2024 (10) TMI 1654 - AT - Income Tax

Revision u/s 263 - Non-Deduction of TDS being bank interest paid outside India - as argued interest was paid on foreign currency loan taken from Foreign Branches of Indian Banks which were Domestic Companies hence TDS was neither required to be deducted u/s 194A nor u/s 195 - HELD THAT - Provisions of section 195 provides that any person responsible for paying to a non-resident not being a company or to a foreign company any interest (not being interest referred to in section 194LB or section 194LC or section 194LD) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head Salaries ) shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode whichever is earlier deduct income-tax thereon at the rates in force. In this case the payment is made by the assessee to Foreign branch of Indian Bank. The nature of payment is interest but is not paid to foreign company. Further these banks are also not a company. Therefore if there recipient interest non-resident then only tax is required to be deducted. The term non-resident is defined in section 2(30) which says that non- resident means a person who is not the resident includes a person who is not ordinary resident within the meaning of clause 6 of section 6. The term resident is defined in section 6(4) of the Act which says that every other person is said to be resident in India in any previous year. In every case except where during that year the control and management of his affairs is situated holly outside India whereas in the case of banking companies effective place and management is controlled in India and not outside India. In this case as is evident that the case of ld. PCIT is not that control and management of this branches of bank are situated outside India. In fact these foreign branches are not foreign entity but foreign branch of Indian Bank. Therefore foreign Branch of this Indian Bank cannot be considered as non-resident. Accordingly provisions of section 195 do not apply to payment made by Indian company to foreign branch of Indian Bank. Hence there is no requirement on deduction of tax at source. Even otherwise these banks are Indian resident and incomes of their branches are taxable in the hands of this Indian Bank in their return of income to be filed in India. Because of these reason that global income of resident of Indian would be chargeable to tax in India if any tax is deducted at source of income of foreign branch of this resident bank once again be granted the credit of taxes in the hands of this Indian Bank. Even otherwise deduction of at source u/s 194A(3) on payment made to an Indian Bank is out of purview of TDS. In view of the provisions of section 194(A)(3)(iii)(f) of the Act under this clause all banks covered under the bank nationalization given the exemption for withholding of tax under section 194A of the Act. In view of this aspect also we do not find that the tax is required to be deducted on the above payment of interest paid to foreign branch of Indian Bank. Thus here also the order of ld. AO cannot be said to the erroneous so far as prejudicial to the interest of revenue. Therefore the twin conditions as prescribed under the Act are missing. Explanation 2 cannot be used for such void manner that if relief is granted which is otherwise eligible by the assessee should again to subjected to verification u/s. 263 by the order of the PCIT. Law does not permit to invoke the provisions of section 263 of the Act without proving that order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue. Charging of dividend income as per section 115BBD Vs. Business income - Assessee has received the dividend income after deducting the withholding of tax and is supported by the dividend certificate (APB-176). The income is supported by the various records placed on record stating that the income is on account of declaration of dividend declared by the joint venture company where the assessee hold 33.33 % shares which is more than 26 % prescribed under the provision of section 115BBD of the Act and thus the income received from the JV was to be treated as dividend income only. The assessee offer this income regularly and the revenue has not challenged that act of the assessee. The contention of the PCIT to treat the dividend income as business profit is against the provision of law and plain reading of section 115BBD read with section 90(2) of the Act the view is against the provision. Moreover while taking that plea the ground taken are also against the law and considering the evidences placed on record the view that the ld. AO has adopted while considering that income chargeable to tax as per section 115BBD cannot be considered as erroneous view and prejudicial to the interest of the revenue. Thus proceeding-initiated u/s. 263 fails on the twin condition and even the ld. PCIT on the issue noted that the issue need only verification / examination and there is no independent view of the ld. PCIT even on merits of the issue and therefore the ground no. 1 to 3 raised by the assessee are allowed.

Summary

The core legal questions considered in this appeal pertain to the validity and correctness of the order passed under section 263 of the Income Tax Act, 1961 (hereinafter "the Act") by the Principal Commissioner of Income Tax (PCIT). Specifically, the issues are:

(i) Whether the PCIT had jurisdiction to invoke section 263 to revise the assessment order passed by the Assessing Officer (AO) for the assessment year 2018-19;

(ii) Whether the AO's order was erroneous and prejudicial to the interests of the revenue on the issue of non-deduction of tax at source (TDS) on interest payments amounting to Rs. 23,09,26,264/- paid to foreign branches of Indian banks;

(iii) Whether the dividend income of Rs. 9,82,58,313/- received from a foreign joint venture (JV) company should be treated as business income taxable at normal rates, instead of dividend income taxed at a concessional rate under section 115BBD of the Act;

(iv) Ancillary issues such as the treatment of education cess expenditure and other grounds reserved for hearing.

Issue-wise Detailed Analysis:

1. Jurisdiction of PCIT under Section 263 of the Act

Legal Framework and Precedents: Section 263 empowers the Commissioner to revise an assessment order if it is "erroneous" and "prejudicial to the interests of the revenue." Both conditions-(i) erroneous order and (ii) prejudicial effect-must be satisfied to invoke this power. The Supreme Court in Malabar Industrial Co. Ltd. v. CIT clarified that mere loss of revenue or difference of opinion does not justify revision unless the AO's order is unsustainable in law or passed without application of mind. Other precedents emphasize that the Commissioner must record a definite finding of error and prejudice before exercising revisionary jurisdiction.

Court's Reasoning: The Tribunal noted that the AO conducted detailed scrutiny, examined submissions, and passed the assessment order after due inquiry. The PCIT's order did not demonstrate a conclusive finding that the AO's order was erroneous or prejudicial; rather, it remanded the matter for further verification without specifying the nature of error. The PCIT's invocation of section 263 based on a difference of view or incomplete verification was held to be improper.

Application to Facts: The AO's order was passed after considering detailed replies and evidence. The PCIT's vague dissatisfaction without specific findings failed to satisfy the twin conditions. The Tribunal held that the PCIT's jurisdiction was not validly invoked.

Competing Arguments: The assessee argued that the AO's order was not erroneous and that the PCIT's notice and order were without jurisdiction. The revenue contended that the PCIT had examined the records and found the order erroneous. The Tribunal favored the assessee, emphasizing the need for clear findings.

Conclusion: The PCIT's order under section 263 was without jurisdiction and liable to be quashed.

2. Non-deduction of TDS on Interest Paid to Foreign Branches of Indian Banks

Legal Framework and Precedents: Section 195 mandates TDS on payments to non-residents. However, section 194A(3)(iii) exempts certain interest payments, including those to specified institutions such as Indian banks. Notifications issued under section 194A(3)(iii)(f) exempt interest payments to foreign branches of Indian banks. The DTAA provisions and relevant judicial precedents (e.g., Commissioner of Income-tax (TDS)-1 v. State Bank of Patiala; Canara Bank cases) support exemption from TDS on such payments.

Court's Reasoning: The Tribunal analyzed the breakup of the total interest payment of Rs. 25,56,23,509/- reported in the ITR and reconciled it with TDS deducted amount of Rs. 13,92,83,709/-. It was found that a large portion (Rs. 23,09,26,264/-) was interest paid to foreign branches of Indian banks, on which no TDS was required under statutory exemptions. Other amounts were either subject to TDS or exempt under DTAA or were accounting entries (foreign exchange translation). The PCIT's generalized assertion without specific findings was held inadequate.

Application to Facts: The AO had examined the issue and accepted the assessee's submissions. The PCIT's direction for further verification was held to be an improper exercise of revisional powers, especially without establishing error or prejudice. The Tribunal noted that foreign branches of Indian banks are not separate non-resident entities for TDS purposes, and income of such branches is taxable in India in the hands of the Indian bank.

Competing Arguments: The assessee relied on notifications, DTAA provisions, and judicial precedents to establish no TDS obligation. The revenue relied on PCIT's order asserting non-deduction. The Tribunal favored the assessee's detailed submissions and legal position.

Conclusion: No TDS was required on interest paid to foreign branches of Indian banks; the AO's order was not erroneous or prejudicial on this issue, and PCIT's revision was unwarranted.

3. Tax Treatment of Dividend Income from Foreign Joint Venture

Legal Framework and Precedents: Section 115BBD provides a concessional tax rate of 15% on dividend income received by an Indian company from a "specified foreign company" in which it holds at least 26% equity. The assessee held 33.33% in the JV. Article 9 of the India-Morocco DTAA deals with associated enterprises and business profits but does not override the specific provisions of the Act. Judicial precedents (e.g., Santhosh Maize & Industries Ltd.; Vatika Township) establish that specific provisions prevail over general provisions.

Court's Reasoning: The Tribunal noted that the dividend income was declared and supported by dividend certificates, shareholder agreements, and annual reports. The income was classified as dividend income and taxed accordingly. The PCIT's contention that the income should be treated as business income was rejected as contrary to the plain language of section 115BBD and the facts. The PCIT's reliance on Article 9 of the DTAA was held misplaced as it does not mandate reclassification of dividend income as business income for tax purposes.

Application to Facts: The assessee's investment was a long-term, non-current investment yielding dividend income. The AO's acceptance of the tax treatment was a plausible view. The PCIT's revision lacked a basis in law or fact to overturn this view.

Competing Arguments: The assessee argued for applicability of section 115BBD and supporting evidence. The revenue argued for recharacterization under DTAA provisions. The Tribunal upheld the assessee's position.

Conclusion: The dividend income rightly qualified for taxation under section 115BBD at concessional rates; the AO's order was not erroneous or prejudicial, and PCIT's revision was unjustified.

4. Treatment of Education Cess Expenditure

The PCIT initially raised an issue regarding disallowance of education cess expenditure of Rs. 5,92,10,074/- relating to AY 2009-10. However, the assessee had already paid tax and interest on this amount, and the PCIT was satisfied with the explanation. This issue was not pressed further.

Significant Holdings:

"The twin conditions as prescribed under the Act are missing. The PCIT has to be satisfied that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue. Without such satisfaction, the revisionary power under section 263 cannot be invoked."

"The foreign branches of Indian banks are not separate non-resident entities for the purpose of TDS under section 195. Interest paid to such branches is exempted from TDS under section 194A(3)(iii) and relevant notifications."

"Dividend income received from a specified foreign company in which the Indian company holds more than 26% equity is taxable under section 115BBD at concessional rates. Article 9 of the DTAA does not override this specific provision."

"The PCIT cannot invoke section 263 merely because she has a different view or requires further verification. The power under section 263 is not to be used as a supervisory or appellate jurisdiction but only when the AO's order is clearly erroneous and prejudicial."

The final determination was to quash the PCIT's order dated 20.03.2024 passed under section 263 and to allow the assessee's appeal, holding that the AO's assessment order was neither erroneous nor prejudicial to the interests of the revenue on the issues raised.