2019 (3) TMI 1668 - HC - Income Tax

Interest income taxed on receipt basis under India-Cyprus DTAA, not accrual.

Commissioner of Income Tax (IT) ­ 3 Versus M/s Pramerica ASPF II Cyprus Holding Limited

The court held that the interest income of the assessee should be taxed only upon receipt, not on an accrual basis, based on the interpretation of the ... Accrual of income - interest income returned by the assessee on cash basis - A.O. has made additions on the ground that interest income was liable to be assessed on accrual basis - DTAA between India and Cyprus - whether the interest income of the Respondent assessee can be taxed on the basis of accrual without receipt thereon or can it be taxed only upon receipt? - HELD THAT:- In M/s Siemens Aktiengesellschaft [2012 (12) TMI 737 - BOMBAY HIGH COURT] held that the assessment of royalty or any fees for technical services should be made in the year in which the amounts are received and not otherwise. Counsel for the Revenue relied upon the Special Bench decision of the Tribunal in the assessee's own case, which in our opinion, has no relevance to the facts of the present case, as it relates to the period prior to the issuance of Notification dated 26th August 1985. In this view of the matter the decision of the Income Tax Appellate Tribunal in holding that the royalty and fees for technical services should be taxed on receipt basis cannot be defaulted. 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 Issues:1. Whether interest income of the assessee can be taxed on accrual basis or only upon receiptRs.2. Interpretation of Double Taxation Avoidance Agreement (DTAA) between India and Cyprus.3. Comparison of DTAA clauses between India and Cyprus and India and Germany.4. Precedent regarding taxing royalty or fees for technical services on receipt basis.Analysis:1. The primary issue in this case is whether the interest income of the assessee should be taxed on an accrual basis or only upon receipt. The question raised by the Revenue was whether the ITAT was correct in directing the Assessing Officer to accept the interest income returned by the assessee on a cash basis, contrary to the AO's decision to assess it on an accrual basis. The tribunal relied on the DTAA between India and Cyprus, specifically Article 11, to conclude that the interest income can be taxed only upon receipt and not on an accrual basis.2. The interpretation of the DTAA between India and Cyprus played a crucial role in determining the taxation of the interest income. Article 11 of the DTAA pertains to interest income and states that interest arising in one contracting state and paid to a resident of the other contracting state may be taxed in that other state. By analyzing this provision, the tribunal concluded that the interest income should be taxed only upon receipt based on the DTAA between India and Cyprus.3. The comparison of DTAA clauses between India and Cyprus and India and Germany was also highlighted in the case. It was pointed out that the DTAA between India and Germany contains an identical clause in Article VIII, similar to the one in the India-Cyprus DTAA. This comparison further supported the argument that interest income should be taxed only upon receipt, aligning with the decision based on the India-Cyprus DTAA.4. The judgment referred to a precedent involving the taxation of royalty or fees for technical services on a receipt basis. The court had previously confirmed the tribunal's decision that such services should be taxed only upon receipt, based on the interpretation of the relevant DTAA clauses. This precedent was followed in subsequent cases, establishing a consistent approach to taxing royalty or fees for technical services on a receipt basis. Consequently, applying the same principle, the court dismissed the appeal in this case, affirming that the interest income should be taxed only upon receipt.