TaxTMI 
TaxTMI 
2023 (11) TMI 1250
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.... cannot be invoked and accordingly, disallowance should be deleted. 1.3 The learned CIT(A) ought to have appreciated that the provisions of section 40(a)(i) of the Act cannot be invoked in view of Article 26(3) of Double Tax Avoidance Agreement (DTAA) entered into by India with USA and accordingly, disallowance should be deleted. 2. 2.1 The learned CIT (A) erred in law and on facts to confirm the disallowance towards part of the expenses directly attributable to operations in India. 2.2 The learned CIT(A) erred on facts that the Advisory and Business support costs in connection with the acquisition of Indian branches of ANZ Grindlays Bank Ltd are not in nature of revenue expenditure with respect to the business activity carried out by the Appellant. 2.3 The learned CIT (A) erred on facts that the Singapore IT Hubbing costs are in the nature of Fees for Technical Services liable to deduction of tax at source by the Appellant. Further, the learned CIT (A) erred in law and on facts to direct the Assessing Officer to obtain breakup of total amount of reimbursement from the Appellant. 3. 3.1 The learned CIT(A) erred in law and on facts to dis....
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....nt and the corresponding recovery of Rs.15,59,20,000/-. 6.4 The learned CIT(A) erred in confirming the action of the Assessing Officer to tax proceeds of Rs. 3,15,00,000/- received by the Appellant with respect to 13% NPCL bonds. 6.5 The learned CIT(A) erred in confirming the action making additions on account of proceeds of Rs. 102,95,55,120/- received with securities pledged by the broker. 6.7 The CIT (A) ought to have considered the submissions of the Appellant that losses allowed in earlier years are subjudice and accordingly, the recovery of the amounts should not be taxed. 7. 7.1 The learned CIT(A) erred in law in confirming the action of the Assessing Officer in applying the provisions of section 115JB which are not attracted to the facts of the case. 7.2 The learned CIT(A) failed to appreciate that: a. Section 90(2) and Circular No. 333 dated April 12, 1982, issued by the Central Board of Direct Taxes (CBDT) provides that the provisions of the Act shall apply to the assessee, who is otherwise eligible for double tax treaty relief only to the extent that they are more beneficial to him. b. The DTAA entered into b....
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....e course of appeal proceeding in view of the decision of the Mumbai Tribunal in the case of Metchem Canada Inc. v/s. DCIT [284 ITR (A.T.) 196], wherein after referring to Article on non-discrimination, it has been held that provisions of section 44C of the Act will have no application. 8.3 Without prejudice to the above, the learned CIT(A) also erred in holding that Article 26 of the DTAA entered into by India with UK is not applicable to the provisions of section 44C of the Act and the provisions of section 44C of the Act does not create a situation of discrimination vis-a-vis an Indian resident taxpayer. 8.4 The learned CIT (A) ought not to have restricted the claim of head-office expenses to 5% under section 44C of the Act and accordingly, should have allowed the head-office expenses in entirety. 9. 9.1 The learned CIT(A) erred in not adjudicating the ground of taxability of interest on tax received by the Appellant on the basis that this is an issue of fact which cannot be raised before the CIT(A). 9.2 The learned CIT(A) ought to have appreciated that the issue raised in additional ground involves question of law which goes to the root of the....
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....iples the income of the PE has to be computed as independent entity. 5. On the facts of the case and in law, the Ld. CIT(A), while allowing the expenditure the expenditure incurred by the HO for salary paid to the expatriate employees for rendering services to PE, erred in not considering at the same time that these expenses being not recorded in books of assessee (PE) in India, were neither actually paid nor shown payable in books of Indian PE and as the assessee did receive the services of such value through its HO, simultaneously there was equivalent income also accruing to assessee u/s. 28(iv) of the Act and once the AO having not made any separate addition u/s. 28(iv), the disallowance of expenses claimed directly in computation of income was merely to bring tax neutrality. 6. On the facts of the case and in law, the Ld CIT(A) erred in holding that the interest paid to the HO represent payments made to self on principles of mutuality, without appreciating the fact that under International taxation principles the income of the PE has to be computed as independent entity by attributing appropriate portion of income arising from transaction between the PE and it....
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....at the taxes have been paid by Master Card in view of which the provisions of section 40(a)(i) of the Income tax Act, 1961 (Act) cannot be invoked and accordingly, disallowance should be deleted. 1.3 The learned CIT(A) ought to have appreciated that the provisions of section 40(a)(i) of the Act cannot be invoked in view of Article 26(3) of Double Tax Avoidance Agreement (DTAA) entered into by India with USA and accordingly, disallowance should be deleted 1.2 Brief facts: During the year consideration, the Appellant has made payment to Master Card on which tax was not deducted by the Appellant on the contention that the income of Master Card is not taxable in India due to following: * Master Card does not have a PE in India. As per Article 5 of the India-US tax treaty, the term 'PE' shall not include the maintenance of fixed place of business solely for the purpose of collating / supplying information. * Even otherwise, Master Card is not profit making body. It is a membership corporation organized and existing under the laws of the state of Delaware, USA. It is acting on the principle of mutuality. * The payment made to MasterCard is in the natur....
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.... is liable to be disallowed under section 40(a)(i) of the Act. Further, CIT(A) rejected the Appellant's contention that disallowance under section 40(a)(i) is covered by Article 26 of India-UK Tax Treaty and held that provision of section 40(a)(i) does not differentiate between foreign Company and a domestic company. The treatment in respect of person whose income is being computed remains the same irrespective of their residential status. 1.5 Appellant's submissions * The Appellant submitted the copy of the order under section 254 of the Act, dated 23 September 2008, in case of MasterCard for AY 2001-02 (copy enclosed at page 7 of the Bank's appeal Factual paper book) confirming the details of taxes paid by MasterCard. * Further, the Appellant submitted that this issue is covered in favor of the Appellant by the decision of the Co-ordinate bench of the Tribunal in the Appellant's own case for the assessment year 1999-2000, wherein the Tribunal followed the decision of Hon'ble Mumbai ITAT in the case of Celltick Mobile Media (India) (P.) Ltd., vs. DCIT[2021] (188 ITD 883) (Copy of the decision is enclosed in the Bank's appeal legal paperbook at page no.80), ....
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....2 Brief facts * During the F.Y. under consideration, the Appellant had claimed the deduction of INR 64, 04, 42,048/- on account of expenses incurred outside India, directly related to the Indian operations based on audit certificates. * The broad nature of direct expenses attributable to the Appellant is as under: o GTS, IT cable & wireless and corporate &institutional banking o Advisory and business support costs o Singapore IT Hubbing/IT Cable & wireless 2.3 AO's contention (page 7) The Ld. AO held that the Appellant failed to produce any details or explanation for the direct expenses, hence, disallowed the entire expenses by relying on the decision of Mumbai ITAT in case of Micoperi, Italian Company (82 ITD 369). 2.4 CIT(A)'s decision (page 19) * The Ld. CIT(A) allowed the direct expenses attributable to Appellant's business of INR 21,50,15,149/- which relates to GTS, IT cable and wireless and corporate and institutional banking as it represents payment made to self and the amounts are held to be not liable to TDS [refer para 6.13, page 19 of the CIT(A) order] * The Hon'ble CIT(A) disallowed the direct expen....
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....O did not agree nor did the AAC. On further appeal, the Tribunal upheld the assessee's contention. It disagreed with the revenue's contention that inasmuch as the said amalgamation resulted in acquisition of the other company by the assessee, which acquisition was in the nature of acquisition of a capital asset, the legal expenses incurred in that behalf partake the nature of capital expenditure. The Tribunal was of the opinion that "as both the companies were carrying on complimentary business and their amalgamation was necessary for the smooth and efficient conduct of the business", it is an expenditure laid out wholly and exclusively for the purpose of the business of the assessee. In view of the, said finding and also in view of the, decision of this Court in Bombay Steam Navigation Co. [1953] (P.) Ltd. v. CIT [1965] 56 ITR 52, we are of the opinion that the Tribunal was right in its conclusion. The decision in Bombay Steam Navigation Co. (1953) (P.) Ltd.'s case (supra) also pertains to amalgamation of two shipping companies. The assessee company took over the assets of the other company and part of the price was treated as a loan secured by a promissory note and hy....
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....ection 37(1) and should not be restricted under section 44C of the Act. However, in the current year (i.e., AY 2001-02), the Ld. CIT(A) has raised an additional contention that Singapore IT Hubbing/ IT Cable & Wireless costs are in nature of "Fees for Technical Services". With regards to additional contention of Ld. CIT (A), the Appellant submit that the same is not sustainable due to following reasons: o The Appellant has undertaken a Hubbing project as result of which its operations were networked to hub in Singapore allowing it to have access to centralized transaction processing operations and operation of bank accounts from anywhere in India. o The expenditure mainly relates to salaries and other related costs, travel, communication for staff working on the project, payment to external vendors such as Cable and Wireless for system maintenance and similar expenditure. o The examples provided in India US DTAA which is relied by the Ld. CIT (A) (refer para 6.16, page 19) are not applicable in the instant case, as the Appellant has incurred the expenses only for the use of technology solely for the purpose of business in India. o Further, the....
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....anches and accordingly, disallowance should be deleted. 3.2 Brief Facts * During the year under consideration, the Appellant paid interest of INR 32, 44,183/- to Head Office (HO)/ Overseas Branch (OB) on overdrawn Nostro accounts. * As the interest paid by the Appellant to HO / OB is not taxable in India, the Appellant had not deducted tax at source while crediting/paying the interest to HO / OB. 3.3 AO's contention (Page 14) The AO disallowed the interest payment on the ground that interest payable to HO/ OB is taxable in India on which the Appellant was required to deduct tax under section 195 of the Act. Since the Appellant had not deducted tax under section 195 of the Act, the same is disallowed under section 40(a) (i) of the Act. 3.4 CIT(A)'s Decision (Page 27, para 8.9) The Hon'ble CIT(A) held that the Special Bench decision in the case of Sumitomo Mitsui Banking Corporation vs. DDIT (2012) (136 ITD 66) (SBMumbai ITAT) is not applicable on the current facts of the Appellant. 3.5 Appellant's submissions At the outset, the Appellant wish to highlight that this issue of disallowance of interest paid to HO was first time raised in AY 2000-01....
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....hat the 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, it follows that the provisions of section 195 of the Act 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) of the Act does not arise. Accordingly we answer question No.1 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. 89. before parting, we may clarify that there may arise a situation where interest is payable by PE to GE and also there is interest receivable by PE from GE in the same year. A similar situation may arise where there are internal dealings of the Indian Branch of a foreign bank with its head office as well as other overseas branches. In such a situation, the issue may arise whether only the net interest would be allowable as deduction while determining profits attributable to the PE in India. This issue, however, has neither been referred to th....
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....argument to controvert the facts of the ground raised by the assessee and also not able to controvert the stand taken by the special bench in the case of Sumitomo Mitsui Banking Corporation vs. DDIT (2012) (136 ITD 66) (SB-Mumbai ITAT). Hence, in the given situation respectfully following the decision of special bench (supra), ground raised by the assessee is allowed. Ground No. 4: Expenditure on refurbishment of premises 4.1 Ground 4.1 The learned CIT (A) erred in law and on facts to disallow 25% of the expenditure incurred on refurbishment of leasehold premises as capital in nature. 4.2 The learned CIT (A) ought to have allowed the said expenditure as revenue in nature and accordingly disallowance should be deleted. 4.2 Brief Facts * During the F.Y. under consideration, the Appellant has incurred expenditure on renovation of its various leasehold premises. The expenses incurred are mainly on account of interior works, electrical works, cabling and wiring etc. * These expenses have been accounted as deferred revenue expenditure and amortized over a period in the books of account. However, in the computation of income, the entire expenses were claim....
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....reof without paying to the lessors any compensation and construct a new building thereon to suit the purpose of their business as per the plan approved by the lessors. Under Clause 2 of the lease deed, the lessee was required to pay a rent of Rs. 1000/- per month for the first fifteen years, Rs. 1500/- per month for the next ten years, Rs. 1650/- per month for the next ten years and Rs. 2000/- per month for the remaining years. The lease deed further provided that the new construction shall, right from the commencement of the work, be the property of the lessors; and upon completion of the work of construction the lessee will have only the right to be a tenant for a period of 39 years under the existing lease subject to the payment of rent and observation of other terms and conditions of the lease. The lessee shall not be entitled under any circumstances for any compensation whatsoever on account of its putting up the new construction in the place of the old. Acting under the lease agreement the assessee invested a sum of Rs. 1, 62, 835/- in the previous year relevant to the assessment year 1968/69 and Rs. 50, 937/- during the succeeding year in constructing a new building....
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....higher and would be not less than Rs. 12,000/- as against which the maximum rent the assessee would be paying was only Rs. 2,000/-. This concessional rent was on account of the fact that the new building was constructed by the assessee at its own cost. In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction? The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was saving in revenue expenditure in the form of rent. Whatever, substitutes for revenue expenditure, should normally be considered as revenue expenditure. Moreover, assessee in the present case did not get any capital asset by spending the sai....
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....garded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. 3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. (Underlining ours) Relying upon the second test enumerated above, learned counsel for the appellant has submitted that the assessee got enduring benefit of a capital nature by spending the amount because the assessee obtained a new building for a period of 39 years. The difficulty, however, in the present case, arises from the fact that this building was never to belong to the assessee. Right from inception, the building was of the ownership of the lessor. Therefore, by spending this money, the assessee did not acquire any capital asset. The only advantage which the assessee derived by spending the money was that it got the lease of a new building at a low rent. From the business point of....
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....t was, therefore, revenue expenditure. In the case of Commissioner of Income-tax, Bombay City- I v. Associated Cement Companies Ltd. (172ITR 257) the respondent-company entered into an agreement to supply water to the municipality and provide water pipelines as also to supply electricity for street lighting and put up a transmission line for that purpose. The assessee also agreed to concrete the main road from the factory to the railway station. The amounts expended for these purposes were held to be revenue expenditure since the installations and accessories were the assets of the municipality and not of the assessee. The expenditure, therefore, did not result in creating any capital asset for the company. The advantage secured by the respondent was immunity from liability to pay municipal rates and taxes for a period of 15 years. This Court said that had these liabilities been paid, the payments would have been on revenue account. Therefore, the advantage secured was in the field of revenue and not capital. In the case of Commissioner of Income-tax v. Bombay Dyeing and Manufacturing Co. Ltd. (219 ITF 521) the company contributed to the State Housing Board certai....
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....ing at the disallowance of expenditure attributable to earning taxable income. 5.2 The learned CIT(A) ought to have considered the Appellant's submission that the expression 'in relation to' under section 14A means dominant and immediate connection which is not applicable in the case of the Appellant as no expenditure has been incurred by the Appellant in relation to earning the exempt income. 5.3 The learned CIT (A) erred in law and on facts in disallowing the expenditure under section 14A of the Act and accordingly, the disallowance should be deleted. 5.2 Brief facts: * During the year under consideration, the Appellant had claimed the total interest received on tax free securities of INR 3,41,16,164/- as exempt u/s. 10(15)(iv) of the Act and divided received of INR 13,750/- as exempt under section 10(34) of the Act. * The Appellant has not incurred any expenses that could be directly attributable to earning tax free income. 5.3 AO's contention (page 18, para 8) * The Appellant cannot take exemption of gross receipts as well as claim deduction of the expenditure incurred; * The Appellant is involved in various business a....
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....anks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favoring the assesses" In view of the above, the Appellant submits before us to follow its own case vide ITAT order for A.Y. 1999-00, dated 27 September 2022, and delete the disallowance of INR 1,26,28,068/- made by the Ld. CIT(A). Without prejudice to the above, if the Hon'ble ITAT do not agree with the above plea of the Appellant, it is submitted that the disallowance be restricted to 1% of the exempt income. We have gone through the entire material and case laws relied upon. Assessee's own case pertains to A.Y. 1997-98 and A.Y. 1999-00, as there is no change in the facts of the case and law laid down by the Hon'ble Apex court in the case of South Indian Bank Ltd [2021] (130 taxmann.com 178) is squarely applicable to the assessee, we agreed with the plea taken by the assessee and to be just and fair in the matter, disallowance is restricted upto 1% of the exempted income. Ground raised by the assessee is partly allowed. Ground No. 6 Recoveries made against securities losses 6....
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....he assessee has been allowed on its own facts, but as the department is in further appeal before the Hon'ble jurisdictional High Court, We agree with the contentions raised by the assessee, that in case Hon'ble High Court reversed the decision of coordinate bench on the ground of crystallization of loss in A.Y. 1998-99, same will be allowed in current A.Y. under consideration as the same has been settled with the parties and final figure of loss has been crystallized in this year. In view of this, this ground of appeal is allowed for statistical purposes and AO is directed to allow the same in A.Y. 2001-02, if Hon'ble High Court reversed the decision of coordinate bench for A.Y. 1993-94, then only on the basis of crystallization, same will be allowed in current assessment year. Ground No. 7 Taxability under section 115JB 7.1 Ground 7.1 The learned CIT(A) erred in law in confirming the action of the Assessing Officer in applying the provisions of section 115JB which are not attracted to the facts of the case. 7.2 The learned CIT (A) failed to appreciate that: a. Section 90(2) and Circular No. 333 dated April 12, 1982, issued by the Central Board of Direct Taxes ....
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....rovides that the profit of the PE is to be computed subject to limitation of the domestic law. * Section 115JA of the Act is part of domestic law and hence applicable to PE also. 7.4 CIT(A)' decision (Page 54, para 16.8) * Article 7 mandates that the computation of the income has to be in accordance with the provisions of the domestic law. Hence, when the DTAA itself mandates that the computation of income of the PE will be in accordance with the domestic law, treating the PE as an independent standalone entity, the Appellant cannot rely on section 90(2) of the Act to claim that such provisions will not be applicable to a PE. * While deciding this issue in A.Y. 2000-01, the Ld. CIT (A) had taken a view that the provisions of section 115JB of the Act are indeed applicable to a PE. * Contention of the Appellant that Companies not preparing their accounts in accordance with Companies Act are not covered by section 115JB of the Act is misplaced. 7.5 Appellant's submissions * The appellant relies on the following decisions, wherein it was held that provisions of section 115JA of the Act are not applicable to the Banking companies which ....
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....ited by the learned Sr. Counsel for the assessee also support this view. Further, the Tribunal, Mumbai Bench, in MSEB (supra), has held that since the assessee is not constituted as a company under the Companies Act, 1956, the provisions of section 115JA of the Act cannot be applied. While doing so, the Bench further observed that since the assessee Corporation is not required to distribute any dividend, it cannot be considered to be a company under the Companies Act, 1956. The facts involved in assessee's case are more or less identical to the facts of MSEB (supra). In view of the aforesaid, we hold that the provisions of section 115JA of the Act are not applicable to the assessee. This ground is allowed." o Appellant's own case ITAT order dated 27 September 2022 for the A.Y. 1999-00 [2022] (ITA No. 803/ Mum/ 2009) - (Mumbai ITAT) [para 18, page 167 of the Bank's Appeal legal paper book] which reads as under: "18. Since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee's own case for the A.Y. 1997-98, we allow the ground raised by the assessee". o CIT vs. Union Bank....
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.... create a situation of discrimination vis-a-vis an Indian resident taxpayer. 8.4 The learned CIT (A) ought not to have restricted the claim of head-office expenses to 5% under section 44C of the Act and accordingly, should have allowed the head-office expenses in entirety. 8.2 Brief facts * For the F.Y. under consideration, the Head Office ('HO') allocated Head Office Expenditure ('HOE') of INR 77, 08, 83,765/- to the Appellant on the basis of the Auditor's certificate. * The Appellant, in its return of income, had claimed a deduction of HOE under section 44C of the Act (being 5% of Adjusted Total Income) * The Appellant had raised the additional ground before the Ld. CIT (A) that in view of express provisions of Article 26 of DTAA, section 44C of the Act will have no application since the provisions of section 44C of the Act are discriminatory in the favour of an Indian enterprise vis-à-vis the Permanent Establishment of a UK enterprise. 8.3 CIT(A)'s decision (page 59) * The Ld. CIT(A) held that facts are the same as A.Y. 2000-01, wherein the Ld. CIT(A) denied the admission of the claim of the Appellant on the basis that the clai....
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....ise of the same or similar kind as those sold, or from other business activities of the same or similar kind as those effected, through that PE. 2. Subject to the provisions of para 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a PE situated therein, there shall in each Contracting State be attributed to that PE, the profits which it 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 conditions and dealing wholly independently with the enterprise of which it is a PE. In any case, where the correct amount of profits attributable to a PE is incapable of determination or the ascertainment thereof presents exceptional difficulties, the profits attributable to the PE may be estimated on a reasonable basis provided that the result shall be in accordance with the principles laid down in this Article. 3. In the determination of the profits of a PE, there shall be allowed those deductible expenses which are incurred for the purposes of the business of the PE including executive and general administrative expenses, whether incur....
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....hether the provisions of computation of business profits in Article 7 are to viewed as subject to the application of nondiscrimination clause in Article 24(2), or is it the other way round i.e., nondiscrimination clause to be read as subject to the clause regarding computation of business profits. There are other peripheral or subsidiary issues raised before us, such as, whether the provisions of Section 44C of the Act can be viewed as a restriction on admissibility of deduction of head office expenditure at, and, whether the provisions of Section 44C of the Act, only provide for a fair method of estimation of deductible head office expenses and are enabling provisions in nature. 6. Article 24(2) of the Indo-Canadian DTAA is worded on the lines of Article 24(3) of the OECD Model Convention. In fact, it is verbatim extract from the Model Convention. While elaborating upon the scope of the said clause the OECD Model Convention Commentary, inter alia, states as follows: 24. Effect of tax bases With regard to the basis of assessment of tax, the principle of equal treatment normally has the following implications: (a) PE must be accorded the same right as resi....
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....his is so held in the case of Graphite India Ltd. v. Dy. CIT (2003) 78 TTJ (Cal) 418 : (2003) 86 ITD 384 (Cal). When an expression or a clause is picked up from the OECD Model Convention, the normal presumption is that the persons using the said clause or expression are also aware about the meanings assigned to the said clause or expression by the OECD and have used it in the same sense and for the same purpose. Unless a contrary intention is specifically expressed, say by a protocol attached to the DTAA, it is only axiomatic that the clause or the expression will have the same meaning as normally assigned in the tax literature by the OECD. Therefore, when an expression or a clause from the OECD Model Convention is used even in a bilateral tax treaty involving a non OECD country, one has to proceed on the basis that it is used in the same meaning and with the same connotations as assigned to it by the OECD Model Convention Commentary. As per the OECD Commentary, placing a restriction on the deduction, on account of overheads of the head office, except when the same restriction is also placed on the resident enterprises, does constitute discrimination under Article 24. The ....
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....erogant', i.e., special things derogate from general things. As observed by a co-ordinate Bench, in the case of ITO v. Titagarh Steels Ltd. (2001) 73 TTJ (Cal) 297 : (2001) 79 ITD 532 (Cal) and relying upon Hon'ble Supreme Court judgment in the case of South India Corporation (P) Ltd. v. Secretary, Board of Revenue AIR 1964 SC 207, 'a special provision normally excludes the operations of general provision'. The provisions of Article 7 being general in nature are therefore, required to be read as subject to the provisions of Article 24. Revenue's argument that since the business profits are to be computed "in accordance with the provisions of and subject to the limitations of the taxation laws of that State" under Article 7(3) and, therefore, limitation placed under Section 44C of the Indian IT Act cannot be ignored, cannot, therefore, be accepted. What Article 24(2) seeks to remove is the discrimination to the permanent residents of Indian and Canadian residents in the other States visa-vis the domestic business entities of that other State. When domestic tax laws permit such discrimination, such legal provisions have to be treated as overridden by the provision....
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.... Section 37(1) of the Act will not stand curtailed by the restriction placed under Section 44C of the Act. In our considered view, this direction of the Ld. CIT (A) is justified and calls for no interference. 10. As far as asst. yr. 1993-94 is concerned, the CIT(A) has held that the provisions of Section 44C of the Act will apply but then, for the reasons set out above, we are of the considered view that Section 44C has no application in the matter and that the assessee is to be allowed deduction of such head office expenses as can be fairly allocated to the PE. Accordingly, as for the asst. yr. 1993-94, the matter is to be restored to the file of the AO for adjudication de novo in the light of the above observations." 22. Respectfully following the above said decision, we allow the ground raised by the assessee." In view of the above, the Appellant submits before Hon'ble ITAT to follow the own case above ITAT order for AY 1999-00 and allow the head office expenditure in entirety under the provisions of Article 26 of the tax treaty without applying the restriction under section 44C of the Act. * Further, the Appellant submits that Article 26 of the Ind....
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....d. CIT(A) that interest on income tax refund ought to be excluded from taxable income and should be taxed, if necessary, only when the issue of income-tax refund reaches finality. Without prejudice, interest should be taxable at the rate of 10% under Article 12 of the tax treaty. 9.3 CIT(A)'s decision (page 68, Para 22.2) The Ld. CIT (A) did not admit the additional ground on account of following: * The ground relating to taxability of interest paid to the Appellant is a factual ground based on the amount received by the Appellant during the year as interest on refunds granted * Such income is connected with the PE and is liable to be included in the income of the Appellant in the year of receipt * This is an issue of fact and cannot be raised by the Appellant at this stage. * The factum of various issues to which such income pertains being subjudice has no relevance with taxation of such amount in the hands of the Appellant. 9.4 Appellant's submissions In this connection, the Appellant submit as under: Interest is taxable in the year of finality / final output of the appellant proceedings The Appellant submit that the amount of....
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....e observe that as the said additional grounds are legal grounds, wherein, the facts are on record and facts do not require fresh investigation, following the decision of Hon'ble Supreme Court in the case of National Thermal Power Co., Limited v. CIT 229 ITR 383 (SC), we admit the said additional grounds of appeal." Further, the Hon'ble ITAT in AY 1999-00, by following the Mumbai ITAT decision in the case of Avada Trading Vs. ACIT 284 ITR (A.T) 73 has held that the interest on IT refund would be assessable in the year in which it is granted [Page 184, para 26], which read as under: "26. Respectfully following the above said decision, additional ground no. (i) is allowed as per the stated direction in the above decision of the Coordinate Bench." With regard to the applicable rate, the Hon'ble ITAT followed the Bombay HC decision in the case of DIT vs. Credit Agricole Indosuez [377 ITR 102] and held that interest should be taxable as per the DTAA at the rate of 10%. The observation of the Tribunal at page 184, para 27 are as under: "27. With regard to Additional ground (ii) which is in respect of "interest on tax refund be taxed at 10% as per India-UK Treaty", ....
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....ievance of the Revenue is with the impugned order following the decision of the Special bench in Clough Engineering Ltd. (supra). (c) However we find that the decision in Clough Engineering (supra) of the Special Bench had been followed by the Tribunal in ITA No.183/Mum/2010 [M/s DHL Operations B.V., the Netherlands vs. Dy. Director of Income Tax]. The issue before the Tribunal was the rate of tax on which Income tax refund is to be taxed i.e. on the basis of the Articles of DTAA or under the Act. The Tribunal on examination of the DTAA in the above case concluded that interest on income tax refund is not effectively connected with the PE (Permanent Establishment) either on asset test or activity test. Therefore, taxable under the Article 11(2) of Indo-Netherlands tax treaty. The Revenue carried the aforesaid decision of M/s. DHL Operations B.V. (supra) in appeal to this Court, being Income Tax Appeal No.431 of 2012. This Court by order dated 17 July 2014 refused to entertain the appeal. In the circumstances no fault can be found with the impugned order of the Tribunal in restoring the issue to the Assessing officer to determine / adopt the rate of tax on refund in the light of the....
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....nting to Rs. 24,79,25,160/- which were not recorded in accounts maintained in India, thereby ignoring the ratio of the decision of the Hon'ble Supreme Court in its judgment in the case of Goetze (India) Ltd Vs CIT(2006) 284 ITR 323(SC) wherein it is held that the Assessing Officer has no power to entertain a claim made otherwise than by filing a revised return of income. 2. Without prejudice to grounds above, on the facts of the case and in law, the Ld. CIT (A) erred in allowing additional claim of direct expenses incurred outside India amounting to Rs 24, 79, 25,160/- merely relying upon the additional evidence based on certificate of the auditors and ignoring rule 46A, without appreciating that such an evidence could not have been admitted once the expenses claimed were not at all recorded in books of assessee maintained in India. 3. Without prejudice to the above grounds, on the facts of the case and in law, the Ld. CIT(A) erred in holding that the expenditure incurred by the HO under the head GTS, IT Cable and wireless and corporate and institutional banking represent payments made to self without appreciating the fact that these transactions between the PE and HO wou....
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....rder]. o With respect to expenses relating to Singapore IT Hubbing costs, the Ld. CIT (A) held that the said expenditure falls within the ambit of FTS on which the Appellant was liable to deduct tax at source. In absence of TDS, the amount is not allowed as deduction [refer para 6.17, page 20 of the Ld. CIT (A) order]. 1.5 Appellant's submissions * With respect to the contention raised by the department for the very first time directly before the ITAT in the Ground No. 1 that simultaneously there was equivalent income also accruing to the Appellant under section 28(iv) of the Act and once the AO having not made any separate addition u/s. 28(iv) of the Act, the disallowance of expenses claimed directly in the computation of income was merely to bring tax neutrality, the Appellant submit as under: o This issue is covered in favor of the Appellant by the decision of the Mumbai Tribunal in case of Shinhan Bank vs. DCIT [2022] 144 taxmann.com 182 (Mumbai ITAT) (Copy of the decision is enclosed in the Department's appeal legal paper book at page no. 1), wherein the Hon'ble Tribunal has inter alia held that non-reimbursement of expenses incurred by HO for sal....
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....nd as such tax subject is the foreign company, the taxation is only in respect of the profits attributable to the Indian PE, and the tax object, as such, is the profits that the PE might be expected to make it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. The entire profit computation is thus based on this fiction. We must also remember that the taxable unit is the foreign company itself, and not the Indian PE. As observed by the Hon'ble Supreme Court in the case of CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 161 Taxman 191/291 ITR 482, "it is clear that under the Act, a taxable unit is a foreign company and not its branch or PE in India". It is in this light that one has to analyze the fact situation that we are dealing with. The assessee has eleven Korean expatriates working in India and running the entire show with respect to its Indian banking operations. These persons are employees of the assessee company, but they work exclusively for the Indian PE. As employees of the Assessee Company and working for i....
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....y the HO, which are relatable to the Indian PE, being allowed as a deduction in the computation of income of the PE when non-reimbursement of that expenditure by the PE is treated as a source of income of the foreign company itself- particularly when, from the income tax perspective, the taxable unit is the foreign company and not the PE. It is also important to bear in mind the fact that, in the light of the five-member bench decision of this Tribunal, in the case of Sumitomo Mitsui Banking Corpn. V. Dy. CIT (IT) [2012] 19 taxmann.com 364/136 ITD 66 (Mum.), the intraorganization transactions, as non-reimbursement of employee costs by the PE to HO, is, are tax neutral. In any case, there cannot be a benefit accruing to the Korean company when the Indian PE of the assessee company does not reimburse its Korean company, because the assessee itself is the Korean company and the transaction in question is a wholly non-business and internal transaction of the Korean company. * With respect to the Ground 2 to 4, the Appellant submits that this issue is covered in favor of the Appellant by a decision of the Co-ordinate bench of the Tribunal in the Appellant's own case for the ass....
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....nd work exclusively for the Appellant's business in India. * Expatriate employees are seconded by Head Office to the Appellant. As the expatriate employees are seconded to India, they work exclusively for the Appellant. The employees are seconded to India Branch normally for a period of two to three years during which they work exclusively for India. Most of the expatriate employees are head of various functions in India and responsible for India business. 5.3 AO's contention (page 7, para 4) The AO disallowed the entire expenditure under section 37(1) of the Act as expense is not laid-out/ incurred wholly and exclusively for purpose of SCB India and not debited in books. However, the AO treated the expenses as Head Office expenditure and allowed the deduction for this expenditure under section 44C of the Act (restricted the claim to 5% of adjusted total income). 5.4 CIT(A)'s decision (page 22, para 7.6) The Ld. CIT (A) following earlier year's decisions in the Appellant's case and decision of Bombay High Court in case of CIT vs. Emirates Commercial Bank Ltd. (262 ITR 55) (Bombay HC), held that the expenses incurred are exclusively for the purpose of busine....
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....ntracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it 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 conditions and dealing wholly independently with the enterprise of which it is a permanent establishment" As Shri Agarwal, learned counsel for the assessee, rightly points out, the fiction of the hypothetical independence of a PE, as inherent in the scheme of Article 7(2), is confined to the computation of PE profits under Article 7(2). Under the scheme of Article 7(2), one has to visualize a situation of hypothetical independence of the source jurisdiction's PE vis-a-vis it's GE (i.e. the foreign company, which is also referred to a the 'general enterprise') and other PEs outside the source jurisdiction, but then such a visualization of the state of things is only to compute the profits which the source jurisdiction PE might have made if such hypothetical independence was to exist. This fiction, however, is confined to the computation of profits attributable....
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....in negative. Therefore, under fiction envisaged in article 7(2), which requires Indian PE to be treated as wholly independent for the purpose of profit computation of the PE, the expenses incurred by the HO, which are exclusively for the benefit of the PE, are required to be treated as expenses relatable to the PE and, as such, taken into account in the computation of the profits attributable to the Indian PE. It is for this reason that the expenses incurred by the HO, though relatable to the PE, are allowed as a deduction in the computation of income attributable to the PE. The next question is as to what is the impact of the Indian PE not reimbursing the costs so incurred, for the benefit of the Indian PE, by the Korean HO. In our considered view it has no impact on income computation so far as PE profits are concerned, as a taxable unit is only the HO or the Korean company. Its importance, if at all, is only from the point of view of cash flow, but then a cash flow, or absence thereof, is not a critical factor from the taxation point of view since an intra-company cash flow simpliciter is tax neutral- unless it can be seen as a standalone transaction of funding. Quite contrary t....
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.... interest of INR 32, 44,183/- to Head Office (HO)/ Overseas Branch (OB) on overdrawn Nostro accounts. * As the interest paid by the Assessee to HO / OB is not taxable in India, the Assessee had not deducted tax at source while crediting/paying the interest to HO / OB. 6.3 AO's contention (Page 14, para 6(a)): The Ld. AO relied on the circular No. 740 dated 17 April 1996 and the commentary of Klaus Vogel and order of CIT(A) in case of Sumitomo Bank and taxed the interest paid by the Assessee to HO/OB and held that the said income is taxable as per Article 12 of the tax treaty between India and UK. 6.4 CIT(A)'s Decision (Page 28, para 9.3) The Ld. CIT (A) relied on the decision of special Bench of Mumbai ITAT in case of Sumitomo Bank vs. DDIT (2012) (136 ITD 66) (SB-Mumbai ITAT) and Decision of Calcutta High Court in case of ABN AMRO Bank vs. CIT (343 ITR 181) and held that amount paid by the Assessee to HO as interest cannot be treated as income of the HO. 6.5 Assessee's submissions The Assessee submits that this issue is covered in favor of the Assessee by the decision of the Special bench of the Mumbai Tribunal in case of Sumitomo Mitsui Banking Corporat....
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....count. 7.2 Assessee's submissions The Assessee submits before us to refer the submission made against the Ground 4 of the Appellant's Appeal. As this issue has already been discussed in detail and already allowed in assessee's own appeal (supra), no further discussion/adjudication is required on the same. Hence ground raised by the revenue is dismissed. Ground No. 8: Indirect Income 8.1 Ground On the facts of the case and in law, the Ld. CIT(A) erred in directing deletion of Rs 2,45,60,214/-treated as indirect income earned by the Head Office by relying on submission admitted in contravention to Rule 46A of the Income-tax Rules, 1962. 8.2 Brief facts * The Assessee submits that the indirect income falling within the scope of Article 7 of the India UK tax treaty has been offered for tax. * The Assessing Officer considered INR 2,45,60,214/- as indirect income arising to the Assessee on the similar activities as that of Indian Permanent Establishment undertaking by the Head Office directly with the Indian customer as taxable under Article 7 of India-UK tax treaty under the "force of attraction "rule. * The said income was already forming pa....