2012 (10) TMI 443 - AT - Income Tax

Invalid Reassessment Orders Quashed; Interest Deduction Allowed; Inter-Office Commission Disallowed

The reassessment proceedings for AY 1997-98 and 1998-99 were deemed invalid due to the absence of failure to disclose material facts by the assessee, ... Reopening assessment u/s 147 - AY 1997-98 & 1998-99 - Held that:- There is nothing in the reasons to indicate, even remotely, that the assessee did not disclose this necessary fact in its return or accompanying documents. It can naturally not be so because the deduction on account of interest paid to head office and overseas branches can only be claimed by way of a debit to the Profit and loss account which is always a part and parcel of the documents accompanying the return of income. Once the assessee disclosed the fact of claim of deduction on account of interest paid to head office or other overseas branches and the original assessment was completed u/s 143(3) accepting such claim, there can be no question of initiation of reassessment proceedings after a gap of four years from the end of relevant assessment year - in favour of assessee. Reopening of assessment - AY 1999-2000 - Held that:- The issuance of notice u/s 148 is within a period of four years from the end of the relevant assessment year - as decided in Multiscreen Media Private Limited v. Union of India [2010 (2) TMI 269 - BOMBAY HIGH COURT reopening on the basis of finding in an order of assessment passed for a subsequent assessment year, where additional material has emerged before the A.O. to lead to the formation of belief that income chargeable to tax had escaped tax, is sustainable. The facts of the instant case stand on a rather stronger footing because here the reassessment is on the basis of the CIT(A)'s order for a subsequent year, thus the initiation of reassessment proceedings for the current year is in order - against assessee. Non deduction of TDS - Disallowance of interest payable to head office and other overseas branches - Held that:- As decided in Sumitomo Mitsui Banking Corporation v. DDIT [2012 (8) TMI 450 - ITAT, MUMBAI] the interest paid to the head office of the assessee bank by its Indian branch cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domestic law - as interest paid by the Indian branch is not chargeable to tax in India, it follows that the provisions of section 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the PE - in favour of assessee. Disallowance of inter office commission paid/payable by the assessee to head office and other overseas branches - Held that:- Since the principle of mutuality is applicable on transactions between Indian branch and head office and other overseas branches, there cannot be any income or any expenditure due to such internal transactions. As the inter office commission has been paid by the assessee to its head office and other overseas branches, it is obviously a transaction with the self. Accordingly the rule of mutuality applies and the assessee cannot be allowed any deduction in this regard. The view taken by the learned CIT(A) on this issue is upheld - against assessee. Interest u/s 234B - Held that:- As decided in DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) Versus NGC NETWORK ASIA LLC [2009 (1) TMI 174 - BOMBAY HIGH COURT] when the duty is cast on the payer to deduct tax at source, on failure of the payer to do so, no interest can be charged from the payee assessee u/s 234B, thus ssue of charging of interest u/s 234B in the present case is no more res integra - in favour of assessee. Penalty u/s 271(1)(c) - disallowance u/s 40(a)(i) & income of the head office/foreign branches - Held that:- When the additions made in the assessment order have been deleted, obviously there cannot be any foundation for imposition of penalty qua such additions - in favour of assessee. Issues Involved:1. Validity of reassessment proceedings for AY 1997-98, 1998-99, and 1999-2000.2. Disallowance of interest payable to head office and overseas branches for AY 1999-2000.3. Disallowance of inter-office commission paid to head office and overseas branches for AY 1999-2000.4. Charging of interest under section 234B for AY 1999-2000.5. Deletion of penalty under section 271(1)(c) for AY 2000-2001.Issue-wise Detailed Analysis:1. Validity of Reassessment Proceedings for AY 1997-98:The assessee's first ground of appeal contested the validity of reassessment proceedings initiated by notice under section 148 after more than four years from the end of the relevant assessment year. The reassessment was based on the CIT(A)'s order for AY 2000-01, which disallowed interest paid to the head office and overseas branches. The Tribunal observed that the original assessment was completed under section 143(3) and the assessee had fully disclosed all material facts. Since the notice under section 148 was issued beyond the four-year limit and there was no failure on the part of the assessee to disclose material facts, the reassessment proceedings were deemed invalid. Thus, the appeal of the assessee was allowed, and the reassessment order was quashed.2. Validity of Reassessment Proceedings for AY 1998-99:The facts for AY 1998-99 were similar to AY 1997-98, with reassessment proceedings initiated after four years based on the same grounds. Following the reasoning for AY 1997-98, the Tribunal held the reassessment proceedings invalid due to the same lack of failure to disclose material facts by the assessee. The appeal of the assessee was allowed, and the reassessment order was set aside.3. Validity of Reassessment Proceedings for AY 1999-2000:For AY 1999-2000, the notice under section 148 was issued within four years from the end of the relevant assessment year. The Tribunal upheld the reassessment proceedings, citing a valid reason based on a subsequent CIT(A) order disallowing interest paid to the head office and overseas branches. The Tribunal referenced the jurisdictional High Court's ruling in Multiscreen Media Private Limited v. Union of India, supporting reassessment based on subsequent findings. Thus, the initiation of reassessment proceedings was considered valid.4. Disallowance of Interest Payable to Head Office and Overseas Branches for AY 1999-2000:The assessee contested the disallowance of interest payable to the head office and overseas branches. The Special Bench in Sumitomo Mitsui Banking Corporation v. DDIT had ruled that the principle of mutuality applies, meaning no deduction for interest paid to the head office under domestic law. However, under the DTAA, the assessee was entitled to such deductions. The Tribunal followed this ruling, allowing the assessee's appeal for interest deduction and dismissing the Revenue's appeal to tax this interest in the hands of the head office.5. Disallowance of Inter-Office Commission Paid to Head Office and Overseas Branches for AY 1999-2000:The assessee also contested the disallowance of inter-office commission. The Tribunal upheld the CIT(A)'s decision, referencing the principle of mutuality, which precludes any income or expenditure from internal transactions between the Indian branch and its head office. Thus, the assessee's appeal was dismissed, and the Revenue's appeal was also dismissed on the same grounds.6. Charging of Interest under Section 234B for AY 1999-2000:The Revenue's appeal against the non-charging of interest under section 234B was dismissed. The Tribunal cited the jurisdictional High Court's ruling in Director of Income-tax (International Taxation) v. NGC Network Asia LLC, which held that no interest under section 234B can be charged when the payer fails to deduct tax at source. This precedent was applied, and the appeal was dismissed.7. Deletion of Penalty under Section 271(1)(c) for AY 2000-2001:The Revenue's appeal against the deletion of penalty under section 271(1)(c) was dismissed. The Tribunal noted that the penalty was imposed based on disallowances under section 40(a)(i) and income of the head office, both of which were deleted in quantum proceedings. Consequently, there was no basis for the penalty, and the deletion by the CIT(A) was upheld. The appeal was dismissed.Conclusion:The appeals of the assessee for AY 1997-98 and 1998-99 were allowed, invalidating the reassessment proceedings. The reassessment for AY 1999-2000 was upheld, but the assessee's appeal regarding interest deduction was allowed, and the Revenue's appeal was dismissed. The disallowance of inter-office commission was upheld, and the Revenue's appeal on interest under section 234B and penalty under section 271(1)(c) were dismissed.