TaxTMI 
TaxTMI 
2016 (5) TMI 283
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....ad office expenses by applying the provisions of Sec. 44C of the Act as against the assessee's claim that the entire expenses allocated to the Indian branches should be allowed as deduction as per the provision of Article 7(3) of the convention between the Government of U.A.E. and the Government of India and (2) Upholding the Assessing Officer's action of not allowing the claim of the assessee that the tax rate applicable to its business income is 35% and not 40% being the rate applicable to foreign companies for the year under appeal. 3. At the very outset, the Ld. Counsel for the assessee submits that this issue is decided in favour of the assessee in assessee's own case for assessment years 1995-96 to 2004-05. The Ld. Counsel submits that the decision of the Tribunal for assessment years 1995-96 to 2000-01 is reported in (150 TTJ 85) and for the assessment years 2001-02 & 2002-03 is reported in (60 SOT 71) and for the assessment years 2003-04 and 2004-05 he submits that the Coordinate Bench decided this issue in ITA Nos. 6530 of 2006 and 3463/M/2010 dated 3.8. 2012. Copies of the decisions are placed on record. 4. The Ld. Departmental Representative vehemently supports the....
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....ts that the Ld. CIT(A) however applied Rule 8D and determined the expenditure attributable for earning exempt income at Rs. 2,42,99,262/-. He further submits that for the assessment year 2004-05, the provisions of Rule 8D have no application in view of the decision of the Jurisdictional High Court in the case of Godrej & Boyce Co. Ltd., Vs CIT (328 ITR 81). The Ld. Counsel further submits that there is no nexus between the borrowed funds and investments and these investments were old and were made during the years 1997 and 2000. The Ld. Counsel further submits that similar issue has been decided in favour of the assessee by the Co-ordinate Bench for the assessment year 2003-04 in ITA No. 581 of 2007 dated 3.8.2012 by deleting the disallowance. 8. The Ld. Departmental Representative placed reliance on the decision of the lower authorities. 9. Heard both sides and perused the orders of the lower authorities. In view of the decision of the Hon'ble Jurisdictional High Court in the case of Godrej & Boyce Co. Ltd., (supra) Rule 8D has no application for the assessment year 2004-05. However, reasonable disallowance should be made towards expenditure attributable for earning exempt i....
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....nch in the case of Oman International Bank SAOG reported in 35 CCH 207 (Mum). The Ld. Counsel for the assessee submits that Oman International Bank is in the contest of the provisions of Sec. 14A and not u/s. 40(a)(i) of the Act and therefore the decision is factually distinguishable. On a reading of the order of the Special Bench, we find that the Special Bench decided the issue in favour of the assessee holding that 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, therefore provisions of Sec. 195 could not be attracted and there being no failure to deduce tax at source from payment of interest made by PE. It was held that the question of disallowance of the said interest by invoking provisions of Sec. 40(a)(i) does not arise. While holding so, the Special Bench of the Tribunal held as under: "63. We have carefully gone through the above provisions of the treaty along with other provisions which are relevant in this context as well as commentaries available on this point which are found to be helpful in interpreting the relevant provisions of the treaty. As per article 11(1), if ....
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....arate and independent entity should be extended to article 11 to the treaty. According to him, if the PE in India and the head office abroad are treated as two separate entities, there will be no difficulty in bringing to tax interest paid by Indian PE as income of the GE in India as per article 11(2). Before we deal with this argument relating to the extension of deeming fiction created in article 7(2) and application thereof to article 11 also as sought by Shri Girish Dave, we consider it proper to first deal with article 11 (6) of the Indo-Japanese treaty which has been referred to by both the sides in different context and in different manner seeking interpretation thereof in support of their respective case. The said article 11(6) reads as under: "The provisions of paragraphs 1,2 and 3 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein or pe2rforms in that other contracting state independent personal services from a fixed base situated therein and the debt-claim in respect of which the interes....
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....ts to Permanent Establishments (see in particular paragraphs 72-92 of Part I of the report) for the purposes of the application of paragraph 2 of Article 7. In the context of that paragraph, the "economic" ownership of a debt-claim means the equivalent of ownership for income tax purposes by a separate enterprise, with the attendant benefits and burdens (e.g. the right to the interest attributable to the ownership of the debt-claim and the potential exposure to gains or losses from the appreciation or depreciation of the debtclaim). 67. Keeping in view the purpose and scope of article 11(4) of the OECD Model Convention, the provisions of which are pari materia to the provisions of article 11(6) of the Indo- Japanese treaty, we are of the view that the same is not applicable to the facts of the present case inasmuch as the situation as contemplated to make it applicable does not exist in the present case. In the present case, the amount is advanced by the head office of the assessee bank to its PE in India and the same represents liability of the PE in India as reflected in the balance sheet of that PE. Interest paid by the PE on such liability, therefore, cannot beregarded....
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....cation contemplated in the treaty cannot be extended and applied to compute the income of the GE. It is no doubt true that if the accounts of two entitles are prepared symmetrically and the methods of attributing profits or expenses applied are the same, such accounts are more acceptable to the tax authorities having jurisdiction over both these entities because the same will result in the deduction allowed in the hands of one entity as income in the hands of other entity. The relationship between a PE and the GE of which the said PE is part, however, is entirely different and the effects of article 7 should be considered keeping in view this peculiar relationship between the PE and GE. 70. The purpose and function of article 7 is to determine whether the source State may tax the profit of an enterprise carried on by a resident of other contracting State through a PE in the source State and if so, how much of the profits the source State may tax. The resident State has to determine the profits attributable to the PE considering it as a separate entity mainly for the purpose of granting double taxation relief according to the relevant treaty and not for the purpose of deter....
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.... Rs. 3 crores, while the PE has taken a loan from third party on which interest of Rs. 3 crores has been paid. In such a case, the profit attributable to the PE will remain the same at Rs. 2 crores on which the PE State will impose tax. The profit of GE which represents the consolidated figure of HO and PE will also remain unchanged at Rs. 100 crores as the interest received from third party of Rs. 3 crores will be credited to the consolidated profit & loss account and the interest paid by PE to third party amounting to Rs. 3 crores will be debited in the consolidated profit & loss account. The total profit of the GE thus will remain the same even in this situation at 100 crores out of which Rs. 2 crore will be taxed in PE State being profit attributable to PE and the balance amount of Rs. 98 crore will be taxed in GE State i.e. resident State. However, it will have to pay in addition to the tax payable on the profit attributable to the PE of Rs. 2 crores, tax on interest of Rs. 3 crores received from third party of the other State in that State i.e. PE State as per article 11 (2) of the treaty. The GE, however, will be able to claim credit for such tax paid in its country as per a....
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.... 73. The OECD commentary 'Model Tax Convention on income and on capital (condensed version)' released in July, 2010 has also considered in paragraph no. 28 the effect of the separate and independent enterprise fiction that is mandated by article 7(2). It is stated in this context that the said fiction is restricted to the determination of profits that are attributable to a Permanent Establishment and it does not extend to create notional interest income for the enterprise which a contracting State could tax as such under its domestic law by arguing that such income is covered by another article of the convention. It is also rarified that the separate and independent enterprise fiction does not extend to article 11 and for the purpose of that article, one part of an enterprise cannot be considered to have made an interest payment to another part of the same enterprise. 74. In the assessment order, the AO has relied on the provisions of section 9(1)(v)(c) of the Income-tax Act to" hold that interest payable by PE in India being income deemed to accrue or arise in India is chargeable to tax in India. In our opinion, such interest payable by the PE to GE being paym....
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....ncurim keeping in view that many relevant and vital aspects are not considered while holding that interest receivable by a foreign bank from its Indian branch was not taxable in the hands of foreign bank in India. Shri Dave has also made an attempt to invite our attention to the various findings and observations recorded by the Hon'ble Calcutta High Court in its judgment delivered in the case of ABN Amro Bank NV (supra) which according to him, are self contradictory and inconsistent. The learned counsels for the assessee, Shri Pardiwala and Shri Dastur, on the other hand, have contended that the decision of Hon'ble Calcutta High Court being the only decision of the High Court directly available on the point, should be followed by the Special Bench even though the same is the decision of the non jurisdictional High Court. Without going into all these arguments raised by the learned representatives of both the ides, we consider it sufficient to observe that the issues raised before us have been considered and decided by us on merits independently after taking into consideration the various submissions made by both the sides and the relevant material placed on record.....
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....eaty. As held by us, the said provision of the treaty cannot be relied upon to bring to tax certain income in the hands of foreign enterprise in India which otherwise is not taxable as per the domestic law. In this regard, we have referred to the provisions of section 90(2) of the Indian Income-tax Act which provide that the provisions of the domestic law override and prevail over the provisions of treaty if the same are beneficial to the assessee. We have also relied on the decision of Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) wherein it was held that treaty cannot impose tax which is otherwise not provided in the domestic law. 79. As regards the reference made by Shri Girish Dave to the balance sheet of Indian Branches of the assessee bank wherein capital and loans given by the head office are reflected separately to show that head office is a distinct and separate entity from the Indian Branches, we have already considered and highlighted the peculiar relationship between the head office of the assessee bank being a foreign GE and its Indian Branches being PE in India. We have also highlighted how as a result of this peculiar relationship, th....
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.... the issue of deductibility of notional expenses in more details. It was held by him in this context that deduction of notional rent was not allowable as deduction also for the reason that the amount of such notional rent was never included as income in the hands of head office. It was held by him that to allow deduction in this circumstance would mean that the tax was being avoided on rental income both in Canada and in United States. The facts involved in the case of Cudd Pressure (supra) thus were entirely different from the facts of the present case. Moreover, the present case is not a case where there is avoidance of tax by the assessee in both the countries as already discussed and explained by us. The observations and comments made in the minority view and relied upon by Shri Dave in the case of Cudd Pressure (supra), in our opinion, therefore, cannot render any support to the Revenue's stand on the issue under consideration in the present case. 81. In the case of ABN Amro Bank (supra) decided by Hon'ble Sindh High Court of Pakistan and cited by Shri Girish Dave, the issue involved was whether the Tribunal was correct to confirm the taxation of interest inco....
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....its order befpre finally concluding the issue in paragraph No. 71 of the order as under: "For all these reasons, we are not persuaded by the learned counsel's arguments that since no one can be expected to make profits out of transactions with himself, intra organization transactions are to be ignored for the purpose of computing profits accruing or arising, to an Indian PE of a foreign company, under section 5(2)(b) of the Act. In our understanding, for the purposes of computing profits of a PE, the intra organization transactions are to be taken into account as long as these transactions are real and bona fide transactions. It is not the assessee's case that the interest income from the head office is without any consideration or without sufficient consideration. In other words, fact of or correctness of interest earnings from head office are not in dispute. Therefore, in our considered view, the interest earnings from the head office are to be taken into account for the purposes of computing profits arising in or accruing in India. We, therefore, reject the contentions of the assessee." In the case of Dresdner Bank AG (supra), a reference was made to th....
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....iwala, the issue that arose before the Division Bench of this Tribunal was whether the interest received by the assessee from its non resident branches could be taxed in India and on this issue, reliance was placed on behalf of the assessee on the decision of Kolkatta Special Bench of ITAT in the case of ABN Amro Bank NV(supra) while the Revenue relied on the decision of Division Bench in the case of Dredsner Bank Ltd (supra). The Division Bench in its order passed in the case of American Express Bank Ltd. took note of the ratio laid down by the Special Bench in the case of ABN Amro Bank (supra) as well as by the decision of the coordinate bench in the case of Dredsner Bank (supra) and found conflict therein. The Division Bench, therefore, preferred to follow the decision of Special Bench in the case of ABN Amro Bank (supra) for the following reasons given in paragraph No. 35 of its order: "The comparative study of both the judgments shows that there is conflict between the ratio laid down by the decision of Special Bench in the case of ABN Amro Bank (supra) and the decision of Division Bench in the case of Desdner Bank (supra). It is not in our domain to make any commento....
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....cannot give rise to any income which is taxable in India since one cannot make profit out of himself. As rightly contended by Shri Dastur, the basic principle which is to be kept in mind in this context is that nobody can make profit from himself and the income accrues or arises only when there is a deal with some third person and not from the deal with himself. 85. As regards the arguments raised by Shri Srivastava relying on the provisions of article 11 (2) of the treaty, it is observed that the same is mainly a reiteration of what has been argued by Shri Girish Dave and we have already dealt with the submissions made by Shri Girish Dave elaborately before finally rejecting the same. As regards the contention raised by Shri Srivastava relying, inter alia, on the decision of Hon'ble Supreme Court in the case of Hyundai Heavy Industries Company Ltd. (supra) that the domestic law also recognizes two entity approach in the case of PE, we are of the opinion that the same cannot be disputed. However, this two entity approach is recognized only to the extent of determining the profit attributable to the PE in India and that too mainly relying on the relevant provisions of t....
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.... GE to a third party and the same having been advanced directly to the PE, it is a transaction between the two parts of the same entity and the interest paid by PE to GE being payment to self, no income can be said to have arisen or accrued which is chargeable to tax 'in India. 87. Shri Srivastava has submitted before us that article 7(2) of the treaty lays down the procedure for apportionment of income between Head Office and Indian Branch. According to him, as per the said scheme of apportionment, what can be allowed as deduction is the actual cost of funds to the Head Office. He has contended that if there is no such cost incurred at HO level, interest paid by the branch to the HO will be only a notional expenditure which cannot be apportioned as per article 7(2) of the treaty. We are unable to accept this contention of Shri Srivastava keeping in view the specific provisions contained in article 7(2) of the treaty. As per the said provisions, the profits attributable to the Permanent Establishment are the profits which the PE might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar co....
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.... 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, the question of disallowance of the said interest by invoking the provisions of section 40(a)(i) does not arise. Accordingly we answer question No. referred to this Special Bench in the negative i.e. in favour of the assessee and question No.2 in affirmative i.e. again in favour of the assessee". Respectfully following the Special Bench decision, we allow ground No. 3 & 4 raised by the assessee. ITA No. 4928/M/2009 - A.Y. 2006-07 17. The first ground relates to the deduction for head office expenses by applying the provisions of Sec. 44C of the Act as against the assessee's claim that the entire expenses allocated to the Indian branches should be allowed as deduction as per the provision of Article 7(3) of the convention between the Government of U.A.E. and the Government of India. 18. This issue is identical with the issue in ground No. 1 in ITA No. 4926/M/09 for assessment year 2004-05, though quantum may differ. Therefore, on similar lines and for similar reasons, the ground raised by the assessee in ITA No. 4....
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....rovisions of Sec. 44C and he states that head office expenses are only to the extent of 5% of the adjusted total income can be claimed. He submits that such expenses were claimed in the earlier years also and the ITAT decided the issue against the assessee and the matter is in appeal before the Hon'ble High Court. It is the contention of the Ld. Departmental Representative that in the computation of income of the branch as per the domestic laws, the interest would have been allowable as deduction from computation of income but the same is not allowable u/s. 40(a)(i) because assessee failed to deduct tax on payment of interest to overseas branch of the head office. The Ld. Departmental Representative vehemently supporting the order of the Assessing Officer submits that assessee has made wrong claims thereby furnishing inaccurate particulars of income. He further submits that the income from head office has not been reported by the assessee, therefore there is concealment of income. He vehemently supports the order of the Assessing Officer in levying penalty. 27. The Ld. Counsel for the assessee submits that the AO erred in passing the order under section 271(1)(c) in a mechanical....