Fairfield Developments Limited Vs DCIT (ITAT Hyderabad)
ITAT Hyderabad held that FCCDs are debt hence interest paid/ payable on FCCDs in to be computed by applying LIBOR plus 200 basis points.
Facts- AO issued show cause asking as to why excess interest income of Rs. 13,98,41,656/ – be not taxed at 40% plus surcharge relying on article 11(7) of India – Cyprus DTAA. The assessee contended since the FCCD’s are in the nature of equity instruments and are denominated in INR and interest on the same is payable in INR, the same has to be benchmarked at the currency specific interest rate benchmark of SBI PLR. However, the Assessing Officer had adopted LIBOR plus 200 basis points as more appropriate to determine the arm’s length price, rejecting the SBI PLR plus 300 basis points adopted by the appellant. Finally, the Assessing Officer had taxed the excess interest of Rs. 13,98,41,656/ – at 40% and ALP of Rs. 2,73,89,512/ -is taxed at DTAA rate of 10% and passed assessment order under sec. 143(3)r.w.s 144C of the Act.
Feeling aggrieved with the final assessment order, assessee carried the matter before ld.CIT(A), who granted partial relief to the assessee.
Feeling aggrieved with the order of ld.CIT(A), both the assessee and Revenue are now in appeal before us.
Conclusion- The Bench has already decided the issue against the assessee in the case of M/s. Watemarke Residency Limited, Hyderabad which is a subsidiary company of M/s. Fairfield Development Limited, Hyderabad (assessee company) by holding that FCCDs are debt, therefore, the benchmarking done by the learned lower authorities are correct by applying LIBOR plus 200 points, which is in consonance with the RBI guidelines issued for the purposes of FDI.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
These two appeals filed by the assessee and the Revenue, respectively, are directed against the order of Commissioner of Income Tax (Appeals) – 10, Hyderabad dated 16.01.2019 for the assessment year 2014-15.
2. The Assessee has raised the following grounds :
“1. The order of CIT(A) is erroneous and contrary to the facts of the case and law on point.
2. The ld. CIT(A) has erred in sustaining the action of TPO / Assessing Officer in proposing the interest rate on fully compulsory convertible debentures at LIBOR+200 basis points ignoring that the fully compulsory convertible debentures were denominated in INR and interest for the same is appropriately benchmarked to SBI Prime lending rate.
3. The ld. CIT(A) has erred in sustaining the action of TPO / Assessing Officer by overlooking the same issue decided in respect of the same instruments in favour of the appellant.
4. The ld. CIT(A) has erred in sustaining the action of the TPO / Assessing Officer in application of 11(7) of the India – Cyprus DTAA.
5. The ld. CIT(A) has erred in sustaining the action of the TPO / Assessing Officer in the application of second proviso to section 92(4).
2.1 Thereafter, assessee has raised the additional grounds which read as under:
“1. Without prejudice to the other grounds submitted in the original submission, we would like to rely on the provisions of Article 3 of the Double taxation avoidance agreement between India and Cyprus in respect of the interest paid / payable to the associated enterprise.”
2. Without prejudice to the other grounds, the Assessing Officer erred in recharacterizing bonafide interest payment transaction, by splitting a transaction of single nature interest payment into two tranches ie. interest and other income other than interest income, on surmise basis.”
3. Without prejudice to the other grounds, the Assessing Officer further erred in not considering the fact that in case of any other income, the appellant shall be taxable only in the country of residence as per Article 22(1) of the India – Cyprus Double Taxation avoidance agreement.
4. Without prejudice to the other grounds, the Assessing Officer further erred in applying the provisions of Article 11 of Double taxation of avoidance agreement between India and Cyprus.
2.2. The only effective ground raised by the Revenue reads as under :
“The ld.CIT(A) has erred in law in holding that word “Tax” does not include ‘Surcharge’ and ‘Education Cess’ for the purposes of the Double Taxation Avoidance Agreement with Cyprus.”
3. Facts of the case, in brief, are that assessee is a foreign company incorporated in Cyprus. It is engaged in the business of real estate and development. The assessee e-filed its original return of income for A.Y. 2014-15 on 30.09.2014 declaring income of Rs. 16,72,31,170 / – and subsequently, a revised return was filed on 13.03.20 15 declaring a refund of Rs.5,47,74,900/-. Subsequently, the case was selected for scrutiny and accordingly, notice u/s 142(1) of the Income Tax Act, 1961 dated 07/ 06/ 2016 was issued and duly served. Thereafter, notices u/s 142(1) of the Act dated 24/ 06/ 2017 and 01/ 12/20 17 were also duly issued and served. Thereafter, the case was referred to the TPO for determination of Arm’s Length Price (ALP) and the TPO on examination of international transactions rejected the Transfer Pricing analysis but did not propose for any adjustment of income as the same has been proposed in case of WRPL on the same transaction to benchmark the interest paid/ payable on FCCD’s denominated in INR at LIBOR plus 200 basis points. A copy of TPO order of WRL was forwarded to the appellant and notice dt. 12.12.2017 was issued by the Assessing Officer asking to show cause as to why excess interest income of Rs. 13,98,41,656/ – be not taxed at 40% plus surcharge relying on article 11(7) of India – Cyprus DTAA. The assessee contended since the FCCD’s are in the nature of equity instruments and are denominated in INR and interest on the same is payable in INR, the same has to be benchmarked at the currency specific interest rate benchmark of SBI PLR. However, the Assessing Officer had adopted LIBOR plus 200 basis points as more appropriate to determine the arm’s length price, rejecting the SBI PLR plus 300 basis points adopted by the appellant. Finally, the Assessing Officer had taxed the excess interest of Rs. 13,98,41,656/ – at 40% and ALP of Rs. 2,73,89,512/ -is taxed at DTAA rate of 10% and passed assessment order under sec. 143(3)r.w.s 144C of the Act.
4. Feeling aggrieved with the final assessment order, assessee carried the matter before ld.CIT(A), who granted partial relief to the assessee.
5. Feeling aggrieved with the order of ld.CIT(A), both the assessee and Revenue are now in appeal before us.
6. Admission of Additional grounds :
We have heard the rival submissions and perused the material on record. Suffice to say, Hon’ble Apex Court’s landmark decision in National Thermal Power Co. Ltd., Vs., CIT [229 ITR 383] (SC); as considered in Tribunal’s Special Bench’s decision All Cargo Global Logistics Ltd., Vs. DCIT (2012) [137 ITD 217](SB) (Mumbai), holds that the Tribunal can very well entertain a new ground going to root of the matter so as to determine correct tax liability of a taxpayer provided all the relevant facts are already on record. Respectfully, following the decisions cited supra, we accept that the assessee’s petition seeking to raise additional grounds. Further, as the additional grounds raised by the assessee are legal in nature and directly emanate from the order contested, the same are admitted.
6.1. First, we will deal with the grounds raised by the assessee.
6.2. Ground No.1 is general in nature and requires no adjudication.
6.3. With respect to ground No.2, the Bench has already decided the issue against the assessee in the case of M/s. Watemarke Residency Limited, Hyderabad which is a subsidiary company of M/s. Fairfield Development Limited, Hyderabad (assessee company by holding as under :
“19. We have heard the rival submissions and perused the material on record. We have also examined the remaining decisions. Before we deal with the issue, it is necessary to understand the nature of the instrument and the competing law in this regard. As per Para 7 (supra) of TPO’s order reproduced hereinabove, the assessee company required funds for its business operations in India and for that purpose, the assessee had issued unsecured FCCDs to its holding company, the assessee had mentioned the said transactions in his T.P. Study for the assessment year 2013-14 and for the assessment year 2014-1 5.
