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TMI Blog2019 (11) TMI 1045X X X X Extracts X X X X X X X X Extracts X X X X ..... ier known as M/s. Indopark Investment Limited, is a non resident company and is engaged in the business of investment holdings. It is stated, the assessee belongs to Merril Lynch Group which is one of the world's leading financial management and advisory companies. In course of transfer pricing proceedings, the Assessing Officer on examining the audit report as well as other documents available on record noticed that during the year under consideration assessee had entered into certain international transactions with its AEs. He noticed that the assessee had purchased compulsorily convertible debentures (CCDs) of Vital Construction Pvt. Ltd., Delhi from its AE Indopark Holdings Limited Mauritius for the total value of Rs. . 34.3 Crores. The coupon rate on the said debentures is 12%. He found that the debentures were acquired vide deed of adherence dated 27th March, 2008. In response to the query raised by the Transfer Pricing Officer, assessee submitted the details of interest on the debentures which was due from Vital Construction Pvt. Ltd., Delhi and also submitted that the interest due has been waived by the assessee. Noticing the above, the Transfer Pricing Officer called upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver by the assessee. Thus, it was claimed that the transaction is at arm's length. It was further submitted, determination of arm's length price under section 92(1) of the Act would arise only when there is a transaction which has resulted in income at the hands of assessee. It was submitted, since no income has accrued on account of waiver of interest on CCDs, TP provisions would not apply. After considering the submission of the assessee, learned Commissioner (Appeals) did not find merit in them. He observed, in spite of opportunity being given the assessee could only produce an unsigned and incomplete copy of the Board Resolution of VCPL dated 28.4.2008 which means that the Resolution was passed after closure of the financial year. He observed, since, the assessee did not pass any Resolution within the Financial year, nor furnish proof of its consent for not charging interest, income on account of interest on CCDs accrued to the assessee as it is following mercantile system of accounting. Therefore, the Transfer Pricing Officer was justified in making adjustment to the income on account of interest on CCDs. As regards assessee's contention that similar transduction between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest and not any notional interest on accrual basis. He submitted, the aforesaid decision of the Tribunal was upheld by the Hon'ble Jurisdictional High Court while dismissing Revenue's appeal vide judgment dated 12th March, 2019 in Income Tax Appeal no. 1824 of 2016. The learned Senior counsel submitted, once the interest on accrual basis is not chargeable to tax in India under the provisions of the tax treaty addition of interest income on notional basis cannot be made applying TP regulations. Drawing our attention to section 92(1) of the Act, he submitted, only in respect of income chargeable to tax under section 4 of the Income Tax Act, the transfer pricing provisions can be made applicable as section 92 provides for computing the income arising from international transaction with regard to the arm's length price. He submitted, once the interest income is not chargeable under section 4 of the Act in view of Article 11(1) of India-Mauritius treaty read with section 90(1) of the Act, there is no question of determining the arm's length price of interest on CCDs on accrual/notional basis. In this context, he drew our attention to the decision of Hon'ble Jurisdictional H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditions of CCDs interest @ 12% per annum is payable to the assessee, interest income has accrued to the assessee and determination of arm's length price of interest income has to be made. It is discernible from the facts on record, in course of proceedings before departmental authorities in A.Y. 2008-09 and 2011-12 the assessee had challenged the TP adjustment on account of interest on CCDs on the ground that no income has accrued at its hands due to waiver of interest and such waiver of interest is at arm's length considering similar waiver made by other AE. However, in course of appeal proceeding for A.Y. 2012-13, for the first time assessee submitted that since as per Article 11(1) of India-Mauritius tax treaty interest income is chargeable only on actual payment, no TP adjustment can be made under section 92(1) of the Act. Of course, before us also the main plank on which the learned Senior counsel contested the TP adjustment is on the basis of applicability of Article 11(1) of the India-Mauritius treaty read with section 90 of the Act. The fact that the assessee has actually not received any interest income on the CCDs has not been disputed by the Revenue. Therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. Thus, once the interest income is not chargeable to tax on accrual basis as per Article 11(1) of the Tax Treaty, it goes out of the purview of the total income chargeable to tax under section 4 of the Act. Now, it is judicially settled that Chapter X containing section 92 and other provisions are in the nature of machinery provisions and subject to section 4 of the Act which is the charging provision. If a particular item of income does not come within the purview of the charging provision as contained under section 4 of the Act, the machinery provisions as contained under Chapter X would not be applicable, though, they may be in the nature of special provision. Therefore, at this juncture it is necessary to evaluate the interplay between the Treaty and TP provisions. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been brought on record that investee companies have requested for the waiver of interest due to bad financial position/cash crunch and delayed project in the real estate and such a request has been accepted by the assessee. Part of the FCCDs held in one of the investee company was sold to a third party during the year at a loss. Thus, none of the investment bore any premium to the assessee on sale of securities. They were either sold at a loss or at par to third parties. The details of investment made by the company in FCCDs and the interest received and factum of waiver of interest are reproduced hereunder:- Investee Initial due of subscri-bing of FCCDs Amount of investment Conversion of deben-ture during the year Interest received during A.Y. 2011-12 FY 2010-11 01.04.2010 to 31.3.2011 (in Rs. ) Waiver of interest DD Housing Ltd. 16-Oct-2006 146,82,00,000 Not converted Nil Waiver of interest with effect from Sep 16, 2008 (including interest for the full subject year) Supreme Buildcap Pvt. Ltd. 22-Dec-2006 75,00,00,000 Converted on 11-May-2010 Nil Waiver of inter- est with effect from Sep 15, 2009 (including inter- est for 1 month & 11 days pertai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Further, in the India Cyprus DTAA wherein similar phrase has been used pertaining to FTS and Royalty in India Cyprus DTAA, Hon'ble Bombay High Court held that assessment of royalty or FTS should be made in the year in which amount have actually received and not otherwise. The coordinate bench of Mumbai ITAT in the case of Pramerica ASPF II Cyprus Holding Ltd. vs. DCI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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