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TMI Blog2013 (12) TMI 718X X X X Extracts X X X X X X X X Extracts X X X X ..... curred overseas which are directly attributable to the Indian operations of your Appellants do not attract the restrictive provisions of Section 44C of the Act. Ground No.2 The learned CIT (Appeals) erred in confirming the decision of the learned Assessing Officer in not allowing interest of Rs.18,147,135 paid to the Income-tax Authorities to be set off against interest of Rs.110,469,871 received from the Income-tax Authorities during Assessment Year 1997-98. Ground No.3 The learned CIT (Appeals) erred in confirming the decision of the learned Assessing Officer in disallowing certain expenses incurred for your Appellants' business in India, having failed to appreciate that under Article 7(3) of the Indo-U.S. Tax Treaty, such expenses incurred for the purpose of your Appellants' business in India are deductible in computing taxable income. Ground No.4 The learned CIT (Appeals) erred in confirming the decision of the learned Assessing Officer in rejecting your Appellants' claim that 25% of the expenditure incurred on entertainment be attributed to staff members accompanying the clients and be, therefore, deleted. Ground No.5 The learned CIT (Appeals) erred in confirming the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered the relevant material on record. The ld. Sr. Counsel has pointed out that AO has disallowed the expenses incurred by the overseas branches by considering the fact that a similar issue came up in the assessment year 1996-97. The ld. Sr. Counsel has referred the assessment order and submitted that the Assessee explained before AO that the expenditure incurred by the overseas branches of the bank is actually expenditure incurred by assessee. In fact the expenditure has been duly audited by local accounting firms at these locations and certified that the expenditure is incurred by the NRI desks exclusive for the Indian Branch and, therefore, the said expenditure is not covered under the provisions of section 44C. The Assessee has given a report of CA regarding expenses incurred outside India. Therefore, there was no ambiguity in the nature of expenditure incurred by the overseas branch. He has further submitted that an identical issue has been considered and decided by this Tribunal in the case of the Assessee for the assessment year 1992- 93, 93-94 to 1996-97 vide order dated 27/04/2011 in ITA Nos.141/Bom/96, ITA Nos.1638/M/98, 2734/M/98, 5644/M/98 and 4903/M/99 . The ld. Sr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 44C and limitations provided therein are in applicable. However AO was of the opinion that provisions of section 44C apply to the assessee for the reason that relevant books of accounts, details of expenditure, as maintained by the overseas branches are not available for him for verify if the said expenditure is exclusively related to the business of the Indian branches of the assessee bank. After considering the above facts as well as legal position, the CIT(A) upheld the action of the AO. 14. Aggrieved with the above, the assessee is before the Tribunal. The ld. Counsel for the assessee argued that this is the case of expenditure of head office expenses, which are directly linked to the Indian branches and this is not a case of the double claim of the assessee once in the hands of the assessee and other in the hands of the Branches abroad. He further relied on jurisdictional High Court judgment in the case of Emeritus Commercial Bank Ltd. (262 ITR 55) as well as the Tribunal order in ITA No.2297/Mum/1996 in the case of British Bank of the Middle East and in ITA 4082/Mum/97 (Para 11) in the case of the Hond Kong and Shanghai Banking Corporation ltd. for the proposition th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e instant case, the expenses of Rs. 273.29 lakhs are undoubtedly falling within the definition of 'head office expenses' within the meaning of the clause (iv) of the Explanation to section 44C of the Act. There is no dispute in this regard. Nevertheless, the case of the assessee is that the said expenses are incurred wholly and exclusively for the business purposes of Indian Business of the Bank. However, the case of the revenue is that the said expenses are incurred also for other Bank branches in Asian Regions. But the Special Counsel for revenue did not have any evidence to support the argument. We have perused the decisions in the case of Emirate Commercial Bank(Supra), and the British Bank of Middle East(supra) and BSBC Ltd. (supra). We find that book entries are not very important for determining the correct assessed income of the assessee. The claim can be made through the 'Computation of Income' route. The provision of section 44C are inapplicable in a case of expenses incurred exclusively by the Bank branches abroad in respect of NRI Desks maintained by those branches. Therefore, we are of the considered opinion that the provision of section 44C is in applicable to this cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax authorities. The AO asked the assessee to explain why the said claim of interest of Rs.1,81,47,135/- paid to the Government may not be disallowed in view of the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills Ltd. vs. CIT (31 ITR 153) as well as the decision of Ferro Alloys Corporation Ltd. vs. CIT (196 ITR 406) and also decision of Hon'ble Supreme Court in the case of CIT vs. Parmeshwari Devi Sultania (230 ITR 745). In reply, the assessee made an alternative plea that the interest paid should be set off against interest received and only net amount should be brought to tax. The AO did not accept the contention of the assessee and disallowed the claim of the assessee regarding interest paid to the Government/Income tax authorities. The ld. Sr. Counsel has submitted that for the assessment year 1990-91 in ITA No.5240/Mum/1995 vide order dated 27/03/2008 (copy enclosed page 88 of paper book ) in assessee's own case, the Tribunal has allowed the claim of netting of interest. On the other hand the ld. DR has relied on orders of authorities below and submitted that the issue is covered by the decision of Hon'ble Jurisdictional High Court in the case of Aruna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court in the following words: - "It was not disputed, as it could not be, that if the assessee had taken a loan from another bank and paid interest thereon his real income would not diminish to the extent thereof. The only question then is : does it make any difference that he took the loan from the same bank in which he had placed the Fixed deposit. There is no difference in the eye of the law. The interest that the assessee received from the bank was income in his hands. It could stand diminished only if there was a provision in law which permits such diminution. There is none, and, therefore, the amount paid by the assessee as interest on the loan that he took from the bank did not reduce his income by way of interest on the fixed deposit placed by him in the bank." The learned counsel for the assessee sought to point out a distinction between Dr. V.P. Gopinathan's case (supra) and the present case by pointing out that if the assessee in the case before the Supreme Court had taken a loan from another bank on the strength of the fixed deposit placed by him in his bank and paid interest thereon then the decision of the Supreme Court would have been different. I am unable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , according to the Hon'ble High Court, have separate and independent legal consequences and that the receipt undoubtedly constituted income of the assessee and the claim to deduct or reduce the interest paid from the interest received should be examined independently. Thereafter the High Court went on to examine the contention based on the principle of netting and eventually rejected the same. Another argument based on the contention that both commercially and technically the payment of interest by the Government and the payment of interest by the assessee stand on the same footing was also rejected. In fact, this is a branch of the argument based on the rule of netting. It was observed by the Court that the provision for payment of interest in the Act is not as compensation for use of the money belonging to the creditor which a debtor has, but the payment is for an entirely different consideration, namely, that there was a default in complying with the statutory obligation to make advance payment of tax. The High Court observed that though the interest cannot be strictly called a penalty, it was in the nature of penalty because it was for a default and also because a higher rate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income tax department. The interest payment cannot also be allowed as a deduction from the interest received. I thus agree with the decision of the learned Judicial Member in respect of Ground No. 4 taken by the department." 3.3 It is clear that in the case of DCIT vs. Sandvik Asia, the issue has been decided against the assessee by following the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills (supra), whereas for the assessment year 1990-91 the Tribunal has followed the decision in the case of Delhi Bench of this Tribunal in the case of K.N. Agarwal without considering the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills Ltd. (supra). In the Third Member decision in the case of DCIT vs. Sandvik Asia the order of the Delhi Bench in case of R.N. Agarwal has been distinguished in view of the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills Ltd. (supra). Therefore, we are of the view that this issue is covered against the assessee by the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills Ltd.(supra), as well as by the Third Member decision of this Tribunal in the case of DCIT vs. Sandvik A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49). Whereas the decision in case of Mashreqbank PSC is no longer a good law in view of the decision of Special Bench of the Tribunal in the case of Sumitomo Mitsui Banking Corporation & Ors. vs. DDIT (136 ITD 66) . The ld. Sr. Counsel has also referred to Article 7(3) of Indo US-DTAA as well as the technical explanation of Indo US Treaty and protocol and submitted that as general rule the expenses which are incurred for the purpose of business of PE shall be allowed as deduction and the restriction provided under second part of Article 7(3) is only in respect to the allocable expenses which fall under the provisions of Section 44C of the Act. Thus the ld. Sr. Counsel submitted that as far as the expenditure incurred exclusively for the business of the PE the same shall be allowed as deduction without any restriction and only the allocable expenses in respect of general expenses, research and development expenses and other expenses incurred for the purpose of enterprise as a whole the provisions of local law and limitations provided under local law of the State of PE are applicable. On the other hand the ld. DR has submitted that the issue has been considered by this Tribunal in As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The decision in the case of Mashrreqbank PSC (supra) proceeded to hold that even in the absence of such a provision in the treaty, the restrictions contained in the domestic law would apply, as otherwise, the non-resident having PE in India would get a preferential treatment compared to a resident carrying on same business in India. 34. The technical explanation of the Indo-US treaty and protocol which serves as an office guide and reflects the policies behind particular convention provisions with respect of the application and interpretation of the treaty, in pages 31.043, 31.044, 31.085 and 31.099-10 provides as follows: Pages 31.043-44: "Paragraph 3 provides that in determining the business profits of a permanent establishment, deductions shall be allowed for expenses incurred for the purpose of the permanent establishment. Deductions are to be allowed regardless of where the expenses are incurred. The paragraph specifies that a deduction is to be allowed for a reasonable allocation of expenses for research and development, interest, executive and general administrative expenses and other expenses incurred for the purposes of the enterprise as a whole (or part thereof which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is nothing in the technical explanation to show that the restrictions in the local law for allowing certain expenses will not apply while determining profits attributable to the PE. As stated in the technical explanation, under the US Model all expenses are to be allowed without any limitation whether incurred in the source country or head office. There is a departure from the US model by virtue of Article 7(3) of the Indo-US treaty. There is nothing to show that this departure is only with reference to the head office expenses. The fact that in the technical explanation there is a reference to only head office expenses does not mean that expenses incurred in the source country have to be allowed without any limitation under the local law of the source country. By implication expenses incurred by the PE in India, have to be allowed subject to the limitations in the domestic law i.e., the Act. In such circumstances, we are of the view that the ratio laid down by the ITAT Mumbai in the case of Bank Indosuez (supra) can no longer be followed in view of the later decisions referred to above. The above aspects were not brought to the notice of the bench when it decided the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taining the clients and accordingly allowable to that extent. 6. Ground No.6 is regarding disallowance in respect of expenditure on rent, repairs and depreciation for the use of Guest House under section 37(iv) of the Income tax Act. 6.1 We have heard the ld. Sr. Counsel for the assessee as well as the ld. DR and have considered the relevant material on record. Though this issue has been decided by the Tribunal in assessee's own case for the assessment years 1992-93 to 1996-97 however, the ld. Sr. Counsel has fairly conceded that now this issue is covered against the assessee by the decision of the Hon'ble Supreme Court in the case of Britannia Industries Ltd. (278 ITR 546) . In view of the fact that the issue is now settled by the Hon'ble Supreme Court in the case of Britannia Industries (supra), the claim of expenditure on rent, repair/depreciation on Guest House is not allowable. Accordingly following the decision of the Hon'ble Supreme Court in case of Britannia Industries supra, we decide this issue against the assessee. 7. Ground No.7 and 8 are regarding disallowance in respect of amount paid to RBI for shortfall in maintenance of Cash Reserve Ratio (CRR) and Statutory Liq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeal by Revenue Assessment Year 1997-98 : 8.1 The revenue for the assessment year 1997-98 raised the following grounds:- "1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting addition of Rs.9,63,803/- made on account of membership fee paid to club. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting addition of Rs.9,18,78,860/- made on account of interest paid to its Singapore Branch. 3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting addition of Rs.19,35,716/- made on account of estimated expenditure incurred on earning interest on the interest free bonds. 4. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting addition of Rs.9,27,131/- made on account of deduction claimed u/s. 36(1)(viia) and section.44C of the Income tax act, 1961. 5. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting the interest charged u/s. 234B of the Income tax Act, 1961." 8.2 Ground No.1 is regarding club membership fee. The AO has disallowed a sum of Rs.9, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of claim being interest paid to Singapore branch as well as taxability of the said interest income of the assessee. 9.1 The India branch of assessee's bank has borrowed funds from Head office/overseas branches on which the assessee paid interest to the tune of Rs.9,18,78,860/- to its Singapore branch and claimed the same as deduction in computation of income. The AO has disallowed the claim of interest on the ground that interest payment to Singapore branch constitutes payment to self. The assessee challenged the disallowance made by AO before the CIT(A). Ld. CIT(A) though accepted the claim of the assessee being interest expenditure paid to overseas branch in view of Article 7(3) of DTAA between India and Singapore however, the ld. CIT(A) has held that the said interest income in the hand of assessee's overseas bank has arisen and accrued in India and therefore, taxable u/s. 9 of the Income tax Act as well as Article 11(2) of DTAA. 9.2 We have heard the ld. Sr. Counsel as well as the ld. DR and considered the relevant material on record. The ld. Sr. Counsel has pointed out that the issue of deductibility and taxability of interest paid to the overseas branch is covered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the PE in India is part of that entity which is a taxable entity in India even in respect of income attributable to the PE in India. There is thus only one person assessable to tax i.e. GE and PE is not an independent person who is assessed to tax separately in India. It is a part of the GE and its income is chargeable to tax in the hands of GE which alone is the person assessable to tax in India. 57. In the case of Sir Kikabhai Premchand (supra) it was held by the Hon'ble Supreme Court that under the Income-tax Act, all that the State can tax is income, profits and gains in the relevant accounting year. It was held that it is well recognized that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. In the case before the Hon'ble Supreme Court, the business was owned and run by the assessee himself and it was held in these facts and circumstances by the Hon'ble Supreme Court that it was wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of fictional sale introduce a fictional profit which in truth and in fact was non-exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to its head office in London within the meaning of section 9(1) of the Income-tax Act, 1961. Their lordships answered the said question in the negative and in favour of the assessee holding that when the transaction between the London head office of the assessee and its unit in India was a transaction as between principal and principal, it cannot be held that any income arose in favour of the assessee either directly or indirectly since the gain in London office was offset by the loss incurred in the Indian branch. It was held that in law there cannot be a valid transaction of sale between the branch office of the assessee in India and its head office in London. It was held that it is a elementary proposition that no person can enter into a contract with oneself and debiting or crediting one's account cannot alter this legal position. It was held that if one unit of a business does not debit any commission to another unit of the same business then it is difficult to follow how any saving has been effected by the business". 9.3 The Special Bench has held that the interest paid to the overseas branch head office is an allowable deduction by virtue of provisions of DTAA and at the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years. He has further submitted that when no expenditure has been incurred by the assessee then the question of disallowance does not arise even under section 14A. The ld. Counsel has further contented that the issue is also covered by the decision of this Tribunal in case of British Bank of Middle East Vs JCIT (4 SOT 122)(Mum.) He has further submitted that section 14A is not applicable in case of the assessee because bonds in question are held as stock in trade and this fact has been recorded by CIT(A). He has relied upon the following decisions:- i) CIT vs. Indian bank Ltd. (56 ITR 77)(SC); ii) CCI Ltd. vs. JCIT (250 CTR 291)(Kar.) and iii) State Bank of Mauritius for assessment year 2008-09 in ITA No.5778/Mum/2011 order dated 7/12/12 10.3 Thus, the ld. Sr. Counsel summarized his contention under three propositions viz. i) The bonds are held as trading assets as stock-in-trade. Therefore, Section 14A is not applicable. ii) The gain on transfer/sale of bond is assessable as business income. Therefore, in view of decision of the Hon'ble Supreme Court in the case of Indian Bank (supra), no disallowance can be made on tax free interest received by the assessee. iii) The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r composite or indivisible activity in which taxable and non-taxable income is received has to be examined in the light of the provisions of Section 14A. Though the ld. Sr. Counsel has relied upon the decision of Hon'ble Karnataka High Court in the case of CCI Ltd. vs. JCIT (250 CTR 291) as well as the decision dated 07/12/2012 of the Tribunal in the case of State Bank of Mauritius for assessment year 2008-09 in ITA No.5778/Mum/2011. However, AO has not examined the issue by considering the expenditure which is incurred for the composite/indivisible activities in which taxable/non-taxable income is received. Therefore, in the facts and circumstances of the case we set aside this issue to the record of AO to reconsider and decide the same as per law only in respect of such expenditure which is common and indivisible in respect of taxable and non taxable income. 11. Ground No.4 of the Revenue appeal is regarding computation of deduction u/s.36(1)(viia) and section 44C. The Assessee has computed deduction u/s. 36(1)(viia) at 5% of the adjusted total income before claiming deductions u/s. 36(1)(viia) and u/s.44C. Thereafter the Assessee computed deduction u/s. 44C. Thus the Assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poses of this section,-- (i) "adjusted total income " means the total income computed in accordance with the provisions of this Act, without giving effect to the allowance referred to in this section or in sub- section (2) of section 32 or the deduction referred to in section 32A or section 33 or section 33A or the first proviso to clause (ix) of sub-section (1) of section 36 or any loss carried forward under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) or sub-section (3) of section 74 or sub- section (3) of section 74A or the deductions under Chapter VIA" 11.4 Thus the adjusted total income for the purpose of Section 44C means total income computed in accordance with the provisions of the Act and interalia after giving effect to the deduction u/s. 36(1)(viia). The conjoined reading of section 36(1)(viia) as well as section 44C makes it clear that for computation of deduction u/s. 36(1)(viia) the deduction u/s. 44C has to be given effect and similarly for deduction u/s. 44C, deduction u/s. 36(1)(viia) has to be given effect. Hence, principally we do not find any error in the view of AO. Accordingly we set aside the order of CIT(A) qua this iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by considering actual expenditure or 5% of adjusted total income. The ld. Sr. Counsel has relied upon the decision of this Tribunal in the case of British Bank of Middle East vs. JCIT (4 SOT 122)(Mum). On the other hand the ld. DR has relied upon the orders of authorities below. 14.2 We have considered the rival submissions as well as relevant material on record. The assessee has claimed to have filed a certificate from the head office auditors confirming head office administrative expenses of Rs.26,07,93,141/- against which assessee has claimed 5% of the adjusted total income amounting to Rs.17,67,21,879/-. Since the assessee has debited the head office administrative expenses in the P&L Account at Rs.15,10,18,863/-, therefore, the AO restricted the deduction only to the extent of the amount which was debited to the P&L Account. Thus, it is clear that the AO has not examined the certificate from the head office auditors regarding the actual expenditure incurred in respect of head office administrative expenses. The CIT(A) has also not examined this issue by taking into account the certificate from the head office showing actual expenses incurred. Accordingly, in the facts and ci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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