GURGAON INVESTMENTS LTD, MUMBAI V. DDIT (IT) 2(3)(2), MUMBAI

ITA 6821/MUM/2017

• Counselvise Citation: [2019] 114 COUNSELVISE.COM (IT) 2175 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-11-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: 2012-2013
• Appeal Filed On: 04-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Double taxation relief; International transaction; Notional interest
• Section: 90; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI N.K.PRADHAN, ACCOUNTANT MEMBER ITA NO.6821 /MUM./2017 (ASSESSMENT YEAR : 201213 ) GURGAON INVESTMENT LTD. (FORMERLY KNOWN AS INDOPARK INVESTMENTS LIMITED) C/O M/S G. M. KAPADIA & CO., 1007, RAHEJA CHAMBER, 213, NARIMAN POINT, MUMBAI400021 PANAABCI7404E . APPELLANT V/S DY. DIRECTOR OF INCOME TAX INTERNATIONAL TRANSACTION CIRCLE3(1), MUMBAI . RESPONDENT ITA NO.1499 /MUM./2014 (ASSESSMENT YEAR : 200809 ) GURGAON INVESTMENT LTD. (FORMERLY KNOWN AS INDOPARK INVESTMENTS LIMITED) C/O M/S G. M. KAPADIA & CO., 1007, RAHEJA CHAMBER, 213, NARIMAN POINT, MUMBAI400021 PANAABCI7404E . APPELLANT V/S DY. DIRECTOR OF INCOME TAX INTERNATIONAL TRANSACTION CIRCLE3(1), MUMBAI . RESPONDENT 2 GURGAON INVESTMENTS LTD ITA NO.7359/MUM./2016 (ASSESSMENT YEAR : 201112 ) GURGAON INVESTMENT LTD. (FORMERLY KNOWN AS INDOPARK INVESTMENTS LIMITED) C/O M/S G. M. KAPADIA & CO., 1007, RAHEJA CHAMBER, 213, NARIMAN POINT, MUMBAI400021 PANAABCI7404E . APPELLANT V/S DY. DIRECTOR OF INCOME TAX INTERNATIONAL TRANSACTION CIRCLE3(1), MUMBAI . RESPONDENT ASSESSEE BY : SHRI PERCY J. PARDIWALA REVENUE BY : SHRI SUHAS KULKARNI DATE OF HEARING 19.08.2019 DATE OF ORDER 15.11.2019 O R D E R PER SAKTIJIT DEY, J.M. THE AFORESAID APPEALS BY THE SAME ASSESSEE ARE DIRE CTED AGAINST THREE SEPARATE ORDERS OF LEARNED COMMISSIONER OF IN COME TAX (APPEALS)15 & 56 MUMBAI, PERTAINING TO ASSESSMENT YEARS 200809, 201112 AND 201213. 2. THE BASIC COMMON GRIEVANCE IN ALL THESE APPEALS REL ATES TO ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUST MENT TOWARDS INTEREST ON DEBENTURES INVESTED IN THE ASSOCIATED E NTERPRISE (AE) VITAL CONSTRUCTION PVT. LTD. (VCPL). FACTS BEING COMMON I N ALL THESE 3 GURGAON INVESTMENTS LTD APPEALS, FOR THE SAKE OF BREVITY WE WILL DISCUSS TH E FACTS AS INVOLVED IN ASSESSMENT YEAR 200809 BEING ITA NO. 1499/MUM/2014 . 3. BRIEFLY STATED, THE ASSESSEE, EARLIER KNOWN AS M/S. INDOPARK INVESTMENT LIMITED, IS A NON RESIDENT COMPANY AND I S ENGAGED IN THE BUSINESS OF INVESTMENT HOLDINGS. IT IS STATED, THE ASSESSEE BELONGS TO MERRIL LYNCH GROUP WHICH IS ONE OF THE WORLDS LEAD ING FINANCIAL MANAGEMENT AND ADVISORY COMPANIES. IN COURSE OF TRA NSFER PRICING PROCEEDINGS, THE ASSESSING OFFICER ON EXAMINING THE AUDIT REPORT AS WELL AS OTHER DOCUMENTS AVAILABLE ON RECORD NOTICED THAT DURING THE YEAR UNDER CONSIDERATION ASSESSEE HAD ENTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS AES. HE NOTICED THAT THE ASSESSEE HAD PURCHASED COMPULSORILY CONVERTIBLE DEBENTURES ( CCDS) OF VITAL CONSTRUCTION PVT. LTD., DELHI FROM ITS AE INDOPARK HOLDINGS LIMITED MAURITIUS FOR THE TOTAL VALUE OF ` . 34.3 CRORES. THE COUPON RATE ON THE SAID DEBENTURES IS 12%. HE FOUND THAT THE DEBENTURE S WERE ACQUIRED VIDE DEED OF ADHERENCE DATED 27 TH MARCH, 2008. IN RESPONSE TO THE QUERY RAISED BY THE TRANSFER PRICING OFFICER, ASSES SEE SUBMITTED THE DETAILS OF INTEREST ON THE DEBENTURES WHICH WAS DUE FROM VITAL CONSTRUCTION PVT. LTD., DELHI AND ALSO SUBMITTED TH AT THE INTEREST DUE HAS BEEN WAIVED BY THE ASSESSEE. NOTICING THE ABOVE , THE TRANSFER PRICING OFFICER CALLED UPON THE ASSESSEE TO EXPLAIN AS TO WHY NO INTEREST WAS CHARGED ON CCDS FOR THE PERIOD FROM 28 TH MARCH, 2008 TO 4 GURGAON INVESTMENTS LTD 31 ST MARCH, 2008 AS PER THE TERMS & CONDITIONS OF THE D EBENTURE. IN RESPONSE, IT WAS SUBMITTED BY THE ASSESSEE THAT IN THE BOARD MEETING HELD ON 28 TH MARCH, 2008 IT WAS RESOLVED TO WAIVE THE INTEREST ON THE DEBENTURES. THEREFORE, NO INCOME HAS ACCRUED TO THE ASSESSEE ON ACCOUNT OF WAIVER OF INTEREST. IT WAS SUBMITTED, EV EN VCPL HAS NOT CLAIMED ANY DEDUCTION IN RESPECT OF INTEREST ON CCD S. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE TRANSFER PRICI NG OFFICER DID NOT FIND MERIT IN THEM. HE OBSERVED, THE ASSESSEE HAS B OUGHT CCDS FROM ITS AE IN MAURITIUS FOR A CONSIDERATION OF ` . 34.3 CRORE AND CARRYING COUPON RATE OF INTEREST OF 12% PER ANNUM. HE OBSERV ED, AT THE TIME OF PURCHASE OF DEBENTURES THE INVESTOR CONSIDERS THE C OUPON RATE FOR THE PURPOSE OF MAKING INVESTMENT. THE COUPON RATE REPRE SENTS THE FAIR RETURN THAT THE INVESTOR CAN EXPECT ON THIS INVESTM ENT MADE IN THE DEBENTURES. HE OBSERVED, THE ASSESSEE IS ALSO HOLDI NG AROUND 26% SHARES IN VCPL. THE TRANSFER PRICING OFFICER OBSERV ED, THE ASSESSEE COMPANY HAS WAIVED THE INTEREST TO HELP ITS AE. THE REFORE, HE HELD THAT THE INTEREST DUE ON THE DEBENTURES HAS TO BE A DJUSTED TO THE INCOME OF THE ASSESSEE. ACCORDINGLY, HE COMPUTED TH E INTEREST ON DEBENTURES AT THE RATE OF 12% PER ANNUM AND WORKED OUT ADJUSTMENT IN DIFFERENT ASSESSMENT YEARS ON THE BASIS OF PERIO D OF HOLDING OF DEBENTURES. THE ADJUSTMENT MADE IN THIS REGARD IN D IFFERENT ASSESSMENT YEARS ARE AS UNDER: 5 GURGAON INVESTMENTS LTD ASSESSMENT YEAR 200809 ` . 4, 51,068/ ASSESSMENT YEAR 201112 ` . 4,63,80,000/ ASSESSMENT YEAR 201213 ` . 3,62,14,521/ 4. BEING AGGRIEVED WITH THE ADJUSTMENT MADE TO THE INCO ME ON ACCOUNT OF INTEREST ON DEBENTURES, ASSESSEE PREFERR ED APPEALS BEFORE LEARNED COMMISSIONER (APPEALS). WHILE CHALLENGING T HE NOTIONAL ADJUSTMENT MADE TOWARDS INTEREST ON DEBENTURES, THE ASSESSEE SUBMITTED THAT BY VIRTUE OF SUPPLEMENTARY AGREEMENT DATED 20 TH MARCH, 2008 IN PURSUANCE TO BOARD MEETING HELD IT WA S AGREED TO WAIVE THE INTEREST ON CCDS. THEREFORE, THE INTEREST INCOME HAS NOT ACCRUED TO THE ASSESSEE DURING THE YEAR. THE ASSESS EE ALSO SUBMITTED THAT ANOTHER AE, NAMELY, BPTP LIMITED HAS ALSO AGREE D TO WAIVE THE INTEREST ON DEBENTURE, HENCE, THAT CAN BE CONSIDERE D AS COMPARABLE UNCONTROLLED PRICE (CUP) TO BENCHMARK THE INTEREST WA IVER BY THE ASSESSEE. THUS, IT WAS CLAIMED THAT THE TRANSACTION IS AT ARMS LENGTH. IT WAS FURTHER SUBMITTED, DETERMINATION OF ARM'S LE NGTH PRICE UNDER SECTION 92(1) OF THE ACT WOULD ARISE ONLY WHEN THER E IS A TRANSACTION WHICH HAS RESULTED IN INCOME AT THE HANDS OF ASSESS EE. IT WAS SUBMITTED, SINCE NO INCOME HAS ACCRUED ON ACCOUNT O F WAIVER OF INTEREST ON CCDS, TP PROVISIONS WOULD NOT APPLY. AF TER CONSIDERING THE SUBMISSION OF THE ASSESSEE, LEARNED COMMISSIONER (A PPEALS) DID NOT FIND MERIT IN THEM. HE OBSERVED, IN SPITE OF OPPORT UNITY BEING GIVEN THE ASSESSEE COULD ONLY PRODUCE AN UNSIGNED AND INC OMPLETE COPY OF 6 GURGAON INVESTMENTS LTD THE BOARD RESOLUTION OF VCPL DATED 28.4.2008 WHICH M EANS THAT THE RESOLUTION WAS PASSED AFTER CLOSURE OF THE FINANCIA L YEAR. HE OBSERVED, SINCE, THE ASSESSEE DID NOT PASS ANY RESOLUTION WIT HIN THE FINANCIAL YEAR, NOR FURNISH PROOF OF ITS CONSENT FOR NOT CHAR GING INTEREST, INCOME ON ACCOUNT OF INTEREST ON CCDS ACCRUED TO THE ASSES SEE AS IT IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THEREFOR E, THE TRANSFER PRICING OFFICER WAS JUSTIFIED IN MAKING ADJUSTMENT TO THE INCOME ON ACCOUNT OF INTEREST ON CCDS. AS REGARDS ASSESSEES CONTENTION THAT SIMILAR TRANSDUCTION BETWEEN BPTP LIMITED AND BPCL LI MITED SHOULD BE APPLIED AS CUP, LEARNED COMMISSIONER (APPEALS) OBSER VED, THE TRANSACTION BETWEEN BPTP LIMITED AND BPCL LIMITED BEI NG A CONTROLLED TRANSACTION CANNOT BE APPLIED AS CUP. HE OBSERVED, AS PER THE SCHEME OF THE ACT INCOME FROM INTERNATIONAL TRANSAC TION IS TO BE TREATED AS ADDITIONAL AND SEPARATE SOURCE OF INCOME AND SUCH INCOME HAS TO BE DETERMINED HAVING REGARD TO THE ARMS LEN GTH PRINCIPLE. THUS, ULTIMATELY, LEARNED COMMISSIONER (APPEALS) SU STAINED THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUST MENT ON INTEREST ON DEBENTURES. IT IS RELEVANT TO OBSERVE, IN ASSESSMEN T YEAR 201213 THE ASSESSEE ADDITIONALLY PLEADED THAT AS PER ARTICLE 1 1 OF INDIAMAURITIUS TREATY, INTEREST IS TAXABLE ONLY ON PAID/RECEIPT BA SIS. IT WAS SUBMITTED, SINCE, NO INTEREST WAS PAID, THERE IS NO QUESTION O F ANY INTEREST INCOME ACCRUING TO THE ASSESSEE. HENCE, THE QUESTION OF DE TERMINING ARM'S 7 GURGAON INVESTMENTS LTD LENGTH PRICE WOULD NOT ARISE. IT WAS SUBMITTED, THE ASSESSEE SHOULD BE GIVEN TREATY BENEFIT AS PER SECTION 90 (1) OF THE A CT. HOWEVER, THE AFORESAID CONTENTION OF THE ASSESSEE ALSO DID NOT F IND FAVOUR WITH THE FIRST APPELLATE AUTHORITY. 5. SHRI. PERCY J. PARDIWALA, LEARNED SENIOR COUNSEL FO R THE ASSESSEE SUBMITTED, THE SHORT ISSUE WHICH NEEDS TO BE ADDRES SED IS WHETHER INTEREST INCOME IS TO BE ASSESSED ON ACCRUAL OR REC EIPT BASIS. DRAWING OUR ATTENTION TO ARTICLE 11 OF INDIAMAURITIUS DOUB LE TAXATION AVOIDABLE AGREEMENT THE LEARNED SENIOR COUNSEL SUBM ITTED, AS PER CLAUSE 1 OF THE SAID ARTICLE THE LANGUAGE USED IS I NTEREST ARISING IN A CONTRACTING STATE AND PAID TO THE RESIDENT OF OTHER CONTRACTING STATES. HE SUBMITTED, THE TERM PAID AS USED IN CLAUSE 1 WOU LD MEAN ACTUAL PAYMENT OF INTEREST AND NOT ANY NOTIONAL COMPUTATIO N OF INTEREST OR ACCRUAL OF INTEREST. HE SUBMITTED, THIS PROPOSITION GETS FURTHER CLARIFIED BY CLAUSE 7 OF ARTICLE 11 AS IT SPEAKS OF ACTUAL PA YMENT OF INTEREST. HE SUBMITTED, IN THE FACTS OF THE ASSESSEES CASE ACTU AL PAYMENT OF INTEREST ON THE CCDS HAS NOT HAPPENED AS THE ASSESS EE HAS WAIVED THE PAYMENT OF INTEREST. HE SUBMITTED, WHILE CONSID ERING IDENTICAL PROVISION IN INDIACYPRUS DTAA INVOLVING ADDITION O F INTEREST INCOME ON CCDS ON ACCRUAL BASIS, THE TRIBUNAL IN PRAMERICA ASPF II CYPRUS HOLDING LIMITED VS. DCIT 2016 157 ITD 1177 (MUMBAI) HAS HELD THAT THE TRUE IMPORT OF ARTICLE 11 INDOCYPRUS TREATY RE QUIRES ACTUAL 8 GURGAON INVESTMENTS LTD PAYMENT OF INTEREST AND NOT ANY NOTIONAL INTEREST O N ACCRUAL BASIS. HE SUBMITTED, THE AFORESAID DECISION OF THE TRIBUNAL W AS UPHELD BY THE HONBLE JURISDICTIONAL HIGH COURT WHILE DISMISSING REVENUES APPEAL VIDE JUDGMENT DATED 12 TH MARCH, 2019 IN INCOME TAX APPEAL NO. 1824 OF 2016. THE LEARNED SENIOR COUNSEL SUBMITTED, ONCE THE INTEREST ON ACCRUAL BASIS IS NOT CHARGEABLE TO TAX IN INDIA UND ER THE PROVISIONS OF THE TAX TREATY ADDITION OF INTEREST INCOME ON NOTIO NAL BASIS CANNOT BE MADE APPLYING TP REGULATIONS. DRAWING OUR ATTENTION TO SECTION 92(1) OF THE ACT, HE SUBMITTED, ONLY IN RESPECT OF INCOME CHARGEABLE TO TAX UNDER SECTION 4 OF THE INCOME TAX ACT, THE TRANSFER PRICING PROVISIONS CAN BE MADE APPLICABLE AS SECTION 92 PROVIDES FOR C OMPUTING THE INCOME ARISING FROM INTERNATIONAL TRANSACTION WITH REGARD TO THE ARM'S LENGTH PRICE. HE SUBMITTED, ONCE THE INTEREST INCOM E IS NOT CHARGEABLE UNDER SECTION 4 OF THE ACT IN VIEW OF ARTICLE 11(1) OF INDIAMAURITIUS TREATY READ WITH SECTION 90(1) OF THE ACT, THERE IS NO QUESTION OF DETERMINING THE ARM'S LENGTH PRICE OF INTEREST ON C CDS ON ACCRUAL/NOTIONAL BASIS. IN THIS CONTEXT, HE DREW OU R ATTENTION TO THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN TH E FOLLOWING CASES. I) VODAFONE INDIA SERVICES PVT. LTD V/S DCIT , [2014] 368 ITR 1 (AHD.); II) DCIT V/D M/S. PMW ASPF I CYPRUS HOLDING CO. L TD. ITA NO. 879/DEL./2016, DATED 09.08.2019. 9 GURGAON INVESTMENTS LTD 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY RELYING UPON THE OBSERVATIONS OF LEARNED COMMISSIONER (APPEALS) SUBMITTED, THE TRANSFER PRICING OFFICER IS MANDATED UNDER THE ACT TO DETERMINE THE ARM'S LENGTH PRICE OF ANY INTERNATIONAL TRANSACTION BY APPLYING ANY ONE OF THE PRESCRIBED METHOD. HE SUBMITTED, THE TP PROV ISIONS HAVING BEEN BROUGHT INTO THE STATUE AS ANTI AVOIDANCE MEASURE H AVE TO BE APPLIED NOTWITHSTANDING THE OTHER PROVISIONS OF THE ACT. TH EREFORE, HE SUBMITTED, DETERMINATION OF ARM'S LENGTH PRICE UNDE R THE TP PROVISION WOULD NOT BE GOVERNED BY THE PROVISIONS OF DTAA. TH US, HE SUBMITTED, THE CONTENTION OF THE ASSESSEE THAT UNDER ARTICLE 1 1(1) OF THE INDIA MAURITIUS TAX TREATY INTEREST INCOME IS CHARGEABLE ONLY ON RECEIPT BASIS SHOULD NOT BE ACCEPTED. WITHOUT PREJUDICE, HE SUBMI TTED, THE SUBMISSIONS OF LEARNED SENIOR COUNSEL WITH REGARD T O APPLICABILITY OF DTAA IS TAKEN FOR THE FIRST TIME BEFORE THE TRIBUNA L AND WAS NEVER ARGUED BEFORE THE DEPARTMENTAL AUTHORITIES. THUS, H E SUBMITTED, IN THE EVENT THE AFORESAID CONTENTION OF THE ASSESSEE IS T O BE CONSIDERED, THE ISSUE HAS TO BE RESTORED BACK TO THE ASSESSING OFFI CER FOR FRESH ADJUDICATION. 6. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE HAVE ALSO EXAMINED CAREFULLY THE JUDI CIAL PRECEDENTS CITED BEFORE US. UNDISPUTEDLY, THE ASSESSEE IS A NO N RESIDENT COMPANY INCORPORATED IN MAURITIUS. UNCONTROVERTED FACTS ARE, THE ASSESSEE 10 GURGAON INVESTMENTS LTD THROUGH ONE OF ITS AES BASED IN MAURITIUS HAD INVES TED IN CCDS OF AN INDIAN COMPANY I.E. VCPL, WHEREIN, THE ASSESSEE IS ALSO STATED TO HAS SHAREHOLDING OF 26%. AS PER THE TERMS AND CONDITION S OF THE DEBENTURE THE ASSESSEE WAS SUPPOSED TO RECEIVE INTE REST @ 12% PER ANNUM. HOWEVER, CONSIDERING THE SLOWDOWN IN BUSINES S IN REAL ESTATE SECTOR WHEREIN VCPL IS ENGAGED, THE BOARD OF DIRECTO RS OF THE ASSESSEE COMPANY PASSED A RESOLUTION WAIVING THE IN TEREST ON CCDS. THOUGH, IT IS THE CASE OF THE ASSESSEE THAT SINCE N O INTEREST WAS RECEIVED ON CCDS IT CANNOT BE TAXED AT ITS HANDS EV EN BY WAY OF TP ADJUSTMENT, HOWEVER, THE REVENUE AUTHORITIES HAVE H ELD THAT SINCE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTI NG AND AS PER THE TERMS & CONDITIONS OF CCDS INTEREST @ 12% PER ANNUM IS PAYABLE TO THE ASSESSEE, INTEREST INCOME HAS ACCRUED TO THE AS SESSEE AND DETERMINATION OF ARM'S LENGTH PRICE OF INTEREST INC OME HAS TO BE MADE. IT IS DISCERNIBLE FROM THE FACTS ON RECORD, IN COUR SE OF PROCEEDINGS BEFORE DEPARTMENTAL AUTHORITIES IN A.Y. 200809 AND 201112 THE ASSESSEE HAD CHALLENGED THE TP ADJUSTMENT ON ACCOUN T OF INTEREST ON CCDS ON THE GROUND THAT NO INCOME HAS ACCRUED AT IT S HANDS DUE TO WAIVER OF INTEREST AND SUCH WAIVER OF INTEREST IS A T ARMS LENGTH CONSIDERING SIMILAR WAIVER MADE BY OTHER AE. HOWEVE R, IN COURSE OF APPEAL PROCEEDING FOR A.Y. 201213, FOR THE FIRST T IME ASSESSEE SUBMITTED THAT SINCE AS PER ARTICLE 11(1) OF INDIA MAURITIUS TAX TREATY 11 GURGAON INVESTMENTS LTD INTEREST INCOME IS CHARGEABLE ONLY ON ACTUAL PAYMEN T, NO TP ADJUSTMENT CAN BE MADE UNDER SECTION 92(1) OF THE A CT. OF COURSE, BEFORE US ALSO THE MAIN PLANK ON WHICH THE LEARNED SENIOR COUNSEL CONTESTED THE TP ADJUSTMENT IS ON THE BASIS OF APPL ICABILITY OF ARTICLE 11(1) OF THE INDIAMAURITIUS TREATY READ WITH SECTI ON 90 OF THE ACT. THE FACT THAT THE ASSESSEE HAS ACTUALLY NOT RECEIVED AN Y INTEREST INCOME ON THE CCDS HAS NOT BEEN DISPUTED BY THE REVENUE. THER EFORE, THE VALIDITY OF TP ADJUSTMENT ON ACCOUNT OF INTEREST ON DEBENTURES HAS TO BE EXAMINED KEEPING IN VIEW THE TREATY PROVISION. A RTICLE 11(1) OF THE INDIAMAURITIUS TREATY WHICH IS RELEVANT FOR OUR PU RPOSE READS AS UNDER: 1. INTEREST ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OTHER STATE. 7. THE LANGUAGE USED IN THE AFORESAID ARTICLE IS I NTEREST ARISING AND PAID. THEREFORE, WHAT IS CHARGEABLE TO TAX UNDER A RTICLE 11(1) OF THE TREATY IS THE INTEREST PAID TO THE RECIPIENT. THE EXPRESSION PAID AS USED IN ARTICLE 11(1) OF THE INDIAMAURITIUS TAX TR EATY HAS COME UP FOR JUDICIAL SCRUTINY AND INTERPRETATION IN VARIOUS CAS ES AS THE SAME TERM HAS BEEN USED IN VARIOUS OTHER TREATIES, THOUGH, IN SIMILAR AS WELL AS DIFFERENT CONTEXT. IN CASE OF DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) VS. M/S SIEMENS AKTIENGESELLSCHAFT, INCOME TAX APPEAL NO.124 OF 2010 DATED 22.10.2012 THE HONBLE BOMBAY HIGH COURT 12 GURGAON INVESTMENTS LTD WHILE INTERPRETING SIMILAR TERMINOLOGY USED IN ARTI CLE IIX-A OF INDIA- GERMANY DTAA WITH REFERENCE TO ROYALTY AND FEES FOR TECHNICAL SERVICES HELD THAT IT CAN BE TAXED ONLY ON RECEIPT BASIS. IN CASE OF JOHNSON & JOHNSON VS. ASSISTANT DIT 60 SOT 109, THE TERM PAID AS USED WITH REFERENCE TO ROYALTY IN ARTICLE 12(1) OF INDIAUS TAX TREATY WAS INTERPRETED BY THE TRIBUNAL TO MEAN THAT ROYALT Y IS TO BE TAXED ON PAID BASIS AND NOT ON ACCRUAL BASIS. IT IS RELEVANT TO OBSERVE, LIKE ARTICLE 11 OF INDIAMAURITIUS TAX TREATY, ARTICLE 1 1 OF INDIACYPRUS TAX TREATY IS IDENTICALLY WORDED. BY INTERPRETING THE SA ID ARTICLE IN CASE OF PRAMERICA ASPF II CYPRUS HOLDING LIMITED (SUPRA), T HE COORDINATE BENCH HELD, GOING BY THE TREATY PROVISION, THE INTER EST INCOME IS LIABLE TO BE TAXED ON PAYMENT/RECEIPT BASIS AND NOT ON ACC RUAL BASIS. THE AFORESAID DECISION OF THE COORDINATE BENCH WAS UPHEL D BY THE HONBLE JURISDICTIONAL HIGH COURT WHILE DECIDING REVENUES APPEAL IN INCOME TAX APPEAL NO. 1824 OF 2016. THUS, THE LOGICAL CONC LUSION WHICH EMERGES FROM THE RATIO LAID DOWN IN THE AFORESAID D ECISIONS IS, AS PER ARTICLE 11(1) OF THE INDIA-MAURITIUS TAX TREATY INT EREST INCOME CAN BE BROUGHT TO TAX ONLY ON FULFILLMENT OF TWIN CONDITIO NS OF ACCRUAL AS WELL AS ACTUAL RECEIPT. IT IS FAIRLY WELL SETTLED, AS PE R SECTION 90(1) OF THE ACT THE PROVISIONS OF DTAAS TO THE EXTENT BENEFICIA L TO THE ASSESSEE WOULD OVERRIDE THE PROVISIONS OF THE ACT. THUS, ONC E THE INTEREST INCOME IS NOT CHARGEABLE TO TAX ON ACCRUAL BASIS AS PER ARTICLE 11(1) OF 13 GURGAON INVESTMENTS LTD THE TAX TREATY, IT GOES OUT OF THE PURVIEW OF THE T OTAL INCOME CHARGEABLE TO TAX UNDER SECTION 4 OF THE ACT. NOW, IT IS JUDICIALLY SETTLED THAT CHAPTER X CONTAINING SECTION 92 AND OT HER PROVISIONS ARE IN THE NATURE OF MACHINERY PROVISIONS AND SUBJECT T O SECTION 4 OF THE ACT WHICH IS THE CHARGING PROVISION. IF A PARTICULA R ITEM OF INCOME DOES NOT COME WITHIN THE PURVIEW OF THE CHARGING PROVISI ON AS CONTAINED UNDER SECTION 4 OF THE ACT, THE MACHINERY PROVISION S AS CONTAINED UNDER CHAPTER X WOULD NOT BE APPLICABLE, THOUGH, TH EY MAY BE IN THE NATURE OF SPECIAL PROVISION. THEREFORE, AT THIS JUN CTURE IT IS NECESSARY TO EVALUATE THE INTERPLAY BETWEEN THE TREATY AND TP PROVISIONS. NO DOUBT, CHAPTER X CONTAINING THE TP PROVISIONS IS IN THE NATURE OF ANTI AVOIDANCE PROVISION TO PREVENT AVOIDANCE/EVASION OF TAX IN RELATION TO TRANSACTION BETWEEN RELATED PARTIES. HOWEVER, WHEN THE INCOME ITSELF IS NOT CHARGEABLE TO TAX BY VIRTUE OF THE PROVISION CONTAINED IN THE TAX TREATY, THERE IS NO OCCASION FOR ANY TAX AVOIDANCE/ EVASION. IN A RECENT DECISION IN CASE OF DCIT (INTERNATIONAL TAXATION) VS. M/S TMW ASPF I CYPRUS HOLDING COMPANY LIMITED, (SUPRA) , THE COORDINATE BENCH WHILE CONSIDERING IDENTICAL ISSUE OF TAXABILIT Y OF INTEREST INCOME ON ACCRUAL BASIS BY APPLYING TP PROVISIONS HAS HELD AS UNDER: 17. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO P ERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AND THE MATERIALS REFERRED TO BEFORE US. THE ASSESSEE IS A CYPRUS BAS ED COMPANY ENGAGED IN THE BUSINESS OF MAKING INVESTMENT IN REA L ESTATE SECTORS VIA FULLY CONVERTIBLE DEBENTURES. IT WAS DU E TO THESE INVESTMENTS IN THE INVESTEE COMPANIES THAT THEY ARE TREATED AS 14 GURGAON INVESTMENTS LTD ASSOCIATED ENTERPRISES AS PER THE PROVISIONS OF TP. AS PER THE AGREEMENT BETWEEN THE INVESTEE COMPANIES AND THE AS SESSEE, THE ASSESSEE WAS ENTITLED TO A COUPON RATE OF 4% AN D FURTHER POST THE CONVERSION OF FCCDS INTO EQUITY SHARES, TH E PROMOTERS OF THE INDIAN COMPANIES WOULD BUY BACK SHARES AT AN AGREED OPTION PRICE. THE OPTION PRICE WAS STIPULATED TO BE SUCH THAT THE INVESTOR GETS THE ORIGINAL INVESTMENT PAID ON SUBSC RIPTION TO THE FCCDS PLUS A RETURN OF 18% PER ANNUM. UNDISPUTEDLY , THE ASSESSEE HAS ONLY RECEIVED INTEREST INCOME OF RS. 6 0,46,895/- FROM ONE OF THE INVESTEE COMPANIES AND THAT TOO ONL Y FOR THE HALF OF THE YEAR. NO ACTUAL INTEREST OTHER THAN THI S AMOUNT HAS BEEN RECEIVED BY THE ASSESSEE FROM ANY OTHER INVEST EE COMPANIES. THE TPO HAS MADE THE ADJUSTMENT ON THE G ROUND THAT ASSESSEE WAS TO EARN AN ASSURED RETURN OF 18% AND ACCORDINGLY, DETERMINED THE ARMS LENGTH PRICE BY T AKING THE COUPON RATE TO BE 18% INSTEAD OF COUPON RATE OF 4%. 18. AS PER THE TERMS OF AGREEMENTS ENTERED BETWEEN THE ASSESSEE WITH THE INVESTEE COMPANIES THERE WERE THR EE SEPARATE AND INDEPENDENT EVENTS: I. SUBSCRIPTION TO FCCDS BEARING AN ANNUAL INTEREST OF 4%; II. CONVERSION OF FCCDS INTO EQUITY AT A CONVERSION PRICE ON THE COMPLETION OF THE SPECIFIED TERM OR AS MAY BE DETER MINED BY THE PARTIES; AND III. POST CONVERSION, SALE OF EQUITY SHARES TO THE PROMOTERS AT A CONSIDERATION PROVIDING ANNUALIZED 18%/19% RETURN O N INVESTMENT. THE LAST TWO OF THE EVENTS WERE FUTURISTIC AND CONT INGENT. THE SALE OF CONVERTED EQUITY SHARES TO THE PROMOTERS OF THE INVESTEE COMPANIES AS PER THE TERMS OF SHAREHOLDERS AGREEME NT PROVIDED AN OPTION TO THE ASSESSEE TO SELL ITS CONVERTED SHA RES TO THE PROMOTERS OF THE INVESTEE COMPANIES AT AN OPTION PR ICE THAT SHALL FETCH THE ASSESSEE A RETURN ON INVESTMENT OF 18%. I T HAS BEEN BROUGHT ON RECORD THAT INVESTEE COMPANIES HAVE REQU ESTED FOR THE WAIVER OF INTEREST DUE TO BAD FINANCIAL POSITIO N/CASH CRUNCH AND DELAYED PROJECT IN THE REAL ESTATE AND SUCH A R EQUEST HAS BEEN ACCEPTED BY THE ASSESSEE. PART OF THE FCCDS HE LD IN ONE OF THE INVESTEE COMPANY WAS SOLD TO A THIRD PARTY DURI NG THE YEAR AT A LOSS. THUS, NONE OF THE INVESTMENT BORE ANY PR EMIUM TO THE ASSESSEE ON SALE OF SECURITIES. THEY WERE EITHER SO LD AT A LOSS OR AT PAR TO THIRD PARTIES. THE DETAILS OF INVESTMENT MADE BY THE COMPANY IN FCCDS AND THE INTEREST RECEIVED AND FACT UM OF WAIVER OF INTEREST ARE REPRODUCED HEREUNDER:- 15 GURGAON INVESTMENTS LTD INVESTEE INITIAL DUE OF SUBSCRI BING OF FCCDS AMOUNT OF INVESTMENT CONVERSION OF DEBEN TURE DURING THE YEAR INTEREST RECEIVED DURING A.Y. 201112 FY 201011 01.04.2010 TO 31.3.2011 (IN `) WAIVER OF INTEREST DD HOUSING LTD. 16OCT 2006 146,82,00,000 NOT CONVERTED NIL WAIVER OF INTER- EST WITH EFFECT FROM SEP 16, 2008 (INCLUDING INTEREST FOR THE FULL SUBJECT YEAR) SUPREME BUILDCAP PVT. LTD. 22DEC 2006 75,00,00,000 CONVERTED ON 11MAY 2010 NIL WAIVER OF INTER EST WITH EFFECT FROM SEP 15, 2009 (INCLUDING INTER EST FOR 1 MONTH & 11 DAYS PERTAIN NING TO THE SUBJECT YEAR) RITESH SPINNING MILLS LTD. 16FEB 2007 30,00,00,000 NOT CONVERTED 60,46,895 (FOR HALF THE YEAR) WAIVER OF INTE REST WITH EFFECT FROM SEP 15, 2010 GRANTED ORALLY AS PER MUTUAL AGREE MENT (INCLUDING SECOND INSTALL MENT FOR THE SUBJECT YEAR) 60,46,895 19. ONE OF THE MAIN CONTENTION RAISED BEFORE US BY THE LD. COUNSEL THAT ASSESSEE BEING A NON RESIDENT AND CYPR US BASED COMPANY THEREFORE IT WAS ENTITLED TO THE BENEFIT OF INDIA CYPRUS DTAA ARTICLE 11(1) OF INDIA-CYPRUS DTAA READS AS UN DER :- INTEREST ARISING IN A CONTRACTING STATE AND PAID T O A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OT HER STATE. 20. THE AFORESAID PARA ENVISAGES THAT FOR TAXING TH E INTEREST INCOME IN THE HANDS OF A NON-RESIDENT, IT IS NECESS ARY THAT THE INTEREST SHOULD ARISE IN A CONTRACTING STATE, I.E., TWIN CONDITIONS OF ACCRUAL AS WELL AS THE PAYMENT ARE TO BE SATISFI ED. IF THERE IS NO ACCRUAL OR ACTUAL PAYMENT RECEIVED 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 SUPPOSED TO REC EIVE INTEREST OF 18%, IF THE CONTINGENT EVENT WOULD HAVE ARISEN, I.E., IF IN THE EVENT, THE OPTION WAS EXERCISED BY THE ASSESSEE TO SELL ITS CONVERTED SHARES TO THE PROMOTERS OF INVESTEE COMPA NY AT AN 16 GURGAON INVESTMENTS LTD OPTION PRICE THEN IT WOULD HAVE GIVEN THE RETURN OF 18%. THUS, ENTIRE EDIFICE OF THE TPO/AO WAS BASED ON FIXATION OF CONTINGENT EVENT WHICH ASSESSEE WAS SUPPOSED TO RECEIVE. IT IS ALSO MATTER OF RECORD NO SUCH CONVERSION WAS ACTUALISED AND ASS ESSEE REMAINED INVESTED EVEN DURING THE YEAR UNDER CONSID ERATION. THE TRANSFER PRICING ADJUSTMENT HAS BEEN MADE ON TH IS HYPOTHETICAL AMOUNT OF INTEREST RECEIVABLE. WHETHER SUCH NOTIONAL INCOME CAN BE BROUGHT TO TAX EVEN UNDER TH E TRANSFER PRICING PROVISION, HAS BEEN DEALT BY THE HONBLE BO MBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES (P) LT D. VS. UNION OF INDIA (SUPRA), WHEREIN THEIR LORDSHIPS HAVE HELD TH AT EVEN INCOME ARISING FROM INTERNATIONAL TRANSACTION MUST SATISFY THE TEST OF INCOME UNDER THE ACT AND MUST FIND ITS HOME IN ONE OF THE CHARGING PROVISIONS. HERE IN THIS CASE, NOWHERE THE TPO/AO HAS BEEN ABLE TO ESTABLISH THAT NOTIONAL INTEREST S ATISFY THE TEST OF INCOME ARISING OR RECEIVED UNDER THE CHARGING PR OVISION OF INCOME TAX ACT. IF INCOME IS NOT TAXABLE IN TERMS O F SECTION 4, THEN CHAPTER X CANNOT BE MADE APPLICABLE, BECAUSE S ECTION 92 PROVIDES FOR COMPUTING THE INCOME ARISING FROM INTE RNATIONAL TRANSACTIONS WITH REGARD TO THE ALP. ONLY THE INTER EST INCOME CHARGEABLE TO TAX CAN BE SUBJECT MATTER OF TRANSFER PRICING IN INDIA. MAKING ANY TRANSFER PRICING ADJUSTMENT ON IN TEREST WHICH HAS NEITHER BEEN RECEIVED NOR ACCRUED TO THE ASSESS EE CANNOT BE HELD TO BE CHARGEABLE IN TERMS OF THE INCOME TAX AC T READ WITH ARTICLE 11(1) OF DTAA. HERE IT CANNOT BE THE CASE O F ACCRUAL OF INTEREST ALSO, BECAUSE NONE OF THE INVESTEE COMPANI ES HAVE ACKNOWLEDGE THAT ANY INTEREST PAYMENT IS DUE, ALBEI T THEY HAVE BEEN REQUESTING FOR WAIVING OF INTEREST OF EVEN COU PON RATE OF 4%, LEAVE ALONE THE RETURN OF 18% WHICH WAS DEPENDE NT UPON SOME FUTURE CONTINGENCIES. ASSESSEE DESPITE ALL ITS EFFORTS HAS ACCEDED TO SUCH REQUEST. FURTHER, IN THE INDIA CYPR US DTAA WHEREIN SIMILAR PHRASE HAS BEEN USED PERTAINING TO FTS AND ROYALTY IN INDIA CYPRUS DTAA, HONBLE BOMBAY HIGH C OURT HELD THAT ASSESSMENT OF ROYALTY OR FTS SHOULD BE MADE IN THE YEAR IN WHICH AMOUNT HAVE ACTUALLY RECEIVED AND NOT OTHERWI SE. THE COORDINATE BENCH OF MUMBAI ITAT IN THE CASE OF PRAM ERICA ASPF II CYPRUS HOLDING LTD. VS. DCIT (SUPRA) ON EXACTLY SIMILAR SET OF FACTS, ADDITION ON ACCOUNT OF NOTIONAL INTEREST WAS MADE; THE TRIBUNAL HAS HELD THAT THE INTEREST INCOME IN QUEST ION CAN ONLY BE TAXED ONPAYMENT /RECEIPT BASIS. THE RELEVANT OBS ERVATION HAS ALREADY BEEN INCORPORATED ABOVE. THE HONBLE BOMBAY HIGH COURT HAS CONFIRMED THE SAID FINDING. SIMILAR VIEW HAS BEEN TAKEN BY THE ITAT CHENNAI BENCH IN THE CASE OF DCIT VS. INZI CONTROL INDIA LIMITED (SUPRA). THUS, IN VIEW OF ART ICLE 11(1) WE HOLD THAT, ONLY THE INTEREST WHICH HAS ACTUALLY BEE N RECEIVED CAN ONLY BE SUBJECT MATTER OF TAXATION AND NO TP ADJUST MENT CAN BE MADE ON SOME HYPOTHETICAL RECEIVABLE AMOUNT WHICH W AS CONTINGENT UPON CERTAIN EVENT WHICH HAS ACTUALLY NO T BEEN TAKEN 17 GURGAON INVESTMENTS LTD PLACE DURING THE YEAR. THUS, THE ORDER OF THE DIREC TION OF THE DRP IS UPHELD AND THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 8. THE AFORESAID DECISION OF THE COORDINATE BENCH SQUARELY APPLIES TO THE ASSESSEES CASE, SINCE, NOT ONLY THE FACTS I NVOLVED ARE MORE OR LESS COMMON BUT THE RELEVANT PROVISIONS OF THE APPL ICABLE DTAAS I.E. ARTICLE 11(1) OF BOTH INDIAMAURITIUS AND INDIACYP RUS TREATIES ARE IDENTICALLY WORDED. NO CONTRARY DECISION HAS BEEN B ROUGHT TO OUR NOTICE BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. EVEN, THE REVENUE IS UNABLE TO PROVE THAT INTEREST ON CCDS WAS ACTUAL LY RECEIVED BY THE ASSESSEE. THEREFORE, FOLLOWING THE JUDICIAL PRECEDE NTS REFERRED TO ABOVE WE HOLD THAT THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IS UNSUSTAINABLE AS THE ASSESSEE HAS ACT UALLY NOT RECEIVED ANY INTEREST INCOME, HENCE, WOULD BE PROTECTED BY A RTICLE 11(1) OF INDIAMAURITIUS TAX TREATY. SINCE, THE TREATY PROVI SION IS MORE BENEFICIAL TO THE ASSESSEE AS PER SECTION 90(1) OF THE ACT, IT WILL OVERRIDE ALL OTHER PROVISIONS OF THE ACT. ADDITIONS MADE ARE DELETED. IN VIEW OF OUR DECISION HEREINABOVE, VARIOUS OTHER GRO UNDS RAISED BY THE ASSESSEE CONTESTING THE TP ADJUSTMENT HAVING BECOME ACADEMIC ARE NOT REQUIRED TO BE ADJUDICATED. HOWEVER, THE ISSUES RAISED THEREIN ARE KEPT OPEN FOR ADJUDICATION IF THEY ARISE IN ANY OTH ER ASSESSMENT YEAR IN FUTURE. THE GROUNDS RAISED BY THE ASSESSEE CHALL ENGING LEVY OF INTEREST BEING CONSEQUENTIAL IN NATURE DO NOT REQUI RE ADJUDICATION. 18 GURGAON INVESTMENTS LTD IN THE RESULT, APPEALS ARE ALLOWED AS INDICATED ABO VE. ORDER PRONOUNCED IN THE OPEN COURT ON 15.11.2019 SD/ - N.K.PRADHAN ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 15.11.2019 COPY OF THE ORDER FORWARDED TO : (1) THE ASSESSEE; (2) THE REVENUE; (3) THE CIT(A); (4) THE CIT, MUMBAI CITY CONCERNED; (5) THE DR, ITAT, MUMBAI; (6) GUARD FILE. TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY ASSISTANT REGISTRAR ITAT, MUMBAI