TaxTMI 
TaxTMI 
2019 (8) TMI 1430
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....dicially held in various case laws relied upon by the assessee that as per Article 11(1) and (2) of Indo- Cyprus DTAA, interest income is chargeable to tax on paid basis when there are no such findings in any decision cited by the assessee before the Hon'ble DRP. (iii) Whether on the facts and in the circumstances of the case, the DRP erred in not considering that the Hon'ble Mumbai High Court in the decision dated 09.07.2012 in ITA No 1026 of 2011 in the case of DIT Vs Credit Suisse First Boston (Cyprus) Ltd while examining the Article 11(1)& 11(2) of the Indo Cyprus Treaty held that interest can be said to have accrued on the date on which it was due as per the terms and conditions of the security (iv) Whether on the facts and in the circumstances of the case, the DRP erred in not considering that under Article 11(1) of the Indo Cyprus DTAA the taxability is of 'interest arising' in a contracting state which is paid to the resident of other contracting state thus laying emphasis on the accrual of interest in a contracting state and the word 'paid' does not necessarily mean actual payment of the interest as also held by the United State Tax Court in C....
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....m's length price, on the said loan advanced to Datex, having regard to its contractual obligation, is a matter for the applicant to consider but for the purposes of the Act the rate of interest will have to be taken as per the principles of arm's length price. (x) The appellant prays for leave to add, amend, modify or alter any grounds of appeal at the time of or before the hearing of the appeal." 2. The cross objections are in support of the directions given by the DRP. 3. The facts in brief are that TMW ASPF CYPRUS (hereinafter referred to as 'assessee') is a private limited company incorporated in Cyprus and is engaged in the business of making investments in the real estate sector. The company in the year 2008 had made investments in independent third-party companies in India (hereinafter collectively known as 'investee companies') engaged in real estate development vide fully convertible debentures (FCCDs). It was these investments that made the investee companies an associated enterprise of the assessee as per TP provisions. The assessee has also placed before us copy of the agreements concluded between the investee companies and the TMW ASPF. A....
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.... terms 'of the agreements entered between the Assessee with the investee companies, there are three separate and independent events: I. Subscription to FCCDs bearing an annual interest of 4%; II. Conversion of FCCDs into equity at a conversion price on the completion of the specified term or as may be determined by the parties; and III. Post conversion, sale of equity shares to the promoters at a consideration providing annualized 18%/19% return on investment. 5.2 The assessee submitted that the latter two events were future and contingent. The second event, i.e. conversion of FCCDs into equity shares: - is an independent future event and the debenture subscription agreement clearly provides the conversion mechanism, i.e., the number of equity shares and percentage of equity share capital to be issued to the Assessee on conversion. - Said debenture subscription agreement specifies that the Conversion ratio would be in accordance with the guidelines issued by Controller of Capital Issues (Reserve Bank of India) - i.e. NAV of the company is required to be computed on the subscription date to arrive at the conversion ratio. This clearly demonstrates t....
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.... Siemens Aktiengesellschaft (Born HC) (ITA no.124 of 2010) * CSC Technology Singapore Pte. Ltd. v. ADIT [2012] 19 taxmann.com 123 (Delhi ITAT) * DCIT v. UhdeGmbh [1996] 54 TTJ 355 (Mum ITAT) National Organic Chemical Industries Ltd. v. DCIT [2006] 5 SOT 317 (Mum ITAT) * Johnson & Johnson v. ADIT [2013J 32 taxmann.com 102 (Mum ITAT) 5.6 The assessee further contended that TPO erred in benchmarking the ALP of interest with that of loan without appreciating that the investments made by assessee are akin to equity and not to loan. It should be noted that ASPF I was incorporated for the purposes of investing in real estate companies. It has been clearly drawn in the agreements that it subscribed the FCCDs as an investor and not as a lender and therefore, getting its stake capitalized in the Indian companies is its objective rather than earning interest on debentures. The FCCDs are not to be repaid but retained by converting into equity shares, therefore, it cannot be said to be a borrowing or loan. Reliance in this regard is placed on the decision of Special 'Bench of ITAT Ahmedabad in the case of Ashima Syntex Ltd. v. Assistant Commissioner of Income- Tax (100 ITD 247) ....
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....axable in hands of recipient assessee @1 0% as DTAA. TP provisions are not intended to be applicable under such circumstances. 6.4 In view of above discussion, the panel is of considered view that TP adjustment is not called for in the present case. The AO/TPO is directed accordingly, Objections are allowed." 7. Aggrieved by the aforesaid finding the Revenue department has filed an appeal before us. 8. After drawing our attention, the relevant observation made by the TPO, Ld. CIT DR submitted that here in this case the assessee has incurred losses due to non receipt of interest and consequent to that it had to sell its investment to other 3rd parties on a loss. No independent entity in the market shall invest its resources in such high risk and if such investment is made which carries maximum risk then same has to be compensated at a higher value and here in this case, assessee has agreed to have only 4% of interest. The market rate of corporate loans of this kind fetches interest income at the rates anywhere between 16% to 30%, but the assessee has agreed for a much lesser compensation @ 18%. However, the assessee has received interest of Rs. 1,21,28,480/- @ 4%. Assessee ha....
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....ann.com 1019 (Mumbai - Trib.) wherein the tribunal while deciding the issue whether the commissioner of income tax (appeals) was correct in directing the AO to tax royalty income on accrual basis had held that the royalty and fees for technical services should be taxed in the hands of the assessee on receipt basis. The Ld. Counsel submitted that the Article pertaining to Royalty was similarly worded as the Article pertaining to interest in the India-Cyprus DTAA. He also brought to our notice that the aforesaid decision of the ITAT stood approved by the Hon'ble Bombay High in the case of DIT v. Siemens Aktiengesellschaft (ITA124 of 2010), wherein Hon'ble Bombay High Court observed and held as under: "The Income Tax Appellate Tribunal referring to para-I to 3 under Article IIX-A of the Double Taxation Avoidance Treaty with the Federal Germany Republic as per Notification dated 26th August 1985 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, ....
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....taxability can only be fastened on receipt of payment. Relevant Paragraph has been reproduced: "8. Thus, 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. This decision was later on followed in Income Tax Appeal No. 1033/11 dated 20/11/2012 and thereafter in Income Tax Appeal No.2356/ 11 and connected Appeals vide the order dated 07/03/2013. 9. On the same principle, the Appeal is dismissed." 12. The Ld. Counsel then proceeded to submit that the issue can also be examined from the angle of the TDS provisions. It was submitted that the Hon'ble Supreme Court in the case of GE Technology Centre (P.) Ltd. V. CIT [2010] 327 ITR 456 has held that when a credit afforded by, or a payment made by, an Indian resident, to a non-resident, does not trigger the taxability of that income in the hands of recipient, the tax deduction liability does not come into play at all. The tax at source is attracted at the very first instance when the income accrues to the payee. Accordingly, in this case by virtue of Article 11 of ....
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....echnology (supra), it does not give rise to any tax withholding obligations under section 195 (1) either." 13. It was accordingly argued that when the income is not taxable in terms of Section 4 of the Act, then chapter X cannot become applicable at all. Section 92 of the Act provides for computing the 'income' arising from an 'international transaction' with reference to the ALP. Therefore, only the interest income chargeable to tax can be subject to transfer pricing in India. Accordingly, by imposing transfer pricing adjustment on interest which, is not chargeable in terms of the Act read with DTAA the TPO has sought to assess notional income and has thus exceeded its jurisdictional powers. Reliance in this regard was placed on the Bombay High Court decision of Vodafone India Services (P.) Ltd. V. Union of India [2014] 5- taxmann.com 300. And our attention was drawn to following paragraphs: "40 It was contended by the Revenue that in view of Chapter X of the Act, the notional income is to be brought to tax and real income will have no place. The entire exercise of determining the ALP is only to arrive at the real income earned i.e. the correct price of the tr....
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....the word "paid" was not mentioned. Their lordships held that word ''payable'' appearing in Section 4o(a)(ia) of the Act would include paid amount also. In our opinion, this judgment would not aid the Revenue in interpreting, the word ''paid' as appearing clause (1) of Article 13 of the DTAA. Terms used in treaties are not to interpreted in the manner which terms are used in a legislative edict in the form of a statute or law. Hon'ble Apex Court had noted as under in its judgment in the case of UOI vs. Azadi Bachao Andolan (2006) 263 ITR 706, which. throws light on the manner which a treaty is to be interpreted." 15. Lastly, the Ld. AR brought to the attention of this Bench that the benchmarking done by the TPO by adopting the rate of 18% to make an adjustment in the present case is from the controlled transaction between the assessee and the Investee companies and for this reason alone, the adjustment made is not at all justified and hence has to be deleted. 16. It was further submitted that the TPO ought to have considered that the Conversion of FCCDS and sale of equity shares to promoters at a consideration providing annualized 18% return on in....
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....ver of interest due to bad financial position/cash crunch and delayed project in the real estate and such a request has been accepted by the assessee. Part of the FCCDs held in one of the investee company was sold to a third party during the year at a loss. Thus, none of the investment bore any premium to the assessee on sale of securities. They were either sold at a loss or at par to third parties. The details of investment made by the company in FCCDs and the interest received and factum of waiver of interest are reproduced hereunder:- Investee Initial date of subscribing to FCCDs Amount of investment Conversion of debenture during the year Interest received during the AY 2011-12 FY 2010-11 01.04.2010 to 31.3.2011 [In Rs.] Waiver of interest DD Housing Ltd. 16-Oct-2006 146,82,00,000 Not converted Nil Waiver of interest with effect from Sep 16, 2008 (including interest for the full subject year) Supreme Buildcap Pvt. Ltd. 22-Dec-2006 75,00,00,000 Converted on 11-May-2010 Nil Waiver of interest with effect from Sep 15,2009 (including interest for 1 month & 11 days pertaining to the subject year) Ritesh Spinning Mills Ltd. 16-Feb-2007 ....