2016 (1) TMI 1178 - AT - Income Tax

Nature of additional consideration received - taxability - interest income or not - Held that - Additional consideration received by the assessee is part and parcel of the total consideration. It cannot be segregated under the heads original sale consideration and penal interest received from Oracle. The business world is governed by its own rules and conventions. If considering the time factor Oracle decided to increase the share price in the offer letter it has to be taken as a part of original transaction. It is noteworthy that in the original offer interest @ 11.35 per share was offered by Oracle. After considering the delay in dispatch letter and other relevant factors if it decided to increase the interest @ of 16 per share it was a business decision. The assessee had no control over the decision making process of Oracle. If we see the transaction from the debtor/creditor angle it is clear that there was no such relationship between the assesse and Oracle. The assesse owned shares of I-flex and in response to the open offer by Oracle it decided to sell the shares-it was a pure and simple case of selling of shares. The assesse had not entered in to any negotiations with Oracle and transferred the shares as per a scheme that was approved by SEBI. The assesse had not advanced any sum to Oracle and had not received any interest from it for delayed repayment of principal amount. In short the additional consideration received by the assesse from Oracle was not penal interest and was part of the original consideration. Hence same is not taxable. - Decided in favour of assessee

Summary

Issues Involved:
1. Taxability of additional consideration received by the assessee.
2. Validity of reopening the assessment.

Issue-wise Detailed Analysis:

1. Taxability of Additional Consideration Received by the Assessee:
The core issue was whether the additional consideration of Rs. 2.20 crores received by the assessee, a sub-account of MSCIL, from Oracle for the delay in making payment of sales consideration for shares of I-flex Solution Ltd., should be treated as taxable income.

The assessee argued that the additional consideration was not interest as per Section 2(28A) of the Income Tax Act, nor was it a service fee or charge. It was part of the sales receipts, arising from the same source, i.e., the shares transferred to Oracle under the open offer. The assessee contended that there was no debtor/creditor relationship between them and Oracle, and hence, the amount should not be taxed as interest under Article-11 of the DTAA. Alternatively, it was argued that it could not be taxed as capital gains under Article-13 of the Treaty and should fall under 'income from other sources' under Article-22 of the Treaty, which would not be taxable in India due to the absence of a Permanent Establishment (PE) in India.

The Department Representative (DR) contended that the additional consideration was for the delay in making the payment of sales consideration and should be treated as interest, taxable under Article-11 of the India-Mauritius DTAA. The DR argued that Oracle's deduction of TDS on the amount indicated it was not part of the sale consideration but interest for delayed payments.

The Tribunal found that the additional consideration was part of the total consideration for the shares and not a separate penal interest. The Tribunal noted that the delay in making the open offer and dispatching the letter of offer led Oracle to revise the offer price, which included the additional consideration. The Tribunal held that the additional consideration was part of the original transaction approved by SEBI and not penal interest. Therefore, it was not taxable. The Tribunal referred to a similar case, Genesis Indian Investment Company Ltd., where additional consideration received under an open offer was treated as part of the capital gain and not interest income.

2. Validity of Reopening the Assessment:
The assessee contended that the reopening of the assessment was a case of change of opinion, with no new material discovered by the AO, and all information was available on record. The assessee relied on the cases of Kelvinator of India Ltd. and Coca Cola Export Corporation to support their argument.

The DR argued that the AO had rightly reopened the matter under Section 147 of the Act, as no opinion was formed during the original assessment. The DR cited cases like ESS Kay Engineering (P) Ltd., A.L.A Firm, and EMA India Ltd. to support their stance.

The Tribunal, having decided the main issue in favor of the assessee, did not adjudicate the technical issue of reopening the assessment. The Tribunal allowed the appeal filed by the assessee, making the discussion on reopening moot.

Conclusion:
The Tribunal concluded that the additional consideration received by the assessee from Oracle was part of the total consideration for the shares and not penal interest, hence not taxable. Consequently, the appeal filed by the assessee was allowed, and the issues regarding reopening the assessment were not adjudicated.