEMENT OF THE PE. IN OTHER WORDS, IN THE ABSEN CE OF A PE, NEITHER THE ASSESSEE IS ELIGIBLE TO BE TAXED ON A NET BASIS NOR THE EXPENSES INCURRED BY IT OUTSIDE THE SOURCE COUNTRY [I.E. IN THE COUNTRY OF RESIDENCE AUSTRALIA] ARE ALLOWABLE AS EXPENSES. ACCORDINGLY, SINCE THE ASSES SEE HAS ELECTED TO BE GOVERNED BY DTAA, IN THE ABSENCE OF A PE, THE AO IS CORRECT IN TAXING THE 9 ITA NO. 1341/DEL/2010 INTEREST INCOME ON A GROSS BASIS AS PER THE PROVISI ONS OF ART-11(2) OF THE DTAA. BOTH THE AO & CIT (A) HAVE HELD THAT CHARGING INTEREST FROM PEC IS A SEPARATE TRANSACTION WHICH HAS RESULTED IN THE EARN ING OF INTEREST INCOME - THEREBY ACCEPTING THE CLAIM OF THE ASSESSEE. HENCE EXPENDITURE INCURRED FOR EARNING THIS INCOME THUS, HAS TO BE EXAMINED FROM T HE PERSPECTIVE AS TO WHETHER THE ASSESSEE IS GOVERNED BY THE DOMESTIC LA W OR DTAA AND IF THE ASSESSEE IS HELD TO BE GOVERNED BY THE DOMESTIC LAW AS WELL AS WHETHER SUCH EXPENSES ARE ALLOWABLE AS PER THE PROVISIONS OF SEC . 57 (III) OF THE ACT. SINCE THE ASSESSEE DOES NOT HAVE A PE IN INDIA, THE APPLI CABILITY OF THE DOMESTIC LAW IN THE FORM OF PROVISIONS OF SECTION 57 (III) D OES NOT ARISE. WITHOUT PREJUDICE TO THE ABOVE AND ASSUMING WITHOUT ACCEPTI NG THAT THE PROVISIONS OF DOMESTIC LAW IS APPLICABLE TO THE ASSESSEE IN TH E ABSENCE OF A PE, NO DEDUCTION U/S 57(III) IS ALLOWABLE TO THE ASSESSEE BECAUSE THE EXPENSES IN QUESTION HAVE BEEN INCURRED IN AUSTRALIA AND NOT IN INDIA. THE LD. DR FURTHER SUBMITTED THAT THERE IS NO EVIDENCE THAT TH E SAID AMOUNT HAS NOT BEEN CLAIMED AS DEDUCTION AGAINST THE INCOME OFFERE D TO TAX IN AUSTRALIA AND HERE IS NOT AN IOTA OF EVIDENCE TO PROVE THAT T HIS IS AN EXPENDITURE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURP OSE OF EARNING INTEREST INCOME IN INDIA. THUS, THE LD. DR SUBMITTED THAT TH E ASSESSEE CANNOT OPT FOR A NET BASIS OF TAXATION AFTER DEDUCTION OF EXPE NSES UNDER DOMESTIC LAW AND AT A LOWER RATE OF TAXATION UNDER DTAA AT THE S AME TIME. THIS WILL DEFEAT THE VERY PURPOSE OF DTAA BY ENABLING AND ENC OURAGING 'DOUBLE NON- TAXATION' [BOTH JURIDICAL AS WELL AS ECONOMIC] WHER E SUCH AMOUNT WILL NEITHER BE TAXED IN AUSTRALIA NOR IN INDIA RESULTIN G THEREBY IN 'FISCAL EVASION' WHICH IS AGAINST THE INTENTIONS OF THE DTA A AS STATED IN ITS PREAMBLE. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL T HE RELEVANT MATERIAL AVAILABLE ON RECORD. FROM THE RECORDS IT CAN BE SE EN THAT THERE IS NO INTEREST CREDIT, SINCE WITHIN A DAY OR TWO OF USANC E OF LETTER OF CREDIT BY PEC LTD'S BANK TO THE ASSESSEE, LETTER OF CREDIT STANDS DISCOUNTED BY THE ASSESSEE WITH ANZ BANK OF AUSTRALIA. THE COST OF DI SCOUNTING LETTER OF CREDIT IS IDENTICAL AND EQUAL TO THE NOTIONAL INTEREST IN RESPECT OF THE LETTER OF CREDIT 10 ITA NO. 1341/DEL/2010 ITSELF. THE ASSESSING OFFICER ALSO ADMITS IN THE AS SESSMENT ORDER THAT INTEREST IN THIS CASE IS NOT INTEREST SIMPLICITOR, I.E., IT DOES NOT ARISE OUT OF A LOAN LIABILITY. THE INTEREST IS IN THE CONTEXT OF A TRANSACTION OF HIGH-SEAS SALE OF BULLION, A PART OF THE COST OF SUCH BULLION ITSE LF. THUS, THE SAME IS IN THE NATURE OF BUSINESS EXPENDITURE AND INCURRED ONLY TO FACILITATE THE TRANSACTION OF SALE OF BULLION. BOTH USANCE INTERES T AND THE DISCOUNTING CHARGES WERE PART OF THE SALE TRANSACTION AS DULY E NTERED INTO BY PARTIES, BUT REVENUE AUTHORITIES ERRED IN GIVING FINDING WHICH I S CONTRARY TO THEIR OWN NARRATION OF THE FACTS. THIS CLAIM IS MADE BY PEC L TD. AS REPRESENTATIVE OF ASSESSEE AND PEC LTD. HAS FILED A RETURN OF INCOME AT 'NIL' ON THE ASSESSEE'S BEHALF, CLAIMING INTEREST PAID BY THEM TO THEIR OWN BANK ON ONE SIDE AND DEDUCTING AN IDENTICAL AMOUNT AGAINST THE SAME IN R ESPECT OF INTEREST RETAINED BY THE ASSESSEE'S BANK FOR THE PERIOD OF S UCH CREDIT. THUS, THIS IS NOT A CASE WHERE A CLAIM HAS BEEN MADE FOR INTEREST UNDER INCOME FROM OTHER SOURCES. THE INTEREST ITSELF IS NOTIONAL AND WAS NEVER RECEIVED BY THE ASSESSEE. THIS IS PROPERLY DEMONSTRATED BY THE ASSE SSEE FROM THE COMPUTATION OF INCOME. THE LIVE LINK BETWEEN INTERE ST CREDIT AND DISCOUNTING COST AS PER THE MODUS OPERANDI AGREED UPON BETWEEN THE PARTIES AND DULY FOLLOWED IN THE SUBJECT CASE, THE PROCESS OF CONSUM MATING THE TRANSACTION ITSELF WAS BASED ON THE ACCEPTED AND NORMAL DEVICE OF THE SELLER DISCOUNTING LETTER OF CREDIT TO HAVE THAT TRANSACTION FINANCED BY THE PARTIES' RESPECTIVE BANKS. THE AUTHORITIES BELOW, IN THE FACE OF EVIDEN CE DEMONSTRATING THE LIVE NEXUS BETWEEN THE TWO, ERRED GROSSLY IN PICKING ONE AND IGNORING THE OTHER. THE INTEREST IN THE PRESENT CASE IS PART OF THE COS T OF THE BULLION ITSELF. THE ASSESSING OFFICER AS WELL AS THE CIT (APPEALS) BOTH FAILED TO LOOKED INTO THIS ASPECT. IN VIEW OF THE RATIO OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. COCANADA RADHASWAMI BANK LTD. (1965) 57 ITR 306 (SC) AS WELL AS IN VIEW OF THE BINDING PRECEDENT OF THE HON'BLE DELHI HIGH COURT ON IDENTICAL FACTS IN THE CASE OF CIT VS. CARGILL GLOBAL TRADING (P.) LTD. (2011) 11 TAXMANN.COM 219 (DEL.), SUCH INTEREST PARTAKES OF T HE CHARACTER OF THE PURCHASE PRICE ITSELF AND COULD NOT HAVE BEEN PUT T O TAX UNDER THE RESIDUAL HEAD OF INCOME FROM OTHER SOURCES. THE REVENUE AUTH ORITIES HAVE CONVENIENTLY OMITTED TO SEEK TO TEST THE TRANSACTIO N UNDER PROVISIONS OF 11 ITA NO. 1341/DEL/2010 BUSINESS INCOME, BECAUSE THEY WERE WELL AWARE THAT IN THE ABSENCE OF A PERMANENT ESTABLISHMENT OF THE ASSESSEE IN INDIA, N O LIABILITY TO TAX COULD BE FASTENED UPON IT. ARTICLE 7 OF THE DTAA BETWEEN INDIA AND AUSTRALIA IS CLEAR IN THIS RESPECT. THE FINDINGS OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. CARGILL GLOBAL TRADING (P.) LTD. (S UPRA) IS APPLICABLE IN THE PRESENT CASE. THE REVENUE AUTHORITIES SHOULD NOT HA VE TREATED THE NOTIONAL INTEREST AS ANYTHING EXCEPT BUSINESS INCOME, UNDER WHICH SUCH INCOME WAS NOT DUE TO BE TAXED IN INDIA AT ALL. ARTICLE 11(1) WAS NOT AT ALL CONSIDERED BY THE REVENUE AUTHORITIES - EVEN IF THE NOTIONAL INTE REST WERE SOUGHT TO HAVE BEEN TREATED AS INTEREST SIMPLICITER, THE CIT (APPE ALS) HAS ERRED IN OMITTING TO CONSIDER ARTICLE 11(1) OF THE INDO- AUSTRALIAN D TAA. AS PER ARTICLES 11(1) AND 11(2) OF THE SAID TREATY, INTEREST INCOME IS AL TERNATIVELY TAXABLE IN THE COUNTRY OF RESIDENCE OF THE RECIPIENT PARTY, IN THE PRESENT CASE, AUSTRALIA. IN ORDER TO INVOKE ARTICLE 11(2), A HEAVY ONUS IS CAST TO ESTABLISH HOW 'ACCORDING TO THE LAW OF THAT STATE' SUCH INTEREST COULD BE TAXED IN INDIA. IN CIT VS. CARGILL GLOBAL TRADING (P.) LTD. (SUPRA), I T HAS ALREADY BEEN HELD THAT SUCH INTEREST IS NOT INTEREST WITHIN THE MEANING OF SECTION 2(28A) OF THE ACT. THE INVOCATION OF ARTICLE 11(2) WITHOUT COMPLIANCE OF THE CONDITION PRECEDENT THEREIN, I.E. TO POINT OUT UNDER WHICH PR OVISION SUCH INTEREST WAS TAXABLE IN INDIA HAS NEVER BEEN DONE, AND THE AUTHO RITIES BELOW HAVE CONVENIENTLY RELIED UPON THE ASSESSEE'S OWN CLAIM, WITHOUT NOTING THAT THIS IS A CASE WHERE THE CLAIM STANDS MADE NOT BY THE AS SESSEE BUT BY A REPRESENTATIVE ASSESSEE. THIS IS A TRANSACTION OF S ALE OF BULLION - ESPECIALLY IN THE CONTEXT OF A TRANSACTION OF BULLION SALE ON HIGH-SEAS BASIS, WHEREIN THE PRICE OF THE PRODUCT VARIES ON DAY TO DAY BASIS , ANY INTEREST COST OR CREDIT WOULD ONLY FORM A PART OF THE COST OF GOODS. IN THAT VIEW OF THE MATTER, THE AUTHORITIES BELOW GROSSLY ERRED IN HOLDING THE NOTIONAL USANCE INTEREST TO BE INTEREST TO BE TAXED AS INCOME FROM OTHER SOURCE S. REFERENCE TO SECTION 57 OF THE ACT IS MISCONCEIVED. THE CIT (A) IGNORED THE ASPECT OF DISCOUNTING COST AND HELD THAT FOR ALLOWANCE UNDER SECTION 57 O F THE ACT, THE DISCOUNTING CHARGES SHOULD HAVE BEEN PAID ONLY 'FOR THE PURPOSE OF EARNING THE INTEREST'. THIS PREMISE ITSELF IS PALPABLY ERRONEOUS IN VIEW O F THE CIT (A)'S OWN FINDING THAT THE INTEREST CREDIT AS WELL AS THE DISCOUNTING COST HAVE ARISEN FROM A 12 ITA NO. 1341/DEL/2010 BUSINESS TRANSACTION ON SALE OF BULLION, AND NOT FR OM ANY TRANSACTION REFERRED TO IN SECTION 56 OF THE ACT. THE AUTHORITI ES BELOW HAVE EVEN FAILED TO POINT OUT HOW SECTION 56 OF THE ACT IS APPLICABLE I N THE SUBJECT CASE. THE REVENUE AUTHORITIES HAVE COMPLETELY FAILED TO UNDER STAND THE TRANSACTION AS ENTERED INTO BY THE ASSESSEE WITH PEC LTD. AND MERE LY SOUGHT TO POUNCE ON ONE STRAY NOTIONAL CREDIT ONLY WITH A VIEW TO CREAT E A TAX LIABILITY. ALL THESE SUBMISSIONS MADE BY THE LD. AR WAS NOT CONSIDERED B Y THE ASSESSING OFFICER AS WELL AS BY THE CIT(A) WHICH NOT CORRECT ON THE PART OF THE REVENUE AUTHORITIES. THEREFORE, WE SET ASIDE THE ORDER OF T HE CIT(A) AND APPEAL OF THE ASSESSEE IS ALLOWED. 8. IN RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 05 TH AUGUST, 2019 . SD/- SD/- (R.K.PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMB ER DATED: 05/08/2019 *BINITA* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI