Macquarie SBI Infrastructure Investments Pte Ltd. vs Assistant Commissioner Of Income Tax (International Taxation), Circle 2(2)(1)

“On the facts and circumstances of the case and in law, the learned AO:

Ground of Appeal No. 1: General Ground

1.

erred in assessing the Appellant's income at Rs. 175,11,36,310 by making an addition of Rs 6,35,79,070;

Grounds of Appeal Nos. 2 to 7: Legal Arguments

DRP directions issued in contravention to Circular No. 19/2019 dated 14 August 2019

2.

erred in treating the directions under section 144C of the Act which manually mentioned the Document Identification Number thereon as valid and passing the order under section 143(3) read with section 144C(13) of the Act which is in contravention to the Circular No. 19/ 2019 dated 14 August 2019 issued by the Central Board of Direct Taxes and therefore the same is bad in law and ought to be quashed;

Validity of the order passed beyond the period of limitation prescribed under section 153 of the Act

3.

erred in passing the final assessment order under section 143(3) read with section 144C(13) of the Act on 26 July 2023 which is beyond the time limit prescribed under section 153 of the Act and hence time barred and liable to be quashed;

Validity of proceedings concluded in absence of a valid notice under section 143(2) of the Act

4.

erred in completing the assessment under section 143(3) read with section 144C(13) of the Act disregarding the principles of natural justice when notice under section 143(2) of the Act is issued by one authority and assessment was completed by another authority:

5.

erred in completing the assessment under section 143(3) read with section 144C(13) of the Act without appreciating the fact that the notice issued under section 143(2) of the Act was not issued to the Appellant (being a foreign company) by the learned AO but by the National Faceless Assessment Centre which does not have valid jurisdiction over the Appellant and therefore, the entire proceedings are bad in law and ought to be quashed;

6.

erred in completing the assessment without following the procedure prescribed under section 1448(8) of the Act for transfer of case from the National Faceless Assessment Centre to the jurisdictional officer which could only have been done by the Principal Chief Commissioners (National Faceless Assessment Centre) Principal Director General (National Faceless Assessment Centre), if he considered it necessary and after obtaining prior approval of the Central Board of Direct Taxes;

Grounds of Appeal Nos. 8 to 11: Arguments on Merits

7.

erred in treating the short-term capital gains amounting to Rs. 6.35.79,070 on sale of Non-Convertible Debentures ('NCDs') of GMR Airports Limited ('GAL') to JP Morgan Securities Asia Pte Ltd ('JPMSA'), otherwise not chargeable to tax in India in terms of Article 13(5) of the India-Singapore Treaty, as interest taxable @15% under Article 11(3) of the India-Singapore Treaty:

8.

ought to have considered amount of Rs. 107,85,00,291 as short-term capital gains on sale of NCDs of GAL to JPMSA not chargeable to tax in India in terms of Article 13(5) of the India-Singapore Treaty, instead of interest taxable @15% under Article 11(3) of the India-Singapore Treaty as inadvertently offered by the Appellant in its Return of Income,

9.

ought to have appreciated that there is no lender-borrower relationship between the Appellant and JPMSA and therefore, Rs. 114,20,79,362 (Rs. 107,85,00,291 Rs. 6,35,79,070) cannot be regarded as interest income:

10 without prejudice to the above, erred in applying tax rate of 40% (plus surcharge and health and education cess) as against the 15% provided under Article 11(3) of the India-Singapore Treaty;

Grounds of Appeal Nos. 12 and 13: Levy of interest under section 234A and 234B of the Act

11 erred in in levying interest under section 234A of the Act amounting to Rs. 10,75,756,

12.

erred in levying interest under section 234B of the Act amounting to Rs 1,07,57,560,

Ground of Appeal No. 14: Initiation of penal proceedings under section 270A of the Act

13.

erred in initiating penalty proceedings under section 270A of the Act on account of alleged under-reporting of income.

The Appellant craves leave to add, alter, vary, omit, substitute or amend any or all of the above grounds of appeal, at any time before or at, the time of the appeal, so as to enable the Hon'ble Income-tax Appellate Tribunal to decide this appeal according to law.

For Macquarie SBI Infrastructure Investments Pte. Limited”

“…

10.

It is also not in dispute that 62 Lakh convertible Debentures with face value of Rs. 100/-have been issued by the assessee in the name of HDFC as per Annexure-K series between September 25, 2009 and January 1, 2010. The Assessing Officer has held that the premium paid or payable on the redemption of Preference shares would be arising out of the reserves and surplus and would constitute Capital expenditure out of the accumulated surplus and therefore, it is not a Revenue expenditure. He has further recorded that the expenditure was contingent upon the issue of IPO and accordingly disallowed the expenditure of Rs. 28,83,17,552/-.

11.

CIT(A), accepting assessee's explanation that Debentures were issued on 25-9-2009 and premium was computed for the Financial Year 2009-10 relevant to A.Y.2010-11 could not be quantified but as per the agreement dated 15-5-2010, the assessee was able to quantify the premium spread over for the financial years 2010-11, 2011-12 and 2012-13, has held that the premium payable quantified on redemption of debentures as Revenue expenditure. The ITAT has recorded in para 6 of its order that there is no quarrel about the proposition that the premium paid on redemption of debentures is Revenue expenditure and allowable proportionately during the period of debenture. Having so held, the ITAT has further recorded that the terms of Original Purchase Agreement may have been changed to suit the convenience of parties and it is a 'make-believe' story to claim deduction. It has further held that the liability had neither crystallized nor genuineness of transaction was proved beyond doubt.

12.

As recorded hereinabove, issuance of debentures is not in dispute. Deduction of TDS is also not in dispute. The Tribunal has rightly recorded the correct principle of law that premium paid on redemption of debenture is Revenue expenditure. By the second Addendum Agreement dated 12-11-2012, the HDFC's right to exercise the option of converting the debentures into preference shares has been restored in consonance with the original Agreement. The resultant position is, the HDFC, at its option, could cause the assessee to redeem all debentures on September 20, 2012. The CIT(A) has accepted assessee's explanation that it had quantified the premium as per the agreement dated 15-5-2010 spread over for three financial years. It is trite that a borrowing Company, which issues debentures incurs liability to pay larger amount than what it has borrowed. The assessee Company has made provision for payment of premium and also paid TDS. The adverse finding recorded by the ITAT that the parties had changed the agreement to suit their convenience and that it is a 'make-believe' story is not supported by any cogent reason nor material on record and therefore, untenable.

13.

Shri. Shankar has placed reliance on Bharat Earth Movers v. CIT [2000] 112 Taxman 61/245 ITR 428/162 CTR 325 (SC) wherein, it is held as follows:

"4.

The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain."

14.

The CIT(A), following the decision in CIT v. Asea Brown Boveri Ltd. [2009] 316 ITR 450 (Kar.) and Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 91 Taxman 340/225 ITR 802/139 SCR 555 (SC) has rightly held that the premium payable quantified on redemption of debentures as Revenue expenditure.

15.

In view of the above, the impugned order passed by the ITAT is unsustainable and hence, this appeal merits consideration.”

“ 18. We heard rival contentions and perused the record. The facts peculiar to this case may first be noted here. The three SPVs, viz., viz., Bhishma Realty Limited, Capricorn Realty Limited and Chaitra Realty Limited are related concerns of the assessee. The assessee is a director in Capricorn Realty Limited. We noticed earlier that the NCDs were issued by above said three SPVs on private placement basis and they were allotted initially to nationalized banks in lieu of outstanding loans. The assessee, herein, has purchased them from those banks, being initial allottees. The debentures were not listed/traded in any of the stock exchanges. As per Section 2(30) of Companies Act, 2013 “debenture” includes debenture stock, bonds, or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. Hence, even though the debentures would fall under the definition of “securities”, yet they are essentially debt instruments evidencing a debt.

19.

The Ld D.R relied on a circular issued by CBDT, i.e., Circular No.002 of 2002, wherein the tax treatment to be given on the gains realized on redemption of Deep Discount Bonds (DDB) has been explained. The DDBs are issued by discounting the face value of debenture/bond and the same will be redeemed at par value. For example, the DDB with tenure of five years and having a face value of Rs.1000/- may be issued at Rs.600/-. They will be redeemed at Rs.1,000/- upon maturity. The NCDs issued by SPVs are opposite to DDBs. The NCDs were issued by the SPVs at a face value of Rs.1.00 lakh and they are redeemable after a period of five years at a premium so as to yield an IRR of 12.50% in the case of NCD-I and 11% in the case of NCD-II. Thus, in the case of DDB, the face value of the bonds is discounted by applying a particular interest rate, so that the maturity proceeds equal to the face value. On the contrary, in the case of NCDs redeemable at premium, the premium amount is determined by applying a particular interest rate. Thus, both the amount of discount and the amount of premium, in effect, are “interest amounts” only. Hence, the companies issuing both types of bonds/debentures usually claim discount/premium as interest expenditure and their claim has been allowed.

20.

We think that there is no dispute with regard to the fact that the “Debentures” fall under the category of “Capital asset” under the Income tax Act. In this regard, the Ld A.R took us to sec.50AA of the Income tax Act, wherein the gains arising on sale/redemption of certain kinds of debentures is stated to be taxable as short term capital gain. We notice that section 50AA is applicable to a case of “market linked debentures” (MLD). In case of Market linked debentures, the interest rate payable on them is no determined at the time of issuing them. Instead, the return on those market linked instruments is determined on the basis of performance of an underlying market index or instrument. Normally, in case of MLD, interest may not be payable every year and it may be payable in lump sum at the end of its tenure. The Parliament, by a legal fiction introduced in sec.50AA of the Act, has stated that the said gain is taxable as short term capital gains, even though the MLD might have been held for more than three years. The reason may be that the tax is payable on short term capital gains under regular rates, as applicable to interest income. In the instant case, the assessee has purchased NCDs and they are materially different from MLDs. Hence, we are of the view that the legal fiction introduced in sec. 50AA to deal with the cases of MLDs cannot be taken support of by the assessee, in the facts of the present case.

21.

The Ld A.R also placed reliance on the fourth proviso to sec.48 of the Act, wherein it is stated that the indexation benefit will not be available to bond or debenture. He also placed reliance on certain case laws, wherein it has been held that the redemption of Preference shares or reduction of face value of shares would result in extinguishment of rights/proportionate rights in shares held by a shareholder and hence the amount paid to the shareholder is exigible to Capital gains tax. We notice that the all the said case laws are related to Preference shares/equity shares and not to debentures. There should not be any dispute that the “shares” and “debentures” are two different types of instruments having different types of rights and liabilities. Hence, both cannot be equated with. A shareholder holds a share in the Share capital of a company and he is considered to be one of the owners of the company. He is having right over the surplus available on liquidation of the company. While the preference shares may be of a particular tenure, the equity shares are held on a perpetual basis. Both kinds of shares can only be sold in the open market. The question of redemption of shares does not arise in the case of equity shares. However, a company may buy back its equity shares subject to complying with the conditions imposed by the Statue. Similarly, subject to compliance of conditions imposed by the statue, the par value of equity shares may be reduced, split etc. On the contrary, a debenture holder is a financial creditor to the company, since debenture is a debt instrument. Further, the debentures are redeemable at the end of the tenure. A debenture holder is entitled to receive interest as per agreed terms and the principal amount upon its maturity. He does not have right to receive anything extra and cannot have any right over the surplus arising on liquidation of company. Thus the shares carry more right over and above its face value, while the debentures do not carry such kind of rights. Hence, “shares” and “debentures” stand on different footing. In our view, the decisions with regard to redemption of preference shares and reduction of capital in case of equity shares have been rendered considering the rights and liabilities attached to shares. Hence, in our view, the ratio of decisions rendered in the case of equity shares/preference shares cannot be applied to debt instruments. We notice that the decision in the case of Mrs. Perviz Wang Chuk basi (supra) was related to Capital investment Bond issued by Government of India and not the case of debenture issued on private placement basis. Accordingly, the redemption of debentures is nothing but repayment of debt and the same, in our view, cannot fall under the category of “extinguishment” as interpreted by the Courts in the case of Shares/Preference shares.

22.

We may explain as to how the incidence of capital gain may arise in the case of debentures. We noticed earlier that the holder of debenture is only entitled to receive interest from it. The said interest income is taxable under the head Income from other sources or under the head business income. In case of shares, the shareholder would get dividend income and the same is taxable as stated above. Thus the face value of shares/debentures would remain static and is the capital amount, while the dividend/interest income is the income generated from the above said capital amount. The possibility of generating capital gains/capital loss will arise only if their market value is different from their face value/par value. Such kind of variation will arise in the case of shares/debentures generally, only when they are sold in the open market and amount realized thereon is different from the face value. The market value of shares would depend upon various aspects considered by the market forces. The market value of debentures would depend upon the fluctuation in the prevailing general interest rates. We may explain this with an example. Let us assume that a debt instrument having face value of Rs.1000/- was issued and it carried interest rate of 12% p.a.. Let us further assume that the market rate of interest has fallen to 6% subsequently. In that case, the market forces will recognize the higher interest yield available in the above said debt instrument. Accordingly, the market value of debt instrument may increase to say Rs.1300/-. If the holder of the said debt instrument having face value of Rs.1000/- sells it for Rs.1300/-, then the gain of Rs.300/- obtained by that person is assessable as Capital gain. So far as the company which had issued the debt instrument is concerned, the above said market value is irrelevant. It would be paying interest on the face value of Rs.1000/- only and further, at the time of redemption of the same, the said company would be redeeming the debt instrument at its face value of Rs.1000/- only. We have held earlier that such kind of redemption will not give rise to any capital gains.

23.

In the instant case, the NCDs under consideration are privately placed debentures and they are not listed in the stock exchange. Further, the assessee herein has not sold the NCDs in the open market. The assessee has only surrendered the NCDs to the SPVs, viz., M/s Bhishma Realty Ltd and M/s Capricorn Realty Ltd, for redemption. Thus, it is a case of realization of money advanced by a creditor, since debentures are debt instruments only. Thus, the question of generation of capital gains will not arise, when the debentures are redeemed by the issuing companies. Further, what is received by the assessee in the form of premium is nothing but interest income only. Accordingly, we are of the view that the Ld CIT(A) was legally correct in holding that the premium/surplus received by the assessee is interest income assessable under the head Income from Other Sources.

24.

We noticed earlier, the cost of purchase of debentures to the assessee was Rs.373.47 lakhs and the redemption value was Rs.649.97 lakhs. Hence the actual interest that has accrued to the assessee was Rs.276.50 lakhs only. Accordingly, we modify the order passed by Ld CIT(A) and direct the AO to assess the above said interest income of Rs.276.50 lakhs only.”

“…

11.

Insofar as the first reason, namely, non-convertible debentures were issued for a period of five years is concerned, that is clearly not tenable. While taking this view, the AO clearly erred as he ignored by ignoring the terms on which debentures were issued. As noted above, there were two methods of payment of interest stipulated in the debenture issued. Debenture holder was entitled to receive periodical interest after every half year @ 18% per annum for five years, or else, the debenture holder could opt for upfront payment of Rs. 55 per debenture towards interest as one time payment. By allowing only 1/5th of the upfront payment actually incurred, though the entire amount of interest is actually incurred in the very first year, the AO, in fact, treated both the methods of payment at par, which was clearly unsustainable. By doing so, the AO, in fact, tampered with the terms of issue, which was beyond his domain. It is obvious that on exercise of the option of upfront payment of interest by the subscriber in the very first year, the assessee paid that amount in terms of the debenture issue and by doing so he was simply discharging the interest liability in that year thereby saving the recurring liability of interest for the remaining life of the debentures because for the remaining period the assessee was not required to pay interest on the borrowed amount.

12.

The next question which arises for consideration is as to whether the assessee was estopped from claiming deduction for the entire interest paid in the year in which it was paid merely because it had spread over this interest in its books of account over a period of five years. Here, the submission of learned counsel for the assessee was that there is no such estoppel, inasmuch as, the treatment of a particular entry (or for that matter interest entered in the instant case) in the books of account is entirely different from the treatment which is to be given to such entry/expenditure under the Act. His contention was that assessment was to be made in accordance with the provisions of the Act and not on the basis of entries in the books of account. His further argument was that had the assessee not claimed the payment of entire interest amount as tax in the income tax returns and had claimed deduction over a period of five years treating it as deferred interest payment, perhaps the AO would have been right in accepting the same in consonance with the accounting treatment which was given. However, learned counsel pointed out that in the instant case the assessee had filed the income tax return claiming the entire deduction which was allowable to it under the provisions of Section 36(1)(iii) of the Act as all the conditions thereof were fulfilled and, thus, it was exercising the statutory right which could not be denied. …..

18.

What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been restricted to the cases of debentures.

19.

In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See -Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC); Tuticorin Alkali Chemicals & Fertilizers Ltd. v. СІТ [1997] 227 ITR 172/93 Taxman 502 (SC); Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) and United Commercial Bank v. CIT [1999] 240 ITR 355/106 Taxman 601 (SC).

20.

At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of account, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed…’