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TMI Blog2016 (3) TMI 829X X X X Extracts X X X X X X X X Extracts X X X X ..... g Pvt. Ltd. (2011 (2) TMI 209 - DELHI HIGH COURT) and, therefore, this conclusion cannot be accepted. We fail to appreciate as to how ld. DRP has drawn the conclusion from the above statement that Indian company is treating this amount as interest. The true nature of transaction cannot alter merely by clubbing the discounting charges under the head ‘financial expenses’. Therefore, this plea raised by ld. CIT(DR) on the basis of observation made by ld. DRP for distinguishing these facts in the current year from earlier years is without any basis. As far as ld. CIT(DR)’s submission regarding non-cooperation of assessee on the basis of observations made by ld. DRP in para 7 are concerned, we find that none of the authorities below have pointed out as to which particular information was missing in the entire trail of transaction. In the submissions filed by assessee it is clearly stated that all the relevant information were furnished before lower revenue authorities. - Decided in favour of assessee X X X X Extracts X X X X X X X X Extracts X X X X ..... der:- "5. In this case, as explained by the assessee, CIPL draws bill of exchange on the buyer. CIPL gets these bills of exchange discounted with CFSA (assessee), which remits the balance amount of bill of exchange (net of discount) to CIPL. On the maturity date the buyer pays the full amount of the bill of exchange to CFSA. As mentioned in the bill of exchange discounting, the pricing of the discounting is based on the Libor plus margin. The transaction from the perspective of the assessee is explained as below: - It purchases the bill of exchange, for which discounting agreement is entered- and this mentions the face value, the date of acceptance of the bill and maturity date. - The discounting agreement also has a mention of the pricing of the product and tenor of the bill. - The discounting agreement has a mention of the face amount, discount amount and the net proceeds payable by the assessee. - On the date of purchase of the bill of exchange, the assessee pays to CIPL the net proceeds after charging the discount on the face value. - On the date of maturity it receives the face value from the buyer/ obligor of the bill. - To summarize the transaction is a simple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discounting of bills. (viii) No reason has been given as to why the bills were not discounted by the Indian company in the Indian market from any bank or financial institutions or any other company engaged in similar business. (ix) Where was the money invested by the Indian company after receiving it from the assessee? (x) Who is in possession of original bill landing and other export documents? (xi) What is the basis of information and expertise with Indian company to identify goods without inspection on high seas and negotiate and sell the same? (xii) No document has been submitted correspondence between the Indian International, Geneva. (xiii) No details are furnished as to how the debt has been recovered by the assessee from Cargill International Geneva? (xiv) No copies of final accounts of the assessee have been furnished before the AO or before this Panel to show the treatment of this transaction in their books of accounts. 7.1 In fact, the whole transaction is a colorful device by the assessee company to earn interest from India without payment of taxes. As the assessee cannot simply deposit funds in India to earn higher rate of interest then in other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest income at ₹ 558,084,042/- taxable @ 15%. 7. Being aggrieved, the assessee is in appeal before us and has taken following grounds of appeal (A.Y. 2003-04):- Based on the facts and circumstances of the case, the Appellant respectfully submits: 1. That the learned Assistant Director of Income Tax, Circle- 1 (1), International Taxation, New Delhi (hereinafter referred to as 'Learned AO') and Hon'ble Dispute Resolution Panel ('the DRP') have erred on the facts and in circumstances of the case and in law in initiating re-assessment proceedings based on mere change of opinion as there were no material facts on record giving rise to any valid reasons to believe that any income has escaped assessment. Accordingly, initiation of the re-assessment proceedings for A Y 2003-04 are bad in law. 2. Without prejudice to above, the Learned AO and Hon'ble DRP have erred in facts and in law in making the addition of discounting charges amounting to ₹ 80,268,762 on the following grounds: 2.1 That on the facts and circumstances of the case and in law, the learned AO erred in characterizing the discounting charges to be in the nature of interest as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts and the circumstances of the case and in law by initiating penalty proceedings u/s 271(l)(c) against the appellant for furnishing inaccurate particulars or for failure to disclose true particulars of income. The above grounds are independent and without prejudice to each other. The Appellant craves leave to add, alter, supplement, amend, vary, withdraw or otherwise modify the ground mentioned herein above at or before the time of hearing. 8. At the outset ld. counsel for the assessee submitted that the issue is squarely covered by the Tribunal's consolidated order dated 19.8.2011 in assessee's own case for AYs 2004-05 and 2005-06rendered in ITA nos. 579/Del/2010 and 580/Del/2010 and also by the decision of Tribunal in the case of Cargill TSF Asia Pte Ltd. for A.Ys. 2005-06, 2006-07 and 2007-08 vide ITA nos. 581/Del/2010, ITA no. 3880 & 3057/Del/2010. He referred to para 7 of the order in assessee's own case, wherein it has been held as under: 6. We have duly considered the rival contentions and gone through the record carefully. In the case of Cargil Clobal Trading India (P) Ltd., the IT AT has made the following observations: "8. We have considered the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed of in India and (b) discount on promissory notes and bills of exchange drawn or made in India. Thus where the legislature was conscious of the fact that even the discount of bills of exchange is to be included within the definition of interest, the same was basically so' provided for. However, under the scheme of Income-tax Act the word "Interest" defined under section 2(28A) does not include the discounting charges on discounting of bills of exchange. Though the circular no. 65 was rendered in relation to deduction of-tax under section 194A, in respect of payment to a resident, the same will be relevant even for the purpose of considering whether the discount should be treated as interest or not. The CBDT has opined that where the supplier of goods makes over the usance bill/hundi to his bank which discounts the same and credits the net amount to the supplier's account straight away without waiting for realization of the bill on due date, the property in the usance bill/ hundi passes on to the bank and the eventual collection on due date is a receipt by the bank on its own behalf and not on behalf of the supplier. For such cases of immediate discounting the ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e may notice at this stage that the respondent-assessee is in the export business. On the exports made by the assessee to its best buyers outside India, the assessee draws bills of exchange on those buyers located outside India. These bills of exchange are discounted by the assessee from CFSA who on discounting the bills immediately remits the discounted amount to the assessee. Thereafter, it is the obligation/headache of CFSA to realise the amounts from those buyers to whom the goods are exported and bills are drawn by the assessee. It is the said discounted charges which were claimed by the assessee as expenses under section 37(1) of the Act. The discounting facilities offered by CFSA to the assessee after charging its aforesaid discounted commission are not questioned by the Revenue. The only objection was that on this amount remitted by the assessee to CFSA, the assessee was to deduct tax at source (TDS) under section 195 of the Act and since it was not done, invoking the provisions of section 40(a)(i) of the Act, the expenditure was disallowed. 6. As pointed out above, according to the Assessing Officer, the aforesaid discounted charges by the assessee to CFSA were treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d written submissions, which are reproduced hereunder: "SUBMISSIONS OF REVENUE ON SPECIFIC ASPECTS 1. The Revenue emphatically relies on the assessment orders of the relevant assessment years as well as directions of the DRP. 2. Without prejudice to these, following additional submissions are made. 3. These submissions below are ONLY on specific aspects. On balance aspects, oral submissions during the hearing, the Assessment Order as well as specific portions, favourable to Revenue, of DRP's orders are relied upon. 4. It is Revenue's humble submission and contention that the Hon'ble Tribunal could differ from its earlier decision, in view of decision of the Hon'ble Supreme Court in the case of Union of India v. Raghubir Singh [1989] 178 ITR 548 and that this is a fit case to do so. This aspect is detailed below. CARGILL TSF ASIA PTE L TO, SINGAPORE I AY 2008-09 5. The Ld. AR has relied, inter alia, on the orders of the Hon'ble ITAT in the assessee's own case in AYs 2005-06, 2006- 07, 2007-08 (combined order dated 19.08.2011) which have also been confirmed by the Hon'ble HC, Delhi (combined order dated 19.11.2012). The copies of these ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which invests it in India and the assessee gets a fixed predetermined interest rate. The payment of interest together with the principal by the Indian company to the assessee is routed through another group company, which is called the buyer of goods. It is important to note that promissory notes are given by the non-resident buyer prior to raising of invoice by the Indian company". 12. The thrust of Revenue's present submission, is that none of the above referred orders of Hon'ble ITAT (i.e., earlier orders of ITAT in the case of the assessee itself, or its orders in the cases of CFSPL & CGTIPL which have been relied and quoted by the ITAT in the case of the assessee) have considered and adjudicated the entire set of facts and circumstances. This has been very briefly highlighted above (at para 9,10,11) and has been detailed below. Thus, the Hon'ble ITAT and Hon'ble High Court have addressed only the legal issue as summarised at Para 6 above without addressing the facts and circumstances that lead to the unmistakable conclusion that the assessee, along with its related concerns, have put through colourable transactions for benefiting from the higher interest ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been analysed in light of RBI regulations and facts of the case and has been found to be of no help to the assessee and is also without supporting evidence. Page 11, Para 9.2-9.3 Page 13 Para (iv)&(v),(i) Page 14 Para (ii) The "paper transactions" of the assessee have been highlighted along with its non-compliance. The definition of "interest" in the Income Tax Act and the DTAA has been put in perspective Page 11-12 Para 9.4 -9.6 Assessee's reliance on CBDT circulars is analysed and rejected. Critical observations therein include (i) Assessee has not approached bankers for discounting of so called bills; (ii) PNs of group concerns are not freely transferable by endorsement and delivery; (iii) The case of the assessee is a private arrangement among group concerns and cannot be compared with banking transactions and CDs. 14. The Revenue submissions remain on the same lines as above. RELIANCE ON judgment in Raghubir Singh [19891178 ITR 548 (SC) 15. It is Revenue's humble submission and contention that the Tribunal could differ from its earlier decision, if such a need arose, in view of decision of the Supreme Court in the case of Unio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mention that in the Indian entities case being M/s Cargill Global Trading India Pvt. Ltd. and M/s Cargill India Pvt. Ltd. for the same A Y i.e. A Y 2008-09, the Ld. CIT(A) has held that the discounting charges paid to appellant (Cargill TSF Asia Pte Ltd) are not in the nature of interest and thus, no disallowance U/S 40(a)(i) was warranted. This order has been accepted by the Department and no further appeal was preferred. The facts and the issue involved in the above mentioned assessment years are identical to. the facts and issue involved in the years in question i.e. whether discounting charges is akin to interest income as defined u/s 2(28A) of the Act, taxable as per the provisions of the Act as well as the DT AA between India and Singapore (Reference in this regard may be made to the grounds of appeal raised). The Learned Department Representative ('Ld. DR') has raised concerns that crucial facts pertaining to the cases involved have not been considered by the Hon'ble ITAT while adjudicating the orders in earlier years. The Appellant here would like to submit its rebuttal on the specific concerns raised by the Ld. DR: Contention No.1: The AO in notes in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of commercial expediency cannot be raised by the revenue at this stage or at any stage prior. Hence, objections raised are of no consequence and deserves to be ignored. Contention No.2: Para 11 and para 12 of the Ld. DR's submission The finding of the Hon'ble DRP that the whole transaction is a colorable device merely entered by the Appellant to earn higher rate of interest on funds (which are lying idle abroad) and are give to Indian group companies, under the shelter of the discounting transaction, which in turn invests it in India and earns fixed pre-determined interest rate is merely an allegation and devoid of any material on record to prove the same. 'At the outset, it is submitted that the trade transaction are actual international trade which is even recognized by RBI as Merchanting Trade. There is actual movement of goods from one country to other through Ship, thus, the transaction cannot be termed as sham transaction or colorful transaction. The Appellant is not a party to the buy-sell agreement but it understands that the whole transaction is routed through banking channel and permitted by Indian regulator. The Appellant is in the business of providing fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention No.3: Para 13 of the Ld. DR's submission i.e. Arguments culled out from the DRP's order Contention on non-cooperation of the assessee in respect of submitting complete trail of documents and limited information available by the assessee: The Appellant had duly submitted all the vital documents pertaining to bill discounting vis a vis invoice raised by Indian group company on offshore buyer of goods, promissory note issued by offshore buyer of goods, discounting agreement between the Appellant and Indian group entity. Moreover, the relevant documents required by the Appellant for undertaking a usual business transaction has been duly submitted by the Appellant during assessment as well as DRP proceedings. Further, as regards, the contention on the margin of Indian group company is a subject matter of Indian group entity and as per information available, had been examined in the transfer pricing analysis by the TPO in case of Indian group companies and in no way shall impact the said discounting transaction of the Appellant. The finding that the Indian company records t!:e transaction as payment of interest and the appellant terms the same as discount is inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot determinative of any material fact or position of law and deserves to be ignored. As stated above, the issue is squarely covered in favor of the assessee by the decision of the Tribunal, the Hon'ble High Court and the Hon'ble Supreme Court. Contention No.4: Reliance on judgment in Raghubir Singh [1989] 178 ITR 548 (SC) Reliance on this judgment has been placed stating that the Hon'ble IT AT can deviate from its earlier decision as the vital points have not been considered. However, the Appellant would like to submit that all the facts of the transaction were duly presented before various authorities arid after consideration of necessary facts, the Hon'ble HC and ITAT have adjudicated the matter in favor of the Appellant. Without prejudice to the above, it is also submitted that in the Appeal filed by the assessee and the grounds raised the question that has been raised is regarding the characterization of the discounting charges and that is the only subject matter of the Appeal and in the absence of any cross objection - by the revenue, the Tribunal is not permitted to go beyond the subject matter of the appeal. This position is stated in concrete by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, reproduced above. In order to appreciate the submissions of ld. CIT(DR), we have to first consider the brief background of the case. 16. The assessee is a company incorporated under the laws of Singapore and is tax resident of Singapore. It had entered into an agreement for cost sharing with Indian party for rendering certain services. Besides this, assessee had also discounted the bills of exchange (BE)/ demand promissory notes (PN) of certain Indian group entities i.e. Cargill India Pvt. Ltd. and Cargill Global Trading Pvt. Ltd. The assessee did not offer the income earned by it on discounting the PN of Cargill India Pvt. Ltd. on the ground that the same was in the nature of "business income" and was not taxable in the absence of permanent establishment (PE) of the assessee in India. The Indian group entities CIPL and CGTIPL got discounted the promissory notes issued to them by the buyer of their goods for the assessee. For this purpose the assessee entered into a discounting agreement with Cargill India Pvt. Ltd. for purchase of PN at a discount specifying the details of PN to be discounted face value, discounted value, rate of discount, name of the company who owed PN, dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 15 of assessment order is with reference to role of Cargill Inc. The said para is reproduced hereunder:- "7.8 As per the last order of the Ld. ITAT in the case of CGTIPL wherein appeal of I CGTIPL has been allowed inl.T.A. No.684/Del/2009 for A.Y. 2004-05 and subsequent years, this income of the assessee is held to be of not of the nature of interest however that order is passed by the Ld. IT AT wherein complete facts were not presented and specially facts relating to the assessee (Cargill TSF Asia Pte Ltd), role of Cargill Inc., role of buyer Cargill IntI. SA., RBI Circulars, FEMA provisions etc. were not presented before the Ld. IT AT which are very material for the case. Also, it becomes an undisputed fact that the interest income (discounting charges as per the nomenclature) arises in India, as is also mentioned by the assessee in the notes to return of income filed on 30-09-2008. Once the interest accrues/arises in India there is no need to go to section 9 of the Income Tax Act, 1961 which provides for 'Income deemed to accrue or arise in India'. Even otherwise, in the present case, the interest is also deemed to accrue or arise in India as: • The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of discounting charges or interest. The RBI regulations cannot decide the true nature of receipt in the hands of assessee. Had there been any violation of RBI regulation in the whole transaction, then action would have been initiated against the assessee in accordance with law. The conclusion drawn by ld. DRP is that as per the definition of interest in the Indian Income-tax Act and the DTAA the amount paid by the assessee is a debt to the Indian company and the assessee company has recovered the said debt with interest from the Indian company through another group company. In our opinion, this aspect has received specific consideration of Hon'ble High Court in the case of Cargill Global Trading Pvt. Ltd. (supra) and, therefore, this conclusion cannot be accepted. Further, ld. CIT(DR) has referred to para 7 and 7.2 of ld. DRP's order, which has been reproduced by us earlier. In para 7.2, ld. DRP has, inter alia, observed that the Indian company, while regarding the above transaction terms the payment as interest and claims deduction, whereas the same amount is termed as discount by the assessee, resulting into no tax payment by the entire group in India. In the submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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