2019 (11) TMI 1045 - AT - Income Tax

TP Adjustment - interest on debentures invested in the Associated Enterprise (AE) - India Mauritius tax treaty - HELD THAT - No doubt, Chapter X containing the TP provisions is in the nature of anti avoidance provision to prevent avoidance/evasion of tax in relation to transaction between related parties. However, when the income itself is not chargeable to tax by virtue of the provision contained in the Tax Treaty, there is no occasion for any tax avoidance/evasion. In a recent decision in case of DCIT (International Taxation) Vs. M/s TMW ASPF i Cyprus Holding Company Limited 2019 (8) TMI 1430 - ITAT DELHI the Coordinate Bench while considering identical issue of taxability of interest income on accrual basis by applying TP provisions held only the interest which has actually been received can only be subject matter of taxation and no TP adjustment can be made on some hypothetical receivable amount which was contingent upon certain event which has actually not been taken place during the year. The aforesaid decision of the Coordinate Bench squarely applies to the assessee s case, since, not only the facts involved are more or less common but the relevant provisions of the applicable DTAAs i.e. Article 11(1) of both India Mauritius and India Cyprus treaties are identically worded. No contrary decision has been brought to our notice by the learned Departmental Representative. Even, the Revenue is unable to prove that interest on CCDs was actually received by the assessee. Therefore, we hold that the addition made on account of transfer pricing adjustment is unsustainable as the assessee has actually not received any interest income, hence, would be protected by Article 11(1) of India Mauritius tax treaty. Since, the treaty provision is more beneficial to the assessee as per section 90(1) of the Act, it will override all other provisions of the Act. Additions made are deleted. - Decided in favour of assessee.

Issues Involved:
1. Addition made on account of Transfer Pricing Adjustment towards interest on debentures invested in the Associated Enterprise (AE).
2. Applicability of Article 11 of the India-Mauritius Double Taxation Avoidance Agreement (DTAA) concerning the taxability of interest income on a paid/receipt basis.
3. Determination of arm's length price under section 92(1) of the Income Tax Act in the absence of actual income accrual.

Detailed Analysis:

Issue 1: Addition made on account of Transfer Pricing Adjustment towards interest on debentures invested in the AE
The primary grievance in these appeals concerns the addition made due to Transfer Pricing Adjustment towards interest on debentures invested in the Associated Enterprise (AE) Vital Construction Pvt. Ltd. (VCPL). The assessee, a non-resident company engaged in investment holdings, had purchased compulsorily convertible debentures (CCDs) from its AE Indopark Holdings Limited Mauritius for ?34.3 Crores with a coupon rate of 12%. The Transfer Pricing Officer (TPO) noted that the interest due on these debentures was waived by the assessee, which led to the adjustment of interest income to the assessee's income. The TPO computed the interest on debentures at 12% per annum, resulting in adjustments for different assessment years: ?4,51,068 for AY 2008-09, ?4,63,80,000 for AY 2011-12, and ?3,62,14,521 for AY 2012-13.

Issue 2: Applicability of Article 11 of the India-Mauritius DTAA
The assessee contended that under Article 11 of the India-Mauritius DTAA, interest income is taxable only on a paid/receipt basis. The assessee argued that since no interest was paid, no income accrued, and thus, the question of determining the arm's length price did not arise. The Tribunal noted that Article 11(1) of the India-Mauritius treaty states, "Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State." This implies that interest income is chargeable to tax only on actual payment. The Tribunal referred to similar interpretations in other treaties and judicial precedents, such as the India-Cyprus DTAA, where it was held that interest is taxable on a receipt basis, not on accrual. The Tribunal concluded that the interest income, as per Article 11(1) of the India-Mauritius treaty, is chargeable only on actual payment, and since no interest was received, no TP adjustment could be made.

Issue 3: Determination of arm's length price under section 92(1) of the Income Tax Act
The Tribunal examined whether the determination of arm's length price under section 92(1) of the Act was applicable in the absence of actual income accrual. The Tribunal observed that the provisions of Chapter X, containing the TP regulations, are machinery provisions subject to section 4 of the Act, which is the charging provision. Since the interest income was not chargeable to tax under section 4 due to the DTAA provisions, the TP regulations could not be applied. The Tribunal referred to the decision in Vodafone India Services Pvt. Ltd v/s DCIT, which stated that income arising from international transactions must satisfy the test of income under the Act and must be chargeable under section 4. Therefore, the Tribunal held that since the interest income was not chargeable to tax on an accrual basis as per the DTAA, the TP adjustment was unsustainable.

Conclusion:
The Tribunal allowed the appeals, holding that the addition made on account of transfer pricing adjustment was unsustainable as the assessee had not received any interest income, and thus, the provisions of Article 11(1) of the India-Mauritius tax treaty applied. Consequently, the other grounds raised by the assessee became academic and were not adjudicated. The Tribunal emphasized that the treaty provisions, being more beneficial to the assessee, would override the provisions of the Income Tax Act. The appeals were allowed, and the additions made were deleted.

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