M/s Instrumentarium Corporation Ltd., Kolkata V. DDIT (IT)-1(1), KOLKATA, Kolkata

ITA 1548/KOL/2009

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 4535 (ITAT-KOLKATA)
• Duration Of Justice: 8 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2003-2004
• Appeal Filed On: 02-09-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Double taxation relief; International transaction; Wholly owned subsidiary; Notional interest; Commercial expediency
• Section: 263; 90; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA C BENCH, KOLKATA (BEFORE SRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER & SRI ABY T. VARKEY, JUDICIAL MEMBER) ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTARIUM CORPORATION LIMITED.........APPELLANT P.O. BOX 100, FI-00031 GE, FINLAND CC: PRICEWTERHOUSE COOPERS SOUTH CITY PINNACLE 7 TH FLOOR PLOT NO.XI-I SECTOR V KOLKATA 700 091 [PAN : AADCG 1535 E] DDIT (I.T.)-1(1), KOLKATA....................................................................................................RESPONDENT APPEARANCES BY: SHRI SACHIT JOLLY, ADVOCATE, APPEARED ON BEHALF OF THE ASSESSEE. SHRI G. MALLIKARJUNA, CIT, D/R. APPEARING ON BEHALF OF THE REVENUE. DATE OF CONCLUDING THE HEARING : JUNE 27 TH , 2018 DATE OF PRONOUNCING THE ORDER : AUGUST 3 RD , 2018 ORDER PER J. SUDHAKAR REDDY, AM :- THESE THREE APPEALS FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE COMMON ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-XVI, KOLKATA PASSED U/S 250 OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT), DT. 09/06/2009. AS THE ISSUES ARISING IN ALL THESE APPEALS ARE COMMON, FOR THE SAKE OF CONVENIENCE THEY ARE HEARD TOGETHER AND DISPOSED OFF BY ASSESSMENT YEAR OF THIS COMMON ORDER. 2. THE APPEALS BEARING NOS ITA NO. 1548 & 1549/KOL/2009 , FOR THE ASSESSMENT YEAR 2003-04 & 2004-05, WERE REFERRED BY THE HONBLE PRESIDENT, ITAT TO A SPECIAL BENCH VIDE ORDER DT. 6 TH APRIL, 2010, TO ANSWER THE FOLLOWING RE-FRAMED QUESTION. 2 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AN ARMS LENGTH PRICE (ALP) ADJUSTMENT, OF RS.3,88,37,190 FOR THE ASSESSMENT YEAR 2003-04 AND RS.5,18,95,560 FOR THE ASSESSMENT YEAR 2004-05, WAS REQUIRED TO BE MADE, IN RESPECT OF INTEREST FREE LOAN GRANTED BY THE ASSESSEE, A NON-RESIDENT COMPANY, TO ITS WHOLLY OWNED SUBSIDIARY IN INDIA? THE FACTS OF THE CASE HAVE BEEN BROUGHT OUT IN THIS ORDER OF THE SPECIAL BENCH DT. 15 TH JULY, 2016. FOR THE SAKE OF BREVITY WE DO NOT REPEAT THE SAME. AFTER CONSIDERING ALL THE ARGUMENTS OF ALL THE PARTIES, THE SPECIAL BENCH HELD AS FOLLOWS: 40. IN VIEW OF THE FOREGOING DISCUSSIONS, AND FOR THE DETAILED REASONS SET OUT ABOVE, WE REJECT THE CONTENTION OF THE ASSESSEE THAT, IN PRINCIPLE, NO ARM'S LENGTH PRICE ADJUSTMENTS CAN BE MADE IN RESPECT OF THE INTEREST FREE ADVANCES GRANTED BY THE ASSESSEE TO ITS INDIAN AE, I.E. DATEX OHMEDA INDIA PVT LTD. HOWEVER, SO FAR AS QUANTIFICATION OF THE ARM'S LENGTH PRICE ADJUSTMENT IS CONCERNED, THE SAME WILL HAVE TO BE DEALT WITH THE DIVISION BENCH AS NO ARGUMENTS, WITH RESPECT TO THE QUANTIFICATION PART, WERE ADVANCED BEFORE US. IT IS ALSO OPEN TO THE PARTIES TO TAKE UP ANY OTHER ISSUE, NOT SPECIFICALLY DEALT WITH ABOVE, BEFORE THE DIVISION BENCH IN ACCORDANCE WITH LAW. 3. BEFORE THIS DIVISION BENCH THE ASSESSEE FILED AN APPLICATION FOR ADMISSION OF ADDITIONAL GROUNDS OF APPEAL FOR BOTH THE ASSESSMENT YEAR. THESE ADDITIONAL GROUNDS ARE AS FOLLOWS:- 1A.) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. AO ERRED IN BRINGING TO TAX, TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF NOTIONAL INTEREST GRANTED ON LOAN, WITHOUT APPRECIATING THAT UNDER ARTICLE 11(2) OF THE INDIA-FINLAND DOUBLE TAX AVOIDANCE AGREEMENT, INTEREST INCOME CAN BE TAXED ONLY ON RECEIPT BASIS AND NOT ON ACCRUAL BASIS . 4A.) WITHOUT PREJUDICE, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. AO/TPO ERRED IN BENCHMARKING THE TRANSACTION AT SBI PRIME LENDING RATE AND NOT LIBOR SINCE THE DENOMINATION OF THE LOAN IN QUESTION WAS US DOLLARS. 3 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED ADMISSION OF ADDITIONAL GROUNDS:- 4. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT, ADDITIONAL GROUND NO. 1A, IS A LEGAL GROUND WHICH GOES TO THE ROOT OF THE MATTER AND IS ESSENTIALLY AN OFFSHOOT OF GROUNDS OF APPEAL NO. 1, WHICH IS ALREADY ON RECORD. 4.1 REGARDING THE ADDITIONAL GROUND NO. 4A, IT WAS SUBMITTED THAT IT IS A SUB-GROUND OF GROUND NO.4, TAKEN BY THE ASSESSEE AND THAT THIS IS A GROUND WHICH DOES NOT REQUIRE ANY FRESH INVESTIGATION INTO FACTS. IT WAS ARGUED THAT BOTH THESE GROUNDS ARE LEGAL ISSUE WHICH GO INTO THE ROOT OF THE MATTER AND WHICH DO NOT REQUIRE ANY FRESH INVESTIGATION INTO THE FACTS OF THE CASE AND HENCE HAVE TO BE ADMITTED. HE RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CO. LTD. VS COMMISSIONER OF INCOME TAX 1998 229 ITR 383 SC & IN THE CASE OF JUTE CORPORATION OF INDIA V. CIT [1991] 187 ITR 688 (SC) . 4.2 THE LD. D/R, OPPOSED THE CONTENTION OF THE ASSESSEE AND ARGUED THAT: A) ADMITTEDLY, GROUND NO. 1A, IS AN OFF SHOOT OF GROUND NO. 1 WHICH WAS RAISED, CONSIDERED AND ADJUDICATED BY THE SPECIAL BENCH OF THE TRIBUNAL. HENCE, WHAT THE ASSESSEE SEEKS IS A REVIEW OF THE ORDER PASSED BY THE SPECIAL BENCH OF THE TRIBUNAL, BY RAISING THE SAME PLEA ONCE AGAIN, UNDER THE DISGUISE OF ADDITIONAL GROUNDS. B) THAT THE ATTEMPT TO RAISE THIS ADDITIONAL GROUND IS NOTHING BUT A DILATORY TACTIC PARTICULARLY IN THE FACE OF AN ADVERSE RULING FROM THE SPECIAL BENCH. THE ASSESSEE SHOULD HAVE BEEN VIGILANT AND TAKE UP ALL POSSIBLE ARGUMENTS, WHEN THE ISSUE WAS BEING ARGUED BEFORE THE SPECIAL BENCH OF THE TRIBUNAL AND HAVING NOT DONE SO ,IT CANNOT BE ALLOWED TO DO SO IN THESE PROCEEDINGS . C) THAT THE SPECIAL BENCH HAD GIVEN A VERDICT THAT ALP OF THE TRANSACTION HAS TO BE DETERMINED, ON THE FACTS AND CIRCUMSTANCES OF THIS CASE. HE POINTED OUT THAT THE QUESTION THAT HAS BEEN REFERRED TO THE SPECIAL BENCH IS A COMPREHENSIVE QUESTION AND THAT THE ANSWER OF THE SPECIAL BENCH WAS CLEAR AND UNAMBIGUOUS. D) THAT THE SPECIAL BENCH HAS REMITTED THE MATTER BACK TO THE DIVISION BENCH ONLY FOR QUANTIFICATION OF THE ALP ADJUSTMENT AND UNDER THOSE CIRCUMSTANCES, THE ASSESSEE IS 4 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED PRECLUDED FROM RE-ARGUING, BEFORE THE DIVISION BENCH, THE ISSUE OF TAXABILITY OF THE TRANSACTION. E) THE DIVISION BENCH IS BOUND BY THE LAW OF PRECEDENCE AND CANNOT TAKE A VIEW WHICH IS CONTRARY TO THE VIEW ENUNCIATED BY THE SPECIAL BENCH IN THIS CASE, ON THE SAME ISSUE. JUDICIAL DISCIPLINE DEMANDS THAT THE DIVISION BENCH IMPLEMENTS THE ORDER OF THE SPECIAL BENCH. RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS SUN POLYTRONE INDUSTRIES LTD. VS. CIT 2015 235 TAXMAN 567 SC YOG BUILDERS VS. ACIT 2015 154 ITD 566 LUCK. TRIB. ULTRATECH CEMENTS LTD. VS. ACIT 2017 81 TAXMANN.COM 74 BOM. BROOKBOND INDIA LTD. VS. CIT 1991 59 TAXMANN 82 (CAL.) F) HE POINTED OUT THAT GROUND NO. 1A IS SPECIFICALLY DEALT BY THE SPECIAL BENCH, AT PARA 37 TO 40, OF ITS ORDER. 4.3 ON ADDITIONAL GROUND NO. 4A, THE LD. D/R, THOUGH NOT LEAVING HIS GROUND, COULD NOT POINT OUT FROM THE ORDER OF THE SPECIAL BENCH THAT THE ISSUE HAS BEEN A SUBJECT MATTER BEFORE THE SPECIAL BENCH OF THE TRIBUNAL. 4.4 IN REPLY, THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO PARA 40 OF THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL AND SUBMITTED THAT THE SPECIAL BENCH HAS SPECIFICALLY GIVEN LIBERTY TO THE PARTIES TO RAISE ANY OTHER ISSUE NOT DEALT WITH BY THE SPECIAL BENCH AND THAT THE IMPLICATIONS OF ARTICLE 11 OF THE DTAA ON THIS ISSUE ON HAND WAS NOT ARGUED AND HENCE WAS NOT DEALT BY THE BENCH. FOR THE PROPOSITION THAT THE ASSESSEE CAN RAISE A LEGAL ARGUMENT ON JURISDICTIONAL ISSUES, HE RELIED UPON THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. JAI PARABOLIC SPRINGS LTD. 306 ITR 42 DEL . HE REITERATED THAT, DTAA HAS NOT BEEN A SUBJECT MATTER BEFORE THE SPECIAL BENCH AND THAT THIS JURISDICTIONAL ISSUE, CAN BE RAISED BY THE ASSESSEE FOR THE FIRST TIME BEFORE THE DIVISION BENCH AND THAT THE ISSUE HAS TO BE CONSIDERED ON MERITS. 5 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED MERITS OF THE ADDITIONAL GROUNDS:- 5. ON MERITS, THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO ARTICLE 11 & ARTICLE 12 OF THE DTAA BETWEEN REPUBLIC OF INDIA AND THE REPUBLIC OF FINLAND. HE REFERRED TO THE WORD PAID IN SUB-CLAUSE 1 OF ARTICLE 11 AND THE TERM SUCH INTEREST IN SUB-CLAUSE 2 OF ARTICLE 11 AND ARGUED THAT INTEREST INCOME CAN BE TAXED UNDER THE DTAA, ONLY IF IT IS ACTUALLY PAID. HE ARGUED THAT THE TERM PAID HAS NOT BEEN DEFINED IN THE TREATY AND THE TERM SUCH INTEREST USED IN SUB-CLAUSE 2 REFERS TO SUCH INTEREST WHICH HAS BEEN ACTUALLY PAID TO THE RESIDENT OF FINLAND. HE FURTHER SUBMITS THAT IN THE CASE ON HAND, INTEREST HAS NEITHER ARISEN NOR ACCRUED OR PAID, AS THE TRANSACTION IN QUESTION DOES NOT CARRY ANY INTEREST. FOR THE PROPOSITION THAT INTEREST CAN BE TAXED ONLY WHEN PAID, HE REFERRED TO THE WORDING OF ARTICLE 12 OF THE DTAA, AND HE RELIED ON THE ORDER OF THE MUMBAI L BENCH OF THE TRIBUNAL IN THE CASE OF BOOZ. ALLEN & HAMILTON (INDIA) LTD. & CO. KG. VS. ADIT (IT) ITA NO. 4502 TO 4504 & 4506/MUM/2003 FOR THE ASSESSMENT YEAR 1998-99 DT. 21 ST DECEMBER, 2012; [2013] 152 TTJ MUMBAI 497 AND THE DELHI B BENCH OF THE TRIBUNAL IN THE CASE OF CSC TECHNOLOGY SINGAPORE PTE. LTD. VS. ADIT CIRCLE-1(1), INTERNATIONAL TAXATION, ORDER DT. FEB 17 TH 2012 I.T. APPEAL NO. 5604 OF 2010 WHERE IT WAS HELD THAT TAX CAN BE LEVIED IN THE YEAR OF PAYMENT AND NOT IN THE YEAR OF ACCRUAL. HE FURTHER RELIED ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF DIT(IT) VS. M/S. SIEMENS AKTENGESELLSCHAFT ITA NO. 124 OF 2010 ORDER DT. 22 ND OCTOBER 2012 , FOR THE PROPOSITION THAT UNDER ARTICLE 12, ROYALTY AND FEE FOR TECHNICAL SERVICES SHOULD BE TAXED ON RECEIPT BASIS. HE DREW THE ATTENTION OF THE BENCH TO THE WORDING OF ARTICLE 12 OF THE DTAA AND COMPARED THE SAME WITH ARTICLE 11 AND SUBMITTED THAT, AS THE LANGUAGE USED IS IDENTICAL, THE PROPOSITION OF LAW LAID DOWN WHILE INTERPRETING ARTICLE 12 BY THE COURTS, WOULD ALSO APPLY TO ARTICLE 11. THUS, HE ARGUES THAT NO ADJUSTMENT CAN BE MADE UNDER TP PROVISIONS AS THE LOAN IN QUESTION IS AN INTEREST FREE LOAN IN VIEW OF THE PROVISIONS OF THE DTAA . 6. ON GROUND 4A, HE SUBMITTED THAT LIBOR HAS TO BE APPLIED IN PREFERENCE TO SBI PRIME LENDING RATE, AS THE LOAN IS A FOREIGN CURRENCY LOAN AND AS IT HAS TO BE REPAID IN FOREIGN CURRENCY I.E. US$. FOR THIS PROPOSITION HE RELIED ON THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. COTTON NATURALS (I)(P) LTD. 2015 276 CTR (DEL.) 445 . HE 6 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED ALSO RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. BHARTI AIRTEL LTD. INCOME TAX APPEAL NO. 294/2013; DATE OF DECISION: 19TH JULY, 2013. 6.1. THE LD. D/R, OPPOSED THE CONTENTIONS OF THE ASSESSEE AND REITERATED THAT THE SPECIAL BENCH OF THE TRIBUNAL HAD CONSIDERED THIS ISSUE AT LENGTH AND HAD COME TO A CONCLUSION THAT ALP HAS TO DETERMINED UNDER THE TP PROVISIONS, THOUGH THE LOAN IN QUESTION IS AN INTEREST FREE LOAN AND THAT THIS DECISION IS BINDING ON THE DIVISION BENCH. 6.1.1. WITHOUT PREJUDICE TO THE ABOVE, HE SUBMITTED THAT, ARTICLE 12 OF THE DTAA BETWEEN INDIA AND FINLAND PERTAINS TO ROYALTY AND FEE FOR TECHNICAL SERVICES AND THAT IT CANNOT BE RELIED UPON WHILE INTERPRETING ARTICLE 11 OF THE DTAA. HE REFERRED TO ARTICLE 9 OF THE DTAA AND SUBMITTED THAT THIS ARTICLE IS ATTRACTED IN THIS CASE, AS A TRANSFER PRICING ADJUSTMENT IS MADE AND NOT ARTICLE 11. HE SUBMITTED THAT THE ASSESSING OFFICER HAS ESTABLISHED THAT THE TRANSACTION IN QUESTION, IS NOT AT ARMS LENGTH AND HENCE APPROPRIATE ADJUSTMENT TO INCOME HAS TO BE MADE IN THE ASSESSMENT BY VIRTUE OF ARTICLE 9 OF THE DTAA. 7. HE FURTHER SUBMITTED THAT, THE FACT IS THAT, INTEREST HAD ACCRUED AND ARISEN TO A NON RESIDENT, BY THE DEEMING PROVISIONS OF SECTION 9(1)(V) OF THE ACT. HE ARGUED THAT DTAA IS NOT A TAXING STATUTE AND THAT IT ONLY DEALS WITH ALLOCATION OF TAXING RIGHTS BETWEEN CONTRACTING STATES AND IS INTENDED TO GIVE RELIEF TO THE INCIDENCE OF DOUBLE TAXATION, EITHER BY WAY OF EXEMPTION OR CREDIT METHOD. HE REFERRED TO ARTICLE 11(1) AND SUBMITTED THAT THIS ARTICLE DOES NOT SPEAK ABOUT THE INCIDENCE OF TAXATION IN THE SOURCE COUNTRY AND THAT ARTICLE 11(2) DOES NOT PUT ANY LIMITATION THAT THE SOURCE COUNTRY CANNOT TAX THE INTEREST BEFORE IT IS ACTUALLY PAID TO THE NON-RESIDENT. HE SUBMITTED THAT TREATY PROVISION WITH RESPECT TO THE SOURCE COUNTRY HAS TO BE SEEN WITH REFERENCE TO THE DOMESTIC LAW, AND THAT SECTION 9(1)(V) IS ATTRACTED. HENCE HE SUBMITTED THAT THE CLAIM OF THE ASSESSEE HAS TO BE REJECTED. 7.1. ON THE ISSUE OF BENCHMARKING OF THE TRANSACTION, HE SUBMITTED THAT SBI PRIME LENDING RATE HAS BEEN RIGHTLY APPLIED BY THE TPO. HE SUBMITTED THAT THE LOAN IN QUESTION WAS EXTENDED TO THE INDIAN ENTITY BY ITS AE, IN CONVERTIBLE US DOLLARS BUT THE 7 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED ASSESSEE COULD USE THE LOAN AMOUNT ONLY UPON CONVERSION OF THE SAME INTO INDIAN RUPEES AFTER THE REMITTANCE IS RECEIVED IN ITS INDIAN BANK ACCOUNT. HE SUBMITTED THAT THE LOAN WAS CONSUMED IN INDIA. HE RELIED ON THE HONBLE BOMBAY HIGH COURT JUDGEMENT IN THE CASE OF CIT VS. TATA AUTOCOMPS SYSTEMS LTD. 374 ITR 516 BOM. WHEREIN IT WAS HELD THAT , WHERE THE INDIAN RESIDENT ASSESSEE HAD ADVANCED A LOAN TO ITS ASSOCIATE ENTERPRISE (AE) SITUATED IN GERMANY, THE RATE WAS DIRECTED TO BE DETERMINED ON THE BASIS OF THE RATES PREVAILING IN GERMANY, AS THAT WAS THE COUNTRY IN WHICH THE LOAN IN QUESTION WAS CONSUMED. HE SUBMITTED THAT SINCE THE LOAN IN QUESTION WAS CONSUMED IN INDIA, SBI PRIME LENDING RATE HAS TO BE APPLIED. HE ONCE AGAIN SUBMITTED THAT THE SPECIAL BENCH REMITTED THE MATTER BACK TO THE DIVISION BENCH, ONLY FOR QUANTIFICATION OF THE ALP ADJUSTMENT AND THAT ALL THESE ISSUES ARE BEYOND THE KEN OF THE DIVISION BENCH. HE PRAYED THAT THE ADDITIONAL GROUNDS HAVE TO BE DISMISSED BOTH, AS NOT ADMISSIBLE, AS WELL AS ON MERITS. 7.2 IN REPLY THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF UOI VS. AZADI BACHAO ANDOLAN 263 ITR 706 SC AND SUBMITTED THAT THAT THE TREATY OVERRIDES THE DOMESTIC LAW AND HENCE IS A JURISDICTIONAL ISSUE. HE SUBMITTED THAT, THE AMOUNT MAY BE TAXABLE U/S 92 OF THE ACT, BUT CANNOT BE BROUGHT TO TAX IN VIEW OF SECTION 90 OF THE ACT. 8. WE HAVE HEARD RIVAL CONTENTIONS. ON CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, PERUSAL OF THE PAPERS ON RECORD, ORDERS OF THE AUTHORITIES BELOW AS WELL AS CASE LAW CITED, WE HOLD AS FOLLOWS:- 8.1 WE FIRST ADJUDICATE THE ISSUE WHETHER, THE ADDITIONAL GROUND OF APPEAL 1A, COULD BE ADMITTED, UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. 9. ON A PERUSAL OF THE WRITTEN ARGUMENTS FILED BY THE ASSESSEE BEFORE THE SPECIAL BENCH OF THE TRIBUNAL, WHICH IS A PART OF THE RECORD, WE FIND THAT THE ASSESSEE HAD ADVANCED THE FOLLOWING ARGUMENTS : 8 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED 5. NO INCOME ARISES, TRANSFER PRICING PROVISIONS CANNOT BE INVOKED. TRANSFER PRICING PROVISIONS ARE ONLY MACHINERY PROVISIONS AS PER SECTION 92(1) OF THE INCOME-TAX ACT, 1961 '92. (1) ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE.' IT IS SUBMITTED THAT, A PLAIN READING OF STATUTORY PROVISIONS CONTAINED IN SECTION 92(1) OF THE ACT WOULD SHOW THAT. STATUTORY PRECONDITION BEFORE THE AFORESAID PROVISION CAN BE APPLIED OR INVOKED IS THAT THERE MUST BE A TRANSACTION RESULTING INTO AN ARISAL OF INCOME. IT IS RESPECTFULLY SUBMITTED THAT. UNLESS THERE IS AN ACCRUAL OF INCOME. THE SAID PROVISIONS CANNOT BE APPLIED. IN OTHER WORDS. IT IS SUBMITTED THAT. IT IS ONLY AND ONLY IF THERE IS AN INCOME. WHICH IS ARISING FROM AN INTERNATIONAL TRANSACTION THEN SUCH INCOME SHALL HAVE TO BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE. IT IS SUBMITTED THAT. IN THE INSTANT CASE SINCE FUNDS ADVANCED ARE INTEREST FREE LOAN NO INCOME ARISES TO THE ASSESSEE COMPANY SO AS TO WARRANT THE INVOCATION OF PROVISIONS CONTAINED IN SUB SECTION (TL OF SECTION 92 OF THE ACT. IT IS SUBMITTED THAT EXPRESSION 'ARISES' HAS BEEN SUBJECT MATTER OF CONSIDERATION BY THE HON'BLE APEX COURT IN THE CASE OF E.D. SASSOON AND COMPANY LIMITED & ORS. VS. CIT REPORTED IN 26 ITR 27 (REFER PAGE 78-79 OF THE CASE LAW COMPENDIUM) WHEREIN, IT WAS HELD AS UNDER: 'ACCRUES', 'ARISES' AND 'IS RECEIVED' ARE THREE DISTINCT TERMS. SO FAR AS RECEIVING OF INCOME IS CONCERNED THERE CAN BE NO DIFFICULTY ; IT CONVEYS A CLEAR AND DEFINITE MEANING, AND I CAN THINK OF NO EXPRESSION WHICH MAKES ITS MEANING PLAINER THAN THE WORD 'RECEIVING' ITSELF. THE WORDS 'ACCRUE' AND 'ARISE' ALSO ARE NOT DEFINED IN THE ACT. THE ORDINARY DICTIONARY MEANINGS OF THESE WORDS HAVE GOT TO BE TAKEN AS THE MEANINGS ATTACHING TO THEM. 'ACCRUING' IS SYNONYMOUS WITH 'ARISING' IN THE SENSE OF SPRINGING AS A NATURAL GROWTH OR RESULT. THE THREE EXPRESSIONS 'ACCRUES', 'ARISES' AND 'IS RECEIVED' HAVING BEEN USED IN THE SECTION, STRICTLY SPEAKING 'ACCRUES' SHOULD NOT BE TAKEN AS SYNONYMOUS WITH 'ARISES' BUT IN THE DISTINCT SENSE OF GROWING UP BY WAY OF ADDITION OR INCREASE OR AS AN ACCESSION OR ADVANTAGE; WHILE THE WORD 'ARISES' MEANS COMES INTO EXISTENCE OR NOTICE OR PRESENTS ITSELF. THE FORMER CONNOTES THE IDEA OF A GROWTH OR ACCUMULATION AND THE LATTER OF THE GROWTH OR ACCUMULATION WITH A TANGIBLE SHAPE SO AS TO BE RECEIVABLE. IT IS DIFFICULT TO SAY THAT THIS DISTINCTION HAS BEEN THROUGHOUT MAINTAINED IN THE ACT AND PERHAPS THE TWO WORDS SEEM TO DENOTE THE SAME IDEA OR IDEAS VERY SIMILAR, AND THE DIFFERENCE ONLY LIES IN THIS THAT ONE IS MORE APPROPRIATE THAN THE OTHER WHEN APPLIED TO PARTICULAR CASES. IT IS CLEAR, HOWEVER, AS POINTED OUT BY FRY, L.J., IN COLQUHOUN V. BROOKS [THIS PART OF THE DECISION NOT HAVING BEEN AFFECTED BY THE REVERSAL OF THE DECISION BY THE HOUSES OF LORDS] THAT BOTH THE WORDS ARE USED IN CONTRADISTINCTION TO THE WORD 'RECEIVE' AND INDICATE A RIGHT TO RECEIVE. THEY REPRESENT A STATE ANTERIOR TO THE POINT OF TIME WHEN THE INCOME BECOMES RECEIVABLE AND CONNOTE A CHARACTER OF THE INCOME WHICH IS MORE OR LESS INCHOATE. ONE OTHER MATTER NEED TO BE REFERRED TO IN CONNECTION WITH THE SECTION. WHAT IS SOUGHT TO BE TAXED MUST BE INCOME AND IT CANNOT BE TAXED UNLESS IT HAS ARRIVED AT A STAGE WHEN IT CAN BE CALLED INCOME. ' THE OBSERVATIONS OF LORD JUSTICE FRY QUOTED ABOVE BY MUKERJI, J., WERE MADE IN COLQUHOUN V. BROOKS, WHILE CONSTRUING THE PROVISIONS OF 16 AND 17 VICTORIA CHAPTER 34, SECTION 2, SCHEDULE 'D'. THE WORDS TO BE CONSTRUED THERE WERE 'PROFITS OR GAINS, ARISING OR ACCRUING' AND IT WAS OBSERVED BY LORD JUSTICE FRY AT PAGE 59 :-- ' IN THE FIRST PLACE, I WOULD OBSERVE THAT THE TAX IS IN RESPECT OF 'PROFITS OR GAINS ARISING OR ACCRUING.' I CANNOT READ THOSE WORDS AS MEANING 'RECEIVED BY'. IF THE ENACTMENT WERE LIMITED TO PROFITS AND GAINS 'RECEIVED BY' THE PERSON TO BE CHARGED, THAT LIMITATION WOULD APPLY AS MUCH TO ALL HER MAJESTY'S SUBJECTS AS TO FOREIGNERS RESIDING IN THIS COUNTRY. THE RESULT WOULD BE THAT NO INCOME-TAX WOULD BE PAYABLE UPON PROFITS WHICH ACCRUED BUT WHICH WERE NOT ACTUALLY RECEIVED, ALTHOUGH PROFITS MIGHT HAVE BEEN EARNED IN THE KINGDOM AND MIGHT HAVE ACCRUED IN THE KINGDOM. I THINK, THEREFORE, THAT THE WORDS 'ARISING OR ACCRUING' ARE GENERAL WORDS DESCRIPTIVE OF A RIGHT TO RECEIVE PROFITS. ' 9 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED TO THE SAME EFFECT ARE THE OBSERVATIONS OF SATYANARAYANA RAO, J., IN COMMISSIONER OF INCOME-TAX, MADRAS V. ANAMALLAIS TIMBER TRUST LTD., AND MUKHERJEA, J., IN COMMISSIONER OF INCOME-TAX, BOMBAY V. AHMEDBHAI UMARBHAI & CO., BOMBAY,WHERE THIS PASSAGE FROM THE JUDGMENT OF MUKERJI, J., IN ROGERS PYATT SHELLAC & CO. V. SECRETARY OF STATE FOR INDIA IS APPROVED AND ADOPTED. IT IS CLEAR THEREFORE THAT INCOME MAY ACCRUE TO AN ASSESSEE WITHOUT THE ACTUAL RECEIPT OF THE SAME. IF THE ASSESSEE ACQUIRES A RIGHT TO RECEIVE THE INCOME, THE INCOME CAN BE SAID TO HAVE ACCRUED TO HIM THOUGH IT MAY BE RECEIVED LATER ON ITS BEING ASCERTAINED. THE BASIC CONCEPTION IS THAT HE MUST HAVE ACQUIRED A RIGHT TO RECEIVE THE INCOME. THERE MUST BE A DEBT OWED TO HIM BY SOMEBODY. THERE MUST BE AS IS OTHERWISE EXPRESSED DEBITUM IN PRAESENTI, SOLVENDUM IN FUTURO. 'UNLESS AND UNTIL THERE IS CREATED IN FAVOUR OF THE ASSESSEE A DEBT DUE, BY SOMEBODY IT CANNOT BE SAID THAT HE HAS ACQUIRED A RIGHT TO RECEIVE THE INCOME OR THAT INCOME HAS ACCRUED TO HIM. IT IS SUBMITTED THAT, IN THE AFORESAID JUDICIAL PRONOUNCEMENT, IT HAS BEEN HELD THAT, AN INCOME ARISES TO AN ASSESSEE COMPANY WHEN IT HAS ACQUIRED A RIGHT TO RECEIVE SUCH INCOME. IT HAS BEEN HELD THAT, IT REPRESENTS A STATE ANTERIOR TO THE POINT OF TIME WHEN THE INCOME BECOMES RECEIVABLE AND, CONNOTES A CHARACTER OF THE INCOME WHICH IS MORE OR LESS INCHOATE. APPLYING THE FOREGOING TO THE FACTS F THE INSTANT CASE, IT WILL BE SEEN THAT, SINCE THERE WAS NO RIGHT TO RECEIVE ANY INCOME TO THE ASSESSEE AS A RESULT OF INTEREST FREE LOAN, THE PROVISIONS CONTAINED IN SECTION 92(1) OF THE ACT ARE INAPPLICABLE.' 9.1. THE SPECIAL BENCH CONSIDERED THESE ARGUMENTS AND AT PARAS 37 TO 39 HELD AS FOLLOWS: 37. IN OUR CONSIDERED VIEW, THE COMMERCIAL EXPEDIENCY OF A LOAN TO SUBSIDIARY IS WHOLLY IRRELEVANT IN ASCERTAINING ARM'S LENGTH INTEREST ON SUCH A LOAN. THERE IS INDEED NO BAR ON ANYONE ADVANCING AN INTEREST FREE LOANS TO ANYONE BUT WHEN SUCH TRANSACTIONS ARE COVERED BY THE INTERNATIONAL TRANSACTIONS BETWEEN THE ASSOCIATED ENTERPRISE, SECTION 92 OF THE ACT MANDATES THAT THE INCOME FROM SUCH TRANSACTIONS IS TO BE COMPUTED ON THE BASIS OF ARM'S LENGTH PRICE. THE JUDICIAL PRECEDENTS RELIED BY THE ASSESSEE, SUCH AS IN THE CASE OF SA BUILDERS (SUPRA), IN SUPPORT OF THE PROPOSITION THAT INTEREST FREE ADVANCE TO THE SUBSIDIARY, IN WHICH ASSESSEE HAS DEEP INTEREST, ARE JUSTIFIED ON THE GROUNDS OF COMMERCIAL EXPEDIENCY ARE IN THE CONTEXT OF THE QUESTION WHETHER SUCH A USE OF BORROWED FUNDS CAN BE SAID TO BE FOR THE PURPOSES OF BUSINESS, AND, ACCORDINGLY, WHETHER INTEREST ON BORROWINGS FOR FUNDS SO USED CAN BE ALLOWED AS A DEDUCTION IN COMPUTATION OF BUSINESS INCOME OF THE ASSESSEE. THAT IS NOT THE ISSUE HERE, AND THESE JUDICIAL PRECEDENTS ON THE COMMERCIAL EXPEDIENCY, THEREFORE, HAVE NO RELEVANCE IN COMPUTATION OF ARM'S LENGTH PRICE OF LOAN GIVEN TO AN ASSOCIATED ENTERPRISE. SIMILARLY, LEARNED COUNSEL'S CONTENTION THAT A NOTIONAL INCOME CANNOT BE TAXED, AND RELIANCE ON SHOORJI VALLABHDAS DECISION (SUPRA) IN THIS REGARD, IS WHOLLY MISPLACED BECAUSE THAT PROPOSITION IS IN THE CONTEXT OF TAX LAWS IN GENERAL, WHEREAS, TRANSFER PRICING PROVISIONS, BEING ANTI ABUSE PROVISIONS WITH THE SANCTION OF THE STATUTE, COME INTO PLAY IN THE SPECIFIC SITUATION OF CERTAIN TRANSACTIONS WITH THE ASSOCIATED ENTERPRISE. THE GENERAL PROVISIONS OF THE LAW HAVE TO GIVE WAY TO THESE SPECIFIC ANTI ABUSE PROVISIONS. WHILE A NOTIONAL INTEREST INCOME CANNOT INDEED BE BROUGHT TO TAX IN GENERAL, THE ARM'S LENGTH PRINCIPLE REQUIRES THAT INCOME IS COMPUTED, IN CERTAIN SITUATIONS, ON THE BASIS OF CERTAIN ASSUMPTIONS WHICH ARE INHERENTLY NOTIONAL IN NATURE. WHEN THE LEGAL PROVISIONS ARE NOT IN PARI MATERIA, AS THE PROVISION OF NORMAL COMPUTATION OF INCOME AND THE PROVISION OF COMPUTATION OF INCOME IN THE CASE OF INTERNATIONAL TRANSACTIONS BETWEEN THE ASSOCIATED ENTERPRISES, WHAT IS HELD TO BE CORRECT IN THE CONTEXT OF ONE SET OF LEGAL PROVISIONS HAS NO APPLICATION IN THE CONTEXT OF THE OTHER SET OF LEGAL PROVISIONS. 38. AS FOR THE ASSESSEE' S CLAIM THAT THE LOAN BEING EXTENDED FREE OF INTEREST WAS IN THE NATURE OF SHAREHOLDER SERVICE, THIS PLEA IS BEING TAKEN UP FOR THE FIRST TIME BEFORE US AND THE ASSESSEE HAS NOT EVEN FURNISHED BASIC EVIDENCES FOR THE FACTUAL ELEMENTS EMBEDDED IN THIS PROPOSITION. SUCH FACTS CANNOT BE INFERRED OR ASSUMED; THERE HAS TO BE SOME MATERIAL ON RECORD TO 10 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED DEMONSTRATE, OR EVEN INDICATE, THE EXISTENCE OF THESE FACTS. THE REFERENCES TO OECD REPORT AND BEPS REPORT IS IN THE CONTEXT OF BENEFIT TEST, BUT THEN THE BENEFIT TEST IS NOT REALLY RELEVANT IN THE CONTEXT OF INDIAN TRANSFER PRICING LEGISLATION. LEARNED COUNSEL HAS NOT EXPLAINED AS TO HOW THESE INPUTS ARE RELEVANT IN INTERPRETING THE SCOPE OF THE STATUTORY PROVISION BEFORE US, NOR DO WE SEE ANY RELEVANCE OF THIS MATERIAL IN THE PRESENT CONTEXT AND GIVEN THE FACT SITUATION ABOVE. IT IS ALSO IMPORTANT TO BEAR IN MIND THE UNCONTROVERTED FINDINGS OF THE ASSESSING OFFICER THAT THE INTEREST WAS ALL ALONG CHARGED BY THE ASSESSEE ON ITS LOANS TO DATEX BUT, FOR SOME UNEXPLAINED REASONS, THE ASSESSEE HAS STOPPED CHARGING INTEREST IN THE ASSESSMENT YEAR 2003-04. THE COMMERCIAL BONAFIDES OF THE PRESENT TRANSACTIONS ARE NOT ESTABLISHED. AS REGARDS THE ASSESSEE'S CLAIM THAT THE REVENUE AUTHORITIES HAVE RE-CHARACTERIZED THE TRANSACTION, AND THAT THEY DO NOT HAVE THE POWERS TO DO SO, WE FIND THAT THE CLAIM OF THE ASSESSEE IS ILL CONCEIVED INASMUCH AS THERE IS NO RE-CHARACTERIZATION OF THE TRANSACTION, INASMUCH AS IT CONTINUES TO BE A LOAN TRANSACTION AND INASMUCH AS THE SUBSTITUTION OF ZERO INTEREST BY ARM'S LENGTH INTEREST DOES NOT ALTER THE BASIC CHARACTER OF TRANSACTION. THE QUESTION OF RE- CHARACTERIZATION ARISES ONLY WHEN THE VERY NATURE OF TRANSACTION IS ALTERED, SUCH AS CAPITAL SUBSCRIPTION BEING TREATED AS LOAN OR SUCH A TRADE ADVANCE RECEIVED BEING TREATED AS A BORROWING. THERE IS NO CHANGE IN THE CHARACTER OF TRANSACTION IN THIS CASE. LEARNED COUNSEL'S RELIANCE ON EKL APPLIANCES DECISION (SUPRA) AND COTTON NATURAL DECISION (SUPRA) IS THUS IRRELEVANT. IN THE CASE OF ABHISHEK AUTO (SUPRA), WHAT WAS DONE WAS THAT OF THE JOINT VENTURE AGREEMENT, WHICH WAS DULY APPROVED BY THE RESERVE BANK OF INDIA AND OTHER REGULATORY BODIES, WAS DISREGARDED BY QUESTIONING ITS NEED, AND IT WAS IN THIS CONTEXT THAT THE TRIBUNAL OBSERVED THAT LEGALLY BINDING JOINT VENTURE ARRANGEMENTS CANNOT BE DISREGARDED BY THE REVENUE AUTHORITIES. THIS OBSERVATIONS, TAKEN OUT OF THE CONTEXT, CANNOT BE INTERPRETED TO MEAN THAT AN ARM'S LENGTH PRICE OF AN INTEREST FREE LOAN CANNOT BE ADOPTED FOR ASCERTAINING INCOME FROM LOAN TRANSACTION. 39. IN OUR CONSIDERED VIEW, THE ASSESSEE IS NOT REALLY CORRECT IN CONTENDING THAT WHEN THE ASSESSEE HAS NOT REPORTED ANY INCOME FROM A PARTICULAR INTERNATIONAL TRANSACTION, THE ALP ADJUSTMENT CANNOT COMPUTE THE SAME. THE COMPUTATION OF INCOME ON THE BASIS OF ARM'S LENGTH PRICE DOES NOT REQUIRE THAT THE ASSESSEE MUST REPORT SOME INCOME FIRST, AND ONLY THEN IT CAN BE ADJUSTED FOR THE ALP. SECTION 92(1) IS NOT AN ADJUSTMENT MECHANISM; IT IS A COMPUTATION MECHANISM. THE ARM'S LENGTH PRICE PRINCIPLE REQUIRES THAT AN ARM'S LENGTH PRICE IS ASSIGNED TO THE TRANSACTIONS BETWEEN THE ASSOCIATED ENTERPRISE, AND IF THE INCOME IS COMPUTED, IF ANY, ON THE BASIS OF THE ARM'S LENGTH PRICE SO ASSIGNED. AS REGARDS RELIANCE ON THE VODAFONE SERVICES DECISION (SUPRA), THAT DEALS WITH A SITUATION IN WHICH THE INTERNATIONAL TRANSACTION WAS INHERENTLY INCAPABLE OF PRODUCING THE INCOME CHARGEABLE TO TAX AS IT WAS IN THE CAPITAL FIELD. THIS IS EVIDENT FROM THE OBSERVATION OF HON'BLE BOMBAY HIGH COURT TO THE EFFECT THAT, 'IN THIS CASE, THE REVENUE SEEMS TO BE CONFUSING THE MEASURE TO A CHARGE AND CALLING THE MEASURE A NOTIONAL INCOME. WE FIND THAT THERE IS ABSENCE OF ANY CHARGE IN THE ACT TO SUBJECT ISSUE OF SHARES AT A PREMIUM TO TAX'. UNDOUBTEDLY, LEARNED COUNSEL IS RIGHT IN INTERPRETING THIS DECISION TO THE EXTENT THAT WHAT IS NOT IN THE NATURE OF INCOME CANNOT BE TURNED INTO INCOME SO AS TO MAKE ALP ADJUSTMENT THEREIN, AND THEN BRING THE ALP ADJUSTMENT TO TAX, SINCE THE COMPUTATION IS OF INCOME AND IT IS ONLY THE PRICE AT WHICH TRANSACTION IS ENTERED INTO THAT IS TO BE TAKEN AS AN ARM'S LENGTH PRICE IN COMPUTATION OF THAT INCOME. THE ALP ADJUSTMENTS CANNOT BE TREATED AS INCOME PER SE. HOWEVER, THE ASSESSEE DOES NOT DERIVE ANY SUPPORT FROM THIS DECISION SINCE CONSIDERATION FOR A LOAN, I.E INTEREST, IS INHERENTLY IN THE NATURE OF INCOME. THERE IS NO, AND THERE CANNOT BE ANY, DISPUTE OR CONTROVERSY ABOUT THIS CHARACTER OF INCOME. THE POINT OF DISPUTE IS WHETHER ZERO INTEREST, OR NO INTEREST, IS GOOD ENOUGH FOR COMPUTING THE INCOME OR WHETHER AN ARM'S LENGTH INTEREST MUST SUBSTITUTE THIS ZERO INTEREST. THE ANSWER IS OBVIOUS. AS LONG AS THE TRANSACTION IS AN INTERNATIONAL TRANSACTION BETWEEN THE AES, THE COMPUTATION OF INCOME HAS TO 11 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED BE ON THE BASIS OF ARM'S LENGTH INTEREST. THEREFORE, IN OUR CONSIDERED VIEW, EVEN WHEN NO INCOME IS REPORTED IN RESPECT OF AN ITEM IN THE NATURE OF INCOME, SUCH AS INTEREST, BUT THE SUBSTITUTION OF TRANSACTION PRICE BY ARM'S LENGTH PRICE RESULTS IN AN INCOME, IT CAN VERY WELL BE BROUGHT TO TAX UNDER SECTION 92 . THIS PLEA OF THE ASSESSEE IS ALSO, THEREFORE, UNSUSTAINABLE IN LAW. 9.2. THE ARGUMENTS ARE SOUGHT TO BE RAISED BY THE ASSESSEE, BY SUBMITTING THAT UNDER ARTICLE 11 OF THE DTAA, AS INTEREST CAN BE TAXED ONLY IF PAID I.E. ON CASH BASIS OF ACCOUNTING SEEKS TO UNDO THE INTERPRETATION ON THIS ISSUE, PLACED BY THE SPECIAL BENCH. WE FIND THAT THE QUESTION AS REFRAMED AND ANSWERED BY THE SPECIAL BENCH IS COMPREHENSIVE AND THIS IS BINDING ON US. THE HONBLE SUPREME COURT IN THE CASE OF KESHORAM & CO. VS. UOI 1989 3 SCC 151 AT PAGE 160 HELD: THE BINDING EFFECT OF A DECISION OF THIS COURT DOES NOT DEPEND UPON WHETHER A PARTICULAR ARGUMENT WAS CONSIDERED OR NOT PROVIDED THE POINT WITH REFERENCE TO WHICH THE ARGUMENT IS ADVANCED SUBSEQUENTLY WAS ACTUALLY DECIDED IN THE EARLIER DECISION. THE HONBLE SUPREME COURT IN THE CASE OF AMBICA PRASAD MISHRA VS. STATE OF UP. 1980 3 SCC 719 HELD THAT:- EVERY NEW DISCOVERY OR ARGUMENTATIVE NOVELTY CANNOT UNDO OR COMPEL RECONSIDERATION OF A BINDING PRECEDENT. 9.2.1. THE SUBMISSION OF THE ASSESSEE IS THAT, THIS GROUND NOW RAISED, IS AN OFF SHOOT OF GROUND NO.1, RAISED IN THE APPEAL. THIS MEANS THAT THIS ARGUMENT IS JUST A LIMB OF THE QUESTION CONSIDERED BY THE SPECIAL BENCH. HENCE IN OUR VIEW, AS THIS ISSUE HAS BEEN RAISED BEFORE THE SPECIAL BENCH AND HAS BEEN ANSWERED, THE ISSUE CANNOT BE ONCE AGAIN BE RAISED AS AN ADDITIONAL GROUND. HENCE THIS GROUND NO 1A CANNOT BE ADMITTED. 9.3. BE IT AS IT MAY, WITHOUT PREJUDICE TO OUR ABOVE FINDING AND AS WE HAVE HEARD THE CASE AT LENGTH, FOR THE SAKE OF COMPLETENESS, WE CONSIDER THE ISSUE ON MERITS ALSO. WE EXTRACT THE RELEVANT ARTICLES OF THE AGREEMENT BETWEEN INDIAN AND FINLAND FOR AVOIDANCE OF DOUBLE TAXATION AND PREVENTION OF FISCAL ABUSE WITH RESPECT TO TAXES ON INCOME. 12 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED ARTICLE 9 ASSOCIATED ENTERPRISES 1. WHERE (A) AN ENTERPRISE OF A CONTRACTING STATE PARTICIPATES DIRECTLY OR INDIRECTLY IN THE MANAGEMENT, CONTROL OR CAPITAL OF AN ENTERPRISE OF THE OTHER CONTRACTING STATE, OR (B) THE SAME PERSONS PARTICIPATE DIRECTLY OR INDIRECTLY IN THE MANAGEMENT, CONTROL OR CAPITAL OF AN ENTERPRISE OF A CONTRACTING STATE AND AN ENTERPRISE OF THE OTHER CONTRACTING STATE, AND IN EITHER CASE CONDITIONS ARE MADE OR IMPOSED BETWEEN THE TWO ENTERPRISES IN THEIR COMMERCIAL OR FINANCIAL RELATIONS WHICH DIFFER FROM THOSE WHICH WOULD BE MADE BETWEEN INDEPENDENT ENTERPRISES, THEN ANY PROFITS WHICH WOULD, BUT FOR THOSE CONDITIONS, HAVE ACCRUED TO ONE OF THE ENTERPRISES, BUT, BY REASON OF THOSE CONDITIONS, HAVE NOT SO ACCRUED, MAY BE INCLUDED IN THE PROFITS OF THAT ENTERPRISE AND TAXED ACCORDINGLY. ARTICLE 11 INTEREST 1. INTEREST ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OTHER STATE. 2. HOWEVER, SUCH INTEREST MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH IT ARISES AND ACCORDING TO THE LAWS OF THAT STATE, BUT IF THE BENEFICIAL OWNER OF THE INTEREST IS A RESIDENT OF THE OTHER CONTRACTING STATE, THE TAX SO CHARGED SHALL NOT EXCEED 10 PER CENT OF THE GROSS AMOUNT OF THE INTEREST. ARTICLE 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. ROYALTIES OR FEES FOR TECHNICAL SERVICES ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OTHER STATE. 2. HOWEVER, SUCH ROYALTIES OR FEES FOR TECHNICAL SERVICES MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH THEY ARISE AND ACCORDING TO THE LAWS OF THAT STATE, BUT IF THE BENEFICIAL OWNER OF THE ROYALTIES IS A RESIDENT OF THE OTHER CONTRACTING STATE, THE TAX SO CHARGED SHALL NOT EXCEED 10 PER CENT OF THE GROSS AMOUNT OF THE ROYALTIES OR FEES FOR TECHNICAL SERVICES. 9.4. ARTICLE 9 IS ATTRACTED IN THIS CASE. THE TRANSFER PRISING ADJUSTMENT ON ACCOUNT OF INTEREST IS TO BE TAXED BY INCLUDING THE SAME IN THE PROFITS OF THE ASSESSEE AS IT IS NOT ACCRUED BY REASON OF CONDITIONS MADE AND IMPOSED BETWEEN THE ASSOCIATE ENTERPRISES. 9.5 ARTICLE 11, DOES NOT APPLY, AS NO INTEREST ACCRUES OR ARISES IN THIS CASE AND THE QUESTION OF PAYMENT OF SUCH INTEREST SIMPLY DOES NOT ARISE. WHAT IS SOUGHT TO BE TAXED IS A TRANSFER PRICING ADJUSTMENT WHICH IS PERMITTED UNDER ARTICLE 9 WHICH TALKS ABOUT 13 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED ACCRUAL AND NOT PAYMENT. IN THE OECD COMMENTARY ON THE PROVISIONS OF THE ARTICLE 11 THE TERM PAID IN CONTEXT OF INTEREST IS AS FOLLOWS: 5. THE TERM PAID HAS A VERY WIDE MEANING, SINCE THE CONCEPT OF PAYMENT MEANS THE FULFILMENT OF THE OBLIGATION TO PUT FUNDS AT THE DISPOSAL OF THE CREDITOR IN THE MANNER REQUIRED BY CONTRACT OR BY CUSTOM . IN THIS CASE THERE IS NO OBLIGATION TO PAY INTEREST. THE LEARNED COUNCIL FOR THE ASSESSEE PROJECTS A SCENARIO WHICH WOULD NEVER EVER ARISE IN THE FACTS OF THIS CASE AND CLAIMS THAT, INTEREST CAN BE TAXED ONLY ON PAYMENT, IN VIEW OF ARTICLE 11. SUCH AN ARGUMENT IS FLAWED. HENCE, THE INTERPRETATION SOUGHT TO BE PLACED BY THE LD. COUNSEL FOR THE ASSESSEE ON ARTICLE 11, BY RELYING ON THE INTERPRETATION GIVEN BY DIFFERENT BENCHES OF THE TRIBUNAL WHILE CONSIDERING ARTICLE 12, DOES NOT HELP THE CASE OF THE ASSESSEE. THIS VIEW IS SUPPORTED BY THE ORDER OF A COORDINATE BENCH OF THE MUMBAI ITAT IN THE CASE OF PMP AUTO COMPONENTS (P.) LTD. V. DCIT, MUMBAI [2014] 50 TAXMANN.COM 272 (MUMBAI TRIB.) . THE TRIBUNAL IN THIS ABOVE-MENTIONED CASE AT PARA 10 & 11 HAS OBSERVED: 10. THEREFORE, IT IS CLEAR THAT THE TRANSACTION OF LOAN GIVEN TO THE AE IS AN INTERNATIONAL TRANSACTION AND SUBJECTED TO ALP AS PER THE TRANSFER PRICING PROVISIONS OF INCOME TAX ACT. THE ASSESSEE HAS RAISED AN ALTERNATIVE PLEA THAT EVEN IN CASE THE TRANSFER PRICING PROVISIONS ARE APPLICABLE IN RESPECT OF THE NON CHARGING OF INTEREST ON LOAN GIVEN TO AE, IT IS NOT TAXABLE IN INDIA AS PER THE PROVISIONS OF ARTICLE 11 OF INDO-MAURITIUS DTAA BECAUSE THE SAID INTEREST WAS NOT PAID TO THE ASSESSE. WE NOTE THAT THE PROVISIONS OF ARTICLE 11 ARE APPLICABLE IN THE CASE OF INTEREST ARISING IN THE CONTRACTING STATE AND PAID TO THE RESIDENT OF ANOTHER CONTRACTING STATE. 11. IT IS CONTEMPLATED UNDER ARTICLE 11 OF DTAA THAT THE PAYMENT IS A CONDITION FOR TAXING THE INTEREST ONLY IN CIRCUMSTANCES WHEN THE INTEREST IS ARISING IN THE CONTRACTING STATE AND ACCRUED TO THE RESIDENT OF ANOTHER CONTRACTING STATE AND, THEREFORE, THE SAME IS SUBJECTED TO TAX IN THE OTHER STATE WHEN IT IS PAID. IN OTHER WORDS, THE PROVISIONS OF ARTICLE 11 DEFERS THE TAXABILITY OF THE INTEREST ARISING BUT NOT RECEIVED AND THEREFORE, IT IS TAXED ONLY WHEN IT IS RECEIVED. ARTICLE 11 DOES NOT EXEMPT THE INTEREST ARISING IN A CONTRACTING STATE AND ACCRUE TO A RESIDENT OF OTHER CONTRACTING STATE BUT IT MAKES THE SAME TAXABLE ON THE EVENT OF PAYMENT. IN THE CASE IN HAND, WHEN THE ASSESSEE HAS NOT EVEN ADMITTED THE INTEREST ARISEN AND ACCRUED TO THE ASSESSEE ON THE LOAN GIVEN TO THE AE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, THEREFORE, THE PROVISIONS OF ARTICLE 11 OF INDO-MAURITIUS TREATY CANNOT BE PRESSED INTO SERVICE. 10. IN VIEW OF THE ABOVE DISCUSSION, WE DISMISS THIS GROUND NO. 1A OF THE ASSESSEE BOTH ON THE GROUND THAT THIS ADDITIONAL GROUND IS NOT ADMISSIBLE, AS WELL AS ON MERITS OF THE CASE. 14 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED 11. WE NOW CONSIDER GROUND NO. 4A: 11.1. THIS ISSUE RELATES TO COMPUTATION OF THE ARM'S LENGTH PRICE. THE SPECIAL BENCH HAS REMITTED THIS ISSUE OF QUANTIFICATION OF ARM'S LENGTH PRICE ADJUSTMENT TO THE DIVISION BENCH. THE ISSUE WHETHER SBI PRIME LENDING RATE HAS TO BE APPLIED OR WHETHER LIBOR HAS TO BE APPLIED IS AN ISSUE WHERE NO FRESH INVESTIGATION INTO FACTS IS REQUIRED. UNDER THESE FACTS AND CIRCUMSTANCES WE ARE OF THE OPINION THAT THIS GROUND NO. 4A HAS TO BE ADMITTED. HENCE, WE ADMIT THE SAME. 12. WE NOW CONSIDER, THE ISSUE ON MERITS. THE LD. D/R, RELIES ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF TATA AUTOCOMPS SYSTEMS LTD. (SUPRA) . THE ASSESSEE ON THE OTHER HAND RELIES ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. COTTON NATURALS (I)(P) LTD. (SUPRA) . THE LOAN IN QUESTION IN THIS CASE HAS BEEN GIVEN IN US DOLLARS. THOUGH THE LOAN HAS BEEN CONSUMED IN INDIA, THE REPAYMENT HAS TO BE MADE IN US DOLLARS. UNDER THESE FACTS AND CIRCUMSTANCE OF THE CASE, WE PREFER TO FOLLOW THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. COTTON NATURALS (I)(P) LTD. (SUPRA) , WHEREIN IT HAS BEEN HELD AS FOLLOWS:- 39. THE QUESTION WHETHER THE INTEREST RATE PREVAILING IN INDIA SHOULD BE APPLIED, FOR THE LENDER WAS AN INDIAN COMPANY/ASSESSEE, OR THE LENDING RATE PREVALENT IN THE UNITED STATES SHOULD BE APPLIED, FOR THE BORROWER WAS A RESIDENT AND AN ASSESSEE OF THE SAID COUNTRY, IN OUR CONSIDERED OPINION, MUST BE ANSWERED BY ADOPTING AND APPLYING A COMMONSENSICAL AND PRAGMATIC REASONING. WE HAVE NO HESITATION IN HOLDING THAT THE INTEREST RATE SHOULD BE THE MARKET DETERMINED INTEREST RATE APPLICABLE TO THE CURRENCY CONCERNED IN WHICH THE LOAN HAS TO BE REPAID. INTEREST RATES SHOULD NOT BE COMPUTED ON THE BASIS OF INTEREST PAYABLE ON THE CURRENCY OR LEGAL TENDER OF THE PLACE OR THE COUNTRY OF RESIDENCE OF EITHER PARTY. INTEREST RATES APPLICABLE TO LOANS AND DEPOSITS IN THE NATIONAL CURRENCY OF THE BORROWER OR THE LENDER WOULD VARY AND ARE DEPENDENT UPON THE FISCAL POLICY OF THE CENTRAL BANK, MANDATE OF THE GOVERNMENT AND SEVERAL OTHER PARAMETERS. INTEREST RATES PAYABLE ON CURRENCY SPECIFIC LOANS/ DEPOSITS ARE SIGNIFICANTLY UNIVERSAL AND GLOBALLY APPLICABLE. THE CURRENCY IN WHICH THE LOAN IS TO BE RE-PAID NORMALLY DETERMINES THE RATE OF RETURN ON THE MONEY LENT, I.E. THE RATE OF INTEREST. KLAUS VOGEL ON DOUBLE TAXATION CONVENTIONS (THIRD EDITION) UNDER ARTICLE 11 IN PARAGRAPH 115 STATES AS UNDER:- 15 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED THE EXISTING DIFFERENCES IN THE LEVELS OF INTEREST RATES DO NOT DEPEND ON ANY PLACE BUT RATHER ON THE CURRENCY CONCERNED. THE RATE OF INTEREST ON A US $ LOAN IS THE SAME IN NEW YORK AS IN FRANKFURT-AT LEAST WITHIN THE FRAMEWORK OF FREE CAPITAL MARKETS (SUBJECT TO THE ARBITRAGE). IN REGARD TO THE QUESTION AS TO WHETHER THE LEVEL OF INTEREST RATES IN THE LENDER'S STATE OR THAT IN THE BORROWER'S IS DECISIVE, THEREFORE, PRIMARILY DEPENDS ON THE CURRENCY AGREED UPON (BFH BST.B1. II 725 (1994), RE. 1 ASTG). A DIFFERENTIATION BETWEEN DEBT-CLAIMS OR DEBTS IN NATIONAL CURRENCY AND THOSE IN FOREIGN CURRENCY IS NORMALLY NO USE, BECAUSE, FOR INSTANCE, A US $ LOAN ADVANCED BY A US LENDER IS TO HIM A DEBT-CLAIM IN NATIONAL CURRENCY WHEREAS TO A GERMAN BORROWER IT IS A FOREIGN CURRENCY DEBT (THE SITUATION BEING DIFFERENT, HOWEVER, WHEN AN AGREEMENT IN A THIRD CURRENCY IS INVOLVED). MOREOVER, A DIFFERENCE IN INTEREST LEVELS FREQUENTLY REFLECTS NO MORE THAN DIFFERENT EXPECTATIONS IN REGARD TO RATES OF EXCHANGE, RATES OF INFLATION AND OTHER ASPECTS. HENCE, THE CHOICE OF ONE PARTICULAR CURRENCY CAN BE JUST AS REASONABLE AS THAT OF ANOTHER, DESPITE DIFFERENT LEVELS OF INTEREST RATES. AN ECONOMIC CRITERION FOR ONE PARTY MAY BE THAT IT WANTS, IF POSSIBLE, TO AVOID EXCHANGE RISKS (FOR EXAMPLE, BY MATCHING THE CURRENCY OF THE LOAN WITH THAT OF THE FUNDS ANTICIPATED TO BE AVAILABLE FOR DEBT SERVICE), SUCH AS TAKING OUT A US $ LOAN IF THE PROCEEDS IN US $ ARE EXPECTED TO BECOME AVAILABLE (SAY FROM EXPORTS). IF AN EXCHANGE RISK WERE TO PROVE INCAPABLE OF BEING AVOIDED (SAY, BY FORWARD RATE FIXING), THE APPROPRIATE COURSE WOULD BE TO ATTRIBUTE IT TO THE ECONOMICALLY MORE POWERFUL PARTY. BUT, EXACTLY WHERE THERE IS NO SPECIAL RELATIONSHIP', THIS WILL FREQUENTLY NOT BE POSSIBLE IN DEALINGS WITH SUCH PARTY. CONSEQUENTLY, IT WILL NORMALLY NOT BE POSSIBLE TO REVIEW AND ADJUST THE INTEREST RATE TO THE EXTENT THAT SUCH RATE DEPENDS ON THE CURRENCY INVOLVED. MOREOVER, IT IS QUESTIONABLE WHETHER SUCH AN ADJUSTMENT COULD BE BASED ON ART. 11 (6). FOR ART. 11(6 ), AT LEAST ITS WORDING, ALLOWS THE AUTHORITIES TO ELIMINATE HYPOTHETICALLY' THE SPECIAL RELATIONSHIPS ONLY IN REGARD TO THE LEVEL OF INTEREST RATES AND NOT IN REGARD TO OTHER CIRCUMSTANCES, SUCH AS THE CHOICE OF CURRENCY. IF SUCH OTHER CIRCUMSTANCES WERE TO BE INCLUDED IN THE REVIEW, THERE WOULD BE DOUBTS AS TO WHERE THE LINE SHOULD BE DRAWN, I.E., WHETHER AN EXAMINATION SHOULD BE ALLOWED OF THE QUESTION OF WHETHER IN THE ABSENCE OF A SPECIAL RELATIONSHIP (I.E., FINANCIAL POWER, STRONG POSITION IN THE MARKET, ETC., OF THE FOREIGN CORPORATE GROUP MEMBER) THE BORROWING COMPANY MIGHT NOT HAVE COMPLETELY REFRAINED FROM MAKING INVESTMENT FOR WHICH IT BORROWED THE MONEY. 40. THE AFORESAID METHODOLOGY RECOMMENDED BY KLAUS VOGEL APPEALS TO US AND APPEARS TO BE THE REASONABLE AND PROPER PARAMETER TO DECIDE UPON THE QUESTION OF APPLICABILITY OF INTEREST RATE. THE LOAN IN QUESTION WAS GIVEN IN FOREIGN CURRENCY I.E. US $ AND WAS ALSO TO BE REPAID IN THE SAME CURRENCY I.E. US $. INTEREST RATE APPLICABLE TO LOANS GRANTED AND TO BE RETURNED IN INDIAN RUPEES WOULD NOT BE THE RELEVANT COMPARABLE. EVEN IN INDIA, INTEREST RATES ON FCNR ACCOUNTS MAINTAINED IN FOREIGN CURRENCY ARE DIFFERENT AND DEPENDENT UPON THE CURRENCY IN QUESTION. THEY ARE NOT DEPENDENT UPON THE PLR RATE, WHICH IS APPLICABLE TO LOANS IN INDIAN RUPEE. THE PLR RATE, THEREFORE, WOULD NOT BE APPLICABLE AND SHOULD NOT BE APPLIED FOR DETERMINING THE INTEREST RATE IN THE EXTANT CASE. PLR RATES ARE NOT APPLICABLE 16 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED TO LOANS TO BE RE-PAID IN FOREIGN CURRENCY. THE INTEREST RATES VARY AND ARE THUS DEPENDENT ON THE FOREIGN CURRENCY IN WHICH THE REPAYMENT IS TO BE MADE. THE SAME PRINCIPLE SHOULD APPLY. 13. RESPECTFULLY, FOLLOWING THE SAME WE HOLD THAT LIBOR HAS TO BE APPLIED WHILE BENCHMARKING THE INTERNATIONAL TRANSACTION IN QUESTION. IN VIEW OF THE ABOVE DISCUSSION, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 13.1. WE NOW REMIT THE MATTER BACK TO THE FILE OF THE TPO FOR RECOMPUTING THE ARM'S LENGTH PRICE ADJUSTMENT BY TAKING LIBOR FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTION. 14. I.T.A. NO.2058/KOL/2010, ASSESSMENT YEAR: 2006-07 , IS ON THE SAME ISSUE, THOUGH NOT REFERRED TO THE SPECIAL BENCH. HENCE THE DECISION HEREIN WOULD APPLY MUTATIS MUTANDIS. 14. IN THE RESULT, ALL THREE APPEALS OF THE ASSESSEE IS ALLOWED IN PART. KOLKATA, THE 3 RD DAY OF AUGUST, 2018. SD/- SD/- [ ABY T. VARKEY ] [ J. SUDHAKAR REDDY ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 03.08.2018 {SC SPS} 17 ITA NO. 1548/KOL/2009 ASSESSMENT YEAR: 2003-04 ITA NO. 1549/KOL/2009 ASSESSMENT YEAR: 2004-05 ITA NO. 2058/KOL/2010 ASSESSMENT YEAR: 2006-07 INSTRUMENTATION CORPORATION LIMITED COPY OF THE ORDER FORWARDED TO: 1. INSTRUMENTATION CORPORATION LIMITED P.O. BOX 100, FI-00031 GE, FINLAND CC: PRICEWTERHOUSE COOPERS SOUTH CITY PINNACLE 7 TH FLOOR PLOT NO.XI-I SECTOR V KOLKATA 700 091 2. DDIT (I.T.)-1(1), KOLKATA 3. CIT(A)- 4. CIT- , 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER SENIOR PRIVATE SECRETARY HEAD OF OFFICE/ D.D.O. ITAT, KOLKATA BENCHES