TMI Blog2017 (7) TMI 860X X X X Extracts X X X X X X X X Extracts X X X X ..... PE to its head office after ascertaining the correct fact, was set aside by the Tribunal for fresh adjudication. The prescribed time limit for such compliance thus has been rightly held by the ld. CIT (Appeals) to be computed under the provisions of section 153(3) of the Act. Whether interest paid by the branch office to head officer is tax deductible? - deduction under section 40(a)(i) read with section 195 - Held that:- We fully concur with the finding of the authorities below that submission of the assessee is based on the nature of transaction between BO and NHB, whereas according to section 10(15)(iv)(fa), the nature of transaction on which interest is paid to non-resident should be in the nature of deposit in foreign currency. So far as the second precondition of the section that such deposit should be approved by RBI is concerned, the directive of the RBI in the present case says that BO should make payment to NHB, and therefore, such directive is with reference to transaction between the BO and NHB only. Undisputedly, RBI has not given any direction regarding source from which the BO can raise funds. We thus fully concur with the finding of the authorities below that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xome Tax Act, 1961 (the Act). 2. Under the second proviso to section 153(2A) of the Act, matters set aside by the Tribunal under section 254 of the Act, for fresh adjudication must be finalized within a period of 9 months from the date on which the order is received by the Chief Commissioner/Commissioner. The order was passed by the Tribunal on 18.8.2006 and the order reframing the assessment was made on 3.12.2010, much after the limitation period statutorily prescribed, hence it is time barred. Hence, assessment is made beyond the statutory limitation period, it is time barred and hence null and void in the eyes of law. 3. The ld. CIT (Appeals) has also erred in interpreting the limitation period of 9 months provided in the second proviso to section 153(2A) as being restricted only to cases when the entire assessment is set aside by the Tribunal under section 254 of the Act. 4. The ld. CIT (Appeals) has erred in law and on facts by disallowing the deduction of interest of ₹ 24,86,73,000/- paid by thje Indian branch to its Head Office for its Indian business, as this interest is fully allowable under the exception clause to Article 7(7) of the India-UK Doubl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeals) deleted most of the additions. Both the parties went in appeals before the Tribunal and the Tribunal vide its order dated 18.08.2006 upheld most of the deletions made by the ld. CIT (Appeals), but set aside the issue regarding the allowability of interest paid by the Indian PE to its head office amounting to ₹ 24,86,73,000/- for adjudication after ascertaining the correct facts. While giving appeal effect under section 250/254 the Assessing Officer disallowed interest paid by the branch office (PE) in India to its head office. The assessee again went in first appeal against the said disallowance of interest, but could not succeed. The assessee also could not succeed on other issues i.e. time limitation for giving appeal effect, interest charged under section 244A and 220(2) of the Act, hence present appeal has been preferred by the assessee. 5. Ground Nos. 1, 2 and 3 : In these grounds the claim of the assessee is that the assessment order dated 3.12.2010 is barred by time limit. 5.1 In support of the above grounds, the ld. AR contended that the assessment order dated 3.12.2010 has been passed much after nine months prescribed time limit by the second proviso t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appellate authority, then limitation as laid down under section 153(2A) would apply. However, where appellate authority has given certain finding and consequent direction to the Assessing Officer to make assessment in accordance therewith, then limitation laid down under section 153(3)(ii) would apply and not one given under section 153(2A) of the Act. Thus, the issue raised in the grounds before us is as to whether the order dated 3.12.2010 passed by the Assessing Officer in compliance of the order dated 18.08.2006 of the Tribunal can be treated as fresh assessment order or a particular aspect of the assessment order. In other words, vide order dated 18.08.2006 had the Tribunal set aside the entire assessment order or had it remanded the matter back to the Assessing Officer for disposal of a particular aspect. 5.4 When we go through the order of the Tribunal in view of the above ratio laid down by the cited decisions, we find that the Tribunal vide order dated 18.08.2006 had not set aside the entire assessment order in question before it, instead one of the issues regarding allowability of interest paid by the Indian PE to its head office amounting to ₹ 24,86,73,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the affairs of the banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or c) to secure the proper management of any banking company generally; The RBI may from time to time issue such directions as it deems fit, and the banking companies or the banking company as the case maybe, shall be bound to comply with such directions. e) It is mandatory for a banking company operating in India to comply with a Directive issued by the RBI under sec. 35A of the Banking Regulation Act, 1949. Accordingly the Assessee bank fully complied with the RBI Directive issued under section 35A of the banking Regulation Act, 1949 and paid the disputed sum to NHB. f) Pursuant to a Directive issued by Reserve Bank of India on 7.10.1992 under sec.35A of the Banking Regulation Act, 1949, the assessee Grindlays Bank deposited a sum of ₹ 506,54,54,878/- on 4.11.1992 with National Housing Bank. g) To make the aforesaid payment, the Indian PE borrowed funds from its Head Office. In accordance with the directions of the Reserve Bank of India. The Assessee Bank- Indian PE paid interest at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal followed the judgement of the Third Member Order in the case of ABN AMRO Bank which is reported in 97 ITD 87 which held that interest paid by a PE to its head office was not an allowable expense as it was payment to self. m) Thereafter the Third Member Judgement of ABN AMRO Bank was reversed and over-ruled by the Kolkotta High Court in ABN Amro v. CIT this judgment is reported in 343 ITR 81. The Kolkatta High Court held that interest payment to be fully allowable as deduction. The court also held that such payment did not attract any with-holding tax as it was payment to self and therefore there was no obligation under Sec. 195 of the Act. Hence the case law relied upon by the Ld. AO is no longer good law as it stand over-ruled by the judgement of the Kolkota High court. High Court in the case of ABN Amro Bank reported in 343 ITR 81. n) Thereafter this entire issue was again thoroughly reexamined by a 5 Member Special Bench of the Tribunal in the case of Sumitomo Banking Corporation Vs. DDIT (2012) 16 ITR (AT) 116 (Mum.). After examining the entire conspectus of law, the Special Bench ruled that interest payments made by the PE in India to the head office for borrowings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollows:- (i) ABN Amro Bank Vs. DDIT reported in 343 ITR 81 (Kolkatta HC) (ii) Sumitomo Banking Corporation Vs. DDIT [2012] 16 ITR (Tribunal) 116 (Mum) [5 judges Special Bench Tribunal]. iii) BNP PARIBAS SA V/S D.D.I.T [150 TTJ 395(MUM)] iv) D.D.I.T V/S Mizuho Corporate Bank Ltd. (54 SOT117) (MUM) v) Shinhan bank v/s D.D.I.T 54 SOT 140 (MUM) vi) D.D.I.T v. Banque Indosuez 19 ITR (TRIB) 463 (MUM) To the best of our knowledge as on date there is no conflicting judgment or any ruling in favour of the Revenue, hence on this ground along this issue should be decided in favour of the assessee. I. Interest paid is exempt u/sec. 10(15)(iv)(fa) of the Income Tax Act, 1961 1) The third argument advanced by the assessee was that in any event on the facts of our case the interest paid to head office on account of making a foreign currency deposit in India of US $ 162.5 Million with National Housing Bank squarely falls within the ambit of Sec 10(15)(iv)(fa) and hence such Interest is exempt from withholding tax. 2) It was clarified that : placements of funds by the assesse bank with NHB constitutes a deposit as understood in banking laws. Any placement of funds c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as also held in the decision of the Special Bench of the Tribunal in the case of Sumitomo Banking Corporation Vs. DDIT 16 ITR (TRIB.) 116 (Mum.) (SB) that under the domestic law, payment by a branch office to head office is in the nature of payment to self, which is neither taxable nor tax deductible in the hands of the assessee. The Special Bench has further held that though payment to self is not tax deductible under domestic tax law, but it is tax deductible under Article 7 of the Indo UK DTAA. He contended that it is clear from the provisions in Article 7(5) that for the purpose of determination of profit attributable to PE, deduction of all expenses incurred for the purpose of business PE including executive and general administrative expenses is allowed irrespective of whether these expenses are incurred in the State of PE or elsewhere. He contended that such a deduction is subject to limitations of domestic law of State of PE which means that if under domestic tax law if any expenditure is not allowable, it will not be allowable even under Article 7(5) of the DTAA. Article 7(5) says that if certain expenses are not allowable under domestic tax law, those shall not be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxation), (2010) 127 TTJ 319 (Del). 8. We have already discussed the relevant facts in brief in para No. 4 hereinabove. The issue involved is as to whether interest paid by the branch office to head officer is tax deductible. In support, the assessee placed reliance on the decision of Special Bench of the Tribunal in the case of Sumitomo Banking Corporation Vs. DDIT (supra). The assessee claimed that the issue raised is also covered by the decision of Hon ble Kolkata High Court in the case of ABN Amro Bank N.V. Vs. CIT (supra) followed in the other decisions cited by the ld. AR hereinabove. The contention of the Revenue, while supporting the orders of the authorities below, remained that the decisions relied upon by the ld. AR are distinguishable as in those cases Indo Japan Tax Treaty was the subject matter, whereas in the present case before us is the Indo-UK DTAA. It was also submitted by the Revenue that in the case of ABN Amro Bank N.V. Vs. CIT (supra) the issue was, as to whether interest paid by branch to its head office is subject to TDS and hence not allowable as deduction under section 40(a)(i) read with section 195 of the Act, which is otherwise tax deductible, where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anent establishment. 3. Where a permanent establishment takes an active part in negotiating, concluding or fulfilling contracts entered into by the enterprise, then, notwithstanding that other parts of the enterprise have also participated in those transactions, that proportion of profits of the enterprise arising out of those contracts which the contribution of the permanent establishment to those transactions bears to that of the enterprise as a whole shall be treated for the purposes of paragraph 1 of this Article as being the profits indirectly attributable to that permanent establishment 4. Insofar as it has been customary in a Contracting State according to its law to determine the profits to be attributed to a permanent establishment on the basis of an appointment of the total profits of the enterprise to its various parts, nothing in paragraphs 1 and 2 of this Article shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be necessary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles laid down in this Article. 5. Subject to paragrap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on monies lent to the head office of the enterprise or any of its other offices. 8. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 9. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. INDO JAPAN TAX TREATY Article 7 1. The profits of an enterprise of a Contracting State shall be taxable, only in that Contracting State unless the enterprise carries on business in the other Contracting State through in permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do-UK DTAA that these deductions shall be subject to limitation of domestic tax law. As a result, limitation under domestic tax law of tax deductibility of interest paid by branch office to head office shall not apply, where Indo Japan DTAA is applicable. Thus the situation in the present appeal is that interest paid by PE to HO is neither tax deductible under I. T. Act nor is it so under Article 7(5) read with Article 7(7) of DTAA. These findings are based on Article 7(5), and 7(7) of the Indo UK DTAA and Article 7(3) of the Indo Japan Tax Treaty. As per Article 7(5) of Indo-UK Treaty, for the purpose of determination of profits attributable to PE, deduction of all expenses incurred for the purpose of business of PE including executive and general administrative expenses is allowable irrespective of whether these expenses are incurred in the State of PE or elsewhere. However, such deduction is subject to limitation of domestic law of the State of PE, meaning thereby that if under domestic tax law, if any expenditure is not allowable, it will not be allowable even under Article 7(5) of the treaty. Article 7(7) contains an exception, as per which Article 7(5) shall not apply to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Banking Regulation Act. The assessee claimed that the sum paid by it to NHB is in the nature of deposit and also RBI had approved this deposit by virtue of its directive, within the meaning of section 10(15)(iv)(fa) of Income Tax Act. The further contention of the assessee remained that it was duty-bound to follow RBI s directive and, therefore, interest payable on such borrowing is in the nature of business expenditure and hence, tax deductible. It submitted that its amount lying in NHB was in the nature of deposit. The authorities below did not agree with these submissions of the assessee on the ground that requirement of section 10(15)(iv)(fa) is that the amount on which interest is paid by scheduled bank to non-resident should be in the nature of deposit in foreign currency, whereas in the present case, interest is paid by branch office to head office in respect of borrowing made by the branch from its head office and thus, this amount is in the nature of loan from head office to branch office and it is not the case of the assessee even that this amount is in the nature of deposit. We fully concur with the finding of the authorities below that submission of the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any specific submission in respect of the above two grounds. On the contrary, the assessee has made written submission vide their letter dated 5.04.2011 addressed to the ld. CIT (Appeals). She contended that interest under section 220(2) has been charged without issuance of notice of demand under section 156 of the Act, which is mandatory. 11. The ld. CIT (DR), on the other hand, placed reliance on the orders of the authorities below. 12. So far as withdrawal of grant of interest under section 244A of ₹ 88,56,062/- is concerned, we fully concur with the approach of the ld. CIT (Appeals) that it is consequential in nature and hence, does not need independent adjudication. We, however, agree with the contention of the ld. AR that for levy of interest under section 220(2) of the Act it is a pre-condition to issue notice of demand under section 156 of the Act first. We thus, set aside the matter to the file of the Assessing Officer to examine the contention of the assessee on the basis of material available on record that notice of demand under section 156 was issued or not and decide the matter afresh as per the law after affording opportunity of being heard to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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