TMI Blog2007 (2) TMI 347X X X X Extracts X X X X X X X X Extracts X X X X ..... n nostro account balances in computing their income." 2. The brief facts of the case are that assessee is a non-resident company engaged in the business of banking. It is having its Head Office at Paris and carries on business throughout the world including India through a branch thereof. For assessment year 1996-97 it had filed its return of income on 31-11-1996 declaring total income of Rs. 8,97,11,720. The return was processed firstly under section 143(1)( a ) and thereafter it was selected for scrutiny and a notice under section 143(2) was issued. 3. The ld. Assessing Officer while going through the accounts found that assessee has credited a sum of Rs. 5,74,45,794 to the P L Account under the head "Interest on nostro account". As against this the assessee has paid interest to Headquarter/Branches amounting to Rs. 7,48,468. The interest received from branches as well as on the nostro account have been excluded from the taxable income in the computation filed along with the return and the interest paid has been added to the income. A notice under section 142(1) along with a letter dated 7-12-1998 was written to the assessee inviting its explanation as to why the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest also does not accrue or arise to our clients in India." The ld. Assessing Officer has considered this contention of the assessee and rejected the same. He made an addition of Rs. 5,74,45,794 as interest income accrued to the assessee. The ld. Assessing Officer in this connection assigned mainly two reasons, firstly he observed that the assessee has credited in its books of account the interest earned by placing the funds through FCNR-B Deposits in a bank abroad, therefore, such interest is accrued in India. Secondly he observed that in any way that interest is deemed to accrue or arise in under section 9(1)( i ) of the Act. Thirdly interest is received from Head Office/Branches. 5. Dissatisfied with the addition assessee carried the matter in appeal before ld. CIT(A) and reiterated its contention as raised before the Assessing Officer. Ld. first appellate authority has gone through the contentions of the assessee and reproduced them at pages 2 to 6 of the impugned order. After going through all these contentions ld. CIT(A) has culled out following material, facts and circumstances for adjudication of this issue : "1.The appellant has a branch in New York. 2.It is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT(A) while business activities have been conducted as one operation by the office of the assessee in India, can it said by merely taking a decision in one particular year and not bringing the deposit and the interest income into India the same would be allowed to escape the taxation under the Indian Income-tax Act. The ld. first appellate authority further observed that in the present context of globalization, information technology, use of computers and world banking operation, the claim of the assessee appears to be incorrect and accordingly ld. first appellate authority has upheld the order of the Assessing Officer. 6. The ld. counsel for the assessee while impugning the order of revenue authorities submitted that the RBI had introduced a foreign currency (non-resident) Account (Bank) Scheme (hereinafter referred as FCNR-B Scheme) in 1993. Under this scheme the assessee was permitted to raise deposits outside India from non-resident Indians and other overseas corporate bodies. Up to 4th December, 1995 the funds raised under the FCNR-B Scheme were required to be brought into India immediately as per the guidelines of the RBI. However, thereafter, these funds were permitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ches do not consist of balance which include monies borrowed locally and placed abroad as deposits. 8. On the strength of Hon ble Madras High Court s decision in the case of C.G. Krishnaswami Naidu v. CIT [1966] 62 ITR 686 ld. counsel for the assessee contended that in a money lending transaction the decisive factors would the place where the money is actually lent irrespective of where it came from. He pointed out that the interest income would accrue or arise at the place where it was lent. The ld. counsel for the assessee further submitted that for treating the interest income as accrued in India ld. Assessing Officer had taken the help of section 9. He submitted that this section provides for the circumstances in which income is deemed to accrue or arise in India. Section 9(1)( v )( c ) provides that the income by way of interest payable by a person who is non-resident shall be deemed to accrue or arise in India only where the interest is payable in respect of any debt incurred or monies borrowed and used for the purpose of business or profession carried on by such person in India. He emphasized that BTC is a non-resident. The interest payable by BTC is not in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deputed persons were under the control of Mumbai Branch had raised the funds for assessee and deposited them outside India but claimed interest expenses on such funds do indicate that there is a direct nexus between the funds which were otherwise meant for Indian Branch and deployed outside. He further invited our attention to section 9(1) of the Act and contended that assessee has been receiving interest as business income resulted by way of direct connection, thus the interest income is to be treated as accrued or arise to the assessee and liable to be taxed. Alternatively he submitted that only the net interest income is to be excluded and not the gross interest income. In this connection he invited our attention towards Rule 10 of Income-tax Rules, 1962 and submitted proportional division is possible. He further submitted that section 14A has been brought on the statute book with retrospective effect. If the interest income earned by the assessee cannot be included in the total income then expenditure incurred for earning such interest income is also to be disallowed to the assessee. The ld. D.R. further submitted that though the Assessing Officer has not made disallowance of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India : ( i )all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Explanation 1. For the purposes of this clause ( a )in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; ( b )in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export;" ** ** ** "( v ) income by way of interest payable by ( a )the Government; or ( b )a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is behalf in India during the previous year, i.e. received as income for the first time in India, but not that much, having been received as income outside India in an earlier year, is brought into India in the year of account ( ii ) on an income deemed by the statute to be received by him or on his behalf in India during the previous year ( iii ) on income accruing or arisen to him in India during the previous year ( iv ) on income deemed by the statute to accrue or arise to him during the previous year. 15. The next point emerges out from the facts of the present case is the place and the point of accrual of interest income to the assessee. The Hon ble Madras High Court in the case of C.G. Krishnaswami Naidu v. CIT [1966] 62 ITR 686 has held that in money lending transaction the decisive factor would be the place where the money is actually lent irrespective of where it came from. In that case the agreement to lent money was made in India though the actual lending took place in the State of Mysore. Thus according to the Hon ble High Court the interest income had arisen at the place where the money was actually lent. Similarly the Hon ble Rajasthan High Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside India. According to him it was distinct to the deposits the assessee made with BTC. If the assessee had not made deposits with BTC and kept this fund idle in that case also interest expenses were to be borne by the assessee. Thus according to the ld. counsel for the assessee merely by debiting interest expenses within India in the accounts it would not be considered that the funds had been transmitted in India constructively and thereafter they were deployed as deposits with the BTC. We find force in this contention of the ld. counsel for the assessee and reject the arguments of the ld. D. R. that a constructive transmission of funds should be accepted. 18. Though in the ground of appeal the assessee is only challenging the addition of interest income which is not arising within India but the controversy has another angle also. Ld. D.R at the time of hearing raised an argument that as to how interest expenses can be claimed against the exempted income. He emphasized on the point that assessee raised funds out of India. These are interest bearing funds and the interest expenses have been booked within India. If these interest bearing funds are deployed out of India for e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ably treated with regard to taxation than an enterprise carrying on the same activities in India. He emphasized that it is accepted in the international arena that discrimination with regard to taxes on business profits is prohibited in respect of the enterprises carrying on the same activities in either of the two States. He further submitted that no doubt Tribunal has taken a view in a number of cases that explanation added to section 90 of the Income-tax Act with retrospective effect providing charge of tax in respect of a foreign company at a rate higher than the rate at which the domestic company is chargeable, shall not be regarded as less favourable charge and a non-discriminative explanation. He pointed out that the Tribunal failed to take note of the aspects that an amendment to domestic law where a provision of the contrary exists in the treat has no effect without the treaty itself being amended. On the strength of ITAT decision rendered in the case of Siemens Aktiengesellschaft v. ITO [1987] 22 ITD 87 (Bom.) (SB) he contended that the provision of the treat had an overriding effect over the provisions of the Income-tax Act. According to the ld. counsel for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equally vis-a-vis resident taxpayers. In other words, in the event of allegation of discrimination on the basis of the rates of non-resident companies, the explanation clarifies the position. The explanation does lay out a new law it only clarifies the position as it stood earlier also. Moreover, section 90(2) only authorize the Central Government to make agreement with foreign countries in respect of assessability and computation of income and not about rates of taxes on the income so computed as it falls in the domain of the Annual Finance Act. The contention of ld. counsel for the assessee that unless the treaty is amended or any protocol thereto is being issued modifying the treaty, its provisions are required to be given more weightage are concerned, we are of the view that no doubt for honouring the international agreement one has to take care about all these aspects but the power of Parliament to make amendment in law is not assigned or compromised by virtue of the DTAA in force. The force of applicability of a treaty even the preferential treatment which is favourable to an assessee is by virtue of the provision in the Income-tax Act and if that source is being modified t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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