TaxTMI 
TaxTMI 
2007 (11) TMI 438
X X X X Extracts X X X X
X X X X Extracts X X X X
....see is showing the interest on accrual basis. 3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in allowing Rs. 26,035 on account of entrance fees and annual subscription of club without appreciating the fact that these expenses are not laid out wholly and exclusively for the business purpose. 4. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs. 79,345 made under section 37(2A) in respect of expenses incurred on staff get together without appreciating the fact that impugned expenditure is not incurred for assessee's business. 5. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs. 3,99,686 being the interest received from overseas branches on the ground that the same cannot be taxed as interest received from self and there cannot be any income from self." 4. Ground No. 1 is covered in favour of the assessee by the decision of the Jurisdictional High Court in the case of American Express International Banking Corpn. v. CIT [2002] 258 ITR 601 (Bom.). The Co-ordinate Bench 'F' in ITA No. 8031/M/1992 for the assessment year....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ficer, the assessee carried the matter in appeal. Before the learned CIT(A), the assessee contended that the impugned amount of interest could not be taxed as its income as it had been received from self, i.e., overseas branch and there cannot be any income from self. It was on the aforesaid ground that the assessee sought exclusion of the impugned amount of interest from its taxable income. The learned CIT(A) considered the submissions of the assessee and decided the issue in favour of the assessee with the following observations:-- "The 7th ground of appeal is that the Assessing Officer erred in taxing Rs. 3,99,686 being the interest received from overseas branches. It is argued by the learned Counsel that the interest received from overseas branches cannot be taxed as its income as it is received from self and there cannot be any income from self. The learned Counsel also relied on the decision of the Hon'ble ITAT in the case of the appellant for assessment year 1982-83 (order dated 21-7-1989 ITA No. 4514/B/85). For the reasons mentioned by the Hon'ble Tribunal in the aforesaid order dated 21-7-1989, in the case of the appellant for assessment year 1982-83 the interest of Rs. 3....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der sections 44BB, 44BBA, 44BBB etc. There- fore, since there is no specific pro- vision under the Act to compute profits accruing in India in the hands of the foreign entities, the profits attributable to the Indian PE of foreign enterprise are required to be computed under normal ac- counting principles and in terms of the general provisions of the In- come-tax Act. Therefore, ascertain- ment of a foreign enterprise's tax- able business profits in India in- volves an artificial division between profits earned in India and profits earned outside India. 24. . . . It is important to bear in mind that, in terms of the provisions of the Indian Income-tax Act, while the tax- able subject is the foreign GE, it is tax- able only in respect of the income in- cluding business profits, which accrues or arises to that foreign GE in India. The Indian Income-tax Act does not provide for any special mechanism for taxation of PE of a foreign enterprise, except taxation on presumptive basis for certain types of incomes such as under sections 44BB, 44BBA, 44BBB, 44D etc. . . . . Since there are no specific legislative provisions to keep pace with this aspect of increased cross border commerce, by....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ugh PE or not. It is the act of setting out a PE which triggers the taxability of transac- tions in the source State. There- fore, unless the PE is set up, the question of taxability does not arise - whether the transactions are di- rect or they are through the PE. In the case of a Turnkey Project, the PE is set up at the installation stage while the entire Turnkey Project, including the sale of equipment, is finalized before the installation stage. The setting up of PE, in such a case, is a stage subsequent to the conclusion of the contract. It is asa result of the sale of equipment that the installation PE comes into ex- istence. 20. There is one more aspect of the matter. . . . The force of attraction rule only implies that when an enterprise sets up a permanent establishment in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such an- other country can properly tax all prof- its that the enterprise derives from that country - whether through the PE or not. It is the act of setting up a PE, therefore, which triggers the taxability of direct transactions in the source State. Therefore, unless the PE set up, the questi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e finding of the ITAT Special Bench in the case of ABN Amro Bank NV (supra). For this proposition, reliance was placed on the decision dated 28-2-2007 of ITAT Mumbai in the case of American Express Bank Ltd. [IT Appeal No. 2439 (Mum.) of 1996] for the assessment year 1991-92, wherein, the Tribunal has considered the decision of the ITAT (SB) in ABN Amro Bank NV's case (supra) as well as the decision in the case of Dresdner Bank AG (supra ) and held as under:-- "However, there is no dispute to the legal position that in case of conflict between the decisions of the Special Bench and Division Bench, it is the decision of Special Bench which would prevail. In the present case, admittedly, there is no treaty between India and USA in the year under consideration. Accordingly, in view of the Special Bench, it is the local law, i.e., the provisions of Income-tax Act, 1961, which would be applicable. Therefore, following the decisions of Special Bench, it is held that income received/receivable by the India branch from head office is not chargeable to tax." 14. With regard to the judgment of the Hon'ble Supreme Court in the case of Hyundai Heavy Industries Co. Ltd. ( supra) relied by the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the question of law involved in this ground of appeal be referred to the Hon'ble President for constitution of Special Bench under section 254(3) of the Income-tax Act, 1961. 17. In reply, the ld. D.R. submitted as under : (a)if the Branch and head office are to be viewed as one and the same thing, then there was no reason to file return in respect of India operations. (b)The NOSTRO account is nothing but the bank account of the India Branch in the head office. The sources of deposits are the banking operations in India. The interest earned would be covered under the definitions of income accruing or arising directly or indirectly. (c)To ascertain profit accruing or arising in India, the only way is by treating the Indian PE as a fictionally separate profit centre and compute the profit of India PE as an independent unit. (d)Intra-organization transactions are to be ignored for computing the business profits hold good only when profits of the organization as a whole are to be computed, or when these transactions are domestic transactions within one single enterprise and within one tax jurisdiction. (e)As far back as 1933, League of Nations Draft Conventions had a specific pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uld not lead to different tax results. Therefore, while incomes of the PE should include all revenues, including revenues earned from other intra-organisation entities outside the respective tax jurisdiction, the expenses allowed as deductions from the profits of a PE should also be those that are actually borne by such a PE. To sum up, a Co-ordinate Bench of the ITAT in the case of Dresdner Bank AG (supra) held as under:-- (i)Provisions of section 5(2) make it clear that under Act so far as foreign companies are concerned, taxable unit is a foreign company and not its branch or permanent establishment in India, even though taxability of such foreign companies is confined to (i) an income which 'accrues or arises in India' or is 'deemed to accrue or arise in India', and (ii) an income which is received or is deemed to be received by or on behalf of such foreign company. (ii)to determine income accruing or arising in India to a foreign enterprise ('GE'), one has to compute income attributable to such branch(es) in India or other form(s) of presence in India such as office, project side, factory, sales outlet, etc., (PE) of foreign enterprise. (iii)For computation of business prof....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ay observe that principle applied by a Co-ordinate Bench in the case of Dresdner Bank AG (supra), which is followed by us, is virtually approved by the Hon'ble Supreme Court in the case of Hyundai Heavy Industries Co. Ltd. (supra). In view of this, the request of the learned Counsel for the assessee to constitute the Special Bench on the issue involved in this ground of appeal cannot be accepted. Ground No. 5 is accordingly accepted. 23. In the result, the appeal of the revenue is partly allowed. 24. The assessee has raised cross objection arising out of ITA No. 1453/M/96, which are as under:-- "1. (a) The respondents submit that in case the token period interest is held to be disallowable then a deduction for this amount should be allowed in the year in which the securities are sold. (b) In the event of any higher authority reversing the decision of the Commissioner of Income-tax (Appeals) in the earlier years that the interest paid to sellers for the broken period is allowable as a revenue expenditure then the DCIT be directed to allow them a deduction for the broken period disallowed by him in the earlier years in respect of securities sold during the previous year relevant ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....paid is allowable under section 36(1)(iii) or under section 37 or under section 28." 27. We find that issue involved in ground No. 1 of assessee's appeal is covered against the assessee by the decision of the Apex Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102. This decision of Hon'ble Supreme Court was also followed by ITAT 'F' Bench in assessee's own case for the assessment year 1989-90 in ITA No. 8384/M/92 wherein disallowance of claim of deduction of Rs. 7,95,232 being interest credit to suspense account was upheld. However, in that year, the direction was issued to Assessing Officer that such amount be not taxed in the year of actual receipt because double taxation is not possible. Following the decision of Tribunal in assessee's own case for the assessment year 1989-90 in ITA No. 8384/Mum./92, we uphold the action of both the authorities in this regard. However, the Assessing Officer was directed not to tax such amount in the year of actual receipt. 28. The only other ground relates to confirming the disallowance of Rs. 8,74,321. The detailed reasons for making this disallowance are contained in para 10 of the assessment order, which is reproduced h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rm placements. It has therefore, been decided that portfolio/fund management services may, hereafter, be offered by the banks/their subsidiaries to their individual/corporate clients, subject to the following guidelines : (i )It may be undertaken only at the customer's risk, without guaranteeing a pre-determined return. (ii )It may be handled on behalf of parties in respect of their long-term investible funds. (iii)The minimum period for which funds are placed for management by the clients should be one year. There will, however, be no objection to shuffling of relative investments during the period. (iv)The transactions should be booked at market rates only. (v )Proper accounting and documentation of such transactions should be ensured.' From the above it is seen that the assessee-bank has violated the above guidelines by guaranteeing fixed rate of return on the funds employed under P.M. Scheme. The actual cost and the cost at the rate of 9 per cent (which is the rate allowable as per RBI guidelines on term deposits) have been filled by the assessee vide its letter dated 26-2-1993. As required we give below the breakup of cost to the bank and cost at the rate of 9 per cent ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng-term investible funds. (iii)The minimum period for which funds are placed for management by the clients should be one year. There will, however, be no objection to shuffling of relative investments during the period. (iv)The transaction should be booked at market rates only. (v)Proper accounting and documentation of such transactions should be ensured. These instructions were issued by this R.B.I. vide letter No. PBOD No. BP/(FSC)BC.120/C.469-89, dated 2-5-1989. These instructions are relevant in financial year 1989-90 relevant to assessment year 1990-91. In order to examine whether the appellant has followed these instructions the appellant's learned counsel was specifically asked vide my order sheet entry dated 28-8-1995 to intimate the following facts : (1)What is the market rate on the date of purchase and sale of securities? (2)Whether the securities were transferred to the name of Parsi Panchayat and Garib Zarthostion Rehtan Fund and if so on which date the securities were transferred. (3)A photocopy of the ledger account of the Parsi Panchayat and Garib Zarthostion Rehtan Fund in the books of the appellant. (4)Evidence about possession of these securities by the B....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted the submissions made before the authorities below. He contended that deposits from both the parties were accepted under Port-Folio Management Scheme (PMS), therefore no disallowance is called for. On a query from the Bench to give a copy of account of both the parties in the books of the assessee, the Counsel submitted that these are not available. He also stated that 9 per cent IRS bond maturing 1999 and 10 per cent NTPC bond maturing 1997 were already held by the assessee and these were transferred to both the parties at market price at the relevant time. Alternatively, the Counsel submitted that entire interest paid to both the parties is allowable as deduction under section 36(1)(iii) of the Income tax Act, 1961 because the RBI has not penalized the assessee for paying excess interest than prescribed by RBI in exercise of power conferred by sections 21 and 35A of Banking Regulation Act, 1949. To sum up, he concluded that entire interest was paid wholly and exclusively for the purpose of business, therefore, the same be allowed. 31. On the other hand, the learned. D.R. supported the orders of the authorities below. He contended that during appellate proceedings, the learned....