TMI Blog2014 (10) TMI 150X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee bank by its Indian branch cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domestic law - as interest paid by the Indian branch is not chargeable to tax in India, it follows that the provisions of section 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the PE - a distinction has to be kept in mind between banking and financial institutions and non-banking and financial institutions - If entity is not in the business of giving commercial loans, no notional interest charged is allowed as a deduction to the intra entity borrowing - If the entity is a bank or other financial institution and, therefore, in the business of giving commercial loans, the current interest rate applicable to the funds lend to the PE is deductible to the borrower (PE) - However, as far as assessability in the hands of lender (HO) is concerned the same has to be excluded on the ground of mutuality – Decided in favour of assessee. Interest accrued/received to the Indian PE from its head office/overseas branches – ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rseas branches and Review of terms and conditions of the approval with respect to ECB loan - The syndication fee was received by Indian Branch for the services - But that part of interest earned by head office/foreign branches which was attributable to the PE in India was not returned by assessee - the assessee has admitted that the Indian branches of the bank play an active role in the disbursement of ECB loan and also regularly monitor the same - Therefore, the ECB loans disbursed by the Head office/foreign branches were effectively connected with the Indian branches – interest income had to be appropriated to the PE in India as it had accrued and arisen in India - The AO has taxed 10% of the gross interest – assessee contended that the interest paid to head office/foreign branches are net of tax for which the loan agreements have to be examined which has been filed by way of additional evidence – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of assessee. Treatment of deferred bank guarantee commission – Held that:- Following the decision in CIT vs. Bank of Tokyo Ltd. [1993 (5) TMI 172 - CALCUTTA HIGH COURT] - full commission though pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than tax payable under MAT, AO computed the tax liability in the draft assessment order using normal provisions of the Act. 4. The assessee filed objections before ld. Dispute Resolution Panel - II dated 03/02/2010. Ld. DRP gave directions u/s 144C(5) vide order dated 24th September, 2010 which were subsequently rectified vide order dated 28/10/2010. Consequent to the directions given by ld. DRP, the AO passed the order u/s 144C(1) determining the total income at ₹ 1125604140/- as under: Normal Computation (Interest from ECB has been considered separately) Particulars Amount (In Rs.) Income shown in the computation before allowing expenses u/s 44C 73,53,68,963 Add: Salary paid to expatriate employees 9,92,36,315 Interest expenses disallowed 13,34,97,526 Interest income on a/c of Indian operations 13,34,97,526 Interest earned by PE for deposits kept with HO/Overseas Branches 2,76,59,232 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the CIT(A) for earlier years wherein the CIT(A) has erred in not following the decision of the Third Member, Kolkata Tribunal in the case of ABN Amro Bank NV vs. JCIT (96 TTJ 1041) by incorrectly stating that the said decision was rendered in the context of section 40(a)(i) and not u/s 44C of the Act. 2. Addition on account of Interest paid to Head Office and other overseas branches of the Bank amounting to ₹ 133,497,526 That on the facts and circumstances of the case and in law, the Hon'ble DRP erred in confirming the addition proposed by the AO in the draft assessment order by holding that the appellant was required to deduct tax at source u/s 195 of the Act on the payment of interest to overseas branches/head office, and accordingly, the order passed by the AO on the basis of DRP's directions, is bad in law on the following counts: a) That the Hon'ble DRP and AO have erred in placing reliance on the CBDT Circular No. 740 dt. 17th July, 1996 in order to disallow the interest paid to overseas branches/head office, without comprehending the true import of the circular. b) That the Hon'ble DRP and AO have erred in not following the direct jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d/received by the Indian PE from its HO/overseas branches. That on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in confirming the addition, as proposed in the draft assessment order, for an amount of ₹ 27,659,232 being the interest accrued/received by the Indian PE of the appellant on funds lying with the Head Office/overseas branches outside India, and accordingly the order of the AO based on DRP's instructions is bad in law as well as on facts, on the following counts: a) The Hon'ble DRP and AO have erred in not appreciating that the interest received by the Indian branches is not chargeable to tax in India in accordance with the provisions of the Act, being 'receipts from self'. b) The Hon'ble DRP and AO have erred in not appreciating that in terms of the provisions of Article 11 of the DTAA, dealing with the taxability of Interest, the interest received by the Indian branches from the head office/overseas branches is not in respect of a 'debt- claim' as contemplated under Article 11 of the DTAA. c) Without prejudice to the above, on the facts of the case and in law, the AO erred in making an a ..... 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( ECBs ) given to Indian Borrowers That on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in confirming the addition, as proposed in the draft assessment order, in respect of interest received by then appellant on ECBs given to Indian borrower parties, and accordingly the order of the AO based on DRP's direction is bad in law as well as on facts on the following counts: a) the Hon'ble DRP AO have erred in making an addition on account of interest received on ECBs, by not appreciating that since the ECBs given are effectively connected with the PE of the appellant, the taxability of such interest is governed by Article 7 of the DTAA in terms of Article 11(6) of the DTAA. b) The Hon'ble DRP AO have erred in not appreciating that under the provisions of Article 7 of the DTAA, an amount, commensurate with the role played by the PE, has been already been offered to tax by the appellant, in computation of its income taxable in India as per the provisions of the DTAA; and, therefore, nothing further could be brought to tax in India. c) The AO has, while complying with the direction of the Hon'ble DRP, has erred in enhancin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case and in law, the Hon'ble DRP AO have failed to appreciate that the appellant follows mercantile method of accounting according to which, the commission falling due for the relevant previous year on accrual basis can only be taxed. c) That on the facts and circumstances of the case and in law, the Hon'ble DRP AO have erred in not following the decision of the Hon'ble Calcutta High Court in the appellant's own case for the AY 1981-82. d) Without prejudice to the above, on the facts and circumstances of the case and in law, the Hon'ble DRP and AO have erred in not appreciating that if the guarantee commission were to be taxed on receipt basis, it would result an additional deduction of ₹ 3,926,300 since the guarantee commission offered to tax on accrual basis was more than the guarantee commission received during the year. 9. Applicable Rate of Tax a) That on the facts and circumstances of the case and in law, the Hon'ble DRP AO have erred in not adjudicating that under the provisions of Article 24 of the DTAA, the applicable rate of tax on the income of the appellant attributable to its PE in India cannot exceed the applicab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The consequential taxes are thus deducted and deposited with the Indian Government treasury. Whole of the salary paid (comprising of both the salary paid outside India as well as the amount paid in India) to such expatriate employees is duly taxed in India in the hands of such expatriates. The Profit and Loss Account prepared by the assessee in respect of its Indian branches for the relevant assessment year was debited, inter-alia, with only that portion of the salary which was paid in Indian rupees by the branches in India. In other words, the salary paid in foreign currency by the Head Office was not routed through the profit and loss account of the Indian branches. Therefore, while computing the profits attributable to the Permanent Establishment ('PE') of the assessee in India, in the return of income filed, a separate deduction is claimed in respect of salaries paid by the Head Office and taxes thereon, as the said sum represented expenditure incurred for the Indian operations of the assessee (being the rupee equivalent of the total salaries paid by the assessee in foreign currency to the expatriates working in India and the income-tax borne and paid by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned expenditure of ₹ 127,955,895/- has been incurred by the Head Office situated outside India, and has been debited to the accounts of such Head Office. The head office has not raised any debit notes on the assessee. There has been no settlement of accounts with the Head Office. The head office has not raised any debit notes on the assessee. There has been no settlement of accounts with the Head Office. From these facts, it is clear that even if these expenses are made in respect of Indian Branch, the liability in respect of such expenses is borne by the Head Office and the same is not passed on to the assessee bank. Also, these expenses are incurred outside India and cannot be subjected to verification. 3.5 The assessee has also argued that the provisions of section 44C are not attracted to these salary payments. Section 44C was introduced with a view to getting over difficulties in scrutinizing and verifying claims in respect of general administrative expenses incurred by the foreign Head Office, in so far as such expenses can be related to their business or profession in India, having regard to the fact that foreign companies operating through branches in India, som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian branches during the year are contained to demonstrate that the employees had been sent on deputation from the head office for rendering services to the Indian branches on whole time basis. Ld. Counsel referred to detailed reply filed before AO in this regard contained at pages 266 onwards of paper book. In regard to the objections regarding verifiability of expenditure, ld. Counsel referred to page 297 of paper book, wherein form no. 16 in respect of Mr. Kita Aeb whose name appeared at page 295 of paper book, containing details of expatriate employees is contained, to demonstrate that from form no. 16, the salary paid to expatriate was verifiable. 9.2 Ld. Counsel referred to section 44C and pointed out that the said section has been incorporated in the statute to allow deduction of head office expenditure attributable to Indian PE in computing the income chargeable under the head profits and gains of business and profession . He submitted that the expenditure contemplated u/s 44C should be in the nature of 'head office expenditure' and the amount should be attributable to the business or profession of the assessee in India. He referred to Explanation 4 to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been accounted for as Indian income, therefore, there was no reason as to why the deduction of expenditure should not be allowed. 9.6 Ld. Counsel further referred to the decision in the case of Bank of America NT and SA vs. DCIT 27 SOT 97 (Mum.), wherein also similar view was taken and it was, inter-alia, held that the provisions of section 44C and limitations provided therein are inapplicable in respect of expenses incurred exclusively for Indian branches. Ld. Counsel further relied on the decision in the case of Bombay High Court in CIT v. Emirates Commercial Bank Ltd. [2003] 262 ITR 55(Mum.), wherein the Hon'ble Bombay High Court approved the view taken by the Tribunal. 10. Ld. CIT(DR) Shri D.K. Gupta relied on the order of AO and submitted that these expenses were covered u/s 44C being incurred outside India for the administrative purposes of PE. He further pointed out that no debit notes had been raised by assessee in respect of branches. No settlement of account was shown. He referred to ld. DRP's order and pointed out that it has been observed that these were not shown to be the liability of branch office. 10.1 We have considered the rival submissions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Intra Group being between head office and assessee's PE in India for which the arguments were advanced covering all the three grounds. First we will deal with ground nos. 2 3 and, thereafter, separately decide ground no. 4. However, since arguments for all the three grounds have been advanced by both sides together, we will take note of them accordingly. 17. Brief facts apropos ground no. 2 are that AO noticed that assessee had paid an interest of ₹ 133497526/- without making any deduction of tax at source. He pointed out that PE of the assessee bank is a separate entity for the purpose of taxation and on this ground assessee had claimed deduction of the interest paid to head office. He further pointed out that the interest paid by the PE to the head office was liable to tax in India and, accordingly, it was subject to the provisions of section 195 of the I.T. Act. After considering the assessee's submissions in this regard, the AO referred to Circular No. 740 dated 17/07/1996, which reads as under: It is clarified that the branch of a foreign company/concern in India is a separate entity for the purposes of taxation interest paid/payable by such branch to it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is treated as distinct and separate enterprise which implies the direct method of separate accounting by the PE. He further pointed out that the provisions of Article 7(3) of the DTA makes it amply clear that in determining the profits of the permanent establishment, there shall be allowed as a deduction expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred, whether in the contracting state in which a permanent establishment is situated or elsewhere. Ld. Counsel further submitted that paragraph 8 of the Protocol no doubt makes it clear that no deduction shall be allowed for any payments made or amounts charged by a PE of an enterprise to its head office for the items specified therein, however, exception has been carved out and it is specified that any interest payable by a permanent establishment to the group establishment which is a banking institution, should be allowed. He, therefore, submitted that deduction in respect of interest paid by PE to the head office has to be deducted in view of the provisions contained in under DTA. 20. As regards the taxability of interest received by h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he DTA then the entire computation has to be made as per DTA. In this regard ld. CIT(DR) referred to the decision of ITAT Mumbai Bench in the case of Dresdner Bank AG vs. ACIT 2006-TII-20-ITAT-Mum.-INTL. He referred to para 78 which is reproduced as under: 78. Undoubtedly, in a case where the Government of India has entered into a tax treaty with a foreign country, then in relation to an assessee on whom such tax treaty applies, the provisions of the Income Tax Act apply only to the extent these are more beneficial to the assessee. However, once assessee himself abandons his option to be assessed to tax in accordance with the provisions of the tax treaty, as is the situation before us, it cannot be open to assessee to go back for the treaty protection on one aspect of the tax assessment i.e. on applicability of minimum alternate tax u/s 115JA of the Act. Either an assessee is to be assessed to tax on the basis of the provisions of the tax treaty or not. In our considered view, the assessment of income cannot be split into several segments and then the applicability of treaty provisions, vis- -vis tax law provisions, cannot be separately considered for each segment. Liability fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or the overall tax liability turns out to be less as per the DTAA vis- -vis the domestic law. In the absence of any discussion about the computation of the business profits of the permanent establishment as per the DTAA, it is not possible to determine as to whether or not the computation under the DTAA is more beneficial to the assessee. In our considered opinion that ends of justice would adequately meet if the impugned order is set aside and the matter is restored to the file of AO for computation of income of the assessee as per the DTAA as well after allowing a reasonable opportunity of being head to the assessee. We order accordingly. After such computation, the AO will compare the income of the permanent establishment as per domestic law and the DTAA. The liability to tax on the assessee in respect of the income of the PE would be fastened by only such of the two computations which is more favourable to the assessee as per the mandate of sec. 90(2) of the Act. 24. With reference to the above decisions, ld. CIT(DR) submitted that assessee is required to make separate computation under domestic law and DTA and then compare as to which computation is more beneficial to as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... option, that it should get the benefit under the Double Taxation Avoidance Agreement. No other consideration is material for this purpose as ultimately what is to be seen is whether the provisions of the Act are more beneficial to the assessee or not. Accordingly, it is held that the assessee is entitled to the benefit under the treaty. 25.1 He, therefore, submitted that Spl. Bench has approved the view taken in M/s Lloyd Registrar (supra). He further relied on the decision in the case of Deputy Director of Income Tax (Mum.) vs. M/s Tokyo Engineering Corporation (2012)-TII-55-ITAT-Mum.-INTL and referred to para 11.2 at page 15 16 of the said order, which is reproduced here under: 11.2 A bare perusal of the above provision indicates that where the Central Government has entered into DTAA with the Government of any other country for granting of relief in respect of income on which tax is payable both in India as well as the other country or for the purposes of avoidance of double taxation of income under this Act or under the corresponding law in force in that other country, then the assessee to whom such agreement applies shall be entitled to be governed by the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said option cannot be reverted back for adopting the other scheme. Ld. CIT(DR) submitted that assessee had opted to be assessed under domestic law. In this regard he referred to page 327 of the paper book dated 18.1.2012, wherein the copy of Return of Income is contained and also to pages 333 and 334, wherein the statement of computation of taxable income/loss is contained and pointed out that assessee itself had computed income under the head profit and gains of business or profession at ₹ 695920087/- which was set off against the brought forward business losses. Ld. CIT(DR) also referred to page 336 of paper book, wherein the computation of taxable income as per ITAT u/s 115JB is contained. He, therefore, submitted that once the assessee had opted for being assessed under domestic law then assessee could not take shelter of the provisions of Article 7(3) of DTA between India and Japan for claiming deduction. 26. Ld. CIT(DR) referred to the decision of Spl. Bench in the case of Suomoto Mitsubishi Banking Corporation (supra) and referred to page 35 36 of the said judgment to submit that the payment to self is not allowable but for the provisions contained under DTA und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est income should be charged to tax nor the interest expenditure be allowed as deduction. This ground is accordingly allowed. 27. He, therefore, submitted that under domestic law since concept of mutuality applies so neither deduction nor taxation of the same amount can be made. However, as regards the taxability aspect, ld. CIT(DR) relied on AO's order and pointed out that AO applied the deeming provisions contained u/s 9(1)(v) and did not apply the concept of mutuality. 28. Ld. CIT(DR), further illustrating this issue, with reference to position under treaty, submitted that there is no dispute that in view of Article 11(6) Article 7 applies because assessee was operating through PE and, therefore, the deduction of interest paid to head office by PE is to be allowed as per Article 7(2),7(3) read with clause (c) of para 8 of Protocol. He submitted that as regards the taxability of the interest received by assessee from PE and the interest earned by PE from the deposits held with head office, the taxability has to be considered as per Article 11(6). The submission of ld. CIT(DR) is that as per Article 11 interest arising in a contracting state and paid to a resident of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s lent to the head office of the enterprise, or any of its other offices. 29. Ld. CIT(DR) further referred to para 8 of Indo Japanese Treaty Protocol which reads as under: - 8. With reference to paragraph 3 of article 7 of the Convention, no deduction shall be allowed in respect of amounts paid or charged (other than reimbursement of actual expenses) by a permanent establishment of an enterprise to the head office of the enterprise or any other offices thereof, by way of : (a) royalties, fees or other similar payments in return for the use of patents or other rights, or for the use of know-how; (b) commission or other charges, for specific services performed or for management; and (c) interest on moneys lent to the permanent establishment; except where the enterprise is a banking institution. 30. With reference to above, ld. CIT(DR) pointed out that the last part from Likewise to other offices of Art. 7(3)(b) of Indo Nether land Treaty is missing in Indo Japanese Treaty. Thus, taxability is missing but there is no bar on taxability in treaty. So the entire interest is taxable in the hands of PE. 31. The second limb of argument of ld. CIT(DR) was that in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income, shall be the gross receipts or net income after deduction of the expenditure incurred in relation to earning of such income. The aspect of total income under the scheme of Income Tax is understood as the earning of the assessee from all the sources as classified under different heads of income reduced by the expenditure directly and indirectly incurred in relation to the earning of the income and further deducting all the allowable claims and the exemption/deduction while computing the total income. Thus, the total income chargeable to tax means the net income computed from the gross receipts after the deduction of the allowable expenditure and other deductions. As per the scheme of the Income Tax, the income which is chargeable to tax is computed after the deduction of the expenditure which has been incurred for earning such taxable income. Therefore, the expenditure incurred for other than the income chargeable to tax, is not permitted to be reduced from the income for computation of the total income. This aspect of allowing the expenditure incurred in relation of the taxable income is embedded in the provisions of sec. 14A to ensure that the expenditure incurred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rseas brandies which has been claimed and allowed as exempt on the principle of mutuality. The ld. AR unsuccessfully tried to argue that the funds for such placement with head office/overseas branches were made available from the assessee's own kitty of interest free available funds. This argument runs contrary to the specific submission made by the assessee before the AO, which has been reproduced above, by which the assessee submitted that its placement with the head office Overseas branches are funded by way of deposits in the foreign currency maintained in India such as EEFC and FCNR deposits . Once the assessee is specifically admitting the placement of funds with head office/overseas branches out of interest bearing deposits, it cannot be argued that the source of such funds was different. We, therefore, hold that the source of the funds placed by the assessee with its head office/overseas branches is the deposits received by it. Since interest income from placement of such funds is exempt from taxation, any interest paid by the assessee on such deposits and other expenses cannot be allowed as deduction u/s 14A. We want to make it clear that this conclusion is based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding on the subject matter of taxability of interest income received from HO. The Special Bench of the Tribunal in the case of Prakash L. Shah (supra) is not applicable to the facts of the case in hand. Therefore, we do not agree with the contention of the ld. AR on this point. 14. As we have discussed above, the issue of applicability of section 14A has been covered by the decision of the coordinate Bench of the Tribunal in the case of M/s Societe Generale (supra). Accordingly by following the decision of the coordinate Bench of this Tribunal, we hold that the provisions of sec. 14A are applicable on the exempt interest income earned from the HO/overseas Branches. 32. Ld. CIT (DR) submitted that in view of above decision the disallowance u/s 14A has to be made if the interest earned by the PE is held to be non- taxable. He, therefore, submitted that matter may be restored back to AO to ascertain the expenses incurred for earning interest income. 33. Ld. Counsel for the assessee in the rejoinder submitted that all the issues raised by ld. CIT(DR) have duly been considered in the case of Sumitomo Mitsui Banking Corporation (supra). Ld. Counsel submitted that the computat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the case of ABN Amro Bank NV and in the case of the assessee (then known as Bank of Tokyo Mitsubishi Ltd.), reported in 280 ITR 117. 34. With reference to these notes, ld. Counsel submitted that it is wrong to plead that computation had been made under the domestic law. 35. Ld. Counsel further referred to the decision in the case of IBM World Trade Corporation vs. DCIT (International Taxation) (2012) 54-SOT-39 (Bang.) and pointed out that Tribunal has considered the issue of taxation simultaneously both under domestic law as well as treaty and has upheld the same, inter-alia, observing as under: In the instant case on hand, the assessee has not invoked or applied the provisions of the Treaty selectively. The assessee has computed the tax on royalty income arising from two different contracts falling under two different limbs of section 115A( 1) (b) at two rates: (i) At the rate prescribed under the Treaty and (ii) at the rate prescribed under the 1.1. Act. The assessee has invoked the benefit of the Treaty only in respect of royalty income arising from the agreements entered into on or before 1.6.2005. In respect of agreements entered into on or after 1.6.2005, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Representative also supported his contention by relying on the order passed by the Tribunal in assessee's own case for assessment years 1983-84 to 1985-86, a copy of such order dated 9th March, 1998 in ITA Nos.2089 to 2091/Bom/91 was placed on record. In the opposition the learned AR relied on the five Members Special Bench order in the case of Sumitomo Mitsui Banking Corpn. V DDIT [(2012) 19 Taxmann. com 364 (Mum.) (SB)} to contend that such interest / commission received from HO cannot be charged to tax. He also relied on a subsequent order passed by the Mumbai Bench of the Tribunal in the case of Oman International Bank S.A. O. G. v. ACIT In this order dated 29th June, 2012, the Tribunal, after considering the five Member Special Bench order in the case of Sumitomo Mitsui Banking Corpn. (supra), has held that the interest received from HO / overseas branches cannot be charged to tax. 23. We have heard the rival submissions and perused the relevant material on record. It is apparent from para nos.55 and 56 of the Special Bench order that under the provisions of the Income-tax Act, 1961 the taxable entity is only one i.e. overseas GE and the PE in India is a part of that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n such provision is beneficial to them. The choice of selection is clearly with the foreign nationals and not with Revenue authorities. The intention of the legislature and spirit to grant benefit and choice to the foreign national is manifestly clear. In view of above provision and other reasons recorded earlier, we direct the AO to allow depreciation to the assessee as per provisions of the IT Act. 37. With reference to aforementioned decisions ld. Counsel submitted that the assessee company was being taxed as per the provisions of treaty and, therefore, the provisions of the Act were to apply to the extent that they were more beneficial to the assessee. 38. As regards the plea of ld. CIT(DR) regarding netting off of interest income, ld. Sr. Counsel pointed out that if no income arises, there is no question of section 14A. Ld. Sr. Counsel referred to page 44 of Sumitomo Corporation decision and submitted that in para 59 it is specifically noted that no income arises which is chargeable to tax. Ld. Sr. Counsel submitted that a case of no income being arisen is to be distinguished from exempted income. He relied on the decision in the case of Commissioner Of Income- Tax vs C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue Engineering Ltd. Tribunal has observed that proper appreciation of the words more beneficial as found u/s 90(2) needs to be appreciated for proper adjudication of the dispute before it. The Tribunal further observed, as noted earlier in the arguments advanced by ld. DR, that this point had not been elaborated upon by any of the contending parties, but Tribunal came to the conclusion that application of this provision can be made after ascertaining the tax payable by the assessee under the double taxation avoidance agreement and then tax payable by the assessee under the Act. Thus, it is evident that this issue per se was not before the Spl. Bench and, therefore, these observations are only in the nature of obiter dicta and not ratio decendi. Be that as it may, Tribunal has primarily taken the same view as was taken by Tribunal in the case of Dresdner Bank AG, wherein also Tribunal had taken a similar view as is evident from para 24 to 27 of its order, which is reproduced hereunder: 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 includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Indian Income Tax Act, no one can make profits by entering into transactions with oneself. It is contended that debiting or crediting one's account does not alter this legal position, and that, therefore, irrespective of the head 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 organization transactions are to be ignored for computing the business profits holds good only when profits of the organization 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 transaction, which should more aptly be termed as 'intra organisation dealings', have a significant impact on the determination of profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een banking and financial institutions and non-banking and financial institutions. If entity is not in the business of giving commercial loans, no notional interest charged is allowed as a deduction to the intra entity borrowing. If the entity is a bank or other financial institution and, therefore, in the business of giving commercial loans, the current interest rate applicable to the funds lend to the PE is deductible to the borrower (PE). However, as far as assessability in the hands of lender (HO) is concerned the same has to be excluded on the ground of mutuality as held by Special Bench in the case of Sumitomo Corporation (supra). 42. As far as the detailed submissions advanced by ld. CIT(DR) with reference to separate computations under DTA and domestic law are concerned, we find that Spl. Bench in the case of Sumitomo Mitsui Banking Corporation, while referring to the decision in Dresdner Bank's case, has itself observed that the same also is one point of view but has observed that since a judicial precedent laid down by Spl. Bench is available, therefore, the same view has to be taken by a Division Bench. We, therefore, respectfully following the decision of Spl. Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision of Hon'ble Supreme Court in the case of SAL Narayan Rao and Another vs. Eshwar Lal Bhagwan Das Another, 57 ITR page 149, wherein the Hon'ble Supreme Court referring to the decision in the case of M.K. Venkata Challan vs. Bombay Dying and Manufacturing Company Limited referred to the observations relied in that case of Lord Asquith of Bishoptone in East End Dwellings Company Limited vs. Finsbury Borough Council, if you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. 45.1 Thus, primarily the contention of ld. CIT(DR) is that when as per Article 7(2) the PE is taken as a distinct and separate enterprise engaged in the same or similar activities then in view of the decision of Hon'ble Supreme Court in the case of Eshwar Lal Bhagwan Das (supra) the consequences flowing from considering the PE as separate entity as real state must inevitably follow and, therefore, the income accruing to the non-resident bank in consequences to the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax Act relating to determination of the profit were applicable and rests provisions were not applicable, then it will lead to an anomalous situation and even the loss incurred in earlier year will not be allowed to be carried forward and set off u/s 80 of the I.T. Act; c) The AO referred to section 115JB(i) and pointed out that the said section is applicable in case of companies and the definition of company u/s 217 includes any body corporate, incorporated by or under the laws of a company outside India. Therefore, company, as used in section 115JB, includes foreign companies. d) There is no indication in the memorandum explaining the introduction of the said section that the said section shall not apply to foreign companies. In this regard the AO pointed out that section 115JB starts with the phrase notwithstanding anything . e) The AO relied on the decision of Authority of Advance Ruling. The AO also referred to the decision of Authority for Advance Ruling in the case of NLKORESSOURCES Ltd. vs. CIT; 234 ITR 828, where the assessee sought the benefit of section 42, which allows special deduction for those engaged in the business of prospecting for mineral oil. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Act, 1956 nor it is required to place the accounts before the AGM as per sec. 210 of the Companies Act. It does not declare or distribute any dividends in India with reference to any such accounts. Therefore, provisions of section 115JB are not applicable in the case of the assessee. The assessee places reliance on the following decisions: Maharashtra State Electricity Board vs. Joint CIT 77 TTJ 33 (Bom.); Process Pumps (P) Ltd. vs. DCIT 94 TTJ 190 (Bang.) However, without prejudice to the assessee's claim that provisions of sec. 115JB are not applicable to its case, computation of book profits u/s 115JB of the Act are annexed herewith alongwith certificate in Form No. 29B. 50.1 Ld. Sr. Counsel filed copy of Annual Report for 2007, wherein the auditors have pointed out that the financial statements of Bank of Tokyo - Mitsubishi UFJ, Ltd. Indian Branches were prepared u/s 29 of the Banking Regulation Act, 1949 and these accounts were not as per part II III of Schedule VI to Companies Act. 50.2 Ld. Sr. Counsel relied on the following decisions : (a) ITAT 'G' Bench, Mumbai in the case of Krunk Thai Bank PLL vs. JCIT, vide ITA No. 3390/Mum/2009; b) Keral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed tax burden will benefit all companies big and small. (ii) I propose to introduce a Minimum Alternate Tax (MAT) on companies. In a case where the total income of the company, as computed under the I.T. Act after availing of all eligible deductions, is less than 30% of the book profit, the total income of such a company shall be deemed to be 30% of the book profit and shall be charged to tax accordingly. The effective rate works out to 12% of book profit calculated under the Companies Act. Companies engaged in the power and infrastructure sectors will, however, be exempted from the levy of MAT. 50.7 He further referred to the Finance Minister's speech while introducing Finance Bill, 2000 which reads as under: 156. The various exemptions currently available while calculating Minimum Alternate Tax (MAT) and the credit system has undermined the efficacy of the existing provision and has also led to legal complications. To address these issues, I propose that the Minimum Alternate Tax be now levied at the revised rate of 7.5% of the book profits as determined under the Companies Act instead of the existing effective rate of 10.5%. However, this will now be uniformly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. He submitted that section 115JB(2) gives only mode of preparation of profit and loss account. It only requires that the accounts are to be prepared as per Schedule VI. Ld. CIT(DR) submitted that language of section is not 'as prepared' but 'as per Schedule VI' only. Only this compliance is mandatory. He submitted that Income Tax Act is not subordinate to Companies Act. He further submitted that section 211 of Companies Act only provides mode of preparation of Balance Sheet and profit and loss account. The manner of preparation is to be followed. In this regard he referred to the decision in the case of 257 ITR 51 (Rajasthan) Chhogmal Chiranji Lal vs Commissioner of Income-Tax. He submitted that Companies Act does not prescribe form of profit and loss account. He referred to page 103, wherein the particulars in regard to profit and loss account as per Banking Regulation Act are required to be given and pointed out with reference to Schedule VI to Companies Act contained at pages 85 to 98 of Paper Book that profit and loss account is not very special under Companies Act. He further referred to section 29(3) of Banking Regulation Act contained at page 102 of paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Finance Minister's speech and memorandum explaining introduction of clause are not relevant. 61.4 As regards assessee's contention regarding non-applicability of provisions of section 115JB to Treaty, ld. CIT(DR) submitted that: (i) Assessee opted to be taxed under domestic law; (ii) Assessee computed income u/s 115JB; (iii) Return filed and tax paid as per domestic law. Treaty in above steps does not come into picture. 61.5 Further, Article 7(3) under Treaty talks of only book profits. If foreign company paying tax below book profit then it will have to determine income as per section 115JB. He submitted that since 115JB has overriding effect, therefore, it will override section 90 also. 62. Ld. DR referred to AAR's ruling contained at page 47 of the Department's case law paper book in the case of Suhas Chandra Sen Mohini Bhussry JJ. [1998] 234 ITR 0335, wherein it has been held that section 115JA is applicable to foreign companies. He pointed out that at internal page 7 AAR observed that there is no difficulty in computing profit/loss of Indian business. He pointed out that Authority relied on IRC vs.Ross Minister (1979) 52 TC 160 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 30 to 43D. All the deductions and allowances permissible under any other provision will also have to be given to the assessee for the purpose of computation of his total income in regular course of assessment of income. If the total income, thus calculated, falls short of thirty per cent of book profit,the special provisions of sec. 115JA come into operation. There is no scope for any deduction or allowance under any other provision of the Act at this stage. The section is to apply notwithstanding anything contained in any other provisions of this Act . Book profit has been defined and explained in section 115JA. This provisionbecame necessary because a large number of companies were not paying any tax in spite of making huge profits by taking advantage of the various provisions for deduction and allowances contained in the Act. The total income thus computed was way below the taxable limit. To circumvent this, section 115JA was introduced in the statute. Thirty per cent of the book profit of a company will have to be treated as its total income in a case where the total income as computed in with the other provisions of the Act was found to be less than thirty per cent of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applicable to the applicant. whether the payment made to the applicant on sale of the shares would suffer any withholding tax under section 195 of the Act and If yes whether tax at 15 per cent of the net capital gains would be required to be withheld? 63.1 Ld. DR pointed out that AAR answered the question no. 3 only in negative but not dissented from earlier decisions. He submitted that since the applicant had no physical presence in India therefore, it was held that the provisions of section 115JB were not applicable. Ld. DR further referred to the decision of AAR in the case of Castleton Investment Ltd. 2012-TII-36- ARA-INTL, wherein, inter-alia, it was held that 115JB is not applicable only to domestic company but also to foreign companies. Ld. DR submitted that this decision has been followed in RST R BatliBoi Co. 25. Question no. 2 is whether the applicant would be liable to be taxed u/s 115JB of the Act in the absence of a Permanent Establishment in India or in the absence of a business connection in India. The applicant argues that section 115JB would apply only to domestic companies and not foreign companies. The relevant notes on clauses to Finance Bill, 2000 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Act and not any special Act. In this regard ld. DR referred to page 37 of paper book, wherein the decision of Tribunal in the case of Maharashtra State Electricity Board is contained and pointed out that in para 15 Tribunal has, inter-alia, noted that as per section 115JA(2) company is required to prepare its profit and loss account in accordance with the provisions of part II III of schedule VI to the Companies Act. However, MSEB was required to prepare its accounts in conformity with the provisions of section 69 of the Electricity Supply Act. Ld. CIT(DR) pointed out that in our case assessee has prepared accounts in accordance with part II of schedule VI to Companies Act and, therefore, this decision is not applicable. Ld. CIT(DR) referred to the decision of ITAT Mumbai Benches in the case of Krung Thai Bank PCL and pointed out that in this case requirements of Banking Regulation Act were not considered. 67. Ld. CIT(DR) further referred to the decision of ITAT, Mumbai Benches in the case of M/s Reliance Energy Ltd. vs. ACIT, vide ITA No. 218/Mum./2005 and pointed out that accounts prepared as per Electricity Act are materially different but in the present case the account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies, however, the provisions of Schedule VI are not applicable in view of exemption set out under proviso to sectlon 211 (2) of the Companies Act. The final accounts of the banking companies are required to be prepared in accordance with the provisions of the Banking Regulation Act. The provisions of Section 115 JB cannot thus be applied to the case of a banking company. 69. Ld. Counsel referred to page 327 and pointed out that in the Return of Income there is typographical error as regards the preparation of profit and loss account as per Schedule VI to which ld. CIT(DR) vehemently opposed at this stage. Ld. Counsel referred to page 336, wherein computation of Taxable Income u/s 115JB(MAT) of the Act is contained and pointed out that was with reference to Note 12 and 13 given in the Notes to computation of Income in Annexure V. He submitted that assessee had pointed out that without prejudice to its claim regarding applicability of provisions of section 115JB, the computation was filed by assessee ld.Counsel referred to the Returns of Income for A.Ys. 2006-07, 2008-09 and 2009-10 and pointed out that assessee had specifically written '2' (No.) in regard to preparati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been rendered with reference to accounts prepared as per the Insurance Regulatory and Development Authority (preparation of financial statements on auditor's report of Insurance Company) Regulation, 2002. In all these decisions it has been held that since the accounts were not prepared as per the provisions of part II of schedule VI of Companies Act and the accounts were not laid before the Annual General Meeting in accordance with the provisions of section 210 of the Companies Act as per the requirements of sub-section (2) of section 115JB, therefore, the provisions of section 115JB were not applicable. Explanation 3 has been inserted by the Finance Act, 2012 w.e.f. 01/04/2013 as per which now the book profits can be computed on the basis of accounts prepared under the governing Act to such company. 73.1 Ld. Counsel pointed out that in the case of State Bank of Hyderabad (supra) it has been held that this amendment is prospective and, therefore, it is not applicable for the present assessment year. 74. Ld. CIT(DR) however, pointed out that Tribunal has not considered in detail the import of this amendment and has simply on the basis of date of insertion has observed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, section 115JB cannot be applied. 76. The MAT provisions were brought in statute by the Income Tax Act by Finance Bill, 1996 and the Hon'ble Finance Minister while introducing this provision, inter-alia, observed that company engaged in the power and infrastructure sector will remain exempt from the levy of MAT. This provision was brought in to bring within the tax net the zero tax companies. In Finance Bill, 2000, the Hon'ble Finance Minister, inter-alia, proposed that the MAT be levied at the revised rate of 7.5% of book profits as determined under the Companies Act instead of the existing effective rate of 10.5%. The Finance Bill, 2002 vide clause (49) amended section 115JB observing as under: Clause 49 seeks to amend section .115JB of the. Income-tax Act relating to special provision for payment of tax by certain companies. . The existing provisions of the said section provide for levy of a minimum, tax on domestic companies of an amount equal to seven and one-half per cent., of the book profit, if the tax payable on the .total income chargeable to tax as per the provisions of the Income-tax Act, 1961, is less than seven and one-half per cent of the book profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h pending details. Since assessee failed to provide the complete details, the AO computed the interest of this account at ₹ 1391607202/- being 20% higher than the figure submitted by the assessee. He pointed out that this interest income accrues to the assessee from India and is arising from India and is taxable in India also as per section 9(1)(v) of the Act and as per article 11 of the DTAA. The assessee pointed out that the fee offered to tax as the 'syndication fee' is the income attributable to the PE and the same has been offered to tax in India. The AO did not accept the assessee's submission and pointed out that the compensation given to the PE for services rendered by it to an associate enterprise has to be at arm's length price. He pointed out that the syndication fee was the remuneration to the branch in India and no way the interest. The interest is received by the head office and the foreign branches which has not been offered to tax. The AO taxed the entire interest income on gross basis @ 10% observing as under: As discussed above the debt claim should form part of lhe balance sheet of the PE; however even otherwise. even as per the argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that this ground was neither raised before AO nor DRP. He referred to page 23 of assessment order to demonstrate that even remotely this issue was not before AO and same was the position before ld. DRP. Ld. CIT(DR) submitted that assessee has to give reasons why this ground was not taken earlier. He submitted that fresh investigation of facts is required to find out as to how the loan was utilized outside India. Ld. DR relied on the decision in the case of Dr. Chandravati, 301 ITR 172; (ii) Brook Bond India vs. CIT, 100 CTR 284(Cal.), wherein it has been held that where fresh examination of facts is required then no additional ground can be raised. He also referred to the following decisions: 116 ITR 778, CIT vs. Gangappa Cables Ltd. 204 ITR 166 (AT), CIT vs. Lt. Begum Noor Banu Alladin. 299 ITR 400 (Ker.), P.R. Narahari Rao vs. CIT. 266 ITR 409 (Ker.), Ooppootil Kurien Co. (P) Ltd. vs. CIT. 81.1 He submitted that if objection on a particular point has not been raised before the First Appellate Authority then the same cannot be raised for the first time before the Tribunal. He submitted that it has to be examined whether the loans given by the head office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or denovo consideration. 83. In the result, this ground is allowed for statistical purposes. 84. Ground no. 7 is with regard to deduction u/s 44C of the Act which deduction has not been allowed by AO while computing interest income from ECB's. As we have restored the ground no. 6 for determining the interest income on ECB's relating to PE in India, therefore, this ground necessarily has to be restored to the file of AO. 85. In the result, this ground is allowed for statistical purposes. 86. Ground no. 8 is regarding treatment in respect of deferred bank guarantee commission. The AO noted that the commission received on guarantees in respect of the period which had not expired was not offered as income accrued for the year but had been treated as an advance in line with the accounting policy followed by the bank. He observed that amount of commission received is an income which accrues at the time the bank issues the guarantee. The period of guarantee has nothing to do with the assessee's right to receive having arisen. He pointed out that the commission received was like a fee for issuing the guarantee and was not a contingent receipt or advance and it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statistical purposes. ITA No. 5104/Del/2011 91. Ground no. 1 is regarding disallowance of salary paid overseas to expatriates of the appellant working in India by the Head Office and the Indian taxes paid thereon by the Head Office ₹ 110,832,464/-. This issues has been decided by us in A.Y. 2007-08 for the reasons stated in para 5 to 12 of the said order this ground is allowed. 92. Ground no. 2 3 are regarding addition on account of interest paid to Head Office and other overseas branches of the Bank amounting to ₹ 238,222,371/- and relating to addition on account of income of the appellant pertaining to receipt of interest from Indian branches amounting to ₹ 238,222,371/-. These two grounds have been decided in A.Y. 2007-08 vide para nos. 16 to 42. These grounds are allowed for the reasons stated therein. 92.1 Ld. CIT(DR) has raised an additional ground in course of argument that if interest received by HO from branch is not considered as income then expenditure claimed by assessee in earning that interest is to be disallowed under section 14A. Additional ground has been considered in para no. 31 onwards and in para 42.1 it has been held that the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B 234C of the Income Tax Act, 1961. The Hon'ble Supreme Court held as under: From the above, it is evident that any tax paid in advance/pre-assessed tax paid can be taken into account in computing the tax payable subject to one caveat, viz., that where the assessee on the basis of self computation unilaterally claims set off or MAT credit, the assessee does so at its risk as in case it is ultimately found that the amount of tax credit availed was not lawfully available, the assessee would be exposed to levy of interest u/s 234B on the shortfall in the payment of advance tax. We reiterate that we cannot accept the case of the Department because it would mean that even if the assessee does not have to pay advance tax in the current year, because it would mean that even if the assessee does not have to pay advance tax in the current year, because of his brought forward MAT credit balance, he would nevertheless be required to pay advance tax, and if he fails, interest u/s 234B would be chargeable. The consequence of adopting the case of the Department would mean that MAT credit would lapse after five succeeding assessment years u/s 115JAA(3); that no interest would be payable ..... X X X X Extracts X X X X X X X X Extracts X X X X
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