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Tax Publishers Dy. CIT v. Coffeeday Enterprises Ltd. [I.T.A. No. 2931/Bang/2018 & C.O. No. 42/Bang/2019, dt. 16-12-2020] : 2020 TaxPub(DT) 5490 (Bang-Trib) Taxability of interest waived on debentures with non-residents but offset with a discounted share price -- Default for non-deduction of TDS in the case of non-resident payees -- Time limit reckoning *Facts:* Assessee was slapped with orders holding them in default for non-deduction of TDS and interest on the same under section 201(1) and under section 201(1A) arising out of interest accrued to non-resident; subsequent to a search and seizure under section 132. One Arduino Holdings Ltd a Cyprus entity had agreed to subscribe to the Compulsorily Convertible Debentures (CCD) for Rs. 359,98,23,200 of the assessee at a coupon rate of 7% p.a. for first 2 years and 3 months and thereafter @ LIBOR + 600 basis points for the next 3 years as per an Agreement dated 27-3-2010. The said interest would be payable on the 30th of April every year. Besides this another Private equity by name NSR PE Mauritius LLC a Mauritian entity had subscribed to the equity shares of the assessee for Rs. 176,800. Both investments would add to a round amount of Rs. 360 crores. It was noticed that the assessee had not provided for the interest payable to the said Cyprus entity and when interrogated a supplementary agreement was produced saying that the said interest stood waived in return for allotment of further shares at a discounted price. It was further noticed that the Cyprus entity had transferred the CCD's on 5-5-2015 to one NLS Mauritius LLC also a Mauritian entity for Rs. 812,88,74,787. The assessing officer held that such high appreciation of the CCD's price could have been possible only because of the underlying interest which had also accrued. Hence the assessing officer held that the entire concept of waiver of interest was an after thought so as to thwart TDS liability as the said interest invariably would have accrued in the hands of the Arduino Holdings Ltd. even under Article 11 of the Indo-Cyprus DTAA. Accordingly he held the assessee in default for non-deduction of TDS under section 195 on the notional interest. It was confirmed with certain agreements and documents that the interest stood waived by Arduino Holdings Ltd. and that in lieu of the same more shares were allotted to the Cyprus entity at a discounted price of Rs. 43 vis-a-vis the actual planned exit price arrived at the time of investment. This was also held to be an afterthought by the assessing officer. On further appeal the Commissioner (Appeals) held on examining the financials of the assessee that no interest was actually paid or accrued in the financial year ending with 31-3-2011. Accordingly no default for TDS can arise. Aggrieved revenue went in appeal on this point. The notice under section 201(1) and under section 201(1A) was issued on 31-3-2018 for assessment year 2010-11. It was pleaded by the assessee that the limitation imposed in section 201(3) is not applicable to non-residents and in the absence of any time limit there has to be a reasonable time and a gap of almost 8 years was too far thus was hit by limitation citing various verdicts. This limitation issue was rejected by the Commissioner (Appeals) holding that the order of the assessing officer was correct. On appeal by the assessee on this point -- Held in favour of the assessee that since no interest was paid factually the assessee was not in default under section 201(1) read with section 201(1A). The subsequent share transfer in the later years was a separate transaction which cannot be read into for imputing interest on due basis when it was actually not claimed or stood waived by the recipient. On principles of real income and even under the DTAA the interest has to be "paid" to attract TDS obligations accordingly the assessee was not in default for non-deduction of TDS and its interest. As regards the limitation under section 201(3) which was not accepted by the Commissioner (Appeals). Since there was no time limit imposed in the Act under section 201(3) for non-residents a reasonable time has to be defined as per law. This in the case of Mahindra & Mahindra Ltd. v. DCIT (2010) 122 ITD 216 (Mum.) : 2009 TaxPub(DT) 1638 (Mum-Trib) has held that the limitation would be akin to reassessment time under section 147. This was also confirmed by the Mumbai High Court in DIT (IT) v. Mahindra & Mahindra Ltd. (2014) 48 taxmann.com 150 (Bombay) : 2014 TaxPub(DT) 2966 (Bom-HC). In CIT v. NHK Japan Broadcasting Corporation (2008) 305 ITR 137 (Delhi) : 2008 TaxPub(DT) 1931 (Del-HC) an order under section 201 beyond four years was held to be invalid hit by limitation. Similar view taken in CIT v. Satluj Jal Vidyut Nigam Ltd. (2012) 345 ITR 552 (HP) : 2012 TaxPub(DT) 2344 (HP-HC). Thus in this case the order was passed on 31-3-2018 for assessment year 2010-11 thus was squarely hit by limitation issue as it was beyond 6 years. Thus the plea of limitation of assessee was upheld quashing the order of section 201 on this ground as well. *Editorial Note:* Section 201(3) reads as under -- (3) No order shall be made under sub-section (1) deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of -- (i) two years from the end of the financial year in which the statement is filed in a case where the statement referred to in section 200 has been filed. (ii) six years from the end of the financial year in which payment is made or credit is given, in any other case: Provided that such order for a financial year commencing on or before the 1-4-2007 may be passed at any time on or before the 31-3-2011.

Tax Publishers

Dy. CIT v. Coffeeday Enterprises Ltd. [I.T.A. No. 2931/Bang/2018 & C.O. No. 42/Bang/2019, dt. 16-12-2020] : 2020 TaxPub(DT) 5490 (Bang-Trib)

Taxability of interest waived on debentures with non-residents but offset with a discounted share price -- Default for non-deduction of TDS in the case of non-resident payees -- Time limit reckoning

Facts:

Assessee was slapped with orders holding them in default for non-deduction of TDS and interest on the same under section 201(1) and under section 201(1A) arising out of interest accrued to non-resident; subsequent to a search and seizure under section 132. One Arduino Holdings Ltd a Cyprus entity had agreed to subscribe to the Compulsorily Convertible Debentures (CCD) for Rs. 359,98,23,200 of the assessee at a coupon rate of 7% p.a. for first 2 years and 3 months and thereafter @ LIBOR + 600 basis points for the next 3 years as per an Agreement dated 27-3-2010. The said interest would be payable on the 30th of April every year. Besides this another Private equity by name NSR PE Mauritius LLC a Mauritian entity had subscribed to the equity shares of the assessee for Rs. 176,800. Both investments would add to a round amount of Rs. 360 crores. It was noticed that the assessee had not provided for the interest payable to the said Cyprus entity and when interrogated a supplementary agreement was produced saying that the said interest stood waived in return for allotment of further shares at a discounted price. It was further noticed that the Cyprus entity had transferred the CCD's on 5-5-2015 to one NLS Mauritius LLC also a Mauritian entity for Rs. 812,88,74,787. The assessing officer held that such high appreciation of the CCD's price could have been possible only because of the underlying interest which had also accrued. Hence the assessing officer held that the entire concept of waiver of interest was an after thought so as to thwart TDS liability as the said interest invariably would have accrued in the hands of the Arduino Holdings Ltd. even under Article 11 of the Indo-Cyprus DTAA. Accordingly he held the assessee in default for non-deduction of TDS under section 195 on the notional interest. It was confirmed with certain agreements and documents that the interest stood waived by Arduino Holdings Ltd. and that in lieu of the same more shares were allotted to the Cyprus entity at a discounted price of Rs. 43 vis-a-vis the actual planned exit price arrived at the time of investment. This was also held to be an afterthought by the assessing officer. On further appeal the Commissioner (Appeals) held on examining the financials of the assessee that no interest was actually paid or accrued in the financial year ending with 31-3-2011. Accordingly no default for TDS can arise. Aggrieved revenue went in appeal on this point.

The notice under section 201(1) and under section 201(1A) was issued on 31-3-2018 for assessment year 2010-11. It was pleaded by the assessee that the limitation imposed in section 201(3) is not applicable to non-residents and in the absence of any time limit there has to be a reasonable time and a gap of almost 8 years was too far thus was hit by limitation citing various verdicts. This limitation issue was rejected by the Commissioner (Appeals) holding that the order of the assessing officer was correct. On appeal by the assessee on this point --

Held in favour of the assessee that since no interest was paid factually the assessee was not in default under section 201(1) read with section 201(1A). The subsequent share transfer in the later years was a separate transaction which cannot be read into for imputing interest on due basis when it was actually not claimed or stood waived by the recipient. On principles of real income and even under the DTAA the interest has to be "paid" to attract TDS obligations accordingly the assessee was not in default for non-deduction of TDS and its interest.

As regards the limitation under section 201(3) which was not accepted by the Commissioner (Appeals). Since there was no time limit imposed in the Act under section 201(3) for non-residents a reasonable time has to be defined as per law. This in the case of Mahindra & Mahindra Ltd. v. DCIT (2010) 122 ITD 216 (Mum.) : 2009 TaxPub(DT) 1638 (Mum-Trib) has held that the limitation would be akin to reassessment time under section 147. This was also confirmed by the Mumbai High Court in DIT (IT) v. Mahindra & Mahindra Ltd. (2014) 48 taxmann.com 150 (Bombay) : 2014 TaxPub(DT) 2966 (Bom-HC). In CIT v. NHK Japan Broadcasting Corporation (2008) 305 ITR 137 (Delhi) : 2008 TaxPub(DT) 1931 (Del-HC) an order under section 201 beyond four years was held to be invalid hit by limitation. Similar view taken in CIT v. Satluj Jal Vidyut Nigam Ltd. (2012) 345 ITR 552 (HP) : 2012 TaxPub(DT) 2344 (HP-HC). Thus in this case the order was passed on 31-3-2018 for assessment year 2010-11 thus was squarely hit by limitation issue as it was beyond 6 years. Thus the plea of limitation of assessee was upheld quashing the order of section 201 on this ground as well.

Editorial Note: Section 201(3) reads as under --

(3) No order shall be made under sub-section (1) deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of --

(i) two years from the end of the financial year in which the statement is filed in a case where the statement referred to in section 200 has been filed.

(ii) six years from the end of the financial year in which payment is made or credit is given, in any other case:

Provided that such order for a financial year commencing on or before the 1-4-2007 may be passed at any time on or before the 31-3-2011.