ITAT Deletes Disallowance On Setting Off Legal Expenses Against Interest Income For Contesting Arbitral Award

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has deleted that disallowance setting off legal and other expenses against interest income for contesting an arbitral award.

The bench of G.S. Pannu (President) and Saktijit Dey (Judicial Member) has observed that the arbitral award was passed in July 2020, which is under challenge before the Delhi High Court. Even after the conclusion of the Common Wealth Games in 2010, the assessee did not wind up its PE in India as the PE was required to look after the arbitration proceedings and other contract-related issues.

The appellant/assessee entered into a contract with Prasar Bharti for television production and coverage of the 2010 Common Wealth Games on Doordarshan. For this purpose, the assessee set up a PO in India, which constitutes a PE in terms of Article 5 of the India-UK DTAA. In fact, not only did the assessee file income tax returns offering income related to PE, but the Revenue also accepted the existence of PE.

It is evident, though, that as per contractual terms, the assessee was to receive Rs. 246 crores from Prasar Bharti; however, a dispute arose between the parties, and Prasar Bharti paid only Rs. 146 crores to the assessee. To settle the dispute, the assessor invoked the arbitration clause.

Out of the amount received from Prasar Bharti, the assessee had advanced certain amounts towards inter-corporate deposits to one of its overseas sister concerns, SIS Holdings, and regularly receives interest on the advances.

In the assessment year 2013–14, the assessee incurred certain expenditures towards legal and professional charges and other expenses. In the return of income filed for the assessment year 2013–14, the assessee declared a loss after setting off legal and other expenses against interest income.

In the course of the assessment proceeding, noticing that the assessee had advanced loans to its AE and earned interest income, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) to determine the arm's length nature of the interest earned.

It was observed that the TPO, finding the rate of interest to be not at arm’s length, made an upward adjustment and suggested an addition to the arm’s length rate of interest. In terms of the adjustments suggested by the TPO, the Assessing Officer completed the assessment after allowing the expenditure claimed by the assessee. Even in the assessment year 2017–18, the Assessing Officer raised a specific query regarding the claim of expenses on the ground that the assessee had no related business activity in India.

In response to the query raised, the assessee furnished its reply, stating its position relating to the existence of PE and the allowability of expenditure.

The Assessing Officer completed the assessment under Section 143(3), accepting the existence of PE as well as the claim of expenses.

The department contended that assessees do not have a PE in India. It will be prejudicial to the interests of Revenue because, irrespective of the final result in the arbitral proceedings, the receipts, which would be in the nature of business profits, cannot be brought to tax in India in the absence of a PE.

The ITAT noted that the PO of the assessee is still in existence as it is looking after arbitration proceedings and other contractual issues. In other words, the PO has not been wound up. As per paragraph 44 of the OECD Commentary on the Model Convention, 2017, a PE ceases to exist with the disposal of a fixed place of business or with the cessation of activity through it, i.e., when all acts and measures connected with the activity of the PE are terminated.

Case Title: SIS Live Versus Assistant Commissioner of Income Tax

Case No.: ITA No.2145/Del/2022

Date: 30.05.2023

Counsel For Appellant: Kamal Sawhney, Nikhil Agarwal, Nishank Vashisht, Arun Bhadauria

Counsel For Respondent: Gangadhar Panda, Virendra Singh

Click Here To Read The Order