TaxTMI 
TaxTMI 
2006 (10) TMI 175
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....laimed that interest received by the assessee on the foreign currency deposits with scheduled banks, amounting to Rs. 2,47,92,503/-, was exempt from tax under Section 10(15)(iv)(fa) of the IT Act, 1961 (hereinafter referred to as 'the Act'). In response to AO's requisition to show cause as to why only net interest income i.e. interest earnings as reduced by interest and other costs paid to acquire funds which were so placed with the scheduled bank in foreign currency deposits, not be allowed the exemption under Section 10(15)(iv)(fa), it was submitted by the assessee that the assessee bank has neither incurred any expenditure nor borrowed any amounts which can be identified as towards earning of interest exempt under Section 10(15)(iv)(fa). The assessee also placed his reliance on the judgment of Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corporation v. CTT. None of these contentions impressed the AO. The AO was of the view that since the exemption is granted to only the income, the amount to be exempted has to be net of expenses and not the gross amount itself. It was also pointed out by the AO that in case contention of the assessee is accept....
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....n the assumption that there is a cost of the funds which have been invested to earn the interest exempt under Section 10(15)(iv)(fa), but in the statement of facts, the assessee has made a categorical assertion that the assessee "has neither incurred any expenditure nor has borrowed any monies which can be identified as towards earning for the said interest", and the CIT(A), on this basis, held that on these facts it was not open to the AO "to estimate the expenditure without any scientific basis". We have noted that this finding of the CIT(A) has not been challenged by the Revenue. Once Revenue accepts this finding, as they have chosen to do in the case before us, the grievance raised before us is rendered purely academic. It does not merit any adjudication before us. In any event, no specific costs have been pointed out which have been incurred by the assessee to earn the eligible interest. We, therefore, decline to entertain this academic question i.e. whether exemption under Section 10(15)(iv)(fa) is to be allowed on the gross basis or net basis. It was in this background that the appeal of the Revenue on this issue was dismissed. In the year before us, the assessee's stan....
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.... gross basis. To that extent, we agree with the assessee. 9. The matter, however, does not end here. The next thing is to examine the matter from the point of view of applicable disallowance under Section 14A, as is the case of the authorities below in their respective orders as well. 10. We have noted that none of the authorities below have carried out any exercise of identifying the expenditure which can be said to be incurred in relation to earning of the income exempt under Section 10(15)(iv)(fa). The references to disallowance under Section 14A by the AO has been made in a somewhat academic manner. He has not bothered to identify the expenditure incurred by the assessee in relation to this tax exempt income. 11. As for the observations of the CIT(A) which we have quoted earlier in this order, to the effect that, "if there is bank and it has borrowed money and purchased tax-free bonds, it will not get deduction for the interest paid" and that "even if there is no co- relation, deduction of expenditure will not be allowed", we are not persuaded either. There can be no dispute or controversy about the position that when any expenditure incurred in relation to earning of a tax ....
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....me' of your appellant taxable as such." 17. The grievance raised by the appellant lies in a very narrow compass of material facts. The assessee is a non-resident banking company incorporated in Germany, and operating in India through its branch office in Mumbai. During the course of assessment proceedings, the Assessing Officer noticed that "the assessee has given a note to the computation of income that inter-branch income/expenditure credited/debited to profit and loss account have been excluded while arriving at the total income since the Bank cannot be regarded as trading with itself i.e., having earned income or incurred expenditure by mere reason of Mumbai branch debiting/crediting the ledger account of the other branches outside India". In response to Assessing Officer's requisition as to why the income from inter-branch transactions should not be brought to tax in India, the assessee reiterated that the branch and head office transactions are transactions with oneself and relied upon the decision of Hon'ble Calcutta High Court in the case of Betts Hartley Huett & Co. Ltd. v. CIT [1979] 116 ITR 425. 18. This stand, however, did not find favour with the Assessin....
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....rt of the total funds of the H.O. As far as the Indian branch is concerned, the interest in question is interest carried on the NOSTRO account. The interest is payable by the head office who is also a non-resident. This non-resident has a business connection in India and also uses part of its funds to lend to Indian business though its Indian branch. It may be seen that source of deposits are the banking operations in India. The interest earned would be covered under the definitions of income accruing or arising directly or indirectly. The Head Office or other office outside India are carrying out their business thought Indian branches. There are flow of funds from overseas branches. The debt incurred or moneys borrowed are used for the purposes of business or profession carried on by such person in India. In our case, the Explanation to section 9(1)(i), is applicable which states that the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. The same thing appears in article 7 (1) and article 7 (2) of the Double Taxation Agreement. The argument ....
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....n the context of an income situation, as is the case before us. It is also pointed out that the decision of the Special Bench was in the context of the treaty provisions and not in the context of the provisions of the Act. Learned counsel, therefore, submits that ABN Amro Bank N.V.'s decision has no bearing on the issue in appeal before us. Learned Departmental Representative points out that in ABN Amro Bank N.V.' s case the taxability of interest income from the head office and other branches was not even disputed by the assessee, and that the dispute was only with regard to claim of deduction for interest paid to head office and other branches. Learned Departmental Representative also thus submits that ABN Amro Bank N.V.'s case, if at all, supports the case of the revenue. We find that in paragraph 10 of the ABN Amra Bank N.V.'s case, it is noted that "the assessee is receiving interest from its head office and other branches outside India, which the assessee has credited to profit and loss account and offered for taxation". In this view of the matter and in deference to the submission of the parties, we see no need to go further so far as ABN Amro Bank N.V.'s....
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....t of Hon'ble Calcutta High Court in the case of Betts Hartley Huett & Co. Ltd., learned Departmental Representative's contention that the said decision was rendered in altogether different context and would not have any application in the present case. It was on the strength of these arguments that we were urged to confirm the order of the authorities below and decline to interfere in the matter. 21. We have heard the rival contentions at considerable length, we have perused the material on record and we have given our thoughtful consideration to the factual matrix of the case as also the applicable legal position. 22. We consider it appropriate to first briefly deal with the scheme of the Act, so far taxation of profits earned by the branch offices of non-resident companies are concerned. Under section 4 of the Act, it is total income of every 'person' which is taxable. Section 2(31), in turn, defines 'person' as including a 'company', which in terms of the provisions of section 2(23A), includes a 'foreign company' as well. Section 6(4) of the Act lays down that a company, unless it is an Indian company or unless it is controlled or manage....
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....s far as the expression 'income deemed to accrue or arise in India' is concerned, section 9 of the Act elaborately deals with the same, but, as learned representatives agree, the expression 'income accruing or arising in India' is not defined anywhere in the Act, nor any judicial precedent is cited before us on the scope of this expression. We will, therefore, have to make our endeavour to find out the principles on the basis of which the income accruing or arising to a foreign enterprise in India can be determined. 24. It is important to bear in mind that, in terms of the provisions of the Indian Income-tax Act, while the taxable subject is the foreign GE, it is taxable only in respect of the income, including business profits, which accrues or arises to that foreign GE in India. The Indian Income-tax Act does not provide for any special mechanism for taxation of PE of a foreign enterprise, except taxation on presumptive basis for certain types of incomes such as under sections 44BB, 44BBA, 44BBB, 44D etc. Its ironical that while the Indian Income-tax Act deals with the scope of income deemed to "accrue or arise" in India, at great length and visualizing possibly ....
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....action with itself and cannot lead to any income liable to be taxed or loss liable to be carried forward. According to the learned counsel, these are self-cancelling transactions, and are, resultantly, profit neutral. 27. In our humble understanding, the proposition that intra organisation transactions are to be ignored for computing the business profits holds good only when profits of the organisation as whole are to be computed, or when these transactions are domestic transactions within one single enterprise and within one tax jurisdiction. These intra organisation transactions, which should more aptly be termed as 'intra organisation dealings', have a significant impact on the determination of profits of the organisational units - whether termed as permanent establishment, or by whatever other description. 28. Cross border dealings within an enterprise, which necessarily concern at least two tax jurisdictions, however, need to be examined in a different perspective - the perspective of ascertaining profits taxable in each such jurisdiction as also the perspective of ascertaining the income eligible for exemption, when tax credit in GE domicile tax jurisdiction is by w....
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....ic activities of an organization are spread over several tax jurisdictions, and the right of each such tax jurisdictions is restricted to the profits accruing or arising to the PE in that jurisdiction, it is necessary that profits accruing or arising in such jurisdiction are computed correctly. This can be better explained by way of following diagram: 33. In the above diagram, PE - A, PE - B and PE - C respectively are three different organizational units of a GE in three different tax jurisdictions. PE - A represents the Head office as an independent unit, and PE-B as also PE - C represent two independent branches. As an intra organization transaction, PE-A earns Rs. 1 million each from PE-B and PE-C, on account of services rendered to those two units. The impact of these transactions of different units of the GE, and the GE as a whole, will be as follows: PE A Business profit up by Rs. 2 million PE B Business profit down by Rs. 1 million PE C Business profit down by Rs. 1 million GE [2,000,000 + (-) 1,000,000 + (-) 1,000,000] = 0 i.e., profit netural It is thus clear that so far as the profits of the GE as a whole are concerned, the intra organization transacti....
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....ent tax results. The income of subsidiaries is determined separately based on the subsidiary's revenues and deductible costs and expenses taking into account all incurred items the taxation of PEs should be designed along the same lines. Therefore, while incomes of the PE should include all revenues, including revenues earned from other intra organization entities outside the respective tax jurisdiction, the expenses allowed as deductions from the profits of a PE should also be those that are actually borne by such a PE (i.e., that are incurred in the interest of the PE and not of another part/parts of the company) irrespective of whether or not the deductible amount should actually be reimbursed by the PE. 36. The question as to how to compute profits of the PE in cross border tax situations has received considerable attention of international tax community right from the initial days of development of international taxation law in the multilateral forums, as also attention of the judicial bodies in several countries. As far back as in 1933, League of Nations Draft Conventions had a specific provision for determining the profits attributable to a PE. This provision, i.e., art....
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....in the business of purchasing tea for its constituents abroad, and apart from reimbursement of expenses for making such purchases, a commission ranging from 1% to 2% of the value of tea was received by the company which was duly offered to tax in India. The assessee-company also purchased tea for its head office in London but did not charge any commission, in respect of the same, even as it recovered all the expenses incurred in connection with the purchases by billing the tea, supplied to the head office, at cost of purchases plus expenditure incurred thereon. On these facts, the case of the revenue was that the commission, which was not charged by the branch office on sales to head office, accrued to the assessee's head office in London. It was on this basis that the Assessing Officer "estimated the profit attributable to purchase operations of the assessee's London office in India, through the assessee, at 1.5% of the value of tea sold and computed such profit at GBP 7,827". This addition was deleted by the AAC but when the matter reached the Tribunal, the Tribunal found that "there was no plausible reason why a commission was not charged on assessee's sales to Londo....
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....Indosuez v. Dy CIT and vice versa (Mumbai D Bench; order dated 9th March, 1998), the above "remarks are in a different context, that is an assessee whose operations comprehend both - ahead office and a branch, and so, to our mind, are not applicable to the case like that of the present assessee in respect of whom the income of the permanent establishment, as a separate unit, has to be determined". Although these observations were in the context of determination of profits of the PE in accordance with the provisions of the applicable tax treaty, we feel that these views are applicable with equal force on the question of determination 'accrued or arisen in India' under section 5(2)(b) of the Act, which is nothing but the profits of the Indian PE as an independent unit. The observations of the Hon'ble Calcutta High Court, on which so much reliance is placed by the assessee, are, therefore, not at all relevant when the matter is being examined from the point of view of a PE and while computing profits accruing or arising to a PE. 42. The italics portions of the extracts which we have reproduced from Hon'ble Calcutta High Court judgment, in the preceding paragraph, also....
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.... of any kind whether the profits to be taxed in India are of the entire business or only the Indian branch. This aspect of the matter was, however, take note of by a later Bench in the case of Banque Indosuez and vice versa (Mumbai D Bench; order dated 9th March, 1998). 47. As rightly observed by the co-ordinate Bench of this Tribunal, in the case of Banque Indosuez, dealing with materially identical remarks made by the Hon'ble Calcutta High Court in the case of Betts Hartley Huett & Co. Ltd., "remarks are in a different context, that is an assessee whose operations comprehend both - a head office and a branch, and so, to our mind, are not applicable to the case like that of the present assessee in respect of whom the income of the permanent establishment, as a separate unit, has to be determined". We are in most respectful agreement with the views so expressed by the co-ordinate Bench. 48. In Banque Indosuez's case, there is a conscious decision by the Tribunal to the effect that the observations made by the Hon'ble Calcutta High Court will not be valid in a case where profits of the permanent establishment, as a separate unit, are to be considered. In Citibank N.A.&....
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....t "the case laws cited by the assessee squarely cover the issue in favour of the assessee". There is no discussion of any kind about the precise issue before the Tribunal or whether the matter has been examined from the perspective of the PE or the GE as a whole. The Tribunal decision in the case of Banque Indosuez was obviously not brought to the notice of the Tribunal, and the Tribunal had no occasion to even take into account the fact that only PE profits were to be taxed in India, and not that of the GE as a whole, and therefore profit neutrality theory could not have applied in this case. 51. In this background, it is interesting to note the following observations made by the Hon'ble Gujarat High Court in the case of Gujarat State Co-operative Bank Ltd. v. CIT [2001] 250 ITR 229: "As per the settled legal position, a decision is an authority for what it actually decides and not necessarily for what logically follows from it. Equally well-settled is the principle that a decision to be law under Article 141 must not be a mere conclusion by which the case is disposed of. Because, a conclusion, mere conclusion, may be on the facts, it may not and does not necessarily involv....
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....merely because Tribunal arrived at a particular conclusion without actual consideration of the legal questions involved, on clearly erroneous facts as presented by the parties and accepted by the Tribunal to be correct in good faith, this Tribunal decision lays down the law which is binding on its co-ordinate Benches. Contrary decisions were not brought to the notice of the Tribunal and the matter was taken as a 'covered matter'. It is a mere conclusion arrived at by the Tribunal and no legal precedent is set out. It is also not clear whether the Tribunal was conscious that the matter is to be considered from the limited point of view of the PE or whether the Tribunal proceeded on the basis that it is in seisin of the GE profits as a whole. In view of the judicial precedents discussed above, we do not have the liberty to treat this Tribunal decision as a binding precedent in respect of a question which was not even considered by the Tribunal. The assessee thus derives no advantage from Tribunal's decision in the case of Societe Generale. 55. Both the Tribunal decisions relied upon by the learned counsel refer to Hon'ble Calcutta High Court's judgment in the cas....
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....id to have much of a precedence value. In Tribunal's decision in the case of Banque Indosuez, on the same set of material facts as before us now, the same Calcutta High Court judgment was distinguished on principle and, therefore, found to be not applicable. 58. As has been said by the Hon'ble Supreme Court, in the case of Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147, "Courts should not place reliance on the decisions without discussing as to how the factual position fits in with the fact situation of the decision on which reliance is placed" and that "there is always peril in treating the words of a speech or judgment as though they were words in the legislative enactment, and it is to remembered that judicial utterances are made in the setting of facts of a particular case.....". Their Lordships further observed that "circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases". The same principle is reiterated time and again by the Hon'ble Supreme Court. Hon'ble Delhi High Court, in the case of SRF Finance Ltd. v. CBDT [1995] 211 ITR 861 and summing up the principles laid down by the ....
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.... to define certain expressions, in the light of the introduction of transfer pricing regulations, and, in our considered view, these definitions are no more than clarificatory in nature. Section 92F(iiia) defines 'permanent establishment' as a "fixed place of business through which the business of the enterprise is wholly or partly carried on". Section 92F(iii) recognizes a permanent establishment also as an enterprise. The effect of this position is that the transactions between a foreign company and its permanent establishment in India is to be viewed as an international transaction between two enterprises - between two associated enterprises though, in the light of provisions of section 92A. Now, in this light, let us take a look at the provisions of section 92(1) which are as follows: "92(1) Any income from an international transaction shall be computed having regard to the arm's length price. Explanation: For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price." 62. Section 92(1), read with Explanation thereto,....
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....is accounted for, the tax incentive by way of increased deduction under section 80HHC is to be granted. One must bear in mind that section 80HHC is not a charging section but is an incentive section. 64. What is important, however, in this respect of the scheme of section 80HHC is the way in which profit in different tax jurisdiction is separated and the way in which hypothetical independence of the PE is maintained for that purpose, even under the Income-tax Act. 65. To illustrate, if cost of a product is Rs. 10/-, the same is transferred to the foreign branch at Rs. 20/- and is finally sold by the foreign branch at Rs. 40/-, the profit from export activity, eligible for deduction under section 80HHC, will be taken at Rs. 10/-. The remaining profit of Rs. 20/- is includible in profit of the foreign PE on which section 80HHC is not available. In this manner, the profit of Rs. 30/-, which is the actual profit on sale of export of this product, is dividend in two tax jurisdictions. 66. Explanation 2 to section 80HHC(2)(b), therefore, does not deal with a taxable event but it does surely, and very unambiguously, highlights the GE PE independence so far as computation of profits are....
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....of granting loans and advances. The entire costs of funds, being interest paid by the PE and the establishment costs will then be tax deductible in India. This will result in huge losses being computed as profits attributable to the PE in India, since revenues earned from the end use of funds will be revenues of the German GE and the revenues earned as interest from head office will not be taxable as income in the hands of the Indian PE. On the other hand, the entire revenue from interest use will be taxable in the hands of the head office. In effect, in the present case, the taxability of income will stand shifted from India and Germany, and the allowability of deduction will stand shifted from Germany to India. In our considered opinion, expenditure can be allowed as deduction only in the tax jurisdiction in which the corresponding income is taxed, or, by the same logic, income is to be taxed in the same tax jurisdiction in which corresponding deduction is to be allowed. Where economic activities to earn an income are spread over two tax jurisdictions, the income can be suitably appropriated in those two jurisdictions, and the provision for intra organization interest charge does....
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....t does not want to delay finalization of its tax liability as the constitution of larger Bench will result in, that the case before us only deals with an income situation under the Act while ABN Amro Bank N.V.'s case deals with an expense situation under the tax treaty, and, that, the issue decided by the Tribunal in ABN Amro Bank N.V.'s case does not arise in this appeal at all. Learned Departmental Representative also, equally emphatically, submitted that the issue before us does not need to be referred to a larger Bench. It was also submitted that there have been no judicial precedents, either from Tribunal or even the higher judicial forums, on the scope of 'income accruing or arising in India' under section 5(2)(b) and, therefore, there is no question of any fetters of the earlier decisions. It was in this backdrop that the matter was decided by us on merits. This decision, therefore, should only be treated as an authority for the issue actually decided by us. Subject to these observations and for the reasons set out above, the plea of the assessee is rejected. 73. Having held, so, we may also add we have not addressed ourselves to the reasoning adopted by the....
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....s not really relevant whether the income can be treated as 'deemed to accrue or arise in India'. While we, therefore, approve the conclusions arrived at by the CIT(A), we do not even see the need to deal with the reasoning adopted by the CIT(A). Our reasoning may be different, but conclusion is the same as arrived at by the CIT(A). We approve the conclusion arrived at by the CIT(A), so far as this grievance of the assessee is concerned, and decline to interfere in the matter. 74. Ground No.2 is, accordingly, dismissed. 75. In the third ground of appeal, the grievance raised by the assessee is as follows: Applicability of minimum alternate tax as per the provisions of Section 115JA of the Act. The CIT(A) erred in holding that the provisions of Section 115JA apply to your appellant. 76. As far as this issue is concerned, having heard the rival contentions and having perused the material on record, we find that Hon'ble Authority for Advance Rulings (AAR), in the case reported as P. No. 14 of 1997, XYZ, In IB(1998) 148 CTR (AAR) 417: (1998) 234 TTR 335 (AAR), had an occasion to consider the issue whether or not the minimum alternate tax under Section 115JA is applica....
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....ous. There is no scope for importing into the statute the words which are not there. Such interpretation would be, not to construe, but to amend the statute. Even if there be a casus omissus, the defect can be remedied only by legislation and not by judicial interpretation....To us, there appears no justification to depart from normal rule of construction according to which the intention of legislature is primarily to be gathered from the words used in the statute. It will be well to recall the words of Rowlatt, J. in Cape Brandy Syndicate v. IRCs (1921) 1 KB 64 (KB) at p. 71, that : "...in a taxing Act one has to look at merely what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." Once it is shown that the case of the assessee comes within the letter of law, he must be taxed, however great the hardship may appear to the judicial mind to be. Even in the case of National Taj Traders (supra), relied upon by the assessee, their Lordships of Hon'ble Supreme Court have referred to, with approval, Maxwell on In....
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.... which have been heavily relied upon by the learned Counsel, we wish to make some observations. The House of Lords itself, in a later judgment in the matter of Magor & St. Mellons R ural District v. Newport Corporation (1951) 2 All ER 839, did not approve the proposition advanced by Lord Denning. It is interesting to note the articulate expressions of Lord Simonds, supporting the majority view and at p. 841 of All England Report, Vol. 2 (1951), unequivocally and categorically rejecting Lord Denning's theory on the relevance of intent of legislature : My Lords, the criticism which I venture to make of the judgment of learned lord justice (Denning L J) is not directed at the conclusion he has reached. It is after all a trite saying that on questions of construction different minds may come to different conclusions....But it is on the approach of lord justice to which is a question of construction and nothing else. I think it desirable to make some comment, for, at a time when so large a proportion of the cases that are brought before the Courts depend on the construction of modem statutes, it would not be right for this house to pass unnoticed the propositions that the learned ....
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....m Ltd. v. Evans (1910) AC 444 (HL), at p. 445. Lord Simonds rejection of Denning's approach was cited, with approval, by Hon'ble Supreme Court in the case of Punjab Land & Development Corporation v. Presiding Officer. We leave it at that. 77. Learned Counsel's next argument is that even if we are to opine that, in principle, the provisions of Section 115JA extend to the foreign companies, the provisions of Section 115JA will not apply to the facts of this case, in view of the provisions of the India Germany DTAA (1996) 136 CTR (St) 50 : (1997) 223 TTR (St) 130. Learned Departmental Representative's objection is that since the assessee has specifically given up his option to be assessed to tax as per the provisions of the tax treaty, it cannot be open to the assessee to seek protection of the tax treaty for the purposes of levy of minimum alternate tax (MAT, in short) under Section 115JA. This kind of selective treaty protection, according to the learned Departmental Representative, is not permissible in law. It is also contended that the levy of MAT under Section 115JA is an integral part of the income computation process, and once the assessee has himself opted th....