Treaty taxation of interest requires actual payment or receipt; notional debenture interest cannot support transfer pricing adjustment.

Interest under Article 11 of the India-Cyprus tax treaty was treated as taxable only on actual payment or receipt, not on a merely notional or contingent basis. Applying the co-ordinate bench view in the assessee's own earlier year, the Tribunal held that the word "paid" in the treaty could not be expanded to include "payable". On that interpretation, no transfer pricing adjustment could be made on notional interest on fully convertible debentures where the amount had neither actually accrued in the relevant sense nor been received during the year. The adjustment based on a future contingent event was therefore unsustainable.

---

---

Issues: Whether the notional interest adjustment on fully convertible debentures could be sustained as taxable income and as an arm's length transfer pricing adjustment under Article 11 of the India-Cyprus tax treaty.

Analysis: The dispute turned on whether interest under Article 11 of the India-Cyprus treaty is taxable only when it is actually paid or received, rather than on a merely hypothetical or contingent basis. The Tribunal followed the co-ordinate bench decision in the assessee's own case for an earlier year, which held that the expression "paid" in Article 11(1) cannot be expanded to include "payable". On that interpretation, only actual interest receipt could be brought to tax, and no transfer pricing adjustment could be made on a notional amount that had neither accrued in the relevant sense nor been received during the year. The Tribunal also noted that the adjustment rested on a contingent future event that had not occurred.

Conclusion: The notional interest adjustment was not sustainable and the issue was decided in favour of the assessee.

Ratio Decidendi: Where the treaty provision taxes interest only when it is "paid" to a resident of the other contracting state, taxation cannot be fastened on a merely notional or contingent receivable, and a transfer pricing adjustment cannot be made on income that has neither actually accrued nor been received.

---