TaxTMI 
TaxTMI 
2016 (3) TMI 829
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....he provisions of the Income-tax Act or the India-Singapore Treaty, which ever was more beneficial to assessee. Assessee had entered into an agreement with Cargill India Pvt. Ltd. ("CIPL"), the assessee's associate, for the rendering of certain administrative and support services relating to treasury and financial activities, whereby CIPL was charged towards the cost of the services (on actual usage basis), as per the method provided in the said agreement, on a cost plus 5% mark up. 3. During the course of assessment proceedings the AO show caused the assessee as to why the amounts paid by Cargill India to it should not be considered as interest as per sec. 2(28A) of the Act and para 4 of Article 11 of the tax treaty between India and Singapore and not discounting charges as claimed by assessee. The assessee in its reply pointed out that it was engaged in the business to subscribe, buy, underwrite or otherwise acquire, own, hold, sell or exchange securities or investments of any kind including negotiable instruments, commercial paper etc. Accordingly, as a part of its business, it draws, makes, accepts, endorses, discounts, executes and issues promissory notes, bill of exchange e....
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....bmissions and after examining the definition of "interest" in section 2(28A) of the Income-tax Act and also various circulars, held that the discounting charges were in the nature of interest and, therefore, taxable in India. He, accordingly, taxed sum of Rs. 8,02,68,762/- @ 15% (in A.Y. 2003-04) and Rs. 558,084,042/- @ 15% (in A.Y. 2008-09) as per DTAA. 5. The assessee filed objections before ld. DRP, which vide its order dated 9.8.2011 concluded that the whole transaction was a colourable device by the assessee company to earn interest from India without payment of tax. Ld. DRP in para 7 to 7.3 (A.Y. 2003-04) has observed as under: 7. A perusal of the whole transaction leads to certain unanswered questions. (i) What is the expertise of Cargill India, 'which is not available with Cargill International, Geneva for the purchase of Argentine Soyabean from the internation.al market? (ii) When the supplier of goods as it appears is also a group company, why the transaction was routed through Cargill India? (iii) Whether at anytime* goods were inspected by Cargill India or Cargill International, Switzerland, the ultimate buyer? (iv) Wh....
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....n *be explained by an example: 7.2 The assessee pays '90 to the Indian company and takes a promissory note of '100 to be received by it from another group company after one year. The Indian company invests '90 in Indian market and claims '10 as expenditure (interest payment). The non-resident buyer, who allegedly purchased the goods from the Indian company makes the payment to the assessee of '100 instead of making payment to the Indian company. The Indian company pays the cost of goods to the other company from whom the so called goods were purchased by the Indian company. In this way the Indian company remits back the entire money i.e. principal plus interest to the assessee through various group companies, who are so called seller and buyers of goods. 7.3 The term discounting instead of interest has been used by the assessee to avoid payment of taxes on interest income and also to avoid the violation of other regulatory laws like RBI, FEMA etc. The term discount is a misnomer for interest. The mere fact that the assessee has taken advantage of its wide group network to route the transactions will not change the true nature of the transaction....
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....elevant and un-contextual facts. 2.3 That on the facts and circumstances of the case and in law, the Learned AO and Hon'ble DRP has erred in not following the circulars issued by CBDT holding that discounting charges are not in the nature of interest, on the basis that the circulars are issued under section I94A of the Act and are applicable to only residents. 2.4 That on the facts and circumstances of the case and in law, the learned AO has erred in treating the discounting charges as taxable in India without appreciating the fact that the same is in the nature of business income and cannot be brought to tax in the absence of any Permanent Establishment ('PE') in India as per provisions of Article 5 of the treaty . 2.5 That on the facts and circumstances of the case and in law, the learned AO erred in not following the principle of judicial discipline by completely ignoring the favorable order of Hon'ble Delhi ITAT passed in the appellant's own case based on same set of facts for AY 2004-05 and AY 2005-06 and the order passed by the Hon'ble Delhi High Court in case of Cargill Global Trading India Pvt Ltd for A Y 2004-05 and A Y 20....
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....The short issue is what is the nature of t~is discount? According to the assessee, the atoresald discount is not in the. nature of interest and hence is not disallowable under section 40(a)(i) 0 the Act whereas the Assess.ing Officer has held that this sum is in the nature of interest under 'section 2(28A) of the Act. Section 2(28A) of the Act provides as under:- "Interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of-the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized." It will be, evident from the above that interest payable in any manner in respect of any moneys borrowed or debt incurred and includes any service fee or other charges in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized. It is thus seen that interest means either sum payable in respect of any money borrowed or debt incurred. In the instant case, it is not a case of debt incurred or moneys borrowed. In fact, here is a....
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.... that usance interest payable outside India by an undertaking engaged in the business of ship breaking is exempt from payment of Income-tax by virtue of Explanation 2 added to section 1 0(150(iv)(c) with retrospective effect from 1.4.1962 and hence the assessee was. not liable to deduct tax at source under section 195 of the Act. The discounting charges are not in" the nature of interest paid by the assessee. Rather after deducting discount the assessee received net amount of the bill of exchange accepted by the purchaser. CFSA not having any permanent establishment in India, is not liable, to tax in respect or such discount earned by it and hence the assessee is not under obligation to deduct tax. at source under section 195 of the Act. Accordingly, the same amount cannot be disallowed by invoking section 40(a)(i) of the Act." "7. This finding of the ITAT in the case of Cargil Clobal Trading (P) Ltd. has been upheld by the Hon'ble High Court in ITA Nos. 331 and 204 of 2011. Learned CIT(Appeals) has also followed this order of the ITAT. We find that the issue in dispute is squarely covered by the above conclusion of the ITAT. Assessing Officer is not justified in consi....
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.... of exchange, etc. Further, CFSA does not have a permanent establishment (PE) in terms of articles 5 of the India Singapore Treaty ("the Treaty" or the "DTAA")." 10. Ld. A/R further pointed out that in the case of assessee, Hon'ble Delhi High Court, following the decision in the case of Cargil Clobal Trading (P) Ltd., dismissed the appeals filed by revenue vide order dated 24.4.2012 in ITA nos. 269/2012 and 272/2012, observing as under:- "These appeals have to be dismissed in view of the decision dated 1ih February, 2011 in ITA No.331/2011 Commissioner of Income Tax Vs. Cargill Global Trading Pvt. Ltd. (2011) 335 ITR 94 (Del.). Cargill Global Trading Pvt. Ltd. was the payer and the Assessing Officer had held that they were liable to deduct tax at source on the bill discounting which was treated and considered as interest paid. The High Court has not agree with the Revenue and has held that bill discount cannot be equated and treated as interest paid and therefore the tax at source was not liable to be deducted. The present appeals are directed against recipient Cargill Financial Services Asia Pvt Ltd. who had entered into the transaction/agreement with Cargill ....
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....ts are not in the nature of interest as defined u/s 2(28A}. 7. It is also seen from the said combined order of the Hon'ble ITAT that it has based its entire order and findings on the Hon'ble ITAT's order dated 19.08.2011 in the case of a related concern, namely Cargil Financial Services P. Ltd (CFSPL). At Para 6, page 5 of the order dated 19.08.2011, the Hon'ble ITAT notes that "There is no disparity of facts between both the assessees." Accordingly it has quoted extensively from the said order dated 19.08.2011 in the case of CFSPL starting at page 5 of its combined order till page 13 of its order. 8. Further, it is seen from the said ITAT order in the case of CFSPL (provided by Ld. AR) that, this order in turn relies on the order of ITAT in case of another related concern Cargil Global Trading India (P) Ltd. (CGTIPL). 9. While relying and quoting extensively from the order of the related concerns (CFSPL & CGTIPL), certain crucial facts (discussed below) remained to be considered and adjudicated by the Hon'ble ITAT. 10. Accordingly, the AO notes in the present AY 2008-09 at page 15, para 7.8 of the assessment order that certai....
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....T in its earlier orders, as culled out from the Ld. DRP's directions, are as under: Para/page of Ld. DRP's order Issue Remarks, if any Page 4, para 3 At the outset, DRP has put on record the non-cooperation of the assessee. The DRP had asked the assessee to place on record the entire transactions, along with complete supporting documents, for one month. The assessee chose to submit selected documents and not the complete trail. This further strengthens the Revenue's contention that the assessee, along with its group companies, are using colourable transactions/ devices. Page 3-7, Para 5-6.1 The limited information made available by the assessee or as already available on record ahs been analysed by Ld. DRP. Para 6.1 gives the issues/ aspects which are unanswered and effectively questions the very genuineness of whole scheme of transactions used by the assessee along with its group concerns The findings of the DRP have to be read with the findings of the AO at page 22 of the assessment order (Gross margin of the assessee on sale is 0.05%. In comparison, the charges suffered by the Indian concern are large 5.75%. This ensures that max amou....
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....t would be a duty of the Court to say so and not to perpetuate the mistake. The Court also furnished two illustrations-{i) where relevant statutory provision was not brought to its notice, (ii) if a vital point was not considered. The submissions above emphasize that the matter is covered by the said point (ii). CONCLUSION 11. The undersigned is committed to provide any further clarification that the Hon'ble Bench may desire. 13. In the rejoinder ld. counsel has filed detailed submissions, which are also reproduced hereunder: ""Brief facts While framing assessment for the subject year, the Ld. AO has characterized the discounting charges received by the Appellant on account of discounting of Bills of exchange / demand Promissory Notes (,hereinafter referred to as BE') from Indian group companies namely, Cargill India Private Limited and Cargill Global Trading Private Limited ('hereinafter collectively referred as Indian group companies') as interest under section 2(28A) of the income Tax Act, 1961 ('the Act') and under the DT AA between India and Singapore. 2. Appellant's Contentions At the outset,....
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....rovisions etc. were not presented before the Ld. ITAT which are very material to the case". Referring to the AO's order points to the fact that the ITAT order referred in the above allegation is that of Cargill Global Trading India Private Limited (CGTIPL - Indian group company) i.e. IT A NO. 684IDel/2009 for A Y 2004-05. The Appellant most humbly submits that the entire transaction pertaining to the discounting has been duly explained and captured in the CGTIPL ITA T order (Refer Para 4 on Page 2 of Annexure I). It is also submitted that the assessee is a nonresident company which does not have any presence in India. The transaction with Indian company was through proper banking channel wherein all laws and regulations would have been complied with. Neither tax authority nor any other authority has alleged any irregularity in the transaction as per applicable Indian law/regulation. It is also respectfully submitted that the questions that have been raised by the Learned Department Representative giving a flavour that certain vital facts regarding the role of the parties involved, RBI Circulars and FEMA provisions, which were material were not presented before....
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....Hon'ble Delhi High Court as well as Supreme Court while dismissing the SLP. Most of the questions raised by the Hon'ble DRP pertains to the trading leg in which Appellant is not a party, thus, it cannot be asked to provide such detail. Moreover, the contention put forth by the Ld. DR that "The scheme of transaction put through by the group is mainly to give color of bill discounting to interest earning activity in hands of the NR Appellant while at the same time minimizing the tax liability in the hands to the supporting group Indian concern" is also not acceptable as the Appellant is not claiming that the income is not taxable in its hands. It merely says that the said income is a business income as the Appellant's are engaged in the business of buying and selling of financial instruments and due to the beneficial provisions of the DTAA, the said income is not taxable in India. Moreover, from the angle of the Indian entity as well, the said charges would be tax deductible even if the said transaction had been carried by the Indian group company with an unrelated entity like Indian banks etc. To the best of the knowledge, it has been communicated to the assesse....
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.... said transaction is discounting charges. Hence, both the Indian company and the Appellant have shown the said transaction as discounting charges. Paper transaction have been highlighted along with its noncompliance of the definition of "interest": The legal question as to whether the discounting charges is interest has already been discussed and adjudicated by the Delhi HC that the same is not in the nature of "interest". CBDT Circulars: The applicability of the CBDT Circulars relied by the Appellant have been duly considered and dealt in detail by the Delhi HC in the order of Cargill Global Trading India Private Limited Critical observations: The queries raised are from the stand point of Indian group companies and could not have been responded by the Appellant in this case. The Appellant had merely carried on a normal business transaction and has earned business income which by virtue of DTAA is not taxable in India. A perusal of the questions raised by the Dispute Resolution Panel are clearly indicative of the fact that these questions are not relevant to be raised now as these questions appear to question the necessity of entering into the t....
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....Tribunal may, after hearing the parties on the appeal, 'pass such orders thereon' as it thinks fit. Thus, on a plain reading of the relevant provision of law, the power to pass such orders as the Tribunal thinks fit can be exercised only in relation to the matters that arise in the appeal and it is not open to the Tribunal to adjudicate on a question which is not in dispute and which does not form the subjectmatter of the appeal. The word 'thereon' is a particularly significant and has been interpreted by many High Courts and Supreme Court to circumscribe the jurisdiction of the Tribunal to the subject-matter of the appeal, which is constituted of the original grounds of appeal and such additional grounds as may be raised by the leave of the Tribunal. The consensus of judicial opinion appears to be that the jurisdiction of the Tribunal is confined to the passing of orders on the subject-matter of the appeal, that in, those orders which are necessary for the disposal of the appeal. The Tribunal cannot give a finding in respect of the assessment of a year which is not the subjectmatter of the appeal before it. The Tribunal thus can give a finding that the deduction/in....
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....of the PN stand transferred to the assessee and in no case the assessee could make the Indian entity liable to make payment to the assessee in case of delay or default on maturity. The assessee makes payment of PN to the Indian entities as per the net present value. The difference between the face value and net present value of the PN has been considered as discounting charges. Further, the above facts were summarized as under: "3.1.2.5. The above position may be summarized as under: - Cargill India approach the assessee for discounting of the PN issued to them by the buyers of goods; - The Assessee purchases the PN at a discount on 'without recourse' basis and pays the discounted amount to the Cargill India; The assessee earns income on maturity or subsequent sale of PN which Is In the nature of 'business income' It may be worthwhile to mention here that purchase of PN on a 'without recourse' basis implies that: - Assessee purchases the PN from the Cargill India - Assessee pays the consideration based on present value which is less than the face value and the difference is regarded as-discount value. ....
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....curred, or. moneys borrowed and used, for the purposes of a business or profession earned on In India The amount borne by the CIPL I CGTIPL would be taxable in the hands of the assessee as per provisions of Section 5(2) of the I.T. Act. Therefore, it is held that the income Is taxable in the hands of the assessee as interest income." 19. A bare perusal of the observations of AO makes it very clear that he has not at all referred to any RBI Circular, FEMA provision which had bearing on the facts of the case and how the receipt in the hands of assessee took the colour of interest and not the discounting charges. However, in this regard ld. CIT(DR) has referred to para 9 and 9.1 of ld. DRP's order at page 10 & 11 wherein ld. DRP has, inter alia, observed that the assessee's contention regarding discounting being 'without recourse' is of no help to assessee because the alleged seller of goods, and the alleged foreign buyer of goods i.e. Cargill International Geneva were obliged to honour the terms of payments as per RBI regulations within a stipulated time. Ld. DRP has further observed that as per RBI Regulations, every exporter of goods has to get the inward remittance wit....
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....panies as well as the assessee term the said transaction as discounting transaction only. In this regard ld. counsel has referred to page 14 of the DRP's order wherein ld. DRP notes in para 9.8 as under: 9.8.The assessee also contended that in the TP study of CIPL discounting charges are classified as discounting charges. However, during the proceedings before this Panel the assessee has submitted on 02.06.2011 as follows: 1. Head under which discounting charges are debited in the books of Indian group entities As per the information provided by the Indian group entities, they have recorded the discounting charges under the head "Financial Expenses" in their profit and loss accounts." 21. We fail to appreciate as to how ld. DRP has drawn the conclusion from the above statement that Indian company is treating this amount as interest. The true nature of transaction cannot alter merely by clubbing the discounting charges under the head 'financial expenses'. Therefore, this plea raised by ld. CIT(DR) on the basis of observation made by ld. DRP for distinguishing these facts in the current year from earlier years is without any basis. As far as ld.....