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Tax Publishers Ampacet Cyprus Ltd. v. Dy. CIT [IT(TP)A Nos. 1518/Mum/16 and 560/Mum/2017, dt. 13-8-2020] : 2020 TaxPub(DT) 3400 (Mum.-Trib) TP adjustment of notional interest whether hit by DTAA Article No. 11 of Indo Cyprus DTAA *Facts:* Assessee was slapped additions of notional interest under TP provisions. It was the case of the assessee that vide article 11 of the Indo Cyprus DTAA interest can be taxed only if it is paid to the recipient and notional addition thus cannot be sustained. The whole argument of the assessee as to what is the meaning of the word "Paid" as in the DTAA clause. This went up to ITAT for adjudication. The ITAT held that this was a debatable point worthy of a special bench thus case was adjudged sine die until pending adjudication by the special bench. Article 11 of Indo-Cyprus DTAA reads as under -- Article 11. Interest 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 percent of the gross amount of the interest. The parent assessee Cypriot entity had lent money to its Indian subsidiary Ampacet Speciality Products Pvt. Ltd. with a moratorium period where in no interest will be payable during the said moratorium. There were additions of notional interest under TP provisions on the said loan even during the moratorium period. This was claimed to be against article 11 where in as per DTAA to tax interest only if it is paid it can be brought to tax and no notional additions even under TP would be possible thus. In all the coordinate bench decisions, there is no discussion whatsoever to the connotations of the expression 'paid' and these decisions simply proceed on the basis that because the expression 'paid' is used Article 11(1) of Indo Cyprus tax treaty, the taxability of interest can only be on cash basis. The expression "paid" is admittedly not defined in the treaty but Article 3(2) of Indo Cyprus tax treaty provides that "As regards the application of the Agreement at any time by a Contracting State any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Agreement applies and any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State". What essentially follows is that unless the context otherwise requires, the definition of the undefined treaty term, under the domestic law of the source country, i.e., India and preferably under the domestic tax laws, is to be adopted. It is in this context, section 43(2) of the Income Tax Act, 1961 may perhaps be relevant because it provides that " 'paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession" (Emphasis supplied by us). While it is indeed true that this meaning cannot be imported in the tax treaty mechanically, without any application of mind and as a sort of automated process, undoubtedly a call is to be taken by the bench as to whether or not this domestic law meaning of the expression 'paid' will be relevant. There could possibly be a school of thought that a decision rendered in this context, without specifically dealing with the implications of section 43(2) read with Article 3(2), could possibly be per incuriam. A conscious call is required to be taken on these aspects. While on this issue, we may further add that one will have to see whether Hon'ble Supreme Court's judgment in the case of Standard Triumph Motor Co. Pvt. Ltd. v. CIT (1993) 201 ITR 391 (SC) : 1993 TaxPub(DT) 1212 (SC) which, inter alia, observes that "it must be held in this case that the credit entry to the account of the assessee in the books of the Indian company does amount to its receipt by the assessee and is accordingly taxable and that it is immaterial when did it actually receive it in UK", will have any bearing on the connotations of expressions "paid" appearing in the Indo Cyprus tax treaty. As a corollary to these discussions, connotations of the expression "paid" appearing in article 11 of Indo Cyprus tax treaty are required to be examined in some detail, and that exercise can at best be conducted by a bench of three or more members so that the decision is unfettered by the decisions of the division benches in this regard. *Editorial Note:* There is no conclusion on the decision to whose favour it is -- but the topic raised makes it a unique verdict. As to if notional interest without payment if taxed would render certain judgments per incuriam, the learned counsel of the assessee did not cite those verdicts. It also brings open an interesting debate are DTAA provisions also subject to be read within real income principles?

Tax Publishers

Ampacet Cyprus Ltd. v. Dy. CIT [IT(TP)A Nos. 1518/Mum/16 and 560/Mum/2017, dt. 13-8-2020] : 2020 TaxPub(DT) 3400 (Mum.-Trib)

TP adjustment of notional interest whether hit by DTAA Article No. 11 of Indo Cyprus DTAA

Facts:

Assessee was slapped additions of notional interest under TP provisions. It was the case of the assessee that vide article 11 of the Indo Cyprus DTAA interest can be taxed only if it is paid to the recipient and notional addition thus cannot be sustained. The whole argument of the assessee as to what is the meaning of the word "Paid" as in the DTAA clause. This went up to ITAT for adjudication.

The ITAT held that this was a debatable point worthy of a special bench thus case was adjudged sine die until pending adjudication by the special bench.

Article 11 of Indo-Cyprus DTAA reads as under --

Article 11. Interest

1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 percent of the gross amount of the interest.

The parent assessee Cypriot entity had lent money to its Indian subsidiary Ampacet Speciality Products Pvt. Ltd. with a moratorium period where in no interest will be payable during the said moratorium. There were additions of notional interest under TP provisions on the said loan even during the moratorium period. This was claimed to be against article 11 where in as per DTAA to tax interest only if it is paid it can be brought to tax and no notional additions even under TP would be possible thus.

In all the coordinate bench decisions, there is no discussion whatsoever to the connotations of the expression 'paid' and these decisions simply proceed on the basis that because the expression 'paid' is used Article 11(1) of Indo Cyprus tax treaty, the taxability of interest can only be on cash basis. The expression "paid" is admittedly not defined in the treaty but Article 3(2) of Indo Cyprus tax treaty provides that "As regards the application of the Agreement at any time by a Contracting State any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Agreement applies and any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State". What essentially follows is that unless the context otherwise requires, the definition of the undefined treaty term, under the domestic law of the source country, i.e., India and preferably under the domestic tax laws, is to be adopted. It is in this context, section 43(2) of the Income Tax Act, 1961 may perhaps be relevant because it provides that " 'paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession" (Emphasis supplied by us). While it is indeed true that this meaning cannot be imported in the tax treaty mechanically, without any application of mind and as a sort of automated process, undoubtedly a call is to be taken by the bench as to whether or not this domestic law meaning of the expression 'paid' will be relevant. There could possibly be a school of thought that a decision rendered in this context, without specifically dealing with the implications of section 43(2) read with Article 3(2), could possibly be per incuriam. A conscious call is required to be taken on these aspects. While on this issue, we may further add that one will have to see whether Hon'ble Supreme Court's judgment in the case of Standard Triumph Motor Co. Pvt. Ltd. v. CIT (1993) 201 ITR 391 (SC) : 1993 TaxPub(DT) 1212 (SC) which, inter alia, observes that "it must be held in this case that the credit entry to the account of the assessee in the books of the Indian company does amount to its receipt by the assessee and is accordingly taxable and that it is immaterial when did it actually receive it in UK", will have any bearing on the connotations of expressions "paid" appearing in the Indo Cyprus tax treaty. As a corollary to these discussions, connotations of the expression "paid" appearing in article 11 of Indo Cyprus tax treaty are required to be examined in some detail, and that exercise can at best be conducted by a bench of three or more members so that the decision is unfettered by the decisions of the division benches in this regard.

Editorial Note: There is no conclusion on the decision to whose favour it is -- but the topic raised makes it a unique verdict. As to if notional interest without payment if taxed would render certain judgments per incuriam, the learned counsel of the assessee did not cite those verdicts. It also brings open an interesting debate are DTAA provisions also subject to be read within real income principles?