TaxTMI 
TaxTMI 
2020 (5) TMI 665
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.... of Rs. 161,332,006 paid as salaries by the Head Office overseas, in foreign currency, to the expatriates working in India exclusively for the permanent establishment ('PE') of the Appellant in India, on which taxes have been duly deducted/deposited in India, and accordingly the order of the Ld. AO, based on the DRP's directions is erroneous in law as well as on facts on the following counts: a) That the Hon'ble DRP and Ld. AO have failed to appreciate that the salary has been paid to the expatriates who are stationed in India and are working exclusively for business operations of the Indian PE of the Appellant and is thus an allowable expenditure as per Article 7(3) of India-Japan DTAA ('DTAA') b) That the Hon'ble DRP and Ld. AO have erred in observing that the nature of expense is covered under section 44C of the Income- tax Act, 1961 read with clause (b) of Explanation (iv) to the section, even though, the said amount is incurred exclusively and for direct benefit of Indian operations of the Appellant. 2. Addition on account of interest paid to Head Office and other overseas branches of the Bank amounting to Rs. 339,135,887 That on the facts a....
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.... it has opted to be governed by the provisions of the DTAA (so far as they are more beneficial) and has wrongly applied the provisions of Act. d) The Hon'ble DRP and Ld. AO have erred in not appreciating that in terms of the provisions of Article 11 of the DTAA, dealing with the taxability of Interest, the interest received by the Appellant from the Indian branches is not in respect of a 'debtclaim' as contemplated under Article 11 of the DTAA. e) That the Hon'ble DRP and Ld. AO have erred in not following the direct judgment of the Mumbai Special Bench in the case of Sumitomo Mitsui Banking Corporation (136 ITD 66) wherein the Appellant was an intervener. f) Without prejudice to Ground no. 2, the Hon'ble DRP and Ld. AO have erred in not appreciating that separate addition of Rs. 339,135,887 relating to interest paid on borrowings from HO/overseas branches would tantamount to double taxation, which is against all canons of taxation. 4. Interest amounting to Rs. 15,956,253 accrued/ received by the Indian PE from its HO/ overseas branches. That on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in confirmin....
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....ternal Commercial Borrowings ('ECBs') given to Indian Borrowers That on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in confirming the addition, as proposed in the draft assessment order, in respect of interest received by the Appellant on ECBs given to Indian borrower parties, and accordingly the order of the Ld. AO based on DRP's directions is bad in law as well as on facts on the following counts: a) The Hon'ble DRP and Ld. AO have erred in not appreciating that under the provisions of Article 7 of the DTAA, an amount, commensurate with the role played by the PE, has already been offered to tax by the Appellant, in computation of its income taxable in India as per the provisions of the DTAA; and therefore nothing further could be brought to tax in India. b) The Hon'ble DRP and Ld. AO has erred in observing that the interest would continue to be taxable under Article 11 of the DTAA, even though it has been acknowledged by the AO himself that the ECBs may be partially connected with the PE. Such an observation is contrary to the express provisions of Article 11 of the DTAA, which clearly provides that in the event debt....
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....RP and Ld. AO have erred in not following the decision of the Hon'ble Calcutta High Court in the Appellant's own case for the Assessment Year 1981-82. 9. Non-grant of tax credit amounting to Rs. 64,314,230 On the facts and circumstances of the case and in law, the Ld. Assessing Officer has erred in not providing the tax credit of Rs. 64,314,230 (resulting from the excess advance tax/TDS paid by the Appellant for Assessment Year 2009-2010) while raising the impugned tax demand by ignoring the fact that no refund has been received by Appellant. 10. Erroneous withdrawal of interest under section 244A of the Act On the facts and circumstances of the case and in law, the Ld. AO has erred in withdrawing the interest under section 244A(3) of the Act without appreciating the fact that no refund has been received by the Appellant for Assessment Year 2009- 2010. 11. Applicable Rate of Tax That on the facts and circumstances of the case and in law, the Hon'ble DRP and Ld. AO have erred in not adjudicating that under the provisions of Article 24 of the DTAA, the applicable rate of tax on the income of the appellant attributable to its PE in....
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....st foreign banks in India, which was engaged in wholesale banking operations. The assessee operated in India under the license of Reserve bank of India (in short "RBI") and was covered by the Banking Regulations Act, 1949. For the year under consideration, the assessee e-filed return of income declaring total income of Rs. 1,44,03,05,977/-. The case of the assessee was taken up for scrutiny. The Assessing Officer first raised the issue as to why the salary paid to expatriates may not be disallowed, in turn relying on the observations of the Assessing Officer in Assessment Year 2007-08. The Assessing Officer had disallowed sum of Rs. 9,92,36,315/- in Assessment Year 2007-08, which was incurred on account of overseas salaries paid to expatriates being in nature of head office expenses and could not be allowed as a deduction as per the provisions of section 44C of the Act. Applying the said reasoning , the Assessing Officer disallowed overseas salaries paid to Japanese expatriates and tax thereon at Rs. 16,13,32,006/- 5. Before the DRP, the plea of the assessee was that the expatriates were working in India exclusively for the PE of the assessee in India and were carrying out day t....
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....e Revenue have been dismissed by consolidated order passed by the Hon'ble Delhi High Court in ITA Nos.604 & 605/2015, vide order dated 08.04.2016. The Hon'ble High Court while deciding the issue of whether deduction is to be allowed, on account of salary paid to expatriates, observed as under:- 9. "The first question urged concerns the payment of salaries to the expatriates. In deciding this issue in favour of the Assessee, the ITAT has in the impugned common order referred to and relied upon the decision of its coordinate bench at Kolkata in ABN Amro Bank v. JCIT (2005) 97 ITD 1 (ITAT [Kol]). Further the ITAT followed the decision of the Bombay High Court in CIT vs Emirates Commercial Bank Ltd. (2003) 262 ITR 55 (Bom.) where the Bombay High Court approved the view taken by the ITAT. The ITAT agreed that the expenses have been incurred wholly and exclusively by the Indian branch and therefore no part of these expenses can be allocated to any other branch of the HO and that there was no dispute with regard to the non-applicability of Section 44C of the Act. 10. This Court has perused the order of the Bombay High Court in Emirates Commercial (supra) where on identic....
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....ssessee. The DRP upheld the order of the Assessing Officer and the final assessment order was thus passed. 15. The Ld.AR for the assessee pointed out that there is no requirement to deduct the tax at source on the interest payment made to Head Office and other overseas branches. He referred to the order of the Tribunal in assessee's own case for Assessment Year 2007-08 and 2008-09 wherein this issue was decided in favour of the assessee relying on the decision of Special Bench of the Tribunal (Larger Bench) in Sumotomo Mitsubishi Banking Corpn. vs Dy. DIT [2012] 136 ITD 66 (Mum.) (SB). He further pointed out that the Hon'ble High Court has decided issue vide paras 12 & 13 of the judgement dated 08.04.2016. He also pointed out that the issue raised in Ground No.3 is to bring to tax the aforesaid amount in the hands of the assessee. 16. We have heard the rival contentions and perused the record. The assessee is a foreign bank with operation in India under license from Reserve Bank of India. It has three branches in India at the relevant time and the said branches in India constituted permanent Establishment (in short "PE") of the assessee in India, within the meaning of Article....
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...." 17. The Hon'ble High Court had decided the first issue of interest paid to the Head office and overseas branches and had also applied the same principle for deciding the issue of taxability of interest received on Indian branches. 18. The issue raised before us vide Ground of appeal Nos. 2 & 3 i.e. interest paid to Head Office and overseas branches and interest received from Indian branches amounting to Rs. 33.91 crores (approx.), for which two separate additions were made by the Assessing Officer, thus, stands covered by the order of the Hon'ble High Court of Delhi (supra) in assessee's own case. Following the same parity of reasoning, we hold that there is no merit in both the additions made in the hands of the assessee in this regard. Ground of appeal Nos. 2 & 3 raised by the assessee are thus allowed in favour of the assessee. 19. Now, coming to the next Ground of appeal No.4 wherein the interest amounting to Rs. 1,69,56,253/- accrued/received by the Indian PE from its Head office/overseas branches was brought to tax in the hands of the assessee. 20. Briefly in the facts of the case the assessee had declared the said interest as credit to the P&L A/c but in the no....
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....e decision of the Hon'ble Bombay High Court. Applying the same parity of reasoning, we find no merit in the aforesaid addition made in the hands of the assessee and the same is deleted. Ground of appeal No.4 raised by the assessee is thus allowed. 24. The issue raised in Ground No.5 by the assessee is whether the provisions of section 115JB of the Act are applicable or not. The case of the assessee before the authorities below was that it was carrying on the banking business through its branches and was preparing the P&L A/c for Indian operation in accordance with the Banking Regulation Act and the second plea raised by the assessee was that it was a foreign company and the provisions of the India-Japan Treaty override the provision of Income Tax Act; hence the provision of section 115JB of the Act were not applicable. The Assessing Officer held otherwise and the objection filed by the assessee was dismissed and final assessment order was passed by the Assessing Officer. 25. The Ld.AR for the assessee points out that the issue stands decided by the decision of Tribunal in Assessment Year 2007-08 & 2008-09 wherein the said issue was elaborated upon by in paras 47 onwards from ....
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.... infirmity. Consequently, the Court declines to frame any question on this issue as well." 28. In view thereof and applying the said parity of reasoning, we hold that the provision of section 115JB of the Act are not applicable to the assessee company. Ground of appeal No.5 raised by the assessee is thus allowed. 29. The next issue raised vide Ground No.6 is against the taxability of interest received on ECB, given to Indian Borrowers. 30. Briefly in the facts of the case the assessee had received interest on ECBs given to Indian customers. The assessee pointed out that the Indian branches of the Bank helped the Indian customers in arranging funds through its overseas branches, as the banking in India could not lend in foreign currencies. Thus, the request of the customers alongwith necessary report was forwarded to the overseas branches, for booking of loan. The taxability of the interest, as per the assessee, was governed by Article 7(3) of the DTAA and not as per Article 11 of the DTAA. The assessee explained to the Assessing Officer that ECBs were connected with the PE and the interest was taxable as per Article 7 of the DTAA and portion relatable to assessee had been ....
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....e was to assess the same in the year of receipt itself. 38. The issue stands fully covered in favour of the assessee by the decision of Hon'ble High Court in assessee's own case vide para 16 & 17 wherein the appeal of the Revenue was dismissed. The relevant findings of the Hon'ble High Court are as under:- 16. "ITA 244/2014, also in the case of assessee Shin, was preferred by the Revenue against the order of the ITAT applying the judgment of Asia Satellite Telecommunication Co. Ltd. '.I' case (supra). Here too the ITAT had overturned the Assessment Order dated 09.04.2012. The order was similar if not wholly identical to the one passed in ITA 500/2012. 17. ITA 473/2012 and 474/2012 are filed by the Revenue against the order of the ITAT overturning common assessment order dated 17.08.2011, in the case of assessee New Skies. Here the return of income for the AY 2008-09 was tiled on 10.10.2008 declaring NIL income. For the same reasons as above, the AO held the income taxable under Section 9(I)(vi). However, in addition to this, the AO also went into the difference between the definition of royalty under Section 9(1)(vi) and the treaty, in that case, the In....
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....nt Year 2007-08 and 2008-09 judgement dated 08.04.2016. Thus, we find no merit in the order of authorities below. Ground of appeal No.8 is thus allowed. 40. The issue raised vide Ground No.11 is against the applicable rate of tax on the income of the assessee attributable to its PE in India. 41. Briefly in the facts of the case the Assessing Officer had observed that the rate of tax applicable to the assessee would be @ 40% being the rate of tax applicable to the foreign companies. The assessee is aggrieved by the order of the Assessing Officer as the applicable rates of tax to the domestic companies was 30%. The contention of the assessee in this regard is application of Article 24 of the DTAA. The Ld.AR for the assessee pointed out that the Tribunal in Assessment Year 2000-01 had adjudicated the said issue. However, the Hon'ble High Court of Calcutta vide judgement dated 07.08.2019 held that the rate of tax applicable would be lower rate i.e. rate on domestic companies. He further referred that the amendment in the Income Tax Act which was not before the Hon'ble High Court. Referring to the amendment i.e. Explanation (1) to section 90 of I.T.Act, it was pointed out by th....
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....etween India and Japan reads as under: "Article 24 ....... 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other Contracting State than the taxation levied on enterprises of that other Contracting State carrying on the same activities." 14. The ld. DR has argued placing reliance on Explanation 1 to Section 90 of the Act which reads as under: "Explanation 1 - For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company." 15. We find that this Explanation has been brought into statute w.e.f. 01.04.2013. Prior to this Explanation read as substituted by the Finance (No. 2) Act, 2009 with effect from 1st October, 2009. Prior to substitution, section 90 as amended by the Finance Act, 2001, with retrospective effect from 1st April, 1962; Finance Act, 2003, with effect from 1st April, 2004; Finance (No. 2) Ac....
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....for the assessment year 1991-92 by referring to the provisions of Article 24 of the DTAA. We also find that the Explanation 1 to Section 90 has not been considered by the Hon'ble High Court of Calcutta while dealing with the case of the assessee for the assessment year 1991-92. However, for assessment year 1998-99, this issue has been dealt with by the Co-ordinate Bench of ITAT Delhi and decided against the assessee vide order dated 03.06.2019 in ITA No. 1783/Kol/2002 by taking into consideration the provisions of Explanation 1 to Section 90(2) of the Act. The ld. AR has submitted that the issue for that year is still pending with the Hon'ble High Court of Delhi. Hence, keeping in view, the entirety of the facts, we hereby hold that the assessee cannot be regarded as treated less favourably by taxing at a higher rate. As a result the appeal of the assessee on this ground is dismissed. 44. The issue has already been decided by the Tribunal in assessee's own case and the same is pending before higher forum and consequently we do not express any view. Applying the said ratio, Ground No.11 raised by the assessee is thus dismissed. 45. The issue raised vide grounds of appeal no. 1....
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....omers and the assessee proposed that the internal CUP data would be taken as comparables to benchmark the international transactions undertaken by the assessee. As far as the external CUP method applied by the TPO, it was pointed out that the same could not be applied. The assessee pointed out that no such adjustment was made in Assessment Year 2008-09 and the facts remained the same. The TPO on page 24 of the order noted that the assessee company had provided guarantee to the AE for obtaining bank loan and "this transaction has resulted into a direct benefits to the AE". The TPO has vide para 53 at page 27 of the TPO's order applied CUP approach by making comparison with guarantee fee rate charges by unrelated 3rd parties providing similar guarantee under similar terms and conditions. The plea of the assessee to apply internal CUP data was not accepted on the ground that there was no similarity in terms and conditions of the transactions with 3rd party. Rejecting the plea of the assessee of internal CUP method, the TPO proposed an average bank rate commission @ 2.71% should have been charged on the value of the bank guarantee; thus, an adjustment of Rs. 7,12,08,840/- was proposed ....
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....the hands of the assessee. The only adjustment which was made in the hands of the assessee was on account of Receipt of guarantee commission. The case of the assessee before us is that as PE in India, it has limited role and was not bearing any risks. The assessee received part of guarantee commission in its capacity as facilitator only. When the persons needed guarantee in India to participate in a tender, then service of the Bank was utilized for issuing guarantee in favour of the beneficiary. The evaluation of the beneficiary for the creditworthiness of the customers was performed by the overseas branches, whereas the assessee had limited role in issuing letter of guarantee, it received 1% guarantee commission. In these facts, there is no merit in comparing the rate received by the assessee with the rate charged by different banks who are operational in India and providing financial guarantee to its customers, with all risk involved therein. In such facts and circumstances, the Assessing Officer/TPO erred in applying the rate charged by Axis Bank, Canara Bank, Punjab National Bank and State Bank of India, etc. with arithmetic mean of 2.71% to benchmark the international transact....