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TMI Blog2020 (5) TMI 665X X X X Extracts X X X X X X X X Extracts X X X X ..... e overseas, in foreign currency, to the expatriates working in India exclusively for the permanent establishment ('PE') of the Appellant in India, on which taxes have been duly deducted/deposited in India, and accordingly the order of the Ld. AO, based on the DRP's directions is erroneous in law as well as on facts on the following counts: a) That the Hon'ble DRP and Ld. AO have failed to appreciate that the salary has been paid to the expatriates who are stationed in India and are working exclusively for business operations of the Indian PE of the Appellant and is thus an allowable expenditure as per Article 7(3) of India-Japan DTAA ('DTAA') b) That the Hon'ble DRP and Ld. AO have erred in observing that the nature of expense is covered under section 44C of the Income- tax Act, 1961 read with clause (b) of Explanation (iv) to the section, even though, the said amount is incurred exclusively and for direct benefit of Indian operations of the Appellant. 2. Addition on account of interest paid to Head Office and other overseas branches of the Bank amounting to Rs. 339,135,887 That on the facts and circumstances of the case and in law, the Hon'ble DRP erred in confirming the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble DRP and Ld. AO have erred in not appreciating that in terms of the provisions of Article 11 of the DTAA, dealing with the taxability of Interest, the interest received by the Appellant from the Indian branches is not in respect of a 'debtclaim' as contemplated under Article 11 of the DTAA. e) That the Hon'ble DRP and Ld. AO have erred in not following the direct judgment of the Mumbai Special Bench in the case of Sumitomo Mitsui Banking Corporation (136 ITD 66) wherein the Appellant was an intervener. f) Without prejudice to Ground no. 2, the Hon'ble DRP and Ld. AO have erred in not appreciating that separate addition of Rs. 339,135,887 relating to interest paid on borrowings from HO/overseas branches would tantamount to double taxation, which is against all canons of taxation. 4. Interest amounting to Rs. 15,956,253 accrued/ received by the Indian PE from its HO/ overseas branches. That on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in confirming the addition, as proposed in the draft assessment order, for an amount of Rs. 15,956,253 being the interest accrued/ received by the Indian PE of the Appellant on funds with the Head of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest received by the Appellant on ECBs given to Indian borrower parties, and accordingly the order of the Ld. AO based on DRP's directions is bad in law as well as on facts on the following counts: a) The Hon'ble DRP and Ld. AO have erred in not appreciating that under the provisions of Article 7 of the DTAA, an amount, commensurate with the role played by the PE, has already been offered to tax by the Appellant, in computation of its income taxable in India as per the provisions of the DTAA; and therefore nothing further could be brought to tax in India. b) The Hon'ble DRP and Ld. AO has erred in observing that the interest would continue to be taxable under Article 11 of the DTAA, even though it has been acknowledged by the AO himself that the ECBs may be partially connected with the PE. Such an observation is contrary to the express provisions of Article 11 of the DTAA, which clearly provides that in the event debt-claim is connected with the PE, the taxability of the interest shifts from Article 11 to Article 7 of the DTAA completely, and not partially, and accordingly, the findings of the Ld. AO are incorrect and bad in law. c) The Hon'ble DRP and Ld. AO have erred in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 64,314,230 (resulting from the excess advance tax/TDS paid by the Appellant for Assessment Year 2009-2010) while raising the impugned tax demand by ignoring the fact that no refund has been received by Appellant. 10. Erroneous withdrawal of interest under section 244A of the Act On the facts and circumstances of the case and in law, the Ld. AO has erred in withdrawing the interest under section 244A(3) of the Act without appreciating the fact that no refund has been received by the Appellant for Assessment Year 2009- 2010. 11. Applicable Rate of Tax That on the facts and circumstances of the case and in law, the Hon'ble DRP and Ld. AO have erred in not adjudicating that under the provisions of Article 24 of the DTAA, the applicable rate of tax on the income of the appellant attributable to its PE in India cannot exceed the applicable rate of tax (as per the Finance Act for the subject assessment year) in the case of Domestic Companies and consequential directions may kindly be issued in this regard. 12. Transfer Pricing adjustment a) That on the facts and circumstances of the case and in law, the Hon'ble DRP and Ld. AO/TPO have erred in rejecting the primary as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue as to why the salary paid to expatriates may not be disallowed, in turn relying on the observations of the Assessing Officer in Assessment Year 2007-08. The Assessing Officer had disallowed sum of Rs. 9,92,36,315/- in Assessment Year 2007-08, which was incurred on account of overseas salaries paid to expatriates being in nature of head office expenses and could not be allowed as a deduction as per the provisions of section 44C of the Act. Applying the said reasoning , the Assessing Officer disallowed overseas salaries paid to Japanese expatriates and tax thereon at Rs. 16,13,32,006/- 5. Before the DRP, the plea of the assessee was that the expatriates were working in India exclusively for the PE of the assessee in India and were carrying out day to day business operations of PE in India. It was stressed that the salary and taxes were not covered within the ambit of the provision of section 44C of the Act. Another submission which was made was that the expenditure incurred by the assessee was allowable as a deduction irrespective of whether such expenditure were incurred in India or outside India, in terms of Article 7(3) of the DTAA. Further, TDS was deducted and deposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has in the impugned common order referred to and relied upon the decision of its coordinate bench at Kolkata in ABN Amro Bank v. JCIT (2005) 97 ITD 1 (ITAT [Kol]). Further the ITAT followed the decision of the Bombay High Court in CIT vs Emirates Commercial Bank Ltd. (2003) 262 ITR 55 (Bom.) where the Bombay High Court approved the view taken by the ITAT. The ITAT agreed that the expenses have been incurred wholly and exclusively by the Indian branch and therefore no part of these expenses can be allocated to any other branch of the HO and that there was no dispute with regard to the non-applicability of Section 44C of the Act. 10. This Court has perused the order of the Bombay High Court in Emirates Commercial (supra) where on identical facts, the issue was decided in favour of the Assessee. This order of the Bombay High Court has been affirmed by the Supreme Court by order dated 26th August 2008 in Commissioner of Income tax vs. M.//s. Emirates Commercial bank Ltd. which in turn referred to an order of the same date in Commissioner of Income Tax vs Deutsche Bank AG (CA No.1544 of 2006)." 10. The appeal of the Revenue was dismissed on this ground. The issue arising in the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Special Bench of the Tribunal (Larger Bench) in Sumotomo Mitsubishi Banking Corpn. vs Dy. DIT [2012] 136 ITD 66 (Mum.) (SB). He further pointed out that the Hon'ble High Court has decided issue vide paras 12 & 13 of the judgement dated 08.04.2016. He also pointed out that the issue raised in Ground No.3 is to bring to tax the aforesaid amount in the hands of the assessee. 16. We have heard the rival contentions and perused the record. The assessee is a foreign bank with operation in India under license from Reserve Bank of India. It has three branches in India at the relevant time and the said branches in India constituted permanent Establishment (in short "PE") of the assessee in India, within the meaning of Article 5 of DTAA between India and Japan. The assessee was subjected to tax in India, on the profit earned by the PE. The assessee had during the year paid interest to the Head officer and other overseas branches, which was claimed as deductible, while determining the profit attributable to the PE in India, under the provisions of Article 7 of India Japan Treaty r.w.para 8 of the Protocol, which was more beneficial to the assessee. The said issue stands decided in favo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, stands covered by the order of the Hon'ble High Court of Delhi (supra) in assessee's own case. Following the same parity of reasoning, we hold that there is no merit in both the additions made in the hands of the assessee in this regard. Ground of appeal Nos. 2 & 3 raised by the assessee are thus allowed in favour of the assessee. 19. Now, coming to the next Ground of appeal No.4 wherein the interest amounting to Rs. 1,69,56,253/- accrued/received by the Indian PE from its Head office/overseas branches was brought to tax in the hands of the assessee. 20. Briefly in the facts of the case the assessee had declared the said interest as credit to the P&L A/c but in the notes to the return of income filed, it had declared that such interest being payment to self was not liable to the tax in India. In this regard, two propositions were raised that the interest income received from the Head office was receipt from self and also the interest was not taxable in view of the provisions of DTAA between India and Japan. The Assessing Officer brought the same to tax in the hands of the assessee and the objections filed by the assessee were rejected and consequent thereto, the final assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... &L A/c for Indian operation in accordance with the Banking Regulation Act and the second plea raised by the assessee was that it was a foreign company and the provisions of the India-Japan Treaty override the provision of Income Tax Act; hence the provision of section 115JB of the Act were not applicable. The Assessing Officer held otherwise and the objection filed by the assessee was dismissed and final assessment order was passed by the Assessing Officer. 25. The Ld.AR for the assessee points out that the issue stands decided by the decision of Tribunal in Assessment Year 2007-08 & 2008-09 wherein the said issue was elaborated upon by in paras 47 onwards from page 26 of the order. The Tribunal vide para 76 hold that MAT provisions were applicable to domestic companies and not to foreign companies and also where the provisions of DTAA have overriding effect, as the income had been computed in the hands of the assessee under DTAA provisions. The Ld.AR for the assessee pointed out that the issue was decided in favour of the assessee by the Tribunal in Assessment Years 2007-08 & 2008-09 and thereafter, the appeal of the Revenue has been dismissed by the Hon'ble Delhi High Court. 26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The assessee pointed out that the Indian branches of the Bank helped the Indian customers in arranging funds through its overseas branches, as the banking in India could not lend in foreign currencies. Thus, the request of the customers alongwith necessary report was forwarded to the overseas branches, for booking of loan. The taxability of the interest, as per the assessee, was governed by Article 7(3) of the DTAA and not as per Article 11 of the DTAA. The assessee explained to the Assessing Officer that ECBs were connected with the PE and the interest was taxable as per Article 7 of the DTAA and portion relatable to assessee had been offered to tax. The Assessing Officer rejecting the plea of the assessee brought to tax interest on ECBs in the hands of the assessee, in turn relying on the assessment order for Assessment Year 2007-08 and passed final assessment order as DRP rejected the objections of the assessee. 31. The Ld.AR for the assessee pointed out that the Tribunal in assessee's own case sent back the matter to the Assessing Officer. However, while deciding the appeal for Assessment Year 2010-11 (supra), the Tribunal vide paras 20 to 26 considered the plea of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder dated 09.04.2012. The order was similar if not wholly identical to the one passed in ITA 500/2012. 17. ITA 473/2012 and 474/2012 are filed by the Revenue against the order of the ITAT overturning common assessment order dated 17.08.2011, in the case of assessee New Skies. Here the return of income for the AY 2008-09 was tiled on 10.10.2008 declaring NIL income. For the same reasons as above, the AO held the income taxable under Section 9(I)(vi). However, in addition to this, the AO also went into the difference between the definition of royalty under Section 9(1)(vi) and the treaty, in that case, the Indo-Netherlands DT AA. Here, the definition of royalty under Article 12(4) is as follows: 'The terms "royalties" as used in this Article means payments of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.' Compared to the definition in Explanation 2(iii) of 9(1 )(vi) the only distinction between the two was on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic companies was 30%. The contention of the assessee in this regard is application of Article 24 of the DTAA. The Ld.AR for the assessee pointed out that the Tribunal in Assessment Year 2000-01 had adjudicated the said issue. However, the Hon'ble High Court of Calcutta vide judgement dated 07.08.2019 held that the rate of tax applicable would be lower rate i.e. rate on domestic companies. He further referred that the amendment in the Income Tax Act which was not before the Hon'ble High Court. Referring to the amendment i.e. Explanation (1) to section 90 of I.T.Act, it was pointed out by the Ld.AR for the assessee that the aforesaid amendment cannot override the terms of DTAA. He placed reliance on the decisions of Hon'ble Delhi High Court in DIT vs New Skies Satellite BV [2016] 68 taxmann.com 8 (Del.). The Ld.AR for the assessee also pointed out that though the tax treaty between India and Japan is silent whether different rate could be applied, but suo motto application of higher rates of tax by the Revenue authorities was discrimination. He also pointed out that the Explanation (1) to section 90 of the Act applies to domestic companies but cooperative societies are not covered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company." 15. We find that this Explanation has been brought into statute w.e.f. 01.04.2013. Prior to this Explanation read as substituted by the Finance (No. 2) Act, 2009 with effect from 1st October, 2009. Prior to substitution, section 90 as amended by the Finance Act, 2001, with retrospective effect from 1st April, 1962; Finance Act, 2003, with effect from 1st April, 2004; Finance (No. 2) Act, 2004, with retrospective effect from 1st April, 1962, stood as under: "90. Agreement with foreign countries. (1) The Central Government may enter into an agreement with the Government of any country outside India - (a) for the granting of relief in respect of- (i) income on which have been paid both income-tax under this Act and income-tax in that country; or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee cannot be regarded as treated less favourably by taxing at a higher rate. As a result the appeal of the assessee on this ground is dismissed. 44. The issue has already been decided by the Tribunal in assessee's own case and the same is pending before higher forum and consequently we do not express any view. Applying the said ratio, Ground No.11 raised by the assessee is thus dismissed. 45. The issue raised vide grounds of appeal no. 12 is against the Transfer Pricing Adjustment made on account of guarantee commission of Rs. 7,12,08,840/-. 46. The assessee had undertaken various international transactions during the year. The Assessing Officer made reference under section 92CA(1) of the Act for determining Arm's Length Price of the said international transaction entered into by the assessee with its AE. The International transaction in dispute is receipt of guarantee commission and we will restrict our comments. The assessee is a foreign bank, resident of Japan and operates its operations across the globe. The customer requires guarantee from the Bank in India, to participate in tender and would approach the overseas branch to issue counter guarantee in favour of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guarantee under similar terms and conditions. The plea of the assessee to apply internal CUP data was not accepted on the ground that there was no similarity in terms and conditions of the transactions with 3rd party. Rejecting the plea of the assessee of internal CUP method, the TPO proposed an average bank rate commission @ 2.71% should have been charged on the value of the bank guarantee; thus, an adjustment of Rs. 7,12,08,840/- was proposed by the TPO. 49. The DRP rejected the objections raised by the assessee and the Assessing Officer made the aforesaid adjustment in the hands of the assessee, against which the assessee is in appeal before us. 50. The Ld. AR for the assessee pointed out that the Assessing Officer has misinterpreted the facts and applied external CUP method to benchmark the international transaction undertaken by the assessee. The Ld. AR for the assessee pointed out that the transactions of the assessee are different from what the TPO wants to benchmark. He further pointed out that correct methodology was TNMM method and since, the Assessing Officer/TPO had accepted the margins of the assessee, there was no merit in the said adjustment. 51. The third proposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparing the rate received by the assessee with the rate charged by different banks who are operational in India and providing financial guarantee to its customers, with all risk involved therein. In such facts and circumstances, the Assessing Officer/TPO erred in applying the rate charged by Axis Bank, Canara Bank, Punjab National Bank and State Bank of India, etc. with arithmetic mean of 2.71% to benchmark the international transactions between the assessee and its overseas branches of receipt of bank guarantee commission. The details of the international transaction are tabulated in the order of the TPO itself and the same clearly reflect that no transaction is undertaken except with overseas branches. The assessee undoubtedly is also providing the services to its customers in India where it a risk bearing entity. We are of the view that where the assessee has undertaken bundle of international transactions with its AE and the same has been benchmarked by applying combined approach and the method of TNMM has been used and the margins shown by the assessee have been accepted; then there is no merit in segregating the international transaction of the receipt of the guarantee comm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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