TMI Blog2020 (5) TMI 665X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee company. Taxability of interest received on ECB, given to Indian Borrowers - HELD THAT:- Interest on ECBs was not attributable to the Indian branches of the assessee and only the portion was taxable in the hands of the Indian branches for the role played in arranging the ECBs. We find that the issue raised in the present appeal is fully covered in favour of the assessee and where the assessee had already offered to tax, the portion attributable to it, then there is no merit in making any other additions in the hands of the assessee. The Tribunal in own case [ 2019 (9) TMI 731 - ITAT DELHI ] had also allowed the claim in the hands of assessee. Ground of appealby the assessee is thus allowed. Treatment in respect of Deferred Bank Guarantee Commission - HELD THAT:- There is no merit in the orders of the authorities below in treating the commission received on Bank Guarantee as taxable on receipt basis. We find that the said issue stands covered in favour of the assessee by the order of the Hon ble High Court in assessee s own case in Assessment Year 2007-08 and 2008-09 [ 2016 (4) TMI 817 - DELHI HIGH COURT ] Higher rate of tax - Applicable rate of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant by: Sh. Percy Pardiwala, Sr.Adv And Sh. Hiteh Chande, Adv. Respondent by: Sh. H.K.Choudhary, CIT DR ORDER Sushma Chowla, The present appeal filed by assessee is against order of DDIT (International Taxation), New Delhi dated 29.01.2014 relating to assessment year 2009-10 against the order passed under section 143(3)/144C(13) of the Income-tax Act, 1961 (in short the Act ). 2. The assessee has raised following grounds of appeal:- 1. Disallowance of salary paid overseas to expatriates of the Appellant working in India by the Head Office and the Indian taxes paid thereon by the Head Office: ₹ 161,332,006 That on the facts and in the circumstances of the case and in law, the Hon ble Dispute Resolution Panel ('DRP') erred in confirming the addition, as proposed in the draft assessment order, in respect of a sum of ₹ 161,332,006 paid as salaries by the Head Office 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Appellant to head office/overseas branches, and accordingly the order of the Ld. AO based on DRP s instructions is incorrect, unjustified and 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 the receipt of the interest from the Indian branches is not taxable under the provisions of the Act, being receipt from self. b) The Hon ble DRP and Ld. AO have erred in making addition in respect of the receipt of interest from Indian branches by making the following observations: That provisions of section 9(1)(v)(c) of the Act are applicable. That the CBDT circular No. 740 is applicable to the Appellant s case. c) The Hon ble DRP and Ld. AO have erred in not appreciating the contention of the Appellant that it has opted to be governed by the provisions of the DTAA (so far as they are more beneficial) and has wrongly applied the provisions of Act. d) The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the contention of the appellant that operations of its Indian PE are taxable in accordance with provisions of Article 7(3) of the DTAA and in view of the provisions of section 90 of the Act, the provisions of section 115JB of the Act cannot be applied. c) The Hon ble DRP and Ld. AO have erred in distinguishing the relevant binding judgments referred to by the Appellant, which substantiates the view of the Appellant that provisions of section 115JB of the Act cannot be applied on the facts of the Appellant s case and have further erred in relying on the decision of the Advance Rulings Authority ( AAR ), which is distinguishable on facts and is not applicable at all. 6. Addition on account of interest received on External Commercial Borrowings ( ECBs ) given to Indian Borrowers 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, in respect of interest 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment in respect of Deferred Bank Guarantee Commission. a) That on the facts and circumstances of the case and in law, the Hon ble DRP and Ld. AO have erred in treating the commission received on guarantee as taxable on receipt basis in the year in which the commission is received. b) That on the facts and circumstances of the case and in law, the Hon ble DRP and Ld. AO have failed to appreciate that the Appellant follows mercantile method of accounting according to which, the commission falling due for the relevant previous year on accrual basis can only be taxed. c) That on the facts and circumstances of the case and in law, the Hon ble DRP and Ld. AO have erred in not following the decision of the Hon ble Calcutta High Court in the Appellant s own case for the Assessment Year 1981-82. 9. Non-grant of tax credit amounting to ₹ 64,314,230 On the facts and circumstances of the case and in law, the Ld. Assessing Officer has erred in not providing the tax credit of ₹ 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 rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction. 13. That on the facts and in the circumstances of the case and in law, the Ld. Assessing Officer has erred in initiating penalty proceedings, being against the provisions of the Act. 3. The first issue raised in the present appeal is against the disallowance of salary paid overseas to expatriates working in India by the Head Office and Indian taxes paid thereon by the Head Office, at ₹ 16,13,32,006/-. 4. Briefly in the facts of the case the assessee is a banking company incorporated in Japan and was a tax resident of Japan. The assessee was one of the oldest foreign banks in India, which was engaged in wholesale banking operations. The assessee operated in India under the license of Reserve bank of India (in short RBI ) and was covered by the Banking Regulations Act, 1949. For the year under consideration, the assessee e-filed return of income declaring total income of ₹ 1,44,03,05,977/-. The case of the assessee was taken up for scrutiny. The Assessing Officer first raised 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 Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Year 2007-08 onwards. The Tribunal in appeals relating to Assessment Years 2007-08 2008-09 vide order dated 19.09.2014 reported in 49 taxmann.com 441 (Delhi-Trib.) [2014] and consequent order passed relating to Assessment Year 2010-11 in ITA No.1174/Del/2015, order dated 25.01.2017 and for Assessment Year 2011-12 in ITA No.306/Del/2016, order dated 26.04.2017 had decided the said issue in favour of the assessee in turn relying on the ratio laid down by the Hon ble Bombay High Court in CIT vs M/s. Emirates Commercial Bank Ltd. [2003] 262 ITR 55 (Bom.). 9. We further find that the appeals of the Revenue have been dismissed by consolidated order passed by the Hon ble Delhi High Court in ITA Nos.604 605/2015, vide order dated 08.04.2016. The Hon ble High Court while deciding the issue of whether deduction is to be allowed, on account of salary paid to expatriates, observed as under:- 9. The first question urged concerns the payment of salaries to the expatriates. In deciding this issue in favour of the Assessee, the ITAT 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 (IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axable in the hands of the overseas branches and hence no requirement to deduct tax at source. 14. The Assessing Officer was of the view that for the purpose of taxation, PE of the assessee was a separate entity and hence, there was obligation to deduct tax at source u/s 195 of the Act. Since the assessee had failed to deduct tax at source, the amount was proposed to be disallowed and also reference was made to CBDT Circular No.740 dated 17.04.1996. The Assessing Officer placed reliance on the assessment order relating to Assessment Year 2007-08 and disallowed the said amount in the hands of the assessee. The DRP upheld the order of the Assessing Officer and the final assessment order was thus passed. 15. The Ld.AR for the assessee pointed out that there is no requirement to deduct the tax at source on the interest payment made to Head Office and other overseas branches. He referred to the order of the Tribunal in assessee s own case for Assessment Year 2007-08 and 2008-09 wherein this issue was decided in favour of the assessee relying on the decision of Special Bench of the Tribunal (Larger Bench) in Sumotomo Mitsubishi Banking Corpn. vs Dy. DIT [2012] 136 ITD 66 (Mum.) (SB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead office, the appellant's said branch was required to deduct tax at source under section 195 of the Income Tax Act, 1961? 14. It is significant that in the aforementioned order, the Calcutta High Court noted the fact that the Special Leave Petition preferred by the Revenue against the judgment of the Calcutta High Court in ABN Amro Bank(supra) was dismissed by the Supreme Court on 3rd August 2012. 15. Accordingly, this Court declines to frame any question on this issue of interest paid to the HO as well as the interest received from the Indian branches. 17. The Hon ble High Court had decided the first issue of interest paid to the Head office and overseas branches and had also applied the same principle for deciding the issue of taxability of interest received on Indian branches. 18. The issue raised before us vide Ground of appeal Nos. 2 3 i.e. interest paid to Head Office and overseas branches and interest received from Indian branches amounting to ₹ 33.91 crores (approx.), for which two separate additions were made by the Assessing Officer, thus, stands covered by the order of the Hon ble High Court of Delhi (supra) in assessee s own case. Following th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the interest received by the Indian branches from its own Head Office/ overseas branches was chargeable to tax in the hands of the assessee. The issue stands covered in favour of the assessee by the decision of the Hon ble Bombay High Court in the case of DIT vs M/s. Credit Agricole Indoseuz (supra). The said proposition has been applied by the Tribunal while deciding the appeals in Assessment Years 2010-11 2011-12. The Tribunal also noted the fact that while deciding the issue in Assessment Years 2007-08 2008-09, the Tribunal did not have the benefit of the decision of the Hon ble Bombay High Court. Applying the same parity of reasoning, we find no merit in the aforesaid addition made in the hands of the assessee and the same is deleted. Ground of appeal No.4 raised by the assessee is thus allowed. 24. The issue raised in Ground No.5 by the assessee is whether the provisions of section 115JB of the Act are applicable or not. The case of the assessee before the authorities below was that it was carrying on the banking business through its branches and was preparing the P L A/c for Indian operation in accordance with the Banking Regulation Act and the second plea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 956 and in fact could not have been prepared in terms thereof. Consequently, the question of applicability of Section 115JB did not arise. As rightly pointed out till the insertion of Section 115JB, banking companies were required to prepare their accounts in terms of special acts that they were governed by, and therefore there were no computation provisions as regards such banking companies. The change brought out by Section 115JB was therefore not retrospective. 21. The reasoning and the conclusion of the IT AT on this issue appears to suffer from no legal infirmity. Consequently, the Court declines to frame any question on this issue as well. 28. In view thereof and applying the said parity of reasoning, we hold that the provision of section 115JB of the Act are not applicable to the assessee company. Ground of appeal No.5 raised by the assessee is thus allowed. 29. The next issue raised vide Ground No.6 is against the taxability of interest received on ECB, given to Indian Borrowers. 30. Briefly in the facts of the case the assessee had received interest on ECBs given to Indian customers. The assessee pointed out that the Indian branches of the Bank helped the Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is thus allowed. 34. The issue raised in Ground of appeal No.7 is without prejudice to Ground No.6 and the same is thus dismissed. 35. The issue raised in Ground Nos. 9 10 by the assessee are not pressed and the same are dismissed. 36. The issue raised in Ground No.11 by the assessee is treatment in respect of Deferred Bank Guarantee Commission. 37. Briefly in the facts relating to the issue, the assessee received bank guarantee commission for a period of three years but offered the same to tax over tenure of guarantee. The case of the Revenue was to assess the same in the year of receipt itself. 38. The issue stands fully covered in favour of the assessee by the decision of Hon ble High Court in assessee s own case vide para 16 17 wherein the appeal of the Revenue was dismissed. The relevant findings of the Hon ble High Court are as under:- 16. ITA 244/2014, also in the case of assessee Shin, was preferred by the Revenue against the order of the ITAT applying the judgment of Asia Satellite Telecommunication Co. Ltd. '.I' case (supra). Here too the ITAT had overturned the Assessment Order dated 09.04.2012. The order was similar if not wholly iden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hidden from all but a few. It was held that the process was within the exclusive knowledge of the assessee. The customer is neither in the know nor is it empowered to use the process in its own way. 39. Following the same parity of reasoning, we hold that there is no merit in the orders of the authorities below in treating the commission received on Bank Guarantee as taxable on receipt basis. We find that the said issue stands covered in favour of the assessee by the order of the Hon ble High Court in assessee s own case in Assessment Year 2007-08 and 2008-09 judgement dated 08.04.2016. Thus, we find no merit in the order of authorities below. Ground of appeal No.8 is thus allowed. 40. The issue raised vide Ground No.11 is against the applicable rate of tax on the income of the assessee attributable to its PE in India. 41. Briefly in the facts of the case the Assessing Officer had observed that the rate of tax applicable to the assessee would be @ 40% being the rate of tax applicable to the foreign companies. The assessee is aggrieved by the order of the Assessing Officer as the applicable rates of tax to the domestic companies was 30%. The contention of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated 13.09.2019 vide paras 13 to 16 which read as under:- 13. The assessee was aggrieved to the application of 45% of tax rate which is much higher than the rate applicable to a domestic company and pleaded that in view of the benefits of non-discrimination provided in the DTAA, the company be assessed at domestic rate. The ld. AR argued that the assessee cannot be disadvantaged and discriminated by way of higher rate of taxation in view of the provisions of the DTAA. It was argued that The provisions of Article 24 of the DTAA between India and Japan reads as under: Article 24 . 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other Contracting State than the taxation levied on enterprises of that other Contracting State carrying on the same activities. 14. The ld. DR has argued placing reliance on Explanation 1 to Section 90 of the Act which reads as under: Explanation 1 For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than 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. 16. The matter has been decided in favour of the assessee in their own case by the order of the Hon ble Calcutta High Court in ITA No. 39 of 1998 dated 07.08.2019 for the assessment year 1991-92 by referring to the provisions of Article 24 of the DTAA. We also find that the Explanation 1 to Section 90 has not been considered by the Hon ble High Court of Calcutta while dealing with the case of the assessee for the assessment year 1991-92. However, for assessment year 1998-99, this issue has been dealt with by the Co-ordinate Bench of ITAT Delhi and decided against the assessee vide order dated 03.06.2019 in ITA No. 1783/Kol/2002 by taking into consideration the provisions of Explanation 1 to Section 90(2) of the Act. The ld. AR has submitted that the issue for that year is still pending with the Hon ble High Court of Delhi. Hence, keeping in view, the entirety of the facts, we hereby hold that the assessee cannot be regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained that in case of the local guarantee advances to regular Indian customers, for which risk and reward was borne by assessee company, it charges 1% of amount as guarantee with minimum of ₹ 500. It was pointed out that in most cases, guarantee fee would be less than or more than 1%. As far as the guarantee fee received from overseas customers was concerned, there was no risk bearing with regard to the default of the customers and the assessee proposed that the internal CUP data would be taken as comparables to benchmark the international transactions undertaken by the assessee. As far as the external CUP method applied by the TPO, it was pointed out that the same could not be applied. The assessee pointed out that no such adjustment was made in Assessment Year 2008-09 and the facts remained the same. The TPO on page 24 of the order noted that the assessee company had provided guarantee to the AE for obtaining bank loan and this transaction has resulted into a direct benefits to the AE . The TPO has vide para 53 at page 27 of the TPO s order applied CUP approach by making comparison with guarantee fee rate charges by unrelated 3rd parties providing similar guarantee und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment made on account of Receipt of guarantee commission. The assessee while benchmarking its international transactions in the transfer pricing report applied combined approach and has benchmarked under TNMM method. The case of the assessee is that the Transfer pricing analysis undertaken by applying TNMM method on combined approach should be accepted, as the margins of the assessee has been accepted and no adjustment has been made in the hands of the assessee. The only adjustment which was made in the hands of the assessee was on account of Receipt of guarantee commission. The case of the assessee before us is that as PE in India, it has limited role and was not bearing any risks. The assessee received part of guarantee commission in its capacity as facilitator only. When the persons needed guarantee in India to participate in a tender, then service of the Bank was utilized for issuing guarantee in favour of the beneficiary. The evaluation of the beneficiary for the creditworthiness of the customers was performed by the overseas branches, whereas the assessee had limited role in issuing letter of guarantee, it received 1% guarantee commission. In these facts, there is no merit in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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