March 2020
Article 11 of India-Mauritius DTAA; sections 4, 92 of the Act – As per Article 11(1), interest can be taxed only if twin conditions of ‘arising’ (i.e., accrual) and ‘paid’ (i.e., actual receipt) are fulfilled – Transfer pricing provisions cannot apply to tax an amount which had neither accrued to, nor was received by, the taxpayer
By Geeta Jani | Dhishat B. Mehta
Chartered Accountants
20 [2020] 113 taxmann.com 79 (Mum.)(Trib.) Gurgaon Investment Ltd. vs. DCIT ITA Nos. 1499 (Mum.) of 2014, 7359 (Mum.) of
2016 & 6821 (Mum.) of 2017 A.Y.: 2008-09, 2011-12 & 2012-13 Date of order: 15th November,
2019
Article 11 of India-Mauritius DTAA;
sections 4, 92 of the Act – As per Article 11(1), interest can be taxed only if
twin conditions of ‘arising’ (i.e., accrual) and ‘paid’ (i.e., actual receipt)
are fulfilled – Transfer pricing provisions cannot apply to tax an amount which
had neither accrued to, nor was received by, the taxpayer
FACTS
The assessee was a
non-resident company incorporated in Mauritius. It was engaged in the business
of holding of investments. It was a member company of an international group of
financial management and advisory companies. The assessee had purchased
compulsorily convertible debentures (CCDs) of an Indian company (I Co) from its
AE based in Mauritius.
In course of transfer pricing proceedings, the assessee furnished
details of interest on debentures due from I Co. The assessee submitted that it
had waived interest that was due from I Co and I Co had also not claimed
deduction of interest on CCDs. Therefore, no income had accrued to the
assessee. The TPO observed that the assessee had waived interest to help its
AE. Therefore, such interest was to be reduced from the income of the assessee.
CIT(A) upheld the
transfer pricing adjustment made.
HELD
- Article 11(1) of the
India-Mauritius DTAA reads: ‘Interest arising in a Contracting State and
paid to a resident of the other Contracting State may be taxed in that other
State.’
- The expression ‘paid’ has
been used in several other DTAAs, in similar as well as different contexts.
Several judicial authorities have interpreted the expression ‘paid’ and held1 that in such cases the relevant income is to
be taxed on paid basis and not accrual basis.
- Article 11(1) of the India-Mauritius DTAA
requires fulfilment of the twin conditions of ‘arising’ (i.e., accrual) and
‘paid’ (i.e., actual receipt) for taxability of interest. Unless both
conditions are fulfilled, interest will not be taxable.
- Once interest is not
taxable as per Article 11(1) of the DTAA, section 4 of the Act will have no
application. Section 92 and other provisions in Chapter X are in the nature of
machinery provisions, which are subject to charging provision in section 4 of
the Act. If a particular item of income does not come within the purview of the
charging provision, the machinery provisions would not be applicable.
- Chapter X containing TP
provisions is in the nature of anti-avoidance provisions applicable in case of
transactions between related parties. However, when income itself is not
chargeable to tax because of DTAA provisions, there is no question of tax
avoidance / evasion being applicable.
- It was only because of
difficulties in the real estate sector that investee companies had requested
for waiver of interest.
- For taxing interest, it was
necessary to satisfy the twin conditions of accrual and payment. However, the
TPO / A.O. had sought to tax what the assessee was supposed to
receive (but, factually had not received).
- Transfer pricing adjustment
was made on this hypothetical amount. In Vodafone India Services (P.)
Ltd. vs. Union of India [2014] 50 taxmann.com 30 (Bom.), the Bombay
High Court held that even income arising from an international transaction must
satisfy the test of income under the Act and must find its home in one of the
charging provisions. The TPO / A.O. had not established that notional interest
satisfied the test of income arising or received under the charging provision
of the Act. Transfer pricing adjustment in respect of interest which was
neither received by, nor had accrued to, the assessee could not be made.
_________________________________________________________________
1 DIT vs. Siemens Aktiengesellscharft, [IT Appeal No.
124 of 2010, dated 22nd October, 2012]
[India-Germany DTAA];
Johnson & Johnson vs. Asstt. DIT; Johnson & Johnson vs. ADIT [2013] 32 taxmann.com
102 (Mum.)(Trib.) [India- USA DTAA]; Pramerica ASPF 11 Cyprus Holding Ltd. vs.
Dy. CIT [2016] 67 taxmann.com 368 (Mum.)(Trib.) [India-Cyprus DTAA].
