TaxTMI 
TaxTMI 
2018 (8) TMI 1192
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....e circumstances of the case, an arm's length price (ALP) adjustment, of Rs. 3,88,37,190 for the assessment year 2003-04 and Rs. 5,18,95,560 for the assessment year 2004-05, was required to be made, in respect of interest free loan granted by the assessee, a non-resident company, to its wholly owned subsidiary in India? The facts of the case have been brought out in this order of the special bench dt. 15th July, 2016. For the sake of brevity we do not repeat the same. After considering all the arguments of all the parties, the Special Bench held as follows: 40. In view of the foregoing discussions, and for the detailed reasons set out above, we reject the contention of the assessee that, in principle, no arm's length price adjustments can be made in respect of the interest free advances granted by the assessee to its Indian AE, i.e. Datex Ohmeda India Pvt Ltd. However, so far as quantification of the arm's length price adjustment is concerned, the same will have to be dealt with the division bench as no arguments, with respect to the quantification part, were advanced before us. It is also open to the parties to take up any other issue, not specifically dealt ....
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....ing argued before the special bench of the tribunal and having not done so ,it cannot be allowed to do so in these proceedings . c) That the special bench had given a verdict that ALP of the transaction has to be determined, on the facts and circumstances of this case. He pointed out that the question that has been referred to the Special Bench is a comprehensive question and that the answer of the special bench was clear and unambiguous. d) That the special bench has remitted the matter back to the Division Bench only for quantification of the ALP adjustment and under those circumstances, the assessee is precluded from re-arguing, before the Division Bench, the issue of taxability of the transaction. e) The Division Bench is bound by the law of precedence and cannot take a view which is contrary to the view enunciated by the special bench in this case, on the same issue. Judicial discipline demands that the division bench implements the order of the special bench. Reliance was placed on the following decisions * Sun Polytrone Industries ltd. Vs. CIT 2015 235 taxman 567 SC * Yog Builders vs. ACIT 2015 154 ITD 566 Luck. Trib. ....
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....1st December, 2012; [2013] 152 TTJ Mumbai 497 and the Delhi 'B'' Bench of the Tribunal in the case of CSC Technology Singapore Pte. Ltd. Vs. ADIT Circle-1(1), international taxation, order dt. Feb 17th 2012 I.T. Appeal No. 5604 of 2010 where it was held that tax can be levied in the year of payment and not in the year of accrual. He further relied on the judgment of the Hon'ble Bombay High Court in the case of DIT(IT) vs. M/s. Siemens Aktengesellschaft ITA no. 124 of 2010 order dt. 22nd October 2012, for the proposition that under Article 12, royalty and fee for technical services should be taxed on receipt basis. He drew the attention of the Bench to the wording of Article 12 of the DTAA and compared the same with Article 11 and submitted that, as the language used is identical, the proposition of law laid down while interpreting Article 12 by the Courts, would also apply to Article 11. Thus, he argues that no adjustment can be made under TP Provisions as the loan in question is an interest free loan in view of the provisions of the DTAA . 6. On ground 4A, he submitted that LIBOR has to be applied in preference to SBI Prime lending rate, as the loan is a foreign currency loa....
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....d that the loan in question was extended to the Indian entity by its AE, in convertible US Dollars but the assessee could use the loan amount only upon conversion of the same into Indian rupees after the remittance is received in its Indian bank account. He submitted that the loan was consumed in India. He relied on the Hon'ble Bombay High Court judgement in the case of CIT vs. TATA Autocomps Systems Ltd. 374 ITR 516 Bom. wherein it was held that , where the Indian resident assessee had advanced a loan to its associate enterprise (AE) situated in Germany, the rate was directed to be determined on the basis of the rates prevailing in Germany, as that was the country in which the loan in question was consumed. He submitted that since the loan in question was consumed in India, SBI Prime Lending Rate has to be applied. He once again submitted that the special bench remitted the matter back to the division bench, only for quantification of the ALP adjustment and that all these issues are beyond the ken of the division bench. He prayed that the additional grounds have to be dismissed both, as not admissible, as well as on merits. 7.2 In reply the ld. Counsel for the assessee relie....
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....are three distinct terms. So far as receiving of income is concerned there can be no difficulty ; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word 'receiving' itself. The words 'accrue' and 'arise' also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. 'Accruing' is synonymous with 'arising' in the sense of springing as a natural growth or result. The three expressions 'accrues', 'arises' and 'is received' having been used in the section, strictly speaking 'accrues' should not be taken as synonymous with 'arises' but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word 'arises' means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two ....
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....he assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro. "Unless and until there is created in favour of the assessee a debt due, by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him. It is submitted that, in the aforesaid judicial pronouncement, it has been held that, an income arises to an assessee company when it has acquired a right to receive such income. It has been held that, it represents a state anterior to the point of time when the income becomes receivable and, connotes a character of the income which is more or less inchoate. Applying the foregoing to the facts f the instant case, it will be seen that, since there was no right to receive any income to the assessee as a result of interest free loan, the provisions contained in section 92(1) of the Act are inapplicable." 9.1. The special bench ....
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....visions. 38. As for the assessee' s claim that the loan being extended free of interest was in the nature of shareholder service, this plea is being taken up for the first time before us and the assessee has not even furnished basic evidences for the factual elements embedded in this proposition. Such facts cannot be inferred or assumed; there has to be some material on record to demonstrate, or even indicate, the existence of these facts. The references to OECD report and BEPS report is in the context of benefit test, but then the benefit test is not really relevant in the context of Indian transfer pricing legislation. Learned counsel has not explained as to how these inputs are relevant in interpreting the scope of the statutory provision before us, nor do we see any relevance of this material in the present context and given the fact situation above. It is also important to bear in mind the uncontroverted findings of the Assessing Officer that the interest was all along charged by the assessee on its loans to Datex but, for some unexplained reasons, the assessee has stopped charging interest in the assessment year 2003-04. The commercial bonafides of the present tr....
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.... evident from the observation of Hon'ble Bombay High Court to the effect that, "In this case, the revenue seems to be confusing the measure to a charge and calling the measure a notional income. We find that there is absence of any charge in the Act to subject issue of shares at a premium to tax". Undoubtedly, learned counsel is right in interpreting this decision to the extent that what is not in the nature of income cannot be turned into income so as to make ALP adjustment therein, and then bring the ALP adjustment to tax, since the computation is of income and it is only the price at which transaction is entered into that is to be taken as an arm's length price in computation of that income. The ALP adjustments cannot be treated as income per se. However, the assessee does not derive any support from this decision since consideration for a loan, i.e interest, is inherently in the nature of income. There is no, and there cannot be any, dispute or controversy about this character of income. The point of dispute is whether zero interest, or no interest, is good enough for computing the income or whether an arm's length interest must substitute this zero interest. The an....
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....the management, control or capital of an enterprise of the other Contracting State, or (b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly." Article 11 INTEREST "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest." ARTICLE 12 ....
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....per the transfer pricing provisions of Income Tax Act. The assessee has raised an alternative plea that even in case the transfer pricing provisions are applicable in respect of the non charging of interest on loan given to AE, it is not taxable in India as per the provisions of Article 11 of Indo-Mauritius DTAA because the said interest was not paid to the assesse. We note that the provisions of Article 11 are applicable in the case of interest arising in the contracting state and paid to the resident of another contracting state. 11. It is contemplated under Article 11 of DTAA that the payment is a condition for taxing the interest only in circumstances when the interest is arising in the contracting state and accrued to the resident of another contracting state and, therefore, the same is subjected to tax in the other state when it is paid. In other words, the provisions of Article 11 defers the taxability of the interest arising but not received and therefore, it is taxed only when it is received. Article 11 does not exempt the interest arising in a contracting state and accrue to a resident of other contracting state but it makes the same taxable on the event of payme....
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....rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- ―The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B1. II 725 (1994), re. 1 § AStG). A differentiation between debt-claims or debts in national currency and those in f....