Notional Interest which is part of Purchase price is business income

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 :-

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