2020 (9) TMI 25 - AT - Income Tax

TP Adjustment - adjustment as notional interest and charging it to tax - provisions of Article 11 of India Cyprus DTAA - matter being referred to a bench of three of more Members under section 255(3) - whether the expression paid is defined under the treaty and if not why should the meanings of expression paid as assigned under section 43(2) of the Income Tax Act 1961 (hereinafter referred to as the Act ) be considered under article 3(2) of Indo Cyprus tax treaty? - HELD THAT - In all the coordinate bench decisions there is no discussion whatsoever to the connotations of the expression paid and these decisions simply proceed on the basis that because the expression paid is used article 11(1) of Indo Cyprus tax treaty the taxability of interest can only be on cash basis. The expression paid is admittedly not defined in the treaty but article 3(2) of Indo Cyprus tax treaty provides that As regards the application of the Agreement at any time by a Contracting State any term not defined therein shall unless the context otherwise requires have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Agreement applies and any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State . What essentially follows is that unless the context otherwise requires the definition of the undefined treaty term under the domestic law of the source country i.e. India- and preferably under the domestic tax laws is to be adopted. It is in this context Section 43(2) of the Income Tax Act 1961 may perhaps be relevant because it provides that paid means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head Profits and gains of business or profession (Emphasis by underlining supplied by us). While it is indeed true that this meaning cannot be imported in the tax treaty mechanically without any application of mind and as a sort of automated process undoubtedly a call is to be taken by the bench as to whether or not this domestic law meaning of the expression paid will be relevant. There could possibly be a school of thought that a decision rendered in this context without specifically dealing with the implications of section 43(2) read with article 3(2) could possibly be per incuriam. A conscious call is required to be taken on these aspects.onnotations of the expression paid appearing in article 11 of Indo Cyprus tax treaty are required to be examined in some detail and that exercise can at best be conducted by a bench of three or more members so that the decision is unfettered by the decisions of the division benches in this regard. The issue raised in these appeals needs to be decided in a holistic manner unfettered by the decisions of the division benches examining all the relevant facets including the facets which are germane in the present context have remained to be examined by the coordinate benches. Once we realize that there was something lacking in our approach last time there cannot be any justification in continuing to adopt the same approach yet again. It is after all one of the fundamental duties under article 51A(h) of the Constitution of India of every citizen to have inter alia the spirt of inquiry of reform . It is in this backdrop and without making any observations on correctness or otherwise of the conclusions arrived at by the coordinate benches we deem it fit and proper to refer the additional grounds of appeal raised before us to a special bench of three or more Members. Let the matter be placed before Hon ble President for his kind consideration and appropriate orders. In the meantime as also prayed for by the learned counsel the matter stands adjourned and in the light of this special bench reference it stands adjourned sine die.

Summary

Issues Involved:
1. Transfer pricing adjustment as notional interest.
2. Applicability of Article 11 of the India-Cyprus DTAA.
3. Definition and interpretation of the term "paid" under the treaty and domestic law.
4. Reference to a special bench for detailed examination.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment as Notional Interest:
The primary issue raised by the assessee-appellant pertains to the transfer pricing adjustment of Rs. 2,62,69,721 for the assessment year 2012-13 and Rs. 55,08,678 for the assessment year 2011-12. The assessee contends that the adjustment, which imputes and charges notional interest, disregards the provisions of Article 11 of the India-Cyprus Double Taxation Avoidance Agreement (DTAA). The appellant argues that since no interest was actually paid during the relevant period due to a moratorium under the loan agreement with its Indian subsidiary, there should be no taxability of interest income.

2. Applicability of Article 11 of the India-Cyprus DTAA:
Article 11 of the Indo-Cyprus DTAA specifies that interest arising in one contracting state and paid to a resident of the other contracting state may be taxed in that other state. The appellant argues that the twin conditions of interest arising in a contracting state and being paid to a resident of the other contracting state must be satisfied for taxability under Article 11. Since no interest was paid, the appellant contends that there can be no taxability of interest income, and consequently, no arm's length price adjustment.

3. Definition and Interpretation of the Term "Paid" Under the Treaty and Domestic Law:
A significant point of contention is the interpretation of the term "paid" as used in the treaty. The appellant submits that the term "paid" is not defined in the treaty, and therefore, the meaning assigned under section 43(2) of the Income Tax Act, 1961, which includes "actually paid or incurred according to the method of accounting," should be considered. The Tribunal noted that the coordinate benches had previously held that taxability of interest under the Indo-Cyprus tax treaty could only be done on a cash basis, but these decisions did not discuss the implications of section 43(2) read with Article 3(2) of the treaty. The Tribunal highlighted the need to examine whether the term "paid" should be interpreted in light of domestic law, including the Supreme Court's judgment in Standard Triumph Motor Co Pvt Ltd Vs CIT.

4. Reference to a Special Bench for Detailed Examination:
Given the complexities and the need for a holistic examination, the Tribunal decided to refer the matter to a special bench of three or more members under section 255(3) of the Act. The Tribunal emphasized the necessity of examining all relevant facets, including those not previously considered by the coordinate benches. The Tribunal also referenced the jurisdictional High Court's decision in Director of Income Tax Vs Siemens AG, noting that the issue of taxation on a receipt basis was not thoroughly examined in light of the current context and the implications of section 43(2) and Article 3(2) of the treaty.

Conclusion:
The Tribunal concluded that the additional grounds of appeal raised by the assessee warranted a detailed examination by a larger bench. The matter was referred to the Hon’ble President for appropriate orders, and the case was adjourned sine die pending the constitution of the special bench. The Tribunal underscored the importance of judicial discipline and the necessity of re-evaluating previous decisions to ensure the correct interpretation and application of the law.