TaxTMI 
TaxTMI 
2026 (7) TMI 1237
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....rries on the business of banking, financial services and allied activities in India in accordance with the provisions of the Banking Regulation Act, 1949. For the year under consideration, the assessee filed its return of income on 29/10/2004. Subsequently, the return was revised on 29/03/2006. The particulars of the revised return of income are as under:- Particulars Rs. Income from House Property 80,558 Profits & Gains of Business or Profession 6,838,178,328 Capital Gain 28,654,514 Gross Total Income 6,866,913,400 Less: Deduction u/s.80-G 120,500 TOTAL INCOME 6,866,792,900 2.1. The assessee received notice issued under section 143(2) of the Act along with a questionnaire under section 142(1), calling for the requisite details and information in respect of the transactions reported in Form No. 3CEB. The issue relating to the reference made under section 92CA of the Act was also examined during the course of the proceedings. The Ld.TPO, after considering the details and explanations furnished by the assessee, accepted the value of the international transactions as reported in Form No. 3CEB, except with regard to the allocation of indirec....
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.... The assessee further submitted that certain contemporaneous documents evidencing the services rendered and benefits received had been furnished. It was also explained that, as a matter of historical practice, such allocated costs were not separately debited in the Branch accounts. 2.3.3. The assessee furnished certificates from the Hong Kong and Singapore co-branches confirming that the said expenses had not been claimed as a deduction by them in their respective incometax assessments. In respect of services rendered by the London office, it was explained that since the assessee Bank was incorporated and tax resident in the UK, the deduction in respect of such expenses would ultimately be claimed by Standard Chartered Bank in the computation of its income under the India column, comprising the entire income and expenditure attributable to the India Branch. 2.3.4. The assessee also contended that the expenditure allocated by the Head Office/offshore co-branches would not fall within the scope of section 92 of the Act, in view of Article 10 of the Double Taxation Avoidance Agreement between India and UK. 2.3.5. The assessee explained that the costs under consideration were ....
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.... 1. Disallowance of salary paid to expatriates amounting to Rs. 8,63,65,727/-. 2. Disallowance of interest expenditure incurred by the Head Office amounting to Rs. 18,69,23,764/-. 3. Attribution of interest income received by the Head Office from the assessee as income in the hands of the assessee amounting to Rs. 18,69,23,764/-. 4. Disallowance of expenditure attributable to exempt income amounting to Rs. 31,16,33,936/-. 5. Disallowance of recoveries against securities loss amounting to Rs. 4,62,27,884/-. 6. Disallowance of deduction claimed in respect of Head Office expenditure amounting to Rs. 192,44,66,501/-. 7. Disallowance of interest on income-tax refund amounting to Rs. 49,17,15,498/-. 2.6.1. Upon receipt of the draft assessment order, the assessee communicated its intention to prefer an appeal before the Ld.CIT(A). Thereafter, the final assessment order was passed on 30/11/2006, wherein the additions/disallowances, as discussed hereinabove, were made in the hands of the assessee. Aggrieved by the order passed by Ld.AO, assessee preferred appeal before Ld.CIT(A). 3. The Ld.CIT(A), while disposing of the ap....
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....te bench ruling in the case of Jabil Circuit India Private Limited Vs. Asst. CIT, Circle 3(2)(1) [TS-1274-ITAT-2018Mum-TP] against the adhoc transfer pricing adjustment, directed the AO to verify the Certified Public Accountant ('CPA') certificate, allocation keys, and relevant cost allocation to the Indian entity in relation to the Direct costs. Further, the Hon'ble ITAT had allowed the Appellant's ground under Section 37(1) of the Act and also deleted the disallowance under Section 40(a)(i) of the Act, by following the ruling of co-ordinate bench of the Hon'ble ITAT in Appellant's own case for AY 1999-00 and 2001-02 which relates to the same Direct costs. The relevant extract from the Hon'ble ITAT's order for AY 2002-03 and AY 2003-04 is reproduced below: "56. It was held that the intra group services should have provided and such services must be at Arm's Length Price. As per OECD, allocation of cost based on approved allocation key and certified by the CPA certificate is relevant. The revenue cannot reject the CPA certificate since the same are specific and authenticated. As per Rule 10D(2)(A), the document must be supported by authentic documents, which includes authe....
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....tal documents to furnish in relation to the Direct Costs for the year under consideration. Given that the Appellant does not have any incremental document to submit, the issue is being decided based on the material available on record, the Hon'ble ITAT order for AY 2002-03 and AY 2003-04 in the Appellant's own case, and the coordinate bench ruling in case of Jabil Circuit India Private Limited Vs. Asst. CIT, (Supra). 5.4.6 It is a well-settled position in law that the primary onus to substantiate the arm's length price of a transaction along with the prescribed / relevant documents is of the Assessee. In the present case, since no details have been submitted by the Appellant to substantiate the arm's length price for the balance costs, I affirm the findings of the TPO to determine the arm's length price for the balance costs of INR 33.24 crs to be NIL. 5.4.7 Further, as discussed above, I observe that the Hon'ble ITAT in past AYs in Appellant own case has allowed the deduction under Section 37(1) of the Act as the expenditure are incurred for the Appellant. The Hon'ble ITAT in AYs 2001-02, 2002-03, 2003-04 has held that the provision of Section 40(a)(i) of the Act....
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.... the India Branch of the assessee. The Ld.Sr.Counsel submitted that most of these expatriate employees were heading various functional divisions in India and were responsible for managing and supervising the business operations of the assessee in India. 6.2.1. The Ld.Sr.Counsel submitted that the expatriate employees received a part of their salary and allowances, including bonus, in their home country and that such overseas payments were made with the approval of the RBI. It was contended that both components of the salary, i.e., the portion paid outside India and the portion paid in India, were offered to tax in India by the respective expatriate employees in their returns of income, as the same accrued and arose in India. 6.2.2. It was submitted that the disallowance under consideration pertained only to the component of salary paid outside India by the Head Office. The Ld.Sr.Counsel submitted that the disallowance was made by the Ld.AO on the premise that such expenditure was in the nature of general administrative expenditure and, therefore, was covered within the scope of section 44C of the Act. The details of the expatriate employees are as under:- Sr. No. Name ....
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....te salary payments were not in the nature of executive and general administrative expenses ("EGA") and, therefore, did not fall within the ambit of section 44C of the Act. In support of the said contention, the relevant extract of section 44C of the Act was reproduced as under:- "Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, no allowance shall be made in computing the income chargeable under the head "Profits and gains of business or profession", in respect of so much of the expenditure in the nature of head office expenditure as is in excess of the amount computed as hereunder, namely:- (a) an amount equal to five per cent of the adjusted total income; or (b) where the adjusted total income of the assessee is a loss, an amount equal to five per cent of the average adjusted total income of the assessee; or (c) the amount of so much of the expenditure in the nature of head office expenditure incurred by the assessee as is attributable to the business or profession of the assessee in India, whichever is the least. Explanation.-For the purposes of this section,- ....
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.... apportionment between such activities. 6.4.6. It was submitted that, in the present case, the expatriate salary expenditure was incurred wholly and exclusively for the Indian business of the assessee and no part thereof was attributable to any business carried on outside India. Therefore, according to the Ld.Sr.Counsel, the said expenditure could not be subjected to the restriction prescribed under section 44C. In support of the aforesaid contention, reliance was placed on the decisions in Rupenjuli Tea Co. Ltd. vs. CIT reported in 186 ITR 301, American Bureau of Shipping vs. ITO reported in 19 ITD 793 and IAC vs. Goodricke Group Ltd. reported in 12 ITD 1. 6.4.7. The Ld.Sr.Counsel submitted that the expenditure incurred towards expatriate salaries had a direct nexus with the functions performed by such employees in India and was incurred wholly and exclusively for the purposes of the assessee's Indian business. Since the expatriate employees were engaged in the Indian operations of the assessee, the expenditure was allowable under section 37(1) of the Act. 6.4.8. Reliance was placed on the judgment of the Hon'ble Bombay High Court in CIT vs. Emirates Commercial Bank Ltd. ....
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....ponding entry was made in the books. 6.4.13. In support of this proposition, reliance was placed on the judgments on decisions of Hon'ble Supreme Court in case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT reported in 82 ITR 363, British Bank of Middle East vs. JCIT reported in 4 SOT 122, Bank of America NT&SA vs. DCIT (supra), Sutlej Cotton Mills Ltd. vs. CIT reported in 116 ITR 1, ADIT vs. Mizuho Corporate Bank Ltd. reported in 54 SOT 117 and Ernst & Young Ltd. vs. ACIT reported in 94 taxmann.com 227. 6.5. Without prejudice to the aforesaid submissions, the Ld.Sr.Counsel submitted that the expatriate salary expenditure was independently allowable under Article 7 of the India-UK Double Taxation Avoidance Agreement(DTAA). It was submitted that, in terms of section 90(2) of the Act, the assessee was entitled to avail the benefit of the provisions of the treaty to the extent the same were more beneficial than the provisions of the Act. Since the assessee was a resident of the United Kingdom, the provisions of the India-UK DTAA were applicable. 6.5.1. Referring to Article 7(5) of the Treaty, it was submitted that while computing the profits attributable to a Permanent Establishment....
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....ein it was held that, seconded employees working under the supervision and control of the Indian entity would not give rise to fees for technical services merely on account of their expatriate status. 6.5.6. Reliance was also placed on the decision of Hon'ble Bombay High Court in DIT vs. Marks and Spencer reported in TS-178-HC-2017, wherein it was held that deputation of expatriate personnel does not by itself amount to rendering technical services and that mere provision of managerial or consultancy assistance, without transfer of technical knowledge, experience, skill, know-how or process, would not satisfy the "make available" condition under the India-UK DTAA. 6.5.7. It was emphasised that, in the present case, the salary income had already been offered to tax in India by the expatriate employees under the head "Salaries" and, therefore, there was no basis to treat the same amount as income attributable to the Head Office. 6.6. Without prejudice to the aforesaid submissions, the Ld.Sr.Counsel submitted that the provisions of section 195 of the Act were also not attracted in the facts of the present case. It was contended that the obligation to deduct tax under section ....
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.... source on reimbursement of that portion of salary which had been paid by the Head Office to the family members or accounts of the expatriate employees in their respective home countries. 6.6.5. The Ld.Sr.Counsel further submitted that the issue relating to the applicability of section 28(iv) of the Act had been examined by the coordinate Bench of this Tribunal in the assessee's own case for Assessment Years 2012-13 and 2013-14. 6.6.6. Reliance was further placed on the decision of the coordinate Bench in the case of Shinhan Bank vs. DCIT reported in 144 taxmann.com 182, wherein it was, inter alia, held that nonreimbursement of expenses incurred by the Head Office towards salary of employees deputed to the Indian Branch did not result in any taxable income in the hands of the Branch Office or the Head Office under section 28(iv) of the Act. It was submitted that, while rendering the said decision, the Tribunal had considered the relevant provisions of the India-Korea DTAA. 6.6.7. Based on the aforesaid decision, the Ld.Sr.Counsel contended that the same principle would apply with greater force in the present case, where the salary expenditure incurred by the Head Office ha....
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...., the same cannot be regarded as "head office expenditure" within the meaning of section 44C merely because the salary component was initially paid by the Head Office. 7.4. The objection of the Ld.AO is also that the expenditure was not incurred for the purposes of business of the assessee in India and, therefore, the same is not allowable under section 37(1) of the Act. However, we find that the allowability of an expenditure under section 37(1) has to be examined from the perspective of whether the expenditure has been incurred for the purposes of carrying on the business of the assessee and not merely on the basis of the entity from which the payment has originated. 7.5. In the present case, it is not disputed that the expatriate employees were rendering services in connection with the activities of the Indian branch and the expenditure was incurred in the course of carrying on the business of the assessee in India. The fact that such employees were employees of the overseas Head Office or that a part of the salary was initially borne by the Head Office would not, by itself, disentitle the assessee from claiming the expenditure, if the same has been incurred for the busine....
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....ion initially paid by the Head Office in their respective home countries, was subjected to tax deduction at source in India. The assessee had deducted tax at source on 100% of the salary payable to such expatriate employees and the same had been offered to tax in India by the concerned employees in their individual returns of income under the head "Salaries". 7.12. The portion of salary paid outside India by the Head Office was only a mode of payment and represented part of the overall salary cost attributable to the services rendered by the expatriate employees in India. The said amount was subsequently reimbursed by the Indian Permanent Establishment to the Head Office. Therefore, the reimbursement made by the India Branch cannot be regarded as a payment towards any independent service rendered by the Head Office or as expenditure incurred for managing the affairs of an overseas office. 7.13. In substance, the expenditure represented salary cost of employees who were working exclusively for the Indian operations of the assessee. Since the entire salary income had already suffered tax in India and there was no dispute regarding the genuineness of the expenditure or the servi....
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....e in India, the Ld.AO proceeded to tax the interest in the hands of the Head Office in India. Consequently, the Ld.AO also disallowed the corresponding interest payment in the hands of the assessee by invoking the provisions of section 40(a)(i) of the Act on the ground that tax had not been deducted at source u/s.195 of the Act. 8.3. The Ld.Sr.Counsel submitted that both the aforesaid issues are intrinsically linked and consequential to each other. It was, therefore, contended that common submissions would apply while adjudicating both the grounds under consideration. 8.4. The Ld.Sr.Counsel submitted that the interest paid by the SCB Indian to its HO/OB is not chargeable to tax in India and, consequently, no tax was deductible at source under section 195 of the Act. It was submitted that the Indian Branch constitutes a Permanent Establishment ("PE") of the assessee in India carrying on banking business and is merely a part and parcel of the same legal entity, namely the assessee-bank. The PE in India and the HO abroad are not independent persons and are not assessed separately in India. The taxable entity is only the assessee-bank and its business income is taxable in India o....
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....anch to the HO/OB cannot be brought to tax under Article 12(2) of the DTAA. 8.8. The Ld.Sr.Counsel further submitted that under Article 12(6) read with Article 7 of the DTAA, where a resident of the UK carries on business in India through a PE and the debt claim in respect of which the interest is paid is effectively connected with such PE, Article 7 dealing with business profits would apply. However, reliance was placed on the decision of the Hon'ble Mumbai Special Bench of this Tribunal in case of Sumitomo Mitsui Banking Corporation v. DDIT reported in [2012] 136 ITD 66 (Mumbai) (SB), wherein it was held that the debt belongs to the HO, which is the economic owner thereof, and consequently the debt cannot be said to be effectively connected with the Indian PE. Therefore, Article 7 cannot be invoked to tax such interest. Reliance was also placed on the OECD Commentary on the Model Tax Convention on Income and on Capital (Condensed Version, 2017), particularly paragraphs 24 and 25, in support of the proposition that the debt belongs to the HO and not to the PE. 8.9. The Ld. Sr.Counsel further submitted that the Ld.AO erred in extending the fiction contained in Article 7(2) of....
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.... interest paid by an Indian branch to its HO is not taxable in the hands of the HO. It is submitted that Special Leave Petition preferred by the Revenue against the said decision was dismissed by the Hon'ble Supreme Court in case of CIT v. Mother India Refrigeration Industries Pvt. Ltd.(supra) 8.11. The Ld.Sr.Counsel submitted that the issue is squarely covered in favour of the assessee by the decision of the Special Bench in Sumitomo Mitsui Banking Corporation v. DDIT (supra), wherein it was held that interest paid by a branch to its HO is merely a payment to self and cannot be taxed either under the Act or under the applicable DTAA. Hon'ble Special Bench further held that since such interest is not chargeable to tax in India, no tax is deductible under section 195 of the Act and consequently no disallowance can be made under section 40(a)(i) of the Act. 8.12. The Ld.Sr.Counsel further relied on following decisions in support of the above proposition: a) Deputy Director of Income-tax (IT)-4(1) v. Mizuho Corporate Bank Ltd. reported in [2012] 24 taxmann.com 268 (Mum.); b) BNP Paribas SA v. ADIT (IT)-3(2) reported in [2016] 69 taxmann.com 6 (Mumbai - Trib....
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....ng addition made in the hands of the HO be deleted since the amount is not chargeable to tax in India. It was further submitted, without prejudice, that if the interest is held to be taxable in the hands of the HO, the same should be taxed only on a net basis after allowing deduction of the interest paid by the HO to the Indian Branch, which had already been offered to tax by the Indian Branch in its return of income. The Ld.Sr.Counsel further submitted that disallowance of Rs. 18,89,23,764/- in the assessment of the PE and simultaneous taxation of the same amount in the hands of the HO would amount to taxing the same income twice and is therefore unsustainable in law. 8.17. The Ld.Sr.Counsel also submitted that Ld.AO erred in not allowing assessee's claim under the proviso to section 40(a)(i) in respect of interest paid to the HO amounting to Rs. 2,24,54,183/-, comprising Rs. 32,44,183/- pertaining to AY 2001-02 and Rs. 1,92,10,100/- pertaining to AY 1997-98. It was submitted that while the reassessment proceedings for AY 1997-98 have already been quashed by the Tribunal, the claim for deduction in respect thereof has been maintained on a protective basis in the event the R....
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....ght to tax in India in the hands of the Head Office. Consequently, no obligation to deduct tax at source under section 195 of the Act arises and the corresponding disallowance made under section 40(a)(i) of the Act is liable to be deleted. Accordingly, these Ground Nos. 3 to 7 raised by revenue stands dismissed. 10. Ground Nos. 8 and 9 raised by the Revenue are in respect of the allowability of interest paid by the assessee to its Head Office amounting to Rs. 18,89,23,764/-. 10.1. We note that this issue has become infructuous in view of our findings while adjudicating Ground Nos. 3 to 7 hereinabove, wherein we have upheld the order of the Ld. CIT(A) holding that the interest paid by the assessee's Indian Branch to its Head Office/Overseas Branches is not chargeable to tax in India and consequently no disallowance under section 40(a)(i) of the Act is warranted. Accordingly, in view of the conclusions reached by us while deciding Ground Nos. 3 to 7, we find no infirmity in the order of the Ld. CIT(A) on this issue. The same is, therefore, upheld. Accordingly, Ground Nos. 8 and 9 raised by the Revenue stand dismissed. 11. Ground No. 10 raised by the Revenue is i....
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....r consideration. It was further submitted that the said methodology adopted by the Ld.CIT(A) was accepted by the assessee and, therefore, no grievance survives from the assessee's perspective in respect of the said issue. 11.4. Per contra, the Ld.DR relied on the order passed by the Ld.AO. We have perused the submissions advanced by both sides in light of the records placed before this Tribunal. 12. It is noted that the issue is recurring in the case of the assessee and has been considered by the Tribunal in the assessee's own case for the preceding assessment years. The Ld.Sr.Counsel submitted that the assessee had sufficient own funds and non-interestbearing funds, which were substantially higher than the investments yielding exempt income, and therefore, no disallowance on account of interest expenditure was warranted. It was further submitted that no borrowed funds had been utilized for making the investments from which the exempt income was earned. 12.1. However, considering the consistent view taken by the Coordinate Benches of the Tribunal in the assessee's own case for the preceding assessment years, wherein the disallowance under section 14A of the Act was rest....
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....higher / final appellate authorities on allowability of the said losses [Refer page 39 of AY 2001-02] We request your Honour to kindly issue similar directions while disposing off the captioned appeal on this ground 10.3 Further, during the course of hearing on 27 February 2025, the Appellant submitted that losses under consideration are allowed by the Hon'ble ITAT in AY 1993-94 and accordingly, the Appellant does not want to press this ground. However, it sought direction that in case the Department succeed in its appeal before the Hon'ble High Court / Supreme Court in AY1993-94 that loss is not allowable in the said AY, then the Ld. AO be directed to not to tax the recoveries against the said securities losses in this AY i.e. AY2004-05. In this regard, the Appellant submitted that the Hon'ble ITAT in AY 2001-02, 2002-03 and 2003-04 has given the said direction. 10.4 Decision on Ground 7 I have considered the submission of the Appellant. The Appellant does not want to press this ground however, has sought a direction as stated above. I agree with the contention raised by the Appellant and I accordingly direct the AO that in case the Department succeed....
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....laim deduction of the entire Head Office expenditure without being subjected to the restriction prescribed under section 44C of the Act. It was submitted that the Ld.AO, without appreciating the provisions of Article 26 of the Treaty, held that in terms of Article 7(5) of the DTAA, deduction towards Head Office expenditure was allowable only subject to the limitations prescribed under the domestic law, namely section 44C of the Act. 15.2.1. The Ld.Sr.Counsel submitted that section 44C places a restriction on the quantum of deduction available to a non-resident enterprise in respect of Head Office expenditure incurred for the purposes of its Permanent Establishment in India. Under the said provision, deduction towards Head Office expenditure while computing the taxable business income of the Permanent Establishment is restricted to the lower of (i) 5% of the adjusted total income, or (ii) the actual expenditure attributable to the Permanent Establishment. 15.3. It was contended that no similar restriction is applicable to a resident enterprise claiming expenditure incurred for the purposes of its business. Accordingly, the limitation prescribed under section 44C results in dis....
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....le 24 of the India-Canada Treaty, the provision of Section 44C of the Act has no application and the assessee is entitled to full deduction of HOE without applying the provisions of Section 44C the Act. (b) In this case, it was also held that Special provisions i.e., Article 26(2) would take precedence over general provisions i.e., Article 7(5). It was also held that since the provisions of the treaty prevail over the provisions of the Act, the restrictions placed on the allowability of the head office expenditure by section 44C were to be ignored in the light of the provisions of article 24(2). (c) It was also observed that when a tax treaty provision was identical to a provision in the OECD Commentary, unless it was specifically stipulated to the contrary in the tax treaty or by way of a protocol to the tax treaty, it was reasonable to presume that the Contracting States were aware about the implications of that provision. 15.5. The Ld.Sr.Counsel further submitted that Article 26(2) of the India-UK DTAA is pari materia with Article 24(2) of the India- Canada DTAA. It was submitted that both provisions embody the principle of non-discrimination and provide tha....
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....he non-discrimination provision under Article 26 of the DTAA had to be extended. 15.8. The Ld.Sr.Counsel, thus submitted that, the issue is covered by various decisions of Co-ordinate Bench of this Tribunal in assessee own case. The details of which are as under:- A.Y. ITA No. 1998-99 3377/Mum/2006 1999-00 803/Mum/2004 2000-01 3458/Mum/2009 2001-02 4867/Mum/2017 2002-03 1407/Mum/2019 2003-04 2936/Mum/2019 15.9. The Ld.DR submitted that the issue stands covered against the assessee by the decision of Hon'ble Supreme Court in the case of DIT (IT) v. American Express Bank Ltd. reported in (2025) 181 taxmann.com 433. It was submitted that the Hon'ble Supreme Court upheld the applicability of section 44C in respect of Head Office expenditure claimed by a non-resident enterprise and held that, once the expenditure falls within the ambit of "Head Office expenditure" as defined under the Act, the deduction is subject to the restriction prescribed under section 44C. 15.10. It was submitted that section 44C is a specific provision enacted to determine the allowable quantum of Head Office expenditure attributable to the Indian Permanent Estab....
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....ermanent Establishment shall be allowed in accordance with and subject to the limitations of the taxation laws of the source State. The present appeal, however, is governed by the India-UK DTAA, whose provisions are materially different and, therefore, require independent examination. 16.3 Under the India-UK DTAA, Article 7 constitutes a self-contained code governing the attribution of profits to a Permanent Establishment. It is necessary to reproduce Article 7 of India UK DTAA as under: Article 7 - Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3) of this Article, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there sha....
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.... 16.3.2. A harmonious reading of Article 7 of the India-UK DTAA shows that while paragraph (2) lays down the substantive principle for attributing profits to a PE by treating it as a distinct and separate enterprise, paragraph (4) expressly preserves the customary domestic mechanism for such attribution through apportionment, subject to the overriding requirement that the resultant attribution must conform to the principles embodied in Article 7. 16.3.3. A further aspect which merits consideration is the language employed in Article 7(5) provides that, in determining the profits of a Permanent Establishment, deductions in respect of expenses incurred for the purposes of the Permanent Establishment, including executive and general administrative expenses incurred either in the State where the Permanent Establishment is situated or elsewhere, shall be allowed "in accordance with the provisions of and subject to the limitations of the taxation laws of that State." Thus, while the Treaty recognises the deductibility of executive and general administrative expenditure incurred outside India, it simultaneously subjects such deduction to the provisions and limitations contained in the....
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....out giving effect to the allowance referred to in this section or in section 32AB or section 33AB or the deduction referred to in Chapter VIA or the deduction under section 35D, and as increased by the aggregate amount of the depreciation allowance, investment allowance, development rebate, development allowance, expenditure on scientific research and expenditure on family planning, to the extent deducted in computing the business income; (ii) "head office expenditure" means executive and general administration expenditure incurred by the assessee outside India, including expenditure incurred in respect of- (a) rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession; (b) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, whether paid or allowed to any employee or other person employed in, or managing the affairs of, any office outside India; (c) travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and (d) such other matters connected with e....
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....ature of the expenditure sought to be regulated and the attribution exercise contemplated under Article 7, and not merely upon the residential status of the assessee. To that extent, the legislative classification recognised by section 44C stands reinforced by the attribution mechanism preserved under Article 7(4) of the India-UK DTAA and by the ratio laid down by the Hon'ble Supreme Court in American Express Bank Ltd.(supra) 16.6 At the same time, the above conclusion does not render Article 26(2) of the India-UK DTAA otiose. In order to understand the whether Article 26 of the India UK treaty would apply, the relevant portion is reproduced as under: Article 26 - Non-discrimination 1. The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. 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 levi....
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.... under Article 26, thus has to be read harmoniously with Article 7. The Treaty itself does not contemplate that every distinction arising in the attribution or computation of profits of a PE would amount to discrimination. On the contrary, Article 7(4) recognises the continued application of domestic attribution mechanisms, whereas Article 26(2) ensures that such mechanisms are not applied in a manner resulting in prohibited discriminatory taxation. Therefore, the applicability of Article 26(2) cannot be examined in the abstract but necessarily depends on the nature of the expenditure subjected to the restriction and the factual matrix of each case. 16.8. We have also carefully considered the decisions relied upon by the Ld.Sr.Counsel, particularly the decisions of the co-ordinate Benches in Metchem Canada Inc. v. DCIT (supra) and Rolls Royce Plc. v. DCIT(supra), wherein it was held that the restriction contained in section 44C could not be applied in view of the non-discrimination clause contained in the applicable DTAA. Those decisions undoubtedly recognize the overriding effect of treaty provisions where a domestic law provision results in prohibited discrimination. However, ....
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.... PE, or expenditure incurred exclusively outside India for the benefit of the Indian PE. In the absence of such foundational facts, it is not possible to determine the precise scope of section 44C or to examine whether, in its application to the facts of the present case, any issue of less favourable taxation within the meaning of Article 26(2) of the India-UK DTAA actually arises. 16.11 In these circumstances, we consider it appropriate to set aside the impugned order on this issue and restore the matter to the file of the Ld.AO. The Ld.AO shall identify and classify the various items comprising the claim of head office expenditure with reference to the definition contained in the Explanation to section 44C and determine whether they constitute common executive and general administrative expenditure of the foreign Head Office, expenditure allocated amongst various PE, or expenditure incurred outside India exclusively for the benefit of the Indian PE. Upon such factual determination, the Ld.AO shall re-examine the allowability of the claim in accordance with the principles laid down by the Hon'ble Supreme Court in American Express Bank Ltd.(supra) and thereafter consider, wh....
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.... current AY at the rate of 10 per cent as per Article 12 of India-UK Tax Treaty. Accordingly, this ground of appeal is allowed for statistical purpose." 17.4. The Ld.Sr.Counsel submitted that, for the previous assessment year i.e., A.Y. 2003-04, the Ld.CIT(A) decided the issue based on the decision of Hon'ble Bombay High court in case of Credit Agricole Corporate & Investment Bank Indosuez reported in [2015] 377 ITR 102 and the decision of Hon'ble Special Bench of Delhi Tribunal in case of ACIT vs. Clough Engineering reported in [2011] 11 taxmann.com 70. The Ld.Sr.Counsel submitted that for A.Y. 2003-04 the CIT(A) directed to tax the income tax refund @10% in accordance with the provisions of Article 12 of the treaty because the interest on income tax refund cannot be said to be effectively connected to the Indian Branch/PE of the assessee. 17.5. The Ld.Sr. Counsel thus, submitted that, the Ld.AO may be directed to tax the interest on income tax refund once it reaches finality and not in the year under consideration. 17.6. On the contrary the Ld.DR relied on the order passed by the Ld.AO. We have perused the submissions advanced by both sides in light of the records pla....
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....espect of that portion of the expenditure which had been accepted by the Ld. TPO as being at arm's length. 19.2.1. The brief facts leading to the present issue are that the assessee, in its return of income, claimed deduction of direct expenses amounting to Rs. 85,18,87,800/-. During the course of assessment proceedings, a reference under section 92CA of the Act was made to the Ld.TPO for determination of the ALP of the international transactions relating to the said expenditure. During the transfer pricing proceedings, the Ld.TPO called upon the assessee to furnish details regarding the nature of the expenditure, the benefits derived therefrom, and supporting evidence under the various heads under which the costs had been allocated. In response, the assessee, vide letter dated 07/09/2006, furnished details regarding the nature of the costs incurred and the benefits derived therefrom. The assessee also produced documentary evidence demonstrating the receipt of benefits in respect of the majority of the costs allocated, aggregating to Rs. 51.95 crore, under various heads. After examining the material placed on record, the Ld. TPO, vide order passed under section 92CA(3) of th....
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....d AY 2003-04 in Appellant's own case. The Hon'ble ITAT, in its order dated 15 March 2024 for AY 2002-03 and AY 2003-04, while principally adjudicating the issue in favor of the Appellant by following the coordinate bench ruling in the case of Jabil Circuit India Private Limited Vs. Asst. CIT, Circle 3(2)(1) [TS-1274-ITAT-2018Mum-TP] against the adhoc transfer pricing adjustment, directed the AO to verify the Certified Public Accountant ('CPA') certificate, allocation keys, and relevant cost allocation to the Indian entity in relation to the Direct costs. Further, the Hon'ble ITAT had allowed the Appellant's ground under Section 37(1) of the Act and also deleted the disallowance under Section 40(a)(i) of the Act, by following the ruling of co-ordinate bench of the Hon'ble ITAT in Appellant's own case for AY 1999-00 and 2001-02 which relates to the same Direct costs. The relevant extract from the Hon'ble ITAT's order for AY 2002-03 and AY 2003-04 is reproduced below: "56. It was held that the intra group services should have provided and such services must be at Arm's Length Price. As per OECD, allocation of cost based on approved allocation key and certified by the CPA cert....
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.... that it has explained the entire transaction and submitted evidence on a representative sample basis for approx. 61 percent of the total costs. Further, the Appellant submitted that it does not have any incremental documents to furnish in relation to the Direct Costs for the year under consideration. Given that the Appellant does not have any incremental document to submit, the issue is being decided based on the material available on record, the Hon'ble ITAT order for AY 2002-03 and AY 2003-04 in the Appellant's own case, and the coordinate bench ruling in case of Jabil Circuit India Private Limited Vs. Asst. CIT, (Supra). 5.4.6 It is a well-settled position in law that the primary onus to substantiate the arm's length price of a transaction along with the prescribed / relevant documents is of the Assessee. In the present case, since no details have been submitted by the Appellant to substantiate the arm's length price for the balance costs, I affirm the findings of the TPO to determine the arm's length price for the balance costs of INR 33.24 crs to be NIL. 5.4.7 Further, as discussed above, I observe that the Hon'ble ITAT in past AYs in Appellant own case has ....
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....on before this Tribunal, as raised by both the assessee and the Revenue, may be bifurcated in the following manner:- Amount of direct expenses (INR) Actions of the learned TPO Actions of the learned AO 51.95 Cr Accepted the ALP to the extent of INR 51.95 Cr. i) Disallowed the expenses stating that the Appellant has not furnished books of accounts of the HO, original voucher supporting such expenses etc. ii) Treated direct expense as royalty and consequently disallowed the same due to nondeduction of tax at source. 33.24 Cr ALP is treated as "NIL" in respect of expense of INR 33.24 Cr on citing non-submission of the details i) Learned AO accepted the finding of learned TPO. ii) Treated direct expense as royalty and consequently disallowed the same due to non-deduction of tax at source. 20.2. The Ld.Sr.Counsel submitted that the adjustment made by the Ld. TPO to the extent of Rs. 33.24 crore ignores the fact that the assessee had furnished an independent auditor's certificate in support of the allocation of the said expenditure, along with various documents evidencing the receipt of services and the benefits derived therefrom, thereby substantiating ....
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....ng years. He also relied upon the order of the Co-ordinate Bench of this Tribunal for Assessment Year 2002-03 in ITA Nos. 1407 & 2936/Mum/2019, vide order dated 15.03.2024. The Ld.Sr.Counsel emphasized that the expenditure, which had been partly accepted by the Ld.TPO, primarily represented technology costs incurred for the Indian operations of the assessee and did not partake the character of Head Office expenditure. He, therefore, submitted that the provisions of section 44C of the Act were inapplicable, as the primary condition for invoking the said provision, namely that the expenditure should have been incurred outside India by the Head Office, was not satisfied. Accordingly, it was contended that the balance expenditure, allocated to the Indian operations on the basis of certified and consistently applied allocation keys, could not be disallowed merely on the basis of conjectures and surmises. 20.4. The Ld.Sr.Counsel submitted that the portion of the expenditure accepted by the Ld.TPO had nevertheless been disallowed by the Ld.AO on two distinct grounds, namely, under section 37(1) of the Act and under section 40(a)(i) of the Act for alleged non-deduction of tax at source ....
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....r technical services. Insofar as the expenditure towards Hong Kong/Singapore information system and technology costs and group technology costs is concerned, there is nothing on record to suggest that any copyright, process, patent or other rights contemplated under section 9(1)(vi) read with Explanation 2 thereto were transferred to the assessee. Likewise, the Revenue has failed to establish that any technical knowledge, experience, skill, know-how or processes were made available to the assessee so as to attract Article 13 of the India-UK DTAA. In the absence of satisfaction of the "make available" condition, the impugned payments cannot be brought within the ambit of fees for technical services under the Treaty. Our aforesaid view is fortified by the decisions of the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. vs. CIT reported in (2021) and decision of Hon'ble Karnataka High Court in case of CIT v. De Beers India Minerals Pvt. Ltd. reported in (2012) 21 taxmann.com 214. 21.2. In view of the foregoing discussion, we hold that the impugned expenditure constitutes allowable business expenditure incurred wholly and exclusively for the purp....
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...., since the assessee was merely a lessee of the premises. He submitted that this Tribunal, while deciding identical issue in earlier assessment years, took note of the fact that no enduring advantage accrued to the assessee in the capital field by incurring the said expenditure and that the expenditure had been incurred wholly and exclusively for the purpose of making the leased premises suitable for carrying on its business and for providing an appropriate working environment to its employees. In support of the aforesaid contention, reliance was placed on the order of the Co-ordinate Bench of this Tribunal in the assessee's own case for Assessment Year 2002-03 in ITA Nos. 1407 & 2936/Mum/2019, vide order dated 15/03/2024, wherein the Tribunal followed its earlier order for Assessment Year 2001-02 in ITA No. 4867/Mum/2017, dated 13/11/2023. 22.3. On the contrary the Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in light of the record placed before us. 24. It is noted that this Tribunal Tribunal in the assessee's own case for Assessment Year 2002-03(supra) observed and held as under: "23. Cons....
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....equired 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 on the said land. The assessee claimed before the Income-tax Officer the expenditure of the said sums of Rs. 1, 62,835/- and Rs. 50, 937/- in the relevant assessment year as capital loss. In the alternative, the assesse....
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.... 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 said amounts. The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, expenditure appears to be revenue expenditure. ....
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....thdrawn, 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 view, therefore, the assessee got the benefit of reduced rent. The High Court has, therefore, rightly considered this as obtaining a business advantage. The expenditure is, therefore, to be treated as revenue expendit....
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....ity and to provide water pipelines as also 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 certain amounts for construction of tenements for its workers. The tenements remained the property of the Housing Board. It was held that the expenditure was incurred wholly and exclusively on the welfare of the employees and, therefore, cons....
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....taken by the coordinate bench in assessee's own case. Respectfully following the consistent approach followed by this Tribunal, this addition made by Ld.AO deserves to be deleted. Accordingly, Ground No. 6 raised by assessee stands allowed. Assessment Year 2005-06. 25. It was submitted by both the assessee and the Revenue that most of the grounds raised in the cross appeals for Assessment Year 2005-06 are mutatis mutandis identical to the issues already adjudicated by us while deciding the cross appeals for Assessment Year 2004-05. It was contended that, except for variation in the quantum of the additions/disallowances, the nature of the disputes, the rival submissions advanced by the parties, and the issues arising for consideration remain substantially the same as those dealt with by us in the preceding paragraphs while adjudicating the appeals for Assessment Year 2004-05. For the sake of convenience and to avoid repetition, the corresponding grounds raised by the assessee as well as the Revenue for Assessment Year 2005-06 are tabulated issue-wise as under: Department appeal Ground No. A.Y. 2004-05 Department appeal Ground No. A.Y. 2005-06 Issue 1 1 Di....
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....essee-bank, in the ordinary course of its banking business, enters into foreign exchange forward contracts with its customers on a day-to-day basis. In certain cases, the maturity of such forward contracts extends beyond the end of the relevant accounting year. In accordance with the accounting guidelines prescribed by the Reserve Bank of India (RBI) and the rates notified by the Foreign Exchange Dealers Association of India (FEDAI), the assessee consistently revalues all outstanding foreign exchange forward contracts as on the balance sheet date and recognizes the resultant profit or loss in its books of account. During the relevant previous year, the assessee debited a sum of Rs. 7,13,49,112/- to its Profit and Loss Account towards loss arising on the year-end revaluation of unmatured foreign exchange forward contracts outstanding as on 31.03.2005 and claimed the same as a deduction while computing its taxable income. 27.1. During the course of the assessment proceedings, the Ld.AO disallowed the aforesaid claim by holding that the loss represented merely a mark-to-market loss on forward contracts that were yet to mature and, therefore, was not an ascertained liability. Accord....
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....llowed. The Ld.Sr.Counsel relied on following decisions of coordinate bench of this Tribunal, where identical issue has been addressed. * Mashreq Bank PSC [2007] (18 SOT 233) (Mum ITAT) * Deutsche Bank v. DCIT [2003] (86 ITD 431) (Mum ITAT) 29.1. The Ld.Sr.Counsel also relied on following decisions by Hon'ble Supreme Court and Hon'ble Bobmay High Court where mark-to-market losses were held to be allowable: * Chainrup Sampatram v. CIT [1953] (24 ITR 481) * CIT v. Bank of India [1996] (218 ITR 371) We have perused the submissions advanced by both sides in light of records placed before us. 30. The undisputed facts reveal that the assessee, being a banking company, enters into foreign exchange forward contracts with its customers in the ordinary course of its banking business. It is also an admitted position that the assessee has consistently followed the accounting policy prescribed by the Reserve Bank of India (RBI) read with the guidelines issued by the Foreign Exchange Dealers Association of India (FEDAI), whereby all outstanding foreign exchange forward contracts are revalued at the prevailing exchange rates as on the balance sheet ....
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.... confirmatory order dated 22.01.2026), has accepted the assessee's claim. Similar views have also been expressed by the Co-ordinate Bench in the cases of Mashreq Bank PSC v. DCIT(supra) and Deutsche Bank v. DCIT (supra). The Revenue has not brought on record any distinguishing feature in the facts of the present assessment year warranting a departure from the consistent view taken in the assessee's own case. 30.3. In view of the aforesaid discussion, we hold that the loss arising on the year-end revaluation of outstanding foreign exchange forward contracts, computed in accordance with the RBI/FEDAI guidelines and the consistently followed method of accounting, represents an accrued trading loss and is allowable as a deduction under the provisions of the Act. The Ld. AO was, therefore, not justified in treating the same as a notional or contingent loss merely because the forward contracts had not matured as on the balance sheet date. We, accordingly, do not find any infirmity in the view taken by the Ld. CIT(A) and the same is upheld. Accordingly, Grounds 12-14 raised by the revenue stands dismissed. Assessee's Appeal 31. The only issue arising in the assessee....