2016 (3) TMI 829 - AT - Income Tax

Amounts received from Indian associated enterprises - whether were in the form of interest or discounting charges? - assessee ( CFSA ), is a company incorporated in Singapore and is a tax resident of Singapore - Held that - 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. The conclusion drawn by ld. DRP is that as per the definition of interest in the Indian Income-tax Act and the DTAA the amount paid by the assessee is a debt to the Indian company and the assessee company has recovered the said debt with interest from the Indian company through another group company. In our opinion, this aspect has received specific consideration of Hon ble High Court in the case of Cargill Global Trading Pvt. Ltd. (2011 (2) TMI 209 - DELHI HIGH COURT) and, therefore, this conclusion cannot be accepted. 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. CIT(DR) s submission regarding non-cooperation of assessee on the basis of observations made by ld. DRP in para 7 are concerned, we find that none of the authorities below have pointed out as to which particular information was missing in the entire trail of transaction. In the submissions filed by assessee it is clearly stated that all the relevant information were furnished before lower revenue authorities. - Decided in favour of assessee

Issues Involved:
1. Characterization of discounting charges as interest under Section 2(28A) of the Income Tax Act and Article 11 of the India-Singapore DTAA.
2. Validity of re-assessment proceedings based on alleged change of opinion.
3. Applicability of CBDT circulars to non-resident entities.
4. Taxability of business income in the absence of a Permanent Establishment (PE) in India.
5. Levy of interest under Section 234B of the Income Tax Act.
6. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Characterization of Discounting Charges as Interest:
The primary issue in the appeals was whether the amounts received by the assessee from its Indian associated enterprises were in the form of interest or discounting charges. The assessee, a Singapore-based company, argued that the amounts were discounting charges from the purchase of bills of exchange/demand promissory notes from its Indian associates, Cargill India Pvt. Ltd. (CIPL) and Cargill Global Trading Pvt. Ltd. (CGTIPL). The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) contended that these amounts were interest under Section 2(28A) of the Income Tax Act and Article 11 of the India-Singapore DTAA. The Tribunal, however, upheld the assessee's position, relying on previous decisions in similar cases, including those of Cargill Global Trading India Pvt. Ltd., where it was held that such discounting charges do not qualify as interest under Section 2(28A) and the DTAA.

2. Validity of Re-assessment Proceedings:
The assessee contended that the re-assessment proceedings initiated by the AO were based on a mere change of opinion and lacked any new material facts. The Tribunal did not find merit in the AO's initiation of re-assessment proceedings solely based on a different interpretation of the same set of facts already on record, thus supporting the assessee's claim that the re-assessment was not justified.

3. Applicability of CBDT Circulars:
The assessee argued that the CBDT circulars, which state that discounting charges are not in the nature of interest, should apply. The AO and DRP rejected this argument, stating that the circulars were issued under Section 194A of the Act and were applicable only to residents. The Tribunal, however, noted that the circulars were relevant for understanding the nature of discounting charges and supported the assessee's position that these charges should not be treated as interest.

4. Taxability of Business Income in the Absence of a PE:
The assessee maintained that the discounting charges were business income and, in the absence of a PE in India, were not taxable under the India-Singapore DTAA. The Tribunal agreed, reiterating that the assessee did not have a PE in India and thus, the discounting charges could not be taxed as business income in India.

5. Levy of Interest under Section 234B:
The AO levied interest under Section 234B of the Income Tax Act, arguing that the assessee was liable for advance tax. The Tribunal found that since the discounting charges were not taxable in India, no advance tax was payable by the assessee, and thus, the levy of interest under Section 234B was unwarranted.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The AO initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income. The Tribunal, considering that the primary issue of characterization of discounting charges was resolved in favor of the assessee, found no basis for the penalty proceedings and thus, these proceedings were not justified.

Conclusion:
The Tribunal, after considering all aspects and previous judicial decisions, concluded that the discounting charges received by the assessee were not in the nature of interest and thus, were not taxable in India in the absence of a PE. The re-assessment proceedings were deemed invalid, the levy of interest under Section 234B was overturned, and the initiation of penalty proceedings under Section 271(1)(c) was dismissed. The appeals were allowed in favor of the assessee.

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