2018 (6) TMI 757 - AT - Income Tax

Tribunal affirms Appeals Commissioner decisions on tax issues involving foreign branch, interest deductibility, and refund orders

Asstt. Director of Income Tax I.T. – 1 (2), Dy. Director of Income Tax, I.T. – 1 (2) And Addl. Director of Income Tax I.T. Range–1, Mumbai Versus DBS Bank Limited

The Tribunal upheld the Commissioner (Appeals)'s decisions on various tax issues, including the deductibility of interest paid by an Indian branch to its ... PE in India - Interest paid by Indian Branch to its foreign Head Office and other overseas Branches - withholding of tax - assessee is a non–resident Banking Company operating in India as Branch of DBS Bank Limited, Singapore - India–Singapore Tax Treaty - Held that:- The issue in dispute has been decided in favour of the assessee by the Tribunal in assessee's own case [2013 (10) TMI 1452 - ITAT MUMBAI] as held under the domestic law the interest paid by the Indian branch to the head office was not allowable as deduction as this was payment to self - interest payment was allowable as deduction while determining the profit attributable to the PE being the Indian branch under DTAA - The said interest cannot be taxed in the hands of the assessee bank in India under the domestic law as it was payment to self. There was no express provisions in the relevant tax treaty which was contrary to the domestic law. Therefore, interest payment was not taxable in the hands of the bank and thus there was no question of any tax deducted at source. - Decided in favour of assessee Allowing loss claimed on valuation of unmatured forward exchange contract - Held that:- As decided in assessee's own case [2013 (10) TMI 1452 - ITAT MUMBAI] adjustment on account of foreign exchange fluctuation can be made on each balance-sheet date in respect of any forward foreign exchange contract pending actual payment and any loss arising there from has to be allowed as an item of expenditure u/s 37(1). We, therefore, see no infirmity in the order of CIT(A) in allowing the claim of loss of the assessee. Disallowance of expenditure u/s 37 - amount was paid to CCIL on account of short position on security deal, hence, in the nature of penalty - Held that:- As rightly observed by the learned Commissioner (Appeals), the Assessing Officer has not established on record that the payment was on account of an offence or was prohibited by law. On the contrary, the payment made by the assessee appears to be compensatory in nature. As in assessee' own case [2011 (4) TMI 791 - ITAT, MUMBAI] has deleted the disallowance. In the aforesaid view of the matter, we uphold the decision of the learned Commissioner (Appeals) on this issue. Taxability of interest earned on investments made in Indian securities by DBS Bank Ltd., Singapore as Foreign Institutional Investor (FII) - Held that:- We direct the Assessing Officer to assess the interest income from Government Bonds on gross basis as per Article–11 of the India–Singapore Tax Treaty. Issues Involved:1. Deductibility of interest paid by Indian Branch to its foreign Head Office and other overseas branches.2. Allowability of loss on valuation of unmatured forward exchange contracts.3. Disallowance of payment made to Clearing Corp. of India Ltd. (CCIL).4. Taxability of interest paid by Indian P.E. of a foreign bank to its Head Office and overseas branches.5. Taxability of interest earned on investments made in Indian securities by DBS Bank Ltd., Singapore as Foreign Institutional Investor (FII).6. Refund of tax deducted at source on the interest paid to Head Office.7. Applicability of section 40(a)(i) of the Income Tax Act.Detailed Analysis:1. Deductibility of Interest Paid by Indian Branch to its Foreign Head Office and Other Overseas Branches:The department challenged the decision of the Commissioner (Appeals) regarding the deductibility of interest paid by the Indian Branch to its foreign Head Office and other overseas branches. The Tribunal upheld the Commissioner (Appeals)'s decision, referencing the Special Bench decision in Sumitomo Mitsui Banking Corporation v/s DCIT. The Tribunal noted that similar issues had been decided in favor of the assessee in previous assessment years (2003-04, 2005-06, and 2006-07). The Tribunal reiterated that under domestic law, the interest paid by the Indian branch to the Head Office was not allowable as a deduction since it was a payment to self. However, it was allowable under the provisions of Article 7(2) and 7(3) of the Indo-Japanese treaty. Therefore, the Tribunal dismissed the ground raised by the Revenue.2. Allowability of Loss on Valuation of Unmatured Forward Exchange Contracts:The department contested the Commissioner (Appeals)'s decision allowing the loss claimed on the valuation of unmatured forward exchange contracts. The Tribunal upheld the Commissioner (Appeals)'s decision, referencing the Supreme Court judgment in CIT vs. Woodward Governor India Private Limited, which allowed adjustments on account of foreign exchange fluctuation on each balance-sheet date. The Tribunal noted that the issue had been consistently decided in favor of the assessee in previous years (1998-99, 2003-04 to 2006-07). Hence, the Tribunal dismissed the ground raised by the Revenue.3. Disallowance of Payment Made to Clearing Corp. of India Ltd. (CCIL):The Revenue challenged the deletion of disallowance made for the payment of Rs. 25,500 to CCIL. The Tribunal upheld the Commissioner (Appeals)'s decision, noting that the payment was compensatory in nature and not a penalty. The Tribunal referenced a similar decision in the assessee's case for the assessment year 1999-2000. Consequently, the Tribunal dismissed the ground raised by the Revenue.4. Taxability of Interest Paid by Indian P.E. of a Foreign Bank to its Head Office and Overseas Branches:The Revenue challenged the decision that the interest paid by the Indian P.E. of a foreign bank to its Head Office and overseas branches is not taxable in India. The Tribunal upheld the Commissioner (Appeals)'s decision, referencing the decision in the assessee's case for the assessment year 2003-04, which held that the interest payment being a payment to self is not taxable. The Tribunal dismissed the ground raised by the Revenue.5. Taxability of Interest Earned on Investments Made in Indian Securities by DBS Bank Ltd., Singapore as Foreign Institutional Investor (FII):The assessee contested the treatment of interest income from FII operations as business income by the Assessing Officer. The Tribunal directed the Assessing Officer to assess the interest income from Government Bonds on a gross basis as per Article 11 of the India-Singapore Tax Treaty, following the Tribunal's decision in the assessee's case for the assessment year 2006-07. The Tribunal allowed the grounds raised by the assessee.6. Refund of Tax Deducted at Source on the Interest Paid to Head Office:The assessee sought a direction to grant a refund of tax deducted at source on the interest paid to the Head Office. The Tribunal directed the Assessing Officer to verify the claim of the assessee and allow consequential relief, following the Commissioner (Appeals)'s direction to examine the assessee's claim. The Tribunal allowed the ground for statistical purposes.7. Applicability of Section 40(a)(i) of the Income Tax Act:The Revenue challenged the applicability of section 40(a)(i) regarding the disallowance of interest expenses. The Tribunal upheld the Commissioner (Appeals)'s decision, noting that since the interest paid to the Head Office is not taxable, there is no requirement for tax deduction under section 40(a)(i). The Tribunal dismissed the ground raised by the Revenue.Conclusion:The Tribunal dismissed the Revenue's appeals, partly allowed the assessee's appeals, and dismissed the cross-objection. The Tribunal's decisions were consistent with previous rulings in similar matters and upheld the Commissioner (Appeals)'s decisions on various issues. The Tribunal's order was pronounced in the open Court on 15.06.2018.