TaxTMI 
TaxTMI 
2006 (10) TMI 175
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....oceedings, the AO noticed that the assessee has claimed 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 ....
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....lowed exemption from tax. The objection, however, proceeds on 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....
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....nditions. The 'interest payable' has to be on the gross basis. Therefore, the exemption of interest has to be on the 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 eit....
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.... The CIT(A) erred in holding that the interest receivable by the Indian branch of your appellant from its head office/overseas branches is 'income' 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 ....
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....rest on the same funds when they are brought to India and lent would be income in the hands of the Indian branch. The funds in the NOSTRO account of the assessee are a part 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 s....
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....matter to a larger Bench in case we have any reservations on the conclusions arrived at by the said Special Bench. Learned counsel submits that ABN Amro Bank N.V.'s decision was in the context of the claim of deduction and not in 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 In....
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.... profits and losses earned by the Indian branch have to take into account the transactions that the Indian branch has entered into with the head office and the other branches. As regards learned counsel's reliance on the judgment 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 ....
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.... 'permanent establishment' or 'PE') of foreign enterprise. It takes us to the question as to what is the scope of income accruing or arising to a foreign company in India. That is the core issue in this appeal before us. As 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 f....
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....ad office account being debited for interest, it cannot be said that the Indian branch has earned any income by way of interest debited to the head office. Learned counsel's emphatic submission is that an inter branch transaction is a transaction 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 ....
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....ained, it would be immaterial whether the expenditure by B unit can be construed as income of A unit or not, because, in that situation, the profits and losses of that unit are to be seen in isolation. 32. In contemporary business situations when economic 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 prof....
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....ment applicable to these fictitious entities, such as a PE, should be the same as in the cases where non-residents establish separate legal entities in the form of subsidiaries. If both entitles carry out similar economic activities, the choice of legal form should not lead to different 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 develop....
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....in the light of Hon'ble Calcutta High Court's judgment in the case of Betts Hartley Huett & Co. Ltd., intra organization transactions are to be ignored. 40. The assessee in this case was a non-resident company with head office in London, and a branch in Calcutta. The assessee-company was engaged 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 off....
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....us examined from the point of view of the GE as a whole and not from the point of view of ascertaining the profits of the Indian PE; rightly so, because, in that particular case, addition was made in the hands of the British GE and not the Indian PE. As rightly noted by a co-ordinate Bench of this Tribunal, in the case of Banque 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 ....
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....de are perfectly valid in case profits of the entire business are to be ascertained, but the vital fact that was missed out was that the profit which can be taxed in India are only of the PE in India, and, therefore, is to be computed as if the PE is hypothetically independent. 46. In the Citibank N.A.'s case, there is no discussion 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 t....
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..... 50. We may also refer to a rather recent decision of the Tribunal in the case of Societe Generale v. Jt. CIT (order dated 24th May, 2004; Mumbai B Bench) which refers to the decisions relied upon by the assessee and states that "the learned DR has not been able to put forth any decision on the point to rebut the claim of the assessee" and that "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 d....
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....'ble Gujarat High Court is of the view that when the consideration of law is not involved, even Hon'ble Supreme Court's decision which is "a mere conclusion by which the case is disposed of" does not become law under article 141 of the Constitution of India. When such are the views about the decisions of the Hon'ble Supreme Court, it is futile to contend that 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 h....
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.... and as also noted in the case of Banque Indosuez, was not at all applicable on the facts before the Tribunal. Bearing in mind this fact and the other elaborate discussions discussed earlier in this order, as well as the esteemed views of Hon'ble AP High Court in the case of CIT v. B.R. Constructions [1993] 202 ITR 222, these Tribunal decisions relied upon by the learned counsel cannot be said 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 particu....
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....are presently concerned, it is not really necessary to address ourselves to those decisions. In any event, we are in considered agreement with the stand taken in the Tribunal's later decision in the case of Banque Indosuez. 61. The scope and nature of the expression 'permanent establishment' has been clarified in section 92F, introduced with effect from 1st April, 2002. This section was inserted 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) w....
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....ign PE takes place in 'x + 1' year, the 80HHC computation in 'x + 1' year will account for this 80HHC deduction. We agree that this is correct position but in our opinion, for the present purposes, this aspect is not really relevant. It is only when sales by the foreign PE takes place, it can be taken to the income of the PE which is includible in the income of the Indian GE. Therefore, the year in which income 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 ....
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....taxable in India, the expenditure incurred for earning these revenues also cannot be allowed as deduction of income exigible to tax in India. The entire costs of acquiring these funds should then cease to be deductible as an expense for the purposes of business in India. 70. To illustrate the above, let us take a case in which a German GE raises funds in India and transfers the same to its head office abroad for end use in, say, business 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, expen....
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....this reason that we did seek comments of the parties on as to why this appeal should not be referred to a larger Bench and let the law be settled in a holistic manner by taking into account all aspects of the intra organization dealings, and unfettered by the earlier decisions of this Tribunal. Learned counsel's emphatic opposition to this. suggestion was on the ground that the assessee bank has already wound up its operations in India and it 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, ....
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....cable legal position as well as factual matrix of the case. Since the case of the assessee fails on the scope of the main chargeability section of income 'accruing or arising in India' under section 5(2)(b) of the Act, there is no need to deal with the scope of the deeming fiction of income deemed to accrue or arise in India under section 9 of the Act. We have held the income to be 'accruing or arising in India' and therefore, it is 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) erre....
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.... by us, as, to do so will be clearly beyond the call and scope of our duty which is only to interpret the law as it exists. Hon'ble Supreme Court, in the case of Smt. Tarulata Shyam and Ors. v. CIT has observed: We have given anxious thought to the persuasive arguments.., (which) if accepted, will certainly soften the rigour of this extremely drastic provision and bring it more in conformity with logic and equity. But the language of sections ... is clear and unambiguous. 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 ....
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....Supreme Court, in the case of Petron Engineering Construction (P) Ltd v. CBDT that in respect to a matter provision of which may have been desirable but has not been really provided by the legislature, the omission cannot be called a defect of the nature which can be cured or supplied by recourse to the mode of construction advocated by Lord Denning in Seaford Court Estates Ltd.'s case (supra). 9. As for the Lord Denning's observations in the Seafoid Court Estates Ltd. (supra), 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 conclu....
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....om time to time. In the case of State of Kerala v. Mathai Verghese, Hon'ble Supreme Court has taken a view that the Court cannot reframe the legislation for the very good reason that it has no power to legislate. In Jumma Masjid v. Kodlamaniandra A IR 1962 SC 847, at p. 850 Hon'ble Supreme Court referred to, with approval, Lord Loreburn's observation, "We are not entitled to read words into an Act of Parliament unless clear reasons for it is to be found within the four corners of the Act itself." Vick ers Sons & Maxim 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 ....
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....ly, third ground of appeal is dismissed. 80. That leaves us with fourth and last grievance of the assessee which is as follows : Treatment for provision of bad debts (of Rs. 4,27,75,000/-) while computing the book profit under Section 115JA of the Act The CIT(A) erred in holding that the amount representing 'provision for bad debts' should be added to the net profit while computing the book profit under Section 115JA of the Act. 81. In the course of assessment proceedings, the AO, for the purposes of computing liability under Section 115JA of the Act, added back the 'provision for bad debts' amounting to Rs. 4,27,75,000/- to the profit as per the P&L a/c. In effect, the AO held that the aforesaid provision constitutes 'a provision made for meeting the liabilities, other than ascertained liabilities'. Aggrieved by the stand so taken by the AO, the assessee carried the matter in appeal before the CIT(A) but without any success. The CIT(A) upheld the action of the AO by relying upon the judgment of Hon'ble Madras High Court in the case of Dy. CTT v. Beardsell Ltd.: (2000) 162 CTR (Mad) 467 : (2000) 244 TTR 256 (Mad). The assessee is ....