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Mashreq Bank psc Versus The Joint Director of Income-tax (International Taxation) -3 (1) , Mumbai

2015 (7) TMI 39 - ITAT MUMBAI

Restricting the deduction for Head Office Expenses (HOE) - DTAA with U.A.E. - AO denied the treaty benefit to the assessee for the reason that it had not paid tax in UAE - Held that:- Firstly,in the assessment year involved, limitation clause of applicability of incometax Act will not apply in Article 7(3) and consequently provisions of sections 44C will not be applicable; secondly, the amendment brought by way of Protocol by which article 7(3) has been amended and limitation clause has been bro .....

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mendment to the treaty but same is applicable w.e.f. 01.04.2008. Therefore,considering the facts of the case and the decisions delivered in Sumitomo Mitsui Banking Corporation [2012 (4) TMI 80 - ITAT MUMBAI], Abu Dhabi Commercial Bank [2012 (7) TMI 703 - ITAT MUMBAI ] and Dalma Energy LLC (2012 (5) TMI 10 - ITAT, Ahmedabad ) we are deciding ground no.1 in favour of the assessee.

Disallowance of loss on foreign exchange contract which were un-matured on the last date of the previous ye .....

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s not brought into account as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is lower, and it is now generally accepted as an established rule of commercial practice and accountancy". No doubt these observations were made in the context of valuation of stock but what is material is the theory underlying the principle of valuing closing stock at cos .....

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proper to direct the Assessing to delete the impugned disallowance. The assessee gets the relief accordingly. - Decided in favour of assessee.

Restricting the exemption in respect of interest on tax free bonds - Held that:- The gross amount of interest payable to the assessee would qualify for exemption under subsections (c) (f) and (h) of section 10(15)(iv). The facts beingsame,respectfully following the predecessor we decide this ground in favour of the assessee.

Arrange .....

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requiring the assessee to make deduction of tax at source before remitting or crediting the amount to the accounts of sub-arrangers, cannot apply. If no deduction of tax at source is required, obviously the provisions of section 40(a)(i) do not come into play. Once it is held that the said commission/brokerage is not chargeable to tax in the hands of non-resident sub-arrangers under the provisions of the Act, there remains no need to examine the taxability or otherwise of this amount in their ha .....

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Revenue : Shri Vivek A. Perampurna Order u/s.254(1)of the Income-tax Act,1961(Act) Per Bench Challenging the orders of CIT(A)-XXXIII Mumbai,the Assessee and the Assessing Officer(AO) have raised various grounds of appeal for the above mentioned Assessment Years(AY.s.): ITA No.4050/Mum/2004-AY.1998-99: 1. The Commissioner of Incometax (Appeals)XXXIII, Mumbai [CIT(A)] erred in confirming the action of the Assessing Officer [AO] of restricting the deduction for head office expenses by applying the .....

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ocable to the permanent establishment, including its share of executive and general administrative expenses. As the treaty overrides the domestic law, the amount allocated by the Head Office should be allowed as a deduction in full. The appellants pray that the AO be directed to allow the entire amount of Head Office expenses. 2. The CIT(A) erred in upholding the AO's action of not allowing the appellants claim that the tax rate applicable to its business income is 35% and not 48% being the .....

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n Exchange Contracts which were unmatured on the last day of the previous year. The appellants submit as under:( i) The forward contracts are entered into in the normal course of banking operations and are not on capital account. (ii) These contracts are generally for a period of less than one year and therefore very short term in nature. Any adjustment would result in the amount having to be allowed in the subsequent year. In short there is no revenue gain or loss by following this method. (iii .....

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ts pray that the AO be directed to allow loss on revaluation of Forward Foreign Exchange Contracts of ₹ 1,54,64,006. b) Without prejudice the appellants submit that the AO be directed to allow the same in the year in which the contracts mature. 4. The CIT(A) erred in upholding the AO's action of restricting the exemption in respect of interest on taxfree bonds to ₹ 3,17,117. The appellants submit that the entire interest on taxfree bonds of ₹ 27,81,617 is exempt under secti .....

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essment year 199899. 6. Without prejudice to the appellants contention that broken period interest is allowable in the year of purchase, the CIT(A) ought to have directed the AO to allow a deduction for the broken period interest disallowed by him in the earlier years in respect of securities sold during the previous year relevant to assessment year 199899. The appellants crave leave to add to, amend, alter, vary, omit or substitute the aforesaid grounds of appeal or add a new ground or grounds .....

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claim that the entire amount of ₹ 1,53,42,210 allocated to the Indian branches should be allowed as a deduction as per the provisions of Article 7(3) of the DTAA between the Government of UA.E. and the Government of India. 2. The CIT(A) ought to have held that in case the higher authorities reverse the decision of the CIT(A) in the assessment year 19992000 of allowing the deduction for payment made on account of Voluntary Retirement Scheme(VRS) in the year of payment, the AO be directed to .....

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before or at the time of hearing of the appeal as they may be advised. ITA No. 4493/Mum/2005,AY-2001-02 "On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in directing the AO to compute the commission income in the hands of the appellant bank received in India under Article 7(1) of the India UAE Treaty and allow the expenditure as claimed by the appellant". "On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in treating the .....

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ome on 30.11.1998 declaring loss of ₹ 5.62 Crores. Lateron it filed a revised return on 05.08.1999 reducing the loss to ₹ 72.82 Lakhs.The AO finalised the assessment u/s. 143(3) of the Act on 19.01.2001 determining the income of the assessee at ₹ 6,05,32,220/-. 2.1.First ground of appeal is about restricting the deduction for Head Office Expenses (HOE). During the assessment proceedings, the AO found that the assessee had made a claim of ₹ 4.63 Crores under the head HOE. .....

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ted or elsewhere. However, the AO held that provisions of section 44C of the Act were applicable in the case under consideration and allowed 5% of the HOE, amounting to ₹ 31.85 Lakhs. 2.2.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). Following the orders of his predecessor for AY.s. 1995-96 to 1997-98, the FAA dismissed the appeal filed by the assessee. 2.3.Before us,the AR stated that the order for the earlier years stand re .....

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has been discussed as under: 13.The case of Mashreqbank Psc (supra), which has been relied upon heavily by the department, first of all, was rendered prior to the amendment brought by the Protocol. However in this case it has been interpreted that Article 25(1) of IndoUAE Treaty should be read in Article 7(3) for applicability of domestic law. After detail analysis and discussion, the relevant observations given in the said decision are as under : 21. In view of the above discussions, and parti .....

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decline to interfere in the matter. This view of Mashreqbank psc (supra), stands impliedly overruled by the latest decision of ITAT Special Bench in the case of M/s Sumitomo Mitsui Banking Corp.(supra), wherein while interpreting a similar provision of Article 23(1) of IndoJapan DTAA, which is material to Article 25(1) of IndoUAE Treaty, has observed and held as under : 60. First we shall deal with the arguments of Shri Girish Dave based on the relevant provisions of the Indo-Japanese treaty. H .....

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a. Before we consider this argument of Shri Girish Dave in the light of the relevant provisions of the article 7 and 11 of the Indo-Japanese treaty, it is pertinent to discuss certain basic aspects of the matter which are relevant in this context. 61. Section 90(2) of the Income-tax Act, 1961 provides that where the Central Government has entered into an agreement with the Government of any country outside India or specific territory outside India, as the case may be, section (1) for granting re .....

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ly to the extent they are more beneficial to him. It, therefore, follows that if the provisions of the domestic law are more beneficial to the assessee than the provisions of the relevant tax treaty, the provisions of the domestic law shall override and prevail over the provisions of the treaty. Article 23 of the Indo- Japanese treaty therefore cannot be interpreted in a way as sought by Shri Girish Dave because if such interpretation is assigned to article 23 and the interest income which is ot .....

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to the assessee which is contrary to the domestic law, then the provisions of treaty can be relied upon which shall override and prevail over the provisions of the domestic law to give any benefit expressly given to the assessee under the treaty. The decision of Hon ble Supreme Court in the case of Azadi Bachao Andolan (supra) fully supports this view. 13.1 The view taken by the Special Bench in a way negates the view of Mashreq Banks case. If such an interpretation of Article 25(1) is to be giv .....

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ed in the following manner : 14. To conclude the legal aspect of this issue, we have already reproduced Article 7 (in para 12.1 above) and on careful perusal, we have noted that in determining the profits of a PE the expenses which are incurred for the purposes of the business of the said PE, including general administrative expenses is to be allowed. At this stage of argument, we have categorically raised a question that if executive and general administrative expenses of a PE is to be allowed .....

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cle 7 (Business Profits) has been replaced by the following :- 3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the tax laws of that St .....

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ons of law, it was decided to incorporate that, for the purposes of determining the profits of a permanent establishment, there shall be allowed deduction of expenses incurred for the purposes of the business of the permanent establishment including general administrative expenses but in accordance with the provisions and also subject to the limitations of the tax laws of that State. Therefore, by this amendment in the Article the applicability of provision of section 44C has been enforced, neve .....

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; thirdly, the judgment of Mashreqbank psc (supra), is no longer relevant in view of the decision of the Special Bench in the case of M/s Sumitomo Mitsui Banking Corp.(supra).and Lastly, from the above conclusions, it is held that computation of income and disallowance of expenses relating to head office cannot be made by invoking the provisions of Section 44C of IT Act. Thus, in view of the above conclusions, we hold that income of the PE of the assessee should be computed as business income af .....

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of ₹ 1.54 Crores,being the loss on foreign exchange contract which were un-matured on the last date of the previous year.During the assessment proceedings, the AO found that the assessee had booked loss of ₹ 1.54 Crores on forward foreign exchange contract. Discussing the salient features of the forward contract,he held that in forward contracts the liability would arise only on the date contract would mature, that before it the liability was contingent in nature, that the loss claim .....

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A/2154/Mum/2001 dated 23.08.2007),the Tribunal had decided the issue in favour of the assessee.He referred to the cases of Bank of Bahrain and Kuwait(132 TTJ 505) & Credit Lyonnais(AY.1998-99 to 2000-01).DR relied upon the order of the FAA.We find that while deciding the appeal,filed by the assessee for the AY 1997-98,the Tribunal has held as under: 12. In ground no. 5, the assessee has raised the following grievance: "The CIT(A) erred in confirming the action of the ACIT of disallowing .....

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he forward exchange rate notified by the Foreign Exchange Dealers Association of India as required by RBI. The forward contracts are normally for a short period. In view of the above submission any loss on revaluation would be properly allowable as a deduction in arriving at the business income. Moreover, such contracts are entered into the ordinary course of business on a day to day basis and the revaluation profit/loss' represents the banks business income/loss. The bank has been consisten .....

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proceeding, the Assessing Officer noticed that the assessee had booked a loss on forward exchange contracts which were unmatured as on the balance sheet datdtate. The loss to claimed as a deduction was ₹ 10,14,045. The loss so computed is by this method. The assessee bank, like many other banking institutions, enters into an forward agreements to buy or sell foreign currencies at a, certain price on a specified date. The unmatured contracts as on the balance sheet dates are the contracts .....

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tion by the assessee, The deduction was declined by the Assessing Officer on the ground that it is a contingent loss which depends on how the markets will move on a future date; the actual loss or profit will depend on the prevailing market price as on the date when tile contact is to mature e.g. on 10th May 1997 in this case, Reliance was also placed upon the Hon'ble High Court judgment in the case of CIT Vs Motor Industries Co. Ltd (229 ITR137). The, Assessing Officer concluded that a loss .....

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om business income. Aggrieved, assessee carried the matter in appeal before the CIT(A), but without any success. The assessee is not satisfied and is in appeal before us. 14.We have heard the rival contentions, perused the material on record and duly considered the factual matrix of the case as also the applicable legal position. 15 .. We have take note of the fact that the Assessing Officer has primarily contended that when anticipated profits on unmatured contracts are held to be non taxable, .....

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provided [or in the computation of income but it does not permit anticipated profits to be taken into account till the proms actually arise. That is the underlying reasons' that in the case of unsold stock, When market rate is higher than the purchase price, the market price is ignored in computation of value of stock, and, as a' result, anticipated profit on sale of such stock is ignored. However, when the market price of stock is lower than the purchase price, the market price is take .....

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s is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is lower, and it is now generally accepted as an established rule of commercial practice and accountancy". No doubt these observations were made in the context of valuation of stock but what is material is the theory underlying the principle of valuing closing stock at cost or market price whichever is lower and the fact that such a theory has tile acceptance of the Hon'ble Supre .....

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. 16. Ground No.5 is thus allowed. Respectfully,following the above we are deciding the ground no.3 in favour of the assessee. 4.Last ground of appeal is about restricting the exemption in respect of interest on tax free bonds. During the assessment proceedings, the AO found that the assessee had received interest of ₹ 27.81 Lakhs on tax free securities, that it claimed that entire interest was exempt u/s 10(15)(iv)(a) of the Act. The AO asked the assessee to explain as to why the income d .....

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sions of section 14A of the Act, that more than 90% of the funds were borrowed by the assessee, that the stand taken by it about investing the money in tax free bonds out of its own funds was not justified.Finally, the FAA upheld the order of the AO. 4.2.Before us,the AR stated that in the preceding AY.identical issue was decided in its favour by the FAA,that while deciding the appeal filed by the Department for that AY. (ITA/1628/ Mum/ 2001 dated 20th May 2004),the Tribunal had decided the issu .....

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n the case of State Bank of India v. Jt. CIT being ITA No. 1292 & 1293/Mum/2001 dated 6.6.2002. In this case, the Tribunal has held that the gross amount of interest payable to the assessee would qualify for exemption under subsections (c) (f) and (h) of section 10(15)(iv). The facts beingsame,respectfully following the predecessor we decide this ground in favour of the assessee. Respectfully, following the above order, we decide ground no. 4 in favour of the assessee. ITA No. 4793/Mum/2005, .....

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n Millennium Deposit Scheme (IMDS),amounting to ₹ 8.20 Crores.During the assessment proceedings,the AO found that the assessee had earned commission from SBI for mobilising IMDS,that State Bank of India (SBI)had launched IMDS in all countries where the local regulatory allowed them to implement the programme,that the acceptance of IMDS commenced on 21.10.2000 with the earlier closing dated 31.10.2000 and final closing date of 20.11.2000, that IMDS was a five year bank deposit product of SB .....

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nches of Abu Dhabi & Dubai.The AO held that the commission income was arising on account of the agreement between the assessee and SBI/SBI Caps, that the assessee-company was incorporated in UAE, that it was not entitled for treaty benefit in terms of Article 4 of the Treaty, that the assessee was not resident of UAE and was not liable to pay tax.Finally, he held that commission income was taxable in India in the assessee s hands. 7.1.After considering the submission of assessee and the asse .....

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t of the PE it would be allowed expenses incurred by it for carrying out its business, that the contention of the assessee that expenses incurred for procurement of deposits was an allowable item had to be endorsed, that out of the total commission receipt major portion i.e. ₹ 8.17 Crores had been passed on to the depositors namely Lheldsley Consultants Ltd., Caliban Enterprises Ltd. And Reflections Consultancy Ltd., that all the three Consultancy were independent legal entities, that they .....

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e us,the AR contended that similar issue was decided in favour of the assessee in the cases of Abu Dhabi Commercial Bank(ITA/7560/Mum/2004-AY-2001-02 dated 10.07.13) and Credit Lyonnias(ITA/9596/Mum/2004 & ITA/214/Mum/2005 dated 22.05.13).DR supported the order of the FAA. 7.3.We have heard the rival submission and perused the material before us. We find that in case of ABU Dbhai Com. Bank Ltd. (Supra) the matter has been dealt as under: 2.First Ground of appeal pertains to deletion of addit .....

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s ing deposits from the eligible depositors for the IMD programme,that the assessee was entitled to appoint some arrangers under the advice to the SBI CAP, that assessee had received fees amounting to ₹ 5.28 Crores on account of commission as collecting bank and ₹ 31.72 Crores as commission on account of arrangers fees,that assessee had remitted a sum of ₹ 31.72 Crores to its Head Office.AO made an enquiry about payment of ₹ 31.72 Crores.After considering the submissions .....

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sessee did not represent the business income of the overseas branches, that the sum under consideration represented the income of the bank, that income had arisen in India, that the Indian branch was taxable under the provisions of Article 5 and 7 of Double Taxation Avoidance Agreement(DTAA),that the assessee was required to deduct tax at source on these payments as envisaged by the provisions of section 40(a)(i) of the Act.Finally,he disallowed the claim of the assessee amounting to ₹ 37. .....

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aid to Fardan Trading Est for procuring the deposits, that Fardan Trading Est was an Indian entity incorporated for Abu Dhabi,that assessee bank had no shareholding in Fardan Trading Est,that ₹ 25.78 lacs were paid to certain customers from whom deposits were procured by Head Office/overseas branches, that certain other expenses on account of staff cost had been incurred by the H.O.,that the expenditure incurred by the H.O. was reasonable, that no income was left out of ₹ 31.72 Crore .....

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Finally,he directed the AO to delete the addition. 2.2.Before us,Departmental Representative (DR) relied upon the orders of the AO.Authorised Representative(AR) submitted that similar issue had arisen in the case of M/s Credit Lyonnais for AY 200102, that the issue was decided by the Tribunal in favour of the assessee while deciding the ITA No. 9596/Mum/2004 and ITA No. 214/Mum/2005. He referred paragraph nos. 9 to 21 of the order dated 22.05.2013 of M/s Credit Lyonnais. 2.3.We have heard the r .....

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sessee to the nonresidents sub-arrangers is not a fees for managerial or technical or consultancy services. Hence, the same cannot be brought within the ambit of fees for technical services as per section 9(1)(vii) of the Act. If this payment is not fees for technical services but only commission, the provisions of section 195 requiring the assessee to make deduction of tax at source before remitting or crediting the amount to the accounts of sub-arrangers, cannot apply. If no deduction of tax a .....

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