TaxTMI 
TaxTMI 
2025 (8) TMI 1269
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.... "17. On the facts and in the circumstances of the case and in law, the learned Assessing Officer (Ld. AO')/learned Transfer Pricing Officer ('Ld. TPO) erred in bringing to tax, notional interest income arising on account of Transfer Pricing adjustment, disregarding the provisions of Article 11 of the India-Germany Double Tax Avoidance Agreement ('DTAA'), which provides for taxability of interest only on paid basis..." 3. The dispute in this appeal pertains to a transfer pricing adjustment of Rs. 7,57,25,784, comprising Rs. 7,20,17,475 on interest relating to External Commercial Borrowings (ECBs) and Rs. 37,08,309 on delayed receivables, both arising from international transactions with Associated Enterprises (AEs) in India. 4. The facts relevant qua the issue are that the assessee, Volkswagen Aktiengesellschaft (VW AG), is a company incorporated and tax-resident in Germany and forms part of the globally reputed Volkswagen Group. The assessee is engaged in the manufacture and worldwide sale of Volkswagen brand vehicles, their components, and related engineering products. In the course of its international operations, VW AG also supplies automotive compon....
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.... terminology, it was argued, is deliberate and cannot be overridden or diluted by importing domestic law concepts through the backdoor of interpretative latitude. 9. He further submitted that the jurisprudence on this issue is now well-settled favouring the view that where the DTAA stipulates taxability on payment basis, no income can be taxed unless there is an actual remittance or constructive receipt. In support of this proposition, he placed heavy reliance on the decision of the Hon'ble Bombay High Court in Siemens Aktiengesellschaft, where the Court held that income under Article 12 of the DTAA (having identical wording to Article 11) is taxable only upon actual receipt and not on accrual basis. 10. The learned Counsel also referred to a series of Tribunal decisions including those in the cases of Pramerica ASPF II Cyprus Holding Ltd. and TMW ASPF I Cyprus Holding Co. Ltd., wherein it was consistently held that notional or hypothetical interest, computed solely for benchmarking under transfer pricing regulations, cannot be taxed unless it is actually paid. These decisions, it was highlighted, have been affirmed by the respective High Courts, thereby lending authoritative....
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.... Officer as per arm's length principles under domestic law, but neither actually paid nor contractually receivable by the assessee, can be brought to tax under the provisions of Article 11 of the India-Germany Double Taxation Avoidance Agreement (DTAA). 15. At the outset, it is not in dispute that the assessee is a tax resident of Germany and is entitled to invoke the beneficial provisions of India - Germany DTAA. The interest actually received by the assessee from its Indian Associated Enterprises, both under the External Commercial Borrowings (ECB) and for delayed payments, has been duly offered to tax at the concessional rate of 10% as per Article 11(2) of the DTAA. The dispute centres around the notional differential, being the excess interest computed by the TPO on an arm's length basis, which was never received, accrued, or even contemplated contractually between the parties. 16. To appreciate the controversy in its proper legal contour, it is imperative to reproduce and interpret Article 11 of the India-Germany DTAA, which reads as under: "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that othe....
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....oidance Agreement (DTAA). Nevertheless, concurrently, the reliance placed upon domestic law to import an accrual-based taxation principle into the treaty framework is, in our considered view, fundamentally misconceived. The interpretative rule embodied in Article 3(2) of the DTAA, which allows reference to domestic law definitions, is subject to an overriding caveat, it applies only 'unless the context otherwise requires'. In the present case, the context is crystal clear: Article 11 of the DTAA expressly stipulates that interest arising in a Contracting State and 'paid' to a resident of the other Contracting State may be taxed. The use of the term 'paid' rather than 'accrued' or 'payable' is a conscious choice of the two contracting states and must be given its plain and natural meaning, particularly when read in conjunction with the OECD Commentary which clarifies that 'paid' entails the actual fulfilment of an obligation to put funds at the disposal of the creditor. The contention that the TPO is empowered under domestic law to benchmark international transactions and make adjustments, while legally correct within the domestic statutory framework, cannot override the binding pro....
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....ent 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, has no relevance to the facts of the present case, as it relates to the period prior to the issuance of Notification dated 26th August 1985. In this view of the matter the decision of the Income Tax Appellate Tribunal in holding that the royalty and fees for technical services should be taxed on receipt basis cannot be faulted." 23. This judgment has been rendered in the context of India- Germany DTAA and the Article 12 of DTAA is parimateria similar to the language under Article 11 of the DTAA to the extent that both the Articles required the income to be taxed on paid basis and therefore, the ratio decidendi laid down by the Hon'ble Jurisdictional High Court shall also be applicable on the interest income of the assessee. 24. We further find that this issue has been considered by the Mumbai Bench Tribunal in Pramerica ASPF II Cyprus Holding Ltd. wherein the Tribunal held that Article 11 of the India-Cyprus DTAA requ....
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....d decision of the Tribunal has also been upheld by the Jurisdictional High Court in ITA No. 1824 of 2016 wherein following substantial questions of law in the year under consideration. "Whether on the facts and circumstances of the case and in law, the ITAT is correct in directing the Assessing Officer to accept the interest income returned by the assessee on cash basis whereas the A. O. has made additions on the ground that interest income was liable to be assessed on accrual basis?" 26. The Hon'ble Bombay High Court dismissed the department appeal filed against the aforementioned ITAT order and followed its earlier decision in Siemens Aktiengesellschaft (supra) to hold that in light of the provisions of the DTAA, the taxability can only be fastened on receipt of payment. The relevant finding is reproduced hereunder for ease of reference: "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 t....