2014 (2) TMI 736 - AT - Income Tax

Tribunal Partially Grants Appeal: Head Office Expenditure Remanded, Interest Deduction Allowed

Antwerp Diamond Bank NV Versus Additional Director of Income-tax (International Taxation)

The tribunal partly allowed the appeal. The issue of head office expenditure was remanded for further verification, while the disallowance of interest ... Disallowance for payment made to the Head Office – Held that:- The certificate issued by Ernest and Young had been issued for the information of and assistance to the Bank's management in connection with the review by 'local tax authorities' - It was 'not to be used', circulated quoted or otherwise referred to 'for any other purposes' - FAA has not inquired in to the relevance of the said certificate as per the Indian tax laws - Assessee itself has disallowed an expenditure incurred under the head for the year under consideration and similar expenditure in subsequent years has been allowed by the AO - if any payment is only reimbursement it cannot be taxed-but if profit is embedded in it same has to be taxed – the matter needs further verification – thus, the matter remitted back to the FAA for fresh adjudication – Decided partly in favour of Assessee. Disallowance of interest paid to Head Office – Held that:- The decision in M/s. Sumitomo Mitsui Banking Corporation, C/o. BSR & Co., Chartered Accountants, KPMG Versus The Deputy Director of Income Tax (IT), Range 2(1), 2012 (8) TMI 450 - ITAT, MUMBAI] followed - interest paid to the head office of the assessee-bank by its Indian branch which constitutes its permanent establishment in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the permanent establishment which is taxable in India - the interest paid by the Indian branch of the assessee-bank to its head office and other branches outside India 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 permanent establishment, the question of disallowance of the said interest by invoking the provisions of section 40(a)(i) does not arise – thus, the order of the FAA reversed - Decided in favour of Assessee. Issues Involved:1. Timeliness of the order served by the Additional Director of Income Tax (ADIT).2. Deductibility of head office expenditure.3. Disallowance of interest paid to the head office.4. Taxability of interest income received by the head office.Detailed Analysis:1. Timeliness of the Order Served by ADIT:The appellant contended that the order passed by the ADIT was served beyond the prescribed time and should be canceled. This issue was raised as a ground of appeal but was not elaborated upon in the judgment.2. Deductibility of Head Office Expenditure:The appellant challenged the disallowance of Rs. 88,56,354/- paid by the branch to the head office for specific tasks such as credit analysis, administration, software implementation, and support activities. The Assessing Officer (AO) and the First Appellate Authority (FAA) disallowed these expenses, stating they were for specific services and not general administrative expenses allowable under Section 44C of the Income Tax Act. The appellant argued these were reimbursements and should be deductible. The tribunal found that the AO and FAA had not fully examined the nature of the expenses and remanded the matter back to the FAA for fresh adjudication, emphasizing the need for detailed verification of the expenses.3. Disallowance of Interest Paid to the Head Office:The appellant contested the disallowance of Rs. 85,715,525/- paid as interest to the head office on subordinated debt and term borrowings. The AO disallowed this based on the Special Bench decision in ABN AMRO Bank NV, which was later overruled by the Kolkata High Court. The tribunal, relying on the Sumitomo Mitsui Banking Corporation case, held that interest paid to the head office by the Indian branch is deductible under Article 7(2) and (3) of the Indo-Belgium DTTA but not taxable in India as it is a payment to self. Consequently, the tribunal reversed the FAA's order and allowed the deduction.4. Taxability of Interest Income Received by the Head Office:The appellant argued that the interest received by the head office from the branch is not taxable in the hands of the head office. This issue was rendered academic as the tribunal had already decided in favor of the appellant regarding the deductibility of interest paid to the head office. Therefore, the additional grounds were allowed for statistical purposes.Conclusion:The tribunal partly allowed the appeal. The issue of head office expenditure was remanded for further verification, while the disallowance of interest paid to the head office was reversed, allowing the deduction. The additional grounds regarding the taxability of interest income were allowed for statistical purposes.