TMI Blog2019 (8) TMI 1430X X X X Extracts X X X X X X X X Extracts X X X X ..... stment paid on subscription to the FCCD s plus a return of 18% per annum. Undisputedly, the assessee has only received interest income of ₹ 60,46,895/- from one of the investee companies and that too only for the half of the year. No actual interest other than this amount has been received by the assessee from any other investee companies. The TPO has made the adjustment on the ground that assessee was to earn an assured return of 18% and accordingly, determined the arm s length price by taking the coupon rate to be 18% instead of coupon rate of 4%. Nowhere the TPO/AO has been able to establish that notional interest satisfy the test of income arising or received under the charging provision of Income Tax Act. If income is not taxable in terms of section 4, then chapter X cannot be made applicable, because section 92 provides for computing the income arising from international transactions with regard to the ALP. Only the interest income chargeable to tax can be subject matter of transfer pricing in India. Making any transfer pricing adjustment on interest which has neither been received nor accrued to the assessee cannot be held to be chargeable in terms of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) Whether on the facts and in the circumstances of the case, the DRP erred in not considering that the Hon'ble Mumbai High Court in the decision dated 09.07.2012 in ITA No 1026 of 2011 in the case of DIT Vs Credit Suisse First Boston (Cyprus) Ltd while examining the Article 11(1) 11(2) of the Indo Cyprus Treaty held that interest can be said to have accrued on the date on which it was due as per the terms and conditions of the security (iv) Whether on the facts and in the circumstances of the case, the DRP erred in not considering that under Article 11(1) of the Indo Cyprus DTAA the taxability is of 'interest arising' in a contracting state which is paid to the resident of other contracting state thus laying emphasis on the accrual of interest in a contracting state and the word 'paid' does not necessarily mean actual payment of the interest as also held by the United State Tax Court in Central De Gas Chihuahua Vs Commissioner 102 TC515 (1994) and in Case De La Jolla Park, Inc Vs Commissioner 94TC384(1990). (v) Whether on the facts and in the circumstances of the case, the DRP erred in deleting the addition of Interest income made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be taken as per the principles of arm's length price. (x) The appellant prays for leave to add, amend, modify or alter any grounds of appeal at the time of or before the hearing of the appeal. 2. The cross objections are in support of the directions given by the DRP. 3. The facts in brief are that TMW ASPF CYPRUS (hereinafter referred to as 'assessee') is a private limited company incorporated in Cyprus and is engaged in the business of making investments in the real estate sector. The company in the year 2008 had made investments in independent third-party companies in India (hereinafter collectively known as 'investee companies') engaged in real estate development vide fully convertible debentures (FCCDs). It was these investments that made the investee companies an associated enterprise of the assessee as per TP provisions. The assessee has also placed before us copy of the agreements concluded between the investee companies and the TMW ASPF. As per the aforesaid agreements, the assessee was entitled to a coupon rate of 4%. Further, post the conversion of the FCCDs into equity shares, the promoter of Indian Companies would buy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee submitted that Ld. TPO has erred in misconstruing the facts of the case, by not appreciating that as per the terms 'of the agreements entered between the Assessee with the investee companies, there are three 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 determined by the parties; and III. Post conversion, sale of equity shares to the promoters at a consideration providing annualized 18%/19% return on investment. 5.2 The assessee submitted that the latter two events were future and contingent. The second event, i.e. conversion of FCCDs into equity shares: - is an independent future event and the debenture subscription agreement clearly provides the conversion mechanism, i.e., the number of equity shares and percentage of equity share capital to be issued to the Assessee on conversion. - Said debenture subscription agreement specifies that the Conversion ratio would be in accordance with the guidelines issued by Controller of Capital Issues (Reserve Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a non-resident, it is necessary that such an income must be 'paid' and notional or accrued interest income cannot be brought under the purview of Article 11 of the DTAA. Reliance is placed on following case laws: DIT v. Siemens Aktiengesellschaft (Born HC) (ITA no.124 of 2010) CSC Technology Singapore Pte. Ltd. v. ADIT [2012] 19 taxmann.com 123 (Delhi ITAT) DCIT v. UhdeGmbh [1996] 54 TTJ 355 (Mum ITAT) National Organic Chemical Industries Ltd. v. DCIT [2006] 5 SOT 317 (Mum ITAT) Johnson Johnson v. ADIT [2013J 32 taxmann.com 102 (Mum ITAT) 5.6 The assessee further contended that TPO erred in benchmarking the ALP of interest with that of loan without appreciating that the investments made by assessee are akin to equity and not to loan. It should be noted that ASPF I was incorporated for the purposes of investing in real estate companies. It has been clearly drawn in the agreements that it subscribed the FCCDs as an investor and not as a lender and therefore, getting its stake capitalized in the Indian companies is its objective rather than earning interest on debentures. The FCCDs are not to be repaid but retained b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee when it has not been claimed by the Indian payer to have accrued/ arisen or paid in favour of the assessee shall lead to unintended consequences of erosion of tax base as such interest expenses shall be tax deductible in hands of Indian company which are subject to tax @30% whereas it shall be taxable in hands of recipient assessee @1 0% as DTAA. TP provisions are not intended to be applicable under such circumstances. 6.4 In view of above discussion, the panel is of considered view that TP adjustment is not called for in the present case. The AO/TPO is directed accordingly, Objections are allowed. 7. Aggrieved by the aforesaid finding the Revenue department has filed an appeal before us. 8. After drawing our attention, the relevant observation made by the TPO, Ld. CIT DR submitted that here in this case the assessee has incurred losses due to non receipt of interest and consequent to that it had to sell its investment to other 3rd parties on a loss. No independent entity in the market shall invest its resources in such high risk and if such investment is made which carries maximum risk then same has to be compensated at a higher value and her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, if the twin conditions are not satisfied, the taxability of such interest in the hands of a non-resident under Article 11 of DTAA does not arise. 10. In support of the aforesaid contentions the Ld. Counsel first relied upon the decision of the coordinate Mumbai bench in the case of DDIT v. Siemens Aktiengesellschaft (2009) taxmann.com 1019 (Mumbai - Trib.) wherein the tribunal while deciding the issue whether the commissioner of income tax (appeals) was correct in directing the AO to tax royalty income on accrual basis had held that the royalty and fees for technical services should be taxed in the hands of the assessee on receipt basis. The Ld. Counsel submitted that the Article pertaining to Royalty was similarly worded as the Article pertaining to interest in the India-Cyprus DTAA. He also brought to our notice that the aforesaid decision of the ITAT stood approved by the Hon'ble Bombay High in the case of DIT v. Siemens Aktiengesellschaft (ITA124 of 2010), wherein Hon'ble Bombay High Court observed and held as under: The Income Tax Appellate Tribunal referring to para-I to 3 under Article IIX-A of the Double Taxation Avoidance Treaty with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee on cash basis whereas the A. O. has made additions on the ground that interest income was liable to be assessed on accrual basis ? . The Hon'ble Bombay High Court dismissed the appeal filed by the revenue department and held that followed its earlier decision in Siemens (Supra) to hold that taxability in a case where the article is worded in the aforesaid manner, taxability can only be fastened on receipt of payment. Relevant Paragraph has been reproduced: 8. Thus, while interpreting similar clause of Indo-German DTAA in relation to taxing royalty or fees for technical services, this Court had confirmed the decision of tribunal holding that such service can be taxed only on receipt. This decision was later on followed in Income Tax Appeal No. 1033/11 dated 20/11/2012 and thereafter in Income Tax Appeal No.2356/ 11 and connected Appeals vide the order dated 07/03/2013. 9. On the same principle, the Appeal is dismissed. 12. The Ld. Counsel then proceeded to submit that the issue can also be examined from the angle of the TDS provisions. It was submitted that the Hon ble Supreme Court in the case of GE Technology Centre (P.) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view taken by a series of decisions by the coordinate benches, including the decision in the case National Organic Chemical Industries Ltd [(2005) 96 TTJ 765 (Mum)], with which we are in respectful agreement. When the royalty so credited by the assessee is not taxable at the time of credit of such amount to the account of payee, in the light of law laid down by Hon'ble Supreme Court in the case of GE Information Technology (supra), it does not give rise to any tax withholding obligations under section 195 (1) either. 13. It was accordingly argued that when the income is not taxable in terms of Section 4 of the Act, then chapter X cannot become applicable at all. Section 92 of the Act provides for computing the 'income' arising from an 'international transaction' with reference to the ALP. Therefore, only the interest income chargeable to tax can be subject to transfer pricing in India. Accordingly, by imposing transfer pricing adjustment on interest which, is not chargeable in terms of the Act read with DTAA the TPO has sought to assess notional income and has thus exceeded its jurisdictional powers. Reliance in this regard was placed on the Bombay Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 112. Relevant Para is reproduced below: First contention of the ld. Departmental Representative is that term paid used in clause (1) will include payable amount also. To buttress this argument) reliance has been placed on the judgment of Hon'ble Apex Court in the case of Palam Gas Service (supra). Said case concerned interpretation of Section 40(a)(ia) of the Act where the :- 9 -: ITA No. 1820/CHNY /2015 word payable occurred and the word paid was not mentioned. Their lordships held that word ''payable'' appearing in Section 4o(a)(ia) of the Act would include paid amount also. In our opinion, this judgment would not aid the Revenue in interpreting, the word ''paid' as appearing clause (1) of Article 13 of the DTAA. Terms used in treaties are not to interpreted in the manner which terms are used in a legislative edict in the form of a statute or law. Hon'ble Apex Court had noted as under in its judgment in the case of UOI vs. Azadi Bachao Andolan (2006) 263 ITR 706, which. throws light on the manner which a treaty is to be interpreted. 15. Lastly, the Ld. AR brought to the attention of this Bench that the benchmark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration providing annualized 18%/19% return on investment. The last two of the events were futuristic and contingent. The sale of converted equity shares to the promoters of the investee companies as per the terms of shareholder s agreement provided an option to the assessee to sell its converted shares to the promoters of the investee companies at an option price that shall fetch the assessee a return on investment of 18%. It has been brought on record that investee companies have requested for the waiver of interest due to bad financial position/cash crunch and delayed project in the real estate and such a request has been accepted by the assessee. Part of the FCCDs held in one of the investee company was sold to a third party during the year at a loss. Thus, none of the investment bore any premium to the assessee on sale of securities. They were either sold at a loss or at par to third parties. The details of investment made by the company in FCCDs and the interest received and factum of waiver of interest are reproduced hereunder:- Investee Initial date of subscribing to FCCDs Amount of investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of investee company at an 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 assessee remained invested even during the year under consideration. The transfer pricing adjustment has been made on this hypothetical amount of interest receivable. Whether such notional income can be brought to tax even under the transfer pricing provision, has been dealt by the Hon ble Bombay High Court in the case of Vodafone India Services (P) Ltd. vs. Union of India (supra), wherein their Lordships have held that 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 satisfy the test of income arising or received under the charging provision of Income Tax Act. If income is not taxable in terms of section 4, then chapter X cannot be made applicable, because section 92 provides for computing the income arising from international t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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