Treaty meaning of "paid" under the India-Cyprus DTAA referred to Special Bench for fuller examination.

The meaning of "paid" in Article 11 of the India-Cyprus DTAA, for taxability of notional interest, was examined by reference to Article 3(2) and section 43(2) of the Income-tax Act, which treats "paid" as actually paid or incurred according to the accounting method. As earlier coordinate-bench views had assumed a cash-basis limitation without considering those provisions and the Supreme Court authority relied on, the matter was considered fit for examination by a larger bench. The issue was therefore referred to a Special Bench under section 255(3), and no merits ruling was given on the transfer-pricing adjustment or treaty interpretation.

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Issues: Whether the additional grounds raising the taxability of notional interest under Article 11 of the India-Cyprus Double Taxation Avoidance Agreement, read with the domestic-law meaning of "paid", required consideration by a Special Bench under section 255(3) of the Income-tax Act, 1961.

Analysis: The expression "paid" in Article 11 was not defined in the treaty. The order noted that Article 3(2) directed adoption of the domestic-law meaning of an undefined treaty term unless the context otherwise required, and that section 43(2) of the Income-tax Act, 1961 defines "paid" as actually paid or incurred according to the method of accounting. It was further observed that earlier coordinate-bench rulings had proceeded on the assumption that taxability under Article 11 was confined to receipt or cash basis without examining the impact of Article 3(2), section 43(2), and the Supreme Court decision relied upon. In that background, the order considered it appropriate that the issue be examined by a bench of three or more Members.

Conclusion: The matter was referred to a Special Bench under section 255(3) of the Income-tax Act, 1961.

Final Conclusion: No decision on the merits of the transfer-pricing adjustment was rendered in this order, and the controversy on the meaning of "paid" under the treaty was left for determination by the larger Bench.

Ratio Decidendi: Where the correctness of coordinate-bench approaches to the domestic-law meaning of an undefined treaty term is in doubt, and the issue has not been examined on all relevant facets, reference to a larger Bench is appropriate.

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