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2023 (2) TMI 789 - AT - Income TaxIncome accrued or arose or deemed to accrues or arise in India - adjustment of notional interest - extension of word paid to payable in respect of interest under Article 11 of Indo-Cyprus treaty - assessee company is incorporated outside India - HELD THAT - As decided in assessee own case 2021 (9) TMI 529 - ITAT DELHI nowhere the TPO/AO has been able to establish that notional interest satisfy the test of income arising or received under the charging provision of Income Tax Act. If income is not taxable in terms of section 4, then chapter X cannot be made applicable, because section 92 provides for computing the income arising from international transactions with regard to the ALP. Only the interest income chargeable to tax can be subject matter of transfer pricing in India. Making any transfer pricing adjustment on interest which has neither been received nor accrued to the assessee cannot be held to be chargeable in terms of the Income Tax Act read with Article 11(1) of DTAA. Here it cannot be the case of accrual of interest also, because none of the investee companies have acknowledge that any interest payment is due, albeit they have been requesting for waiving of interest of even coupon rate of 4%, leave alone the return of 18% which was dependent upon some future contingencies. Assessee despite all its efforts has acceded to such request. As in view of Article 11(1) we hold that, 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. Thus, the order of the Direction of the DRP is upheld and the grounds raised by the revenue are dismissed. 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 - Decided in favour of assessee.
Issues Involved:
1. Adjustment of Rs.26,58,12,530/- as income on account of notional interest. 2. Taxability of interest income under DTAA between India and Cyprus. 3. Rejection of assessee's analysis and determination of transaction price by TPO. 4. Application of internal comparable uncontrolled price method. 5. Treatment of investment in debentures as non-performing assets. 6. Charging of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Adjustment of Rs.26,58,12,530/- as Income on Account of Notional Interest: The assessee challenged the adjustment made by the AO, confirmed by CIT(A), arguing it was based on incorrect facts and findings, and violated principles of natural justice. The Tribunal noted that similar issues were previously decided in favor of the assessee for AY 2009-10. The Tribunal followed the precedent and allowed the appeal, indicating that the adjustment of notional interest was not justified. 2. Taxability of Interest Income under DTAA between India and Cyprus: The Tribunal examined Article 11 of the DTAA, which states 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 Tribunal referenced the Bombay High Court's decision in CIT v. Pramerica ASPF II Cyprus Holding Limited, which held that interest income is taxable on a receipt basis, not on an accrual basis. The Tribunal concluded that the word "paid" in Article 11 cannot be extended to "payable," thus supporting the assessee's position that the interest income should be taxed only when actually received. 3. Rejection of Assessee's Analysis and Determination of Transaction Price by TPO: The AO, based on the TPO's order, rejected the assessee's analysis and determined the price of the impugned transaction using the internal CUP method. The Tribunal found that this approach was not appropriate, as the notional interest did not meet the criteria for income under the Income Tax Act or the DTAA. The Tribunal upheld the assessee's argument that the adjustment was based on hypothetical and contingent events that did not occur during the year under consideration. 4. Application of Internal Comparable Uncontrolled Price Method: The TPO applied the internal CUP method to determine the arm's length price of the international transaction. The Tribunal noted that this method led to an unjustified adjustment of Rs.26,58,12,530/-. The Tribunal emphasized that transfer pricing adjustments should be based on actual transactions and not on hypothetical scenarios, thereby rejecting the TPO's application of the internal CUP method. 5. Treatment of Investment in Debentures as Non-Performing Assets: The AO did not treat the investment in debentures as non-performing assets, leading to the recognition of income on such assets. The Tribunal, following the precedent set in the assessee's own case for AY 2009-10, found that the income from these debentures should not be recognized as it was contingent and not actually received. 6. Charging of Interest under Sections 234A, 234B, 234C, and 234D of the Income Tax Act, 1961: The assessee contested the charging of interest under sections 234A, 234B, 234C, and 234D. The Tribunal, having decided the primary issue in favor of the assessee, deemed the other grounds of appeal as academic and did not adjudicate them separately. Conclusion: The Tribunal allowed the appeal of the assessee, reiterating that the notional interest adjustment was not justified and that interest income under the DTAA should be taxed on a receipt basis. The Tribunal's decision was based on the precedent set in the assessee's own case for AY 2009-10 and other judicial pronouncements, ensuring consistency in the application of the law.
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