TMI Blog2020 (12) TMI 1192X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee had not paid any interest. Since no interest was paid or claimed as expenditure, the provisions of section 195 of the Act cannot be applied. As decided in the case of CIT vs. Kalyani Steels Ltd [ 2018 (5) TMI 152 - KARNATAKA HIGH COURT] wherein it was held that if there is no income embedded in a payment there is no tax deductible at source. In the case of the assessee neither any interest is paid nor provided for in the books as payable. Further, an amount which will not be included in the total income of a person cannot be considered as income for the purpose of deduction of tax at source at all. The purpose of deduction of tax at source is not to collect a sum which is not a tax levied under the Act, it is to facilitate the collection of tax lawfully leviable under the Act. For the aforesaid reasons, we hold that the liability to deduct tax did not arise in the year under consideration. Whether the order passed u/s. 201(1) and 201(1A) of the Act for the assessment year 2011-12, was barred by limitation? - In the instant case, the financial year concerned is 2010-11 and notice for initiating proceedings u/s. 201(1)/201(1A) was issued on 19.03.2018. The order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny was required to pay interest for the FY 2010-11 and hence the expenditure has accrued for the assessee (as per the agreement) and hence the liability to deduct also has accrued in FY 2010-11. Just because the payment/credit was not paid till 31.03.2011, this does not absolve the assessee's responsibility of deducting the taxes on interest accrued which was to be paid. 3. The Ld. CIT(A) erred in considering that the assessee has not claimed any such interest expenditure for the FY 2010-11. Whether the assessee claims the expenditure or not, the interest to be paid has accrued and TDS should have been deducted. In fact, the assessee has discharged the interest liability which has accrued in an indirect way by entering into an arrangement which also resulted in evasion of taxes. 4. The Ld. CIT(A) erred in considering that the assessee company indirectly discharged the interest liability to the investors by giving them the equity share at discounted price of ₹ 43/- per share less than as agreed in the original subscription agreement and this differential price was comparable with the actual interest. This means though the assessee company did not outrightly pay t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cross objection: 1. The order of the learned Commissioner of Income Tax(Appeals) is opposed to the facts of the case and applicability of provision of section 201(1) of the Act for the A.Y. 2011-12 for non residents. 2. The CIT(A) has erred in ignoring the position of law that, the order passed by the Assessing Officer under the provisions of section 201(1) and 201(1A) of the Act for the F.Y. 2010-11 relevant to A.Y. 2011-12 on 31.03.2018 is barred by limitation and hence deserves to be annulled. 3. The CIT(A) after having given a finding that the time limit for passing the order under the provisions of section 201(1) of the Act from 01.10.2014 is not applicable to non residents, should have considered ratios laid down in various decisions wherein the High Courts/Supreme Court have held certain time limits as reasonable and should have held that the order passed by the Assessing Officer is barred by limitation and hence, deserves to be annulled. 4. The CIT(A) has erred in ignoring the ratio laid down by the Supreme Court in the case of State of Punjab vs. Bhatinda Co-op Milk Producers' Union Ltd. (2007) 11 SCC 363 wherein it is held that action must be initi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the I.T. Act on 21/09/2017 in the case of M/s. Coffee Day Enterprises Limited, M/s. Coffee Day Global Limited and Shri V.G. Siddhartha. It was noticed that M/s. Coffee Day Enterprises Ltd. (earlier Coffee Day Resort Pvt. Ltd.) had entered into subscription agreement with a Cyprus based company, M/s. Arduino Holding Limited with another Mauritius LLC on 27th March, 2010. As per the provisions of the agreement, the Cyprus company M/s. Arduino Holdings Limited had invested an amount of ₹ 3,59,98,23,200/- in the form of Compulsorily Convertible Debentures (CCDs) in M/s. Coffee Day Enterprises Ltd. Further, M/s. NSR PE, Mauritius LLC had invested ₹ 1,76,800/- being the investments in equity shares. Thus. the total investment amounted to ₹ 3,60,00,00,000/-. The investor, M/s. Arduino Holdings Limited was entitled to receive coupon on an annual basis at the rate of 7% per annum for a period of 2 years from the date of issue and 3 months LIBOR plus 600 basis points per annum for a period of 3 years from the completion of the 2 year period. Further, it was noticed that the agreement also mentioned that the coupon will be payable on 30th April of each year. 4.1. Furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order u/s. 201 201(1A) of the I.T. Act dated 31/03/2018 was passed. 4.3. According to the Assessing Officer, the assessee had submitted the following additional evidences before CIT(A): (i) first amendment agreement dated 01.07.2011: The agreement was entered into on 01.07.2011, wherein the following clause was introduced in place of the earlier clause in regard to coupon payment: The coupon will be payable on an yearly basis on April 30th of each year and paid on or before 7th May of each year(the coupon payment date). The first coupon payment date shall be April, 30th, 2013. The assessee submitted that for FY 2010-11 initially it was agreed that, interest would be paid on 30/04/2011, however with the amendment agreement which was entered into on 01.07.2011, the interest payment was on 30.04.2013 thereby the interests for FY 2010-11 and FY 2011-12 were waived. (ii) Addedum to subscription agreement dated 08/05/2015: in this agreement it is stated that, the clauses in regard to the coupon payment are cancelled. The relevant clause 1 reads as follows: The parties agree that the coupon is payable on the investor 3 CCDs for the term which shall be deeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the Transaction Documents: 1. DEFINITIONS Capitalized terms used but not defined in this Schedule V shall have the same meaning as ascribed to such terms in the Transaction Documents. 2. INVESTOR 3 CCDs 2.1 Face Value: The face value of each Investor 3 CCD shall be INR 100/- (Indian Rupees One Hundred). 2.2 Investor 3 CCDs shall be Indian Rupee denominated compulsorily convertible debentures issued by the Company. 2.3 Rank: The Investor 3 CCDs will rank pari passu among themselves and on liquidation will rank pari passu with any Securities issued as part of the Current Financing Round, without any preference of one over the other by reason of priority of the date of issue or currency of payment or otherwise. The Equity Shares allotted on conversion of Investor 3 CCDs in terms here of shall be subject to the provisions of the Amended Company Charter Documents and shall rank pari passu in all respects with the then existing Equity Shares of the Company. 2.4 Term: Investor 3 CCDs shall have a term of 7 (seven) years, commencing from the date on which the Investor 3 CCDs are issued and allotted to Investor 3, unless mutually extended for a term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Subscription Shares at a pre-money equity value equal to the equity valuation of the Company determined for external placement of minimum of USD 50 Million which has been completed successfully within 6 months prior to Coupon Payments. Date: Provided however, if no such placement has occurred, then the Investor 3 shall invest at a pre-money equity value which is the higher of- (j) the fair market value of such Equity Shares as determined by an independent reputed and internationally recognized merchant banker 4.6. Thus, the Assessing Officer found that the amendment agreement does not actually deal with the waiver of interest in any of the clauses. Hence, the Assessing Officer found that the assessee's claim that vide first amendment agreement, the interest for FYs 2010-11 and 2011-12 was waived off was wrong on facts itself. Therefore, the Assessing Officer held that even though the assessee did not make any payment during the A.Y. 2011-12, the interest income accrued in the hands of the foreign entity for which the assessee company was liable to deduct TDS u/s. 195 on accrual basis. 4.7. Further, according to the Assessing Officer, the assessee submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conversion of CCDs. 4.8. In view of the above, the Assessing Officer concluded that the additional details furnished by the assessee before the CIT(A) is clearly an imitation of its tax evasion arrangement. The assessee had failed to produce any of the relevant details during the course of the proceedings under section 201, even after giving sufficient opportunity in contention of its claim. 5. On appeal, with regard to limitation, the CIT(A) observed that for the year under consideration, as the law stood then, no period of limitation, was prescribed under section 201 for exercise of power thereunder. According to the CIT(A), the assessee also does not dispute the fact that there was no other provision, wherein limitation for exercise of power under section 201 was expressly provided till sub-section 3 to section 201 was inserted vide Finance Act (No. 2) Act, 2009 w.e.f. 1.4.2010, applicable from A.Y. 2011-12. It has only relied on various judicial pronouncements for the proposition that if no period of time is prescribed for exercise of such power, then it can only be exercised within a reasonable time and not beyond that. The CIT(A) observed that a search action u/s. 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duino Holdings Limited. Further, the CIT(A) observed that in view of the waiver of the interest and the benefit having accrued to the assessee company, the assessee voluntarily agreed to offer the benefit accrued (i.e. 7% of the amount of investment) which implied that the amount was not treated as chargeable to tax in the hands of the non-resident entity. For the aforesaid reasons, the CIT(A) held that the liability to deduct tax did not arise in the year under consideration. 6. On merits, the Department is in appeal before us and on the issue of limitation, the assessee has filed Cross Objection. 7. The Ld. DR submitted that an order u/s. 201(1) and 201(1A) of the I.T. Act was passed in the case of the assessee for interest accrued/paid to the non resident entity subsequent to the search and seizure u/s. 132 of the I.T. Act on 21/09/2017 in the case of M/s. Coffee Day Enterprises Limited, M/s. Coffee Day Global Limited and Shri V.G. Siddhartha. The Ld. DR submitted that M/s. Coffee Day Enterprises Ltd. (earlier Coffee Day Resort Pvt. Ltd.) had entered into subscription agreement with a Cyprus based company, M/s. Arduino Holding Limited with another Mauritius LLC on 27th Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer is between two foreign entities and the basis of valuation is not known. According to the Ld. DR the old DTAA between India and Cyprus, as in paragraph 2 of Article 11 of the agreement, the withholding tax for the payment of interest be deducted by the source country. In view of all the above, the Ld. DR submitted that it was evident that in order to avoid the deduction of withholding taxes in the form of TDS on the payment of interest, the assessee company claimed having received a waiver agreement. However, it was noticed that no waiver agreement copy was submitted to the company, M/s. Arduino Holdings Limited. According to the Ld. DR, the assessee company ought to have deducted the TDS u/s. 195 of the I.T. Act for this transaction as the income was accrued in the hands of M/s. Arduino Holdings Limited also. For the non deduction of TDS, the Ld. DR submitted that the assessee is in default and thus, the order u/s. 201 201(1A) of the I.T. Act dated 31/03/2018 was passed. 7.3. The Ld. DR stated that assessee had submitted the following additional evidences before CIT(A): (i) first amendment agreement dated 01.07.2011: The agreement was entered into on 01.07.2011, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the investor has an option to invest the entire coupon (interest) each year for acquiring additional equity shares. Clause 3.3.1 of Schedule V shall stand amended to read as follows: Investor 3 has an option to invest the entire coupon (excluding gross-ups) each year for acquiring by way of subscription, additional Equity shares (Collectively called the investor 3 subsequent Subscription Shares). Schedule 5 reads as follows: TERMS AND CONDITIONS OF INVESTOR 3 CCDs The compulsorily convertible debentures to be issued and allotted to the investor pursuant to the Agreement by the Company shall be called Investor 3 CCD shall be subject to the terms and conditions contained herein. The terms and conditions set out in this Schedule shall be (i) endorsed on the reverse of the certificate representing the Investor 3 CCDs along with a reference to this Schedule and the Transaction Documents: 1. DEFINITIONS Capitalized terms used but not defined in this Schedule V shall have the same meaning as ascribed to such terms in the Transaction Documents. 2. INVESTOR 3 CCDs 2.1 Face Value: The face value of each Investor 3 CCD shall be INR 100/- (In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, additional Equity Shares (collectively called the Investor 3 Subsequent Subscription Shares ) as below: 3.3.1.1 Reinvestment of Fixed Coupon: Each holder of Investor 3 CCDs shall reinvest in the Company the entire Fixed Coupon in the manner set out below: (a) After the first Coupon Payment Date but before May 15th 2011 for the first year at pre money equity value equal to investor 3 Post-Money Company Equity Valuation. (b) After the Coupon Payment Date but before May 15th 2012 for the second year at pre money equity value equal to investor 3 Post-Money Company Equity Valuation plus Coupon paid as per 3.3.1.1(a) above. 3.3.1.2 Reinvestment of Floating Coupon: After each Coupon Payment Date and within 15 days of the Coupon Payment Date, Investor 3 shall have the right to acquire, by way of subscription, every year such number of additional Investor 3 Subsequent Subscription Shares at a pre-money equity value equal to the equity valuation of the Company determined for external placement of minimum of USD 50 Million which has been completed successfully within 6 months prior to Coupon Payments. Date: Provided however, if no such placement has occurred, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned table, that should have been paid over the previous years. 18. From the above analysis and from the perusal of the terms and conditions of the subscription agreement, it may be opined that the company M/s. Coffee Day Enterprises Limited should have deducted TDS u/s. 195 of the Income Tax Act, 1961 for the payment of interest to M/s. Arduino Holdings Limited. However, the company has not deducted the TDS even though the interest payment is accrued in the hands of M/s. Arduino Holdings Ltd. as per the provisions of the agreement. Instead it claims to have received a waiver of interest from M/s. Arduino Holdings Limited even though no such agreements have been produced during the course of proceedings. On the other hand interest accrued on the CCDs is compensated by way of reduction in the rate of price of equity shares allotted to M/s. NLS Mauritius LLC on conversion of CCDs. 7.8. In view of the above, the Ld. DR concluded that the additional details furnished by the assessee before the CIT(A) is clearly an imitation of its tax evasion arrangement and the assessee had failed to produce any of the relevant details during the course of the 201 proceedings, even after g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 118,02,00,000/- 8.2. Thus, the Ld. AR submitted that the Assessing Officer considered the alleged interest payable at ₹ 25,20,00,000/- for the A.Y. 2011-12 which was deleted by the CIT(A). However, it was submitted that the Department had not initiated any action u/s. 201(1) 201(1A) of the I.T. Act or passed any order or raised any demand for the A.Ys. 2012-13 to 2015-16 after considering the order of the CIT(A) for the A.Y. 2011-12. It was submitted that since the Department refrained itself from raising demand for the A.Ys. 2012-13 to 2015-16, the question of any demand for A.Y. 2011-12 does not arise and hence, the appeal cannot sustain. 8.3. The Ld. AR submitted that during the course of search proceedings, the search party had taken a declaration of the interest waiver as income of the assessee as per the statement recorded u/s. 132(4) of the I.T. Act from Shri V.G. Siddhartha, M.D. of the assessee company. It was submitted that since the interest was not claimed as expenditure in the books, the event of waiver of such interest does not result in any income and hence, the assessee retracted on the statement recorded and the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his event cannot have a bearing on the transaction for the A.Y. 2011-12. 8.6. Regarding non deduction of tax at source on interest paid during the F.Y. 2010-11 relevant to A.Y. 2011-12, the Ld. AR submitted that there was no interest claimed in the books for the FY 2010-11 since the said interest was waived by debenture holder and once the interest is waived and no provision made in the books and also in the absence of any such claim as expenditure, the provisions of section 195 of the Act are not attracted and hence, there was no tax deductible at source. Hence, it was submitted that in the absence of any default as contemplated u/s. 195 of the Act, there could not have been any demand u/s. 201(1) and 201(1A) of the Act for A.Y. 2011-12. 8.7. The Ld. AR submitted that the compulsorily convertible debentures were converted to equity shares during the F.Y. 2015-16 relevant to A.Y. 2016-17. Regarding the issue of interest payable for A.Ys. 2011-12 to 2015-16 that they were compensated by allotting equity shares at a discounted price, it was submitted that this issue was considered by the auditor appointed u/s. 142(2A) of the Act by the Department and the Assessing Officer durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t cannot be applied. 8.9. The Ld. AR relied on the judgment of the Karnataka High Court in the case of Karnataka Power Corporation Ltd. vs. DCIT(TDS) (ITA No. 750 758-759/2009 wherein it was held that even if a provision is made in the books, no taxes would be deductible at source, if the provision is reversed and no payment made. It was submitted that in the case of the assessee even the provision itself was not made. Thus, it was submitted that in view of the above judgment of the Karnataka High Court, the issue of tax deduction does not arise. 8.9.1. The Ld. AR relied on the decision of the ITAT, Mumbai in the case of National Organic Chemical Industry vs. DCIT 5 SOT 317 (Mum) wherein it was held that the expressed paid used in DTAA is to be interpreted as intended to be taxed on paid basis and not on accrual basis and on the same analogy since the transaction which is subject matter of the present appeal is covered by India Cyprus Double Taxation Avoidance Agreement, the issue of deduction of tax at source on accrual basis does not arise for the reason that interest was not paid and not provided in the books also. 8.9.2. The Ld. AR also relied on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest payable was eventually waived, therefore, the assessee had not paid any interest. Since no interest was paid or claimed as expenditure, the provisions of section 195 of the Act cannot be applied. 9.2. Reliance is placed on the judgment of the Karnataka High Court in the case of Karnataka Power Transmission Corporation Ltd. vs. DCIT(TDS) (ITA No. 750 758-759/2009 wherein it was held that when interest has not been paid to the payee and the provision of the same has been reversed in the books of accounts, there would be no liability to deduct tax as no income has accrued in the hands of the payee. Since interest is not considered to be an income of the payee, Section 194A(1) of the Income-tax Act, 1961 (the Act) is not applicable. Thus, even if a provision is made in the books, no taxes would be deductible at source, if the provision is reversed and no payment made. The Karnataka High Court referred to the Delhi High Court's decision where it was held that mere passing of book entries, which have subsequently been reversed, would not give rise to an obligation to deduct tax at source, since there is no debt acknowledged by the taxpayer. No income had accrued, arisen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. The Ld. AR submitted that various High Courts/Supreme Court have held that certain time limits as reasonable and should have held that the order passed by the Assessing Officer is barred by limitation and hence, deserves to be annulled. The Ld. AR relied on the judgment of the Supreme Court in the case of State of Punjab vs. Bhatinda Co-op Milk Producers' Union Ltd. (2007) 11 SCC 363 wherein it is held that action must be initiated by the competent authority under the Act where no limitation is prescribed, as in section 201 within a period of four years and not later. The Ld. AR relied on the judgment of the High Court of Delhi in the case of Commissioner of Income Tax vs. Hutchison Essar Telecom Ltd. (2010) 323 ITR 230 (Del), wherein it is held that, the proceedings u/s. 201 and 201(1A) of the Act can be initiated within a period of four years from the end of the financial year and hence, proceedings initiated after that period were barred by limitation. Further, the Ld. AR relied on the judgment of the High Court of Delhi in the case of CIT, Delhi XVII vs. NHK Japan Broadcasting Corpn. (2008) 172 Taxman 230 (Delhi), a decision in the context of non deduction of tax at sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any other case Provided that such order for a financial year commencing on or before the 1st day of April, 2007 may be passed at any time on or before the 31st day of March, 2011. 10.4. The question whether the order passed u/s. 201(1) and 201(1A) of the Act for the assessment year 2011-12, was barred by limitation was decided against the assessee by the CIT(A), on the reason that it is observed from the provisions of section 201(3) that the time limit period of six years is applicable for the failure to deduct whole or any part of the tax from the person resident in India and in the appellant's case the deductee is not an Indian resident company and therefore the time limit period of six years prescribed u/s. 201(3) will not apply to the present case. In view of the above, it is held that the order passed by the Assessing Officer is legally valid. 10.5. The learned DR submitted that the order passed u/s. 201(1) and 201(1A) was not barred by limitation u/s. 201(3) of the I.T. Act for the reason that the payee in the instant case is a non-resident, whereas, the limitation prescribed u/s. 201(3) of the I.T. Act would apply only to payments made to Indian resident company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en by the Hon'ble Himachal Pradesh High Court in the case of CIT v. Satluj Jal Vidyut Nigam Ltd. reported in [ (2012) 345 ITR 552 (HP)]. As mentioned earlier, the learned DR submitted that the time limit prescribed in sub-section (3) of section 201 does not have application since the payee is a non-resident. The Hon'ble Bombay High Court in the case of Director of Income-tax (International Taxation) v. Mahindra Mahindra Ltd. (supra) had held even if there is no time limit prescribed under the statute for passing an order u/s. 201(1)/201(1A) of the I.T. Act, a reasonable time limit should be read into the provision. The Hon'ble Bombay High Court had confirmed the Special Bench order of the Tribunal, wherein the time limit prescribed for initiating and completion of reassessment u/s. 147 of the I.T. Act was upheld to be correct. The Hon'ble High Court was considering the following substantial question of law:- (1) Whether the Tribunal was justified in prescribing the time limit for initiation and completion of proceedings under sub-sections (1) and (1A) of Section 201 of the Income-tax Act, 1961 in the absence of any time-limit provided under the said Act? ..... X X X X Extracts X X X X X X X X Extracts X X X X
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