2016 (1) TMI 1178 - AT - Income Tax

Assessee's Additional Consideration for Shares Not Taxable: Tribunal Rules in Favor

Morgan Stanley Mauritius Company Versus DCIT (Intl. Taxation) -4 (1), Mumbai

Morgan Stanley Mauritius Company Versus DCIT (Intl. Taxation) -4 (1), Mumbai - TMI Issues Involved:1. Taxability of additional consideration received by the assessee.2. Validity of reopening the assessment.Issue-wise Detailed Analysis:1. Taxability of Additional Consideration Received by the Assessee:The core issue was whether the additional consideration of Rs. 2.20 crores received by the assessee, a sub-account of MSCIL, from Oracle for the delay in making payment of sales consideration for shares of I-flex Solution Ltd., should be treated as taxable income.The assessee argued that the additional consideration was not interest as per Section 2(28A) of the Income Tax Act, nor was it a service fee or charge. It was part of the sales receipts, arising from the same source, i.e., the shares transferred to Oracle under the open offer. The assessee contended that there was no debtor/creditor relationship between them and Oracle, and hence, the amount should not be taxed as interest under Article-11 of the DTAA. Alternatively, it was argued that it could not be taxed as capital gains under Article-13 of the Treaty and should fall under 'income from other sources' under Article-22 of the Treaty, which would not be taxable in India due to the absence of a Permanent Establishment (PE) in India.The Department Representative (DR) contended that the additional consideration was for the delay in making the payment of sales consideration and should be treated as interest, taxable under Article-11 of the India-Mauritius DTAA. The DR argued that Oracle's deduction of TDS on the amount indicated it was not part of the sale consideration but interest for delayed payments.The Tribunal found that the additional consideration was part of the total consideration for the shares and not a separate penal interest. The Tribunal noted that the delay in making the open offer and dispatching the letter of offer led Oracle to revise the offer price, which included the additional consideration. The Tribunal held that the additional consideration was part of the original transaction approved by SEBI and not penal interest. Therefore, it was not taxable. The Tribunal referred to a similar case, Genesis Indian Investment Company Ltd., where additional consideration received under an open offer was treated as part of the capital gain and not interest income.2. Validity of Reopening the Assessment:The assessee contended that the reopening of the assessment was a case of change of opinion, with no new material discovered by the AO, and all information was available on record. The assessee relied on the cases of Kelvinator of India Ltd. and Coca Cola Export Corporation to support their argument.The DR argued that the AO had rightly reopened the matter under Section 147 of the Act, as no opinion was formed during the original assessment. The DR cited cases like ESS Kay Engineering (P) Ltd., A.L.A Firm, and EMA India Ltd. to support their stance.The Tribunal, having decided the main issue in favor of the assessee, did not adjudicate the technical issue of reopening the assessment. The Tribunal allowed the appeal filed by the assessee, making the discussion on reopening moot.Conclusion:The Tribunal concluded that the additional consideration received by the assessee from Oracle was part of the total consideration for the shares and not penal interest, hence not taxable. Consequently, the appeal filed by the assessee was allowed, and the issues regarding reopening the assessment were not adjudicated.