2021 (9) TMI 529 - AT - Income Tax

TP Adjustment - Adjustment as income in the hands of assessee company on account of deemed interest income - whether as per Article 11(1) interest paid includes interest payable or not? - Indo-Cyprus DTAA - HELD THAT - Since, the matter stands adjudicated by various orders of the Tribunal and Hon'ble Courts that the word paid cannot be extended to payable in respect of interest under Article 11 of Indo-Cyprus treaty, we hereby allow the appeal of the assessee.

Summary

Issues Involved:
1. Adjustment of ?4,02,72,970/- as deemed interest income.
2. Rejection of the appellant’s analysis and determination of the transaction price based on TPO's order.
3. Consideration of stewardship activities and business exigency.
4. Application of Circular 14/2001 issued by CBDT.
5. Computation of arm's length price using internal comparable uncontrolled price method.
6. Treatment of investment in debentures as non-performing assets.
7. Application of DTAA between India and Cyprus.
8. Charging of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Adjustment of ?4,02,72,970/- as deemed interest income:
The assessee challenged the adjustment made by the Assessing Officer (AO) of ?4,02,72,970/- as deemed interest income. The AO had applied an internal Comparable Uncontrolled Price (CUP) method to charge interest on Fully Convertible Debentures (FCDs) at a rate of 15%, which was the rate before conversion to 0% FCDs. The Tribunal noted that the AO's adjustments were based on hypothetical interest receivable, which did not satisfy the test of income under the Income Tax Act.

2. Rejection of the appellant’s analysis and determination of the transaction price based on TPO's order:
The Tribunal observed that the Transfer Pricing Officer (TPO) had rejected the analysis followed by the appellant and determined the price of the transaction based on the TPO’s order. The Tribunal held that the TPO's adjustments were based on contingent events that did not materialize, and thus, the notional interest could not be taxed.

3. Consideration of stewardship activities and business exigency:
The appellant argued that the conversion of FCDs and issuance of fresh 0% FCDs was due to business exigency and commercial expediency. The Tribunal acknowledged that the appellant had undertaken stewardship activities to financially support group companies and reduce their financial burden. However, this argument was not the primary basis for the Tribunal's decision.

4. Application of Circular 14/2001 issued by CBDT:
The appellant contended that the AO's adjustment was in contravention of Circular 14/2001 issued by the CBDT, which aimed to prevent the reduction of the tax base in India. The Tribunal did not specifically address this issue in detail, as the primary basis for the decision was the interpretation of Article 11(1) of the Indo-Cyprus DTAA.

5. Computation of arm's length price using internal comparable uncontrolled price method:
The Tribunal found that the TPO had incorrectly computed the arm's length price using the internal CUP method. The Tribunal held that only the interest actually received could be subject to tax, and no transfer pricing adjustment could be made on hypothetical interest receivable.

6. Treatment of investment in debentures as non-performing assets:
The appellant argued that the investment in debentures should be treated as non-performing assets, and thus, no income should be recognized. The Tribunal did not specifically address this issue, as the primary basis for the decision was the interpretation of Article 11(1) of the Indo-Cyprus DTAA.

7. Application of DTAA between India and Cyprus:
The Tribunal extensively analyzed Article 11 of the Indo-Cyprus DTAA, which deals with the taxation of interest. The Tribunal referred to various judicial precedents, including the Bombay High Court's decision in CIT v. Pramerica ASPF II Cyprus Holding Limited, which held that interest income under Article 11(1) is taxable only on receipt basis. The Tribunal concluded that the word "paid" in Article 11(1) includes "payable," and thus, only the interest actually received could be taxed.

8. Charging of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act, 1961:
The appellant challenged the AO's action of charging interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act. The Tribunal did not specifically address this issue, as the primary basis for the decision was the interpretation of Article 11(1) of the Indo-Cyprus DTAA.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the word "paid" in Article 11(1) of the Indo-Cyprus DTAA cannot be extended to "payable." Therefore, only the interest actually received could be taxed, and no transfer pricing adjustment could be made on hypothetical interest receivable. The other grounds raised by the assessee were deemed academic and were not adjudicated. The appeal was allowed, and the order was pronounced in the open court on 02/09/2021.