TMI Blog2018 (8) TMI 1192X X X X Extracts X X X X X X X X Extracts X X X X ..... st the assessee. Regarding benchmarking the transaction - Held that:- 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. - 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. - ITA No. 1548/Kol/2009, ITA No. 1549/Kol/2009 And ITA No. 2058/Kol/2010 - - - Dated:- 3-8-2018 - Sri J. Sudhakar Reddy, Accountant Member And Sri Aby T. Varkey, Judicial Member For The Assessee : Shri Sachit Jolly, Advocate, appeared For The Revenue : Shri G. Mallikarjuna, CIT, D/R. 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 no s ITA No. 1548 1549/Kol/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 Hon ble 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 add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Arm s 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions 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. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;. 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. 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. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 Hon ble 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axed is a Transfer Pricing adjustment which is permitted under Article 9 which talks about 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . D/R, relies on the judgment of the Hon ble Bombay High Court in the case of TATA Autocomps Systems Ltd. (supra). The assessee on the other hand relies on the decision of the Hon ble 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 Hon ble 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 sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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