AGR Matthey of Western Australia Vs. ADIT (ITAT Delhi)
From the records it can be seen that there is no interest credit, since within a day or two of usance of letter of credit by PEC Ltd’s bank to the Assessee, letter of credit stands discounted by the Assessee with ANZ Bank of Australia. The cost of discounting letter of credit is identical and equal to the notional interest in respect of the letter of credit itself. The Assessing Officer also admits in the assessment order that interest in this case is not interest simplicitor, i.e., it does not arise out of a loan liability. The interest is in the context of a transaction of high-seas sale of bullion, a part of the cost of such bullion itself. Thus, the same is in the nature of business expenditure and incurred only to facilitate the transaction of sale of bullion. Both Usance interest and the discounting charges were part of the sale transaction as duly entered into by parties, but revenue authorities erred in giving finding which is contrary to their own narration of the facts. This claim is made by PEC Ltd. as representative of assessee and PEC Ltd. has filed a return of income at ‘NIL’ on the Assessee’s behalf, claiming interest paid by them to their own bank on one side and deducting an identical amount against the same in respect of interest retained by the Assessee’s bank for the period of such credit. Thus, this is not a case where a claim has been made for interest under income from other sources. The interest itself is notional and was never received by the assessee. This is properly demonstrated by the assessee from the computation of income. The live link between interest credit and discounting cost as per the modus operandi agreed upon between the parties and duly followed in the subject case, the process of consummating the transaction itself was based on the accepted and normal device of the seller discounting letter of credit to have that transaction financed by the parties’ respective banks. The authorities below, in the face of evidence demonstrating the live nexus between the two, erred grossly in picking one and ignoring the other. The interest in the present case is part of the cost of the bullion itself. The Assessing Officer as well as the CIT (Appeals) both failed to looked into this aspect. In view of the ratio of the Hon’ble Supreme Court in the case of CIT Vs. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC) as well as in view of the binding precedent of the Hon’ble Delhi High Court on identical facts in the case of CIT Vs. Cargill Global Trading (P.) Ltd. (2011) 11 Taxmann.com 219 (Del.), such interest partakes of the character of the purchase price itself and could not have been put to tax under the residual head of income from other sources. The Revenue Authorities have conveniently omitted to seek to test the transaction under provisions of business income, because they were well aware that in the absence of a permanent establishment of the Assessee in India, no liability to tax could be fastened upon it. Article 7 of the DTAA between India and Australia is clear in this respect. The findings of the Hon’ble Delhi High Court in the case of CIT Vs. Cargill Global Trading (P.) Ltd. (supra) is applicable in the present case. The revenue authorities should not have treated the notional interest as anything except business income, under which such income was not due to be taxed in India at all. Article 11(1) was not at all considered by the Revenue Authorities – Even if the notional interest were sought to have been treated as interest simpliciter, the CIT (Appeals) has erred in omitting to consider Article 11(1) of the Indo- Australian DTAA. As per Articles 11(1) and 11(2) of the said Treaty, interest income is alternatively taxable in the country of residence of the recipient party, in the present case, Australia. In order to invoke Article 11(2), a heavy onus is cast to establish how ”according to the law of that State” such interest could be taxed in India. In CIT Vs. Cargill Global Trading (P.) Ltd. (supra), it has already been held that such interest is not interest within the meaning of section 2(28A) of the Act. The invocation of Article 11(2) without compliance of the condition precedent therein, i.e. to point out under which provision such interest was taxable in India has never been done, and the authorities below have conveniently relied upon the Assessee’s own claim, without noting that this is a case where the claim stands made not by the Assessee but by a representative assessee. This is a transaction of sale of bullion – Especially in the context of a transaction of bullion sale on high-seas basis, wherein the price of the product varies on day to day basis, any interest cost or credit would only form a part of the cost of goods. In that view of the matter, the authorities below grossly erred in holding the notional usance interest to be interest to be taxed as income from other sources. Reference to section 57 of the Act is misconceived. The CIT (A) ignored the aspect of discounting cost and held that for allowance under section 57 of the Act, the discounting charges should have been paid only ”for the purpose of earning the interest”. This premise itself is palpably erroneous in view of the CIT(A)’s own finding that the interest credit as well as the discounting cost have arisen from a business transaction on sale of bullion, and not from any transaction referred to in section 56 taxguru.in of the Act. The authorities below have even failed to point out how section 56 of the Act is applicable in the subject case. The revenue authorities have completely failed to understand the transaction as entered into by the Assessee with PEC Ltd. and merely sought to pounce on one stray notional credit only with a view to create a tax liability. All these submissions made by the Ld. AR was not considered by the Assessing Officer as well as by the CIT(A) which not correct on the part of the Revenue authorities. Therefore, we set aside the order of the CIT(A) and appeal of the assessee is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal is filed against the order dated 14.12.2009 passed by CIT(A)-XXIX, New Delhi for assessment year 2005-06.
2. The grounds of appeal are as under :-
1) “That the order of the learned Commissioner of Income Tax (Appeals)- XXIX, New Delhi (hereinafter referred to as CIT(A)) is wrong on facts and bad in law.
2) That on the facts and in the circumstances of the case, the learned CIT(A) has erred in confirming the addition of Rs. 25,71,10,851/- by way of disallowance of expenditure incurred for earning the income from usance interest.
3) That on the facts and in the circumstances of the case, the learned CIT(A) has erred in confirming the disallowance of expenditure of Rs.25,71,10,851/- by not appreciating the provisions of the DTAA between India and Australia.
4) That on the facts and in the circumstances of the case, the learned CIT(A) taxguru.in has erred in not appreciating the fact that granting of credit (facility to pay later) to the Indian buyer and in turn discounting of bills on payment of discounting charges relate to the same transaction of sale on credit and has consequently further erred in not allowing the discounting charges incurred by the assessee as deduction from the interest received from the Indian party.
5) That without prejudice to the above mentioned grounds, the learned CIT(A) has erred in not allowing the expenditure to earn the interest income even though the Assessing Officer had held the expenditure to be business expenditure and interest income as Income from Other Sources since the business expenditure can be set off against the income from other sources in the same assessment year as per provisions of section 71 of the Income Tax Act, 1961.
6) That the Appellant craves leave to reserve to itself the right to add, alter and/or vary any ground(s) at or before the time of hearing.”
3. The assessee is a seller of gold/bullion to PEC, a Government of India undertaking and nominated agency for import of bullion, against issuance of letters of credit. Against supplies of gold by the assessee to PEC, PEC establishes a issuance of letter of credit in favour of the assessee for 90/180/360 days credit. The assessee accepts the LC through its bankers in Australia. As per the terms of LC the assessee is entitled to charge interest at the rate of LIBOR plus a margin of 0.5% per annum. In its return of income filed on 18.05.2006, the assessee declared an amount of Rs. 25,71,10,851/- as interest income. Against this income the assessee claimed expenses of an equal amount on account of discounting of various LCs received from PEC and discounted with its bankers in Australia which have been disallowed by the Assessing Officer in the assessment proceedings.
4. Being aggrieved by the assessment order the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.
5. The Ld. AR submitted that the issue arising in the subject appeal relates to an addition in respect of Usance interest in a sum of 25,7 1,10,851/-. The CIT (Appeals) at para 5 of the impugned order observed that the assessee is an Australian Company which has sold bullion to PEC Ltd., a government of India Company. Its return of income stands filed by PEC Ltd. in the capacity of representative assessee. Thus, claims made in the return are not claims of the assessee, but made unilaterally by PEC Ltd. The CIT(A) further observed that on 18.10.200 1 the Assessee and PEC Ltd. agreed upon a transaction of sale of gold and silver bars by the Assessee to PEC Ltd. From the perusal of the letter of understanding especially from the schedule therein, following steps would be undertaken to consummate the transaction:
Comments are closed.