2020 (10) TMI 753 - AT - Income Tax

Tribunal Grants Relief on Overseas Salary, Interest Exclusion & Transfer Pricing; Upholds Tax Rate

MUFG Bank Ltd Versus ACIT (International Taxation), Circle-2 (2) (1), New Delhi

The Tribunal partially allowed the appeal, granting relief on various grounds such as disallowance of overseas salary payments, exclusion of interest ... Disallowance of salary paid overseas to expatriates of the Appellant working in India by the Head Office (“HO’) and the Indian taxes paid thereon by the HO - head office of the assessee is situated in Japan and has deputed certain employees to work in its branches situated in India whose sole responsibility is to exclusively manage the business operation of the branches of the assessee in India. - HELD THAT:- Expatriate employees deputed by the HO are working exclusively for the Indian branches. Therefore, the salary paid to expatriates is incurred wholly and exclusively for the purpose of carrying on the business of branches in India and thus, the salary paid to expatriate is deductible as an expense under section 37(1) of the Act and not covered within the scope of ‘head office expenditure’ under section 44C of the Act. It is submitted that this issue is now covered by the order of the High Court in [2016 (4) TMI 817 - DELHI HIGH COURT] wherein the High Court dismissed the appeal of the Department - we direct the learned assessing officer to delete the disallowance of salary paid overseas to the expatriates of the appellant working in India by the head office and the Indian taxes paid thereon by that office. Addition on account of the interest received by Indian branches from head office and other overseas branches - HELD THAT:- Income earned from head office and overseas branches is not taxable in the hands of the PE in India since they are not separate legal entities and are part of the same foreign company therefore no income can arise when the transactions are carried out by different parts of the same legal entity. It is a settled principle of law that no man can make profit out of himself. Therefore, the interest income earned from head office and overseas branches is not chargeable to tax. Disallowance u/s 14 A on account of the exempt interest income earned on pass-through certificates claimed as exempt u/ 10 [35A] - HELD THAT:- Difference if the income is received as a dividend u/s 10 (34) or is distributed by a securitisation trust which is also exempt u/s 10 (35A) - we are of the view that if these passthrough certificates are held as stock in trade by the assessee and distribution of income is also exempt in the hands of the assessee, it is also on the same footing as in case of other banks which are receiving the dividend from securities held as stock in trade. Therefore, we hold that in this case, provisions of Section 14 A does not apply. Hence no disallowance is called for under that Section. Accordingly, made by the learned assessing officer u/s 14A of the income tax act of ₹ 22,521,366/– is unwarranted. Further, as the assessee is granted relief on the first argument that Section 14 A is not applicable in case of bank when the investments are held as stock in trade, other arguments raised are merely academic. Taxability of interest earned on external commercial borrowing to Indian customers - HELD THAT:- Assessee has received interest from external commercial borrowing loan given by the head office/overseas branches to various customers in India. AO has taxed this income at the rate of 10% applying the article 11 (2) of double Taxation Avoidance Agreement. In view of this we dismiss ground number [4] of the appeal to that extent. Deduction u/s 44C - AO has held that since the interest on external commercial borrowing loans are taxed on gross basis, therefore there is no question of allowing any deduction from such income and accordingly did not consider the interest on external commercial borrowing loans for the purpose of computing deduction under that Section - HELD THAT:- It is the option of the assessee to govern by the provision of the Domestic tax Laws or DTAA, whichever is more beneficial to assessee. But there is no mandate that assessee can opt for lower taxes as per DTAA and claim expenses as per Domestic tax laws. Therefore there cannot be any further expenditure claimed as deduction from that income. That will dilute the amount of tax payable on interest income in the source country as payable according to the Double Taxation Avoidance Agreement - no mandate in the DTAA to grant any such deduction from income taxed u/s 11 (2) - No infirmity in the order of AO in not granting deduction u/s 44C of the act from the above income which is taxed under article 11 (2) of the DTAA on gross basis at the rate of 10%. As we hold that there is no need to go to Section 44C of the act in this case, reliance placed by the assessee on the several judicial precedents with respect to the definition of meaning of total income/ adjusted income is not relevant. Taxation of interest received by the assessee u/s 244A of the income tax act on income taxes refund received during the year - in the return of income the interest was offered to tax at the rate of 10% under article 11 (2) of the DTAA - HELD THAT:- This issue squarely covered in favour of the assessee by the decision of the Honourable Bombay High Court in CREDIT AGRICOLE INDOSUEZ [2015 (6) TMI 974 - BOMBAY HIGH COURT]wherein the issue has been set aside to the file of the learned assessing officer to determine/adopt the rate of tax on refund in the light of relevant clauses of the DTAA . Therefore, we also set aside this issue to the file of the learned assessing officer to decide on the rate of tax on interest on income tax refund received by the assessee. TP Adjustment - segregating the international transaction of the receipt of the guarantee commission and benchmarking the same separately - HELD THAT:- We allow this ground of appeal of the assessee holding that as the banking business of the assessee and the transactions related to the issue of guarantee commission on by the assessee are interlinked and closely connected, they should have been benchmarked in a bundled manner. Accordingly ground number 9 of the appeal of the assessee is allowed. Liability for education cess on income-tax levied for AY 2015-16 ought to be allowed as a deduction under the head income from business and profession.’ - HELD THAT:- Whether education cess is allowable as a deduction to the assessee u/s 37 (1) of the income tax act the issue has been decided in Sesa Goa Ltd. [2020 (3) TMI 347 - BOMBAY HIGH COURT] - we set aside the issue back to the file of the learned assessing officer directing him to allow the education cess as deduction u/s 37 (1) of the act after verifying the computation of the same. Accordingly additional ground raised by the assessee is allowed with above direction. Issues Involved:1. Disallowance of salary paid overseas to expatriates.2. Interest received by Indian PE from HO overseas branches.3. Disallowance under section 14A of the Act on account of exempt interest earned on Pass Through Certificates (PTCs).4. Addition on account of interest received on External Commercial Borrowings (ECBs) given to Indian Borrowers.5. Taxability of interest under section 244A of the Act on income tax refund.6. Applicable rate of tax.7. Short grant of credit for TDS.8. Erroneous computation of tax liability.9. Transfer Pricing adjustment.10. Initiation of penalty proceedings.11. Additional ground regarding deduction of education cess.Issue-wise Detailed Analysis:1. Disallowance of Salary Paid Overseas to Expatriates:The assessee claimed a deduction for salaries paid by the Head Office (HO) to expatriate employees working in India, which was disallowed by the AO on the grounds that these employees worked for both the HO and the Indian branch. The Tribunal, following the Delhi High Court's decision in the assessee's favor for earlier years, directed the AO to delete the disallowance, holding that the salaries were incurred wholly and exclusively for the Indian branch's business.2. Interest Received by Indian PE from HO Overseas Branches:The AO added interest received by the Indian PE from its HO and overseas branches, treating them as separate entities for tax purposes. The Tribunal, following earlier decisions in the assessee's favor, held that such interest is not taxable as it is a payment to self and directed the AO to exclude this interest from the assessee's income.3. Disallowance under Section 14A on Exempt Interest Earned on PTCs:The AO disallowed expenses under section 14A related to exempt interest income from PTCs. The Tribunal held that since the PTCs were held as stock-in-trade by the bank, section 14A does not apply, and no disallowance is warranted. The Tribunal allowed the assessee's appeal on this ground.4. Addition on Account of Interest Received on ECBs Given to Indian Borrowers:The AO taxed interest received on ECBs at 10% under Article 11 of the India-Japan DTAA. The Tribunal upheld this tax rate but dismissed the assessee's claim for deduction under section 44C, stating that the income taxed under DTAA cannot be combined with domestic tax laws for claiming deductions.5. Taxability of Interest under Section 244A on Income Tax Refund:The AO taxed interest on income tax refunds at 40%. The Tribunal, following the Bombay High Court's decision, set aside the issue to the AO to determine the correct rate of tax under the DTAA, directing that the interest should be taxed at 10%.6. Applicable Rate of Tax:The AO applied a tax rate of 40%. The Tribunal, following earlier decisions, held that the tax rate of 40% is applicable to the assessee as a foreign company, and dismissed the assessee's appeal on this ground.7. Short Grant of Credit for TDS:The issue of short grant of TDS credit was resolved by the AO in a rectification order. The Tribunal dismissed this ground as infructuous.8. Erroneous Computation of Tax Liability:The AO corrected the computation error in a rectification order. The Tribunal dismissed this ground as infructuous.9. Transfer Pricing Adjustment:The AO made a transfer pricing adjustment for guarantee commission. The Tribunal, following the decision in the assessee's own case for earlier years, held that the international transactions should be benchmarked together using the Transactional Net Margin Method (TNMM) and deleted the transfer pricing adjustment.10. Initiation of Penalty Proceedings:This ground was not specifically addressed in the judgment.11. Additional Ground Regarding Deduction of Education Cess:The Tribunal admitted the additional ground for deduction of education cess, following the Bombay and Rajasthan High Courts' decisions, and directed the AO to allow the deduction after verifying the computation.Conclusion:The Tribunal allowed the appeal in part, providing relief on several grounds, including the disallowance of salary paid overseas, interest received from HO, disallowance under section 14A, and transfer pricing adjustments, while upholding the AO's decisions on the applicable tax rate and dismissing the grounds related to TDS credit and tax liability computation as resolved. The additional ground for deduction of education cess was also allowed.