2021 (4) TMI 985 - AT - Income Tax

Lower tax rate of 10% provided in India-Cyprus DTAA - whether the assessee is entitled to the beneficial provisions of Article 11(2) of the India Cyprus Double Tax Avoidance Agreement (DTAA), which provides, lower tax rate of 10% on interest income arising in India? - HELD THAT - For requirement of eligibility of lower tax rate of 10%, the recipient should be beneficial owner of the interest. The Tribunal in the case of Golden Bella Holdings Ltd Vs. DCIT (International taxation) 2019 (9) TMI 302 - ITAT MUMBAI for assessment year 2013-14 in identical circumstances has allowed the benefit of lower rate of tax of 10% It is evident from the order of lower authorities that they have decided the issue of beneficial ownership of interest only on the basis of information of assets and liabilities provided in the return of income, which mistakenly reported by the assessee as Nil and the financial statements including, balance-sheet and Profit and Loss Accounts have not been considered. In such circumstance, we feel it appropriate to set aside the order of Ld. CIT(A) and restore the matter back to the file of the Assessing Officer to decide the issue of beneficial ownership of interest afresh in the light of financial statement of the assessee and documents. The Assessing Officer may examine all the tests laid down in the decision in case of Golden Bella Holdings Ltd. (supra). Ground of the assessee is accordingly allowed for statistical purposes.

Summary

Issues Involved:
1. Validity of the order passed by the CIT(A) dismissing the appeal under section 246A(1)(a) of the Act.
2. Determination of the beneficial ownership of interest income under the India-Cyprus Double Taxation Avoidance Agreement (DTAA).
3. Taxation of interest income on an accrual basis versus receipt basis under Article 11 of the DTAA.
4. Applicability of legal precedents regarding treaty benefits based on the Tax Residency Certificate (TRC).
5. Adherence to the Rule of Consistency as established by the Supreme Court in Radhasoami Satsang vs. CIT.

Detailed Analysis:

1. Validity of the Order Passed by CIT(A):
The appellant argued that the order passed by the CIT(A) dismissing the appeal under section 246A(1)(a) is "wrong and bad in law" and should be quashed. However, this ground was not pressed further by the appellant during the hearing. Therefore, this issue was not addressed in detail by the Tribunal.

2. Beneficial Ownership of Interest Income:
The primary issue was whether the appellant, a company registered in Cyprus, is the beneficial owner of the interest income under Article 11(2) of the India-Cyprus DTAA, which provides for a lower tax rate of 10% on interest income if the recipient is the beneficial owner. The Assessing Officer (AO) and CIT(A) concluded that the appellant was not the beneficial owner, citing several factors:
- 100% beneficial ownership of shares by Myddleton Holdings Limited, Gibraltar.
- A balance sheet showing nil assets and liabilities.
- Filings and operations conducted from Gibraltar.
- Lack of independent funds or assets.

The Tribunal referenced a similar case, Golden Bella Holdings Ltd vs. DCIT, where the Tribunal held that the appellant was the beneficial owner as it had exclusive possession and control over the interest income. The Tribunal found that the AO and CIT(A) had only considered the return of income, which mistakenly reported assets and liabilities as nil, without considering the financial statements. Therefore, the Tribunal set aside the order of the CIT(A) and remanded the matter back to the AO for fresh examination of the beneficial ownership in light of the financial statements and relevant documents.

3. Taxation of Interest Income on Accrual Basis vs. Receipt Basis:
The appellant contended that the interest income should be taxed on a receipt basis as per Article 11 of the DTAA. However, the Tribunal noted that the appellant had itself declared the income on an accrual basis in its return of income. Consequently, the Tribunal held that the appellant could not now argue for taxation on a receipt basis, dismissing this ground as infructuous.

4. Applicability of Legal Precedents on Treaty Benefits Based on TRC:
The appellant argued that the CIT(A) erred in holding that legal precedents granting treaty benefits based on the Tax Residency Certificate (TRC) were not applicable to its case. However, this ground was not pressed by the appellant during the hearing, and thus, it was not addressed in detail by the Tribunal.

5. Adherence to the Rule of Consistency:
The appellant contended that the CIT(A) failed to follow the Rule of Consistency as laid down by the Supreme Court in Radhasoami Satsang vs. CIT. This ground was also not pressed by the appellant during the hearing and was not addressed in detail by the Tribunal.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, setting aside the order of the CIT(A) and remanding the matter back to the AO to re-examine the issue of beneficial ownership of interest income in light of the financial statements and relevant documents. The remaining grounds were dismissed as infructuous or not pressed by the appellant. The order was pronounced in the open court on 2nd March, 2021.