TMI Blog2020 (10) TMI 1189X X X X Extracts X X X X X X X X Extracts X X X X ..... of indirect expenses incurred in relation to such impugned interest income. i) Work out the ratio between the total revenue viz a viz the gross income earned by the assessee on foreign currency loan. ii) Based on the above ratio the indirect expenses will be determined for four months for the purpose of disallowance u/s 115A of the Act. Addition u/s 14A - Disallowance of Expenses on Tax Free interest are foreign currency Syndicated Term Loan AND Disallowance of Expenses out of Dividend Income - HELD THAT:- While there is no dispute regarding the disallowance of expenditure incurred in relation to exempt income under both the heads, the Act prescribes proper procedure of computing such disallowance u/s 14A(2). We find that the revenue has not invoked the procedure as specified under the said section wherein the AO has to record his dissatisfaction as to the correctness of the claim with regard to the accounts of the assessee. Owing to the procedural tumble, we hereby delete the disallowance made by the Assessing Officer. Disallowance of Club Expenditure - HELD THAT:- The club membership fee is taken for promoting business of the bank and for better customer relations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of 20% of NRI expenses amounting to ₹ 16,92,655/- on the grounds that these are in the nature of head office expenses and ignoring the ITAT order dt. 18.8.2006 which has held that NRI expenses are fully allowable and no portion of these are head office expenses. 2. The Ld. CIT(A) was not justified in law in ignoring the order of a superior judicial forum in the appellant s own case for earlier years wherein it was held that the NRI expenses are fully allowable and no part of them are in the nature of Head office expenses. 3. The learned Ld. CIT(A) has erred in law and on facts in upholding an excessively high pitched estimate of as much as 94% of the gross receipts amounting to ₹ 3,04,60,516/- as expenses attributable to earning income on foreign currency syndicated term loans under Sec. 115A(3) of the Income Tax Act, 1961. 4. (i) The learned Ld. CIT(A) has erred in law and on facts in making an ad hoc addition of ₹ 15,00,000/- on account of expenses incurred on earning foreign currency syndicated term loans. (ii) On page 14, para 6.1 of the CIT(A) s Order, when dealing with the expenses on foreign currency syndicated terms loans, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for the Appellant s business in India, hence this is a permissible deduction under section 40(a)(i) read with section 37(1) of the Income Tax Act, 1961 and Article 7 of the Indo-Australia DTAA and CBDT Circular No.649 dated 31.3.1993. 10. The Order of the Ld. CIT(A) suffers from an error apparent: on the face of the records on the following ground: The CIT(A) has allowed us the tax deductibility of CBS costs, and Operations Technology costs for the following periods: 1.4.1999 to 31.3.2000 1.4.2000 to 31.7.2000. This was in accordance with the provisions of sec. 40(a)(i) as withholding tax was paid on such payments in May 2000. However when granting relief in figures, the CIT(A) has correctly taken the CBS costs Ops /Tech costs for the period 1.4.1999 to 31.3.2000. But for the period 1.4.2000 to 31.7.2000 he has erroneously bunched up the costs of CBS.+ Operations Technology + Credit Cards Support Costs and treated the entire amount as Credit Cards Support Costs costs. This would be exfacie evident from CIT(A) s order itself as well as the records. Therefore although the relief is computed by him of ₹ 379,366,666/- actually there is a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice expenses in respect of which deduction under section 44C has already been allowed. The AO placed reliance on the judgment of the Calcutta High Court in the case of UCO Bank Vs. CIT, 200 ITR. 5. The ld. CIT (A) directed to re-compute the disallowance @80% of NRI deposit mobilization expenses u/s 37(1) of the Income Tax Act, 1961 and 20% of NRI expenses u/s 44C. 6. This issue has been adjudicated by the ITAT Delhi Bench in the case of the assessee for the assessment years 1993-94 to 1998-99 in ITA No. 4988/Del/2003 dated 24.10.2008 and ITA No. 1106/Del/2017 dated 30.11.2017. The relevant portion of the order of the ITAT is as under: 6. We have considered the rival submissions. The Tribunal while considering similar claim in earlier year held as under (ITA Nos.1850/Del/1997, 2376, 2818 2819/Del/99, order dated 18th August, 2006). We have carefully considered the rival submissions: The xxxxxx abroad were brought to India in foreign currency xxxx and kept in India for the Indian business of the assessee bank. The benefits reaped by the India branch or Permanent Establishment in India have been accounted for as Indian income. We, therefore, see no reason as to why the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es including the 20% expenses disallowed in the earlier years. Hence, this issue is no more res integra. The appeal of the assessee on this ground is allowed. Disallowance of Expenses: 8. Brief facts of the case are that the assessee has shown an amount of ₹ 3,24,04,804/- as interest income from foreign currency loans to its Indian customers, taxable u/s 115A(3). The AO held that under section 115A(3), no deduction is permissible for the income covered under the said provision and the corresponding expenditure is to be disallowed. Based on the gross receipts and expenditure shown in the P L account for the year of ₹ 14,82,24,25,000/- and ₹ 13,94,24,89,000/- respectively, the AO held that the assessee had incurred expenses in the ratio of 94% of the gross receipts. Therefore, the AO estimated the expenditure relatable to income of ₹ 3,24,04,804/- at ₹ 3,04,60,516/-. 9. The ld. CIT (A) confirmed the addition on the grounds that in absence of any details, the AO is correct in estimating the disallowance. 10. Before us, it was submitted that the bank earned interest of ₹ 3.24 crores on FCNR B Rules and this interest duly offered at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance of Expenses on Tax Free interest are foreign currency Syndicated Term Loan : Disallowance of Expenses out of Dividend Income The grounds are being adjudicated together. 13. The AO disallowed ₹ 81.31 lakhs on account of expenses incurred on earning foreign currency syndicated term loan of ₹ 86.50 lakhs which is tax free. The ld. CIT (A) confirmed the addition to the tune of ₹ 15 lakhs on the grounds that estimation of disallowance of expenditure of 17.34% on the exempt income. 14. With regard to dividend, the AO disallowed an amount of ₹ 16,60,280/- out of the dividend income earned of ₹ 17,66,255/-. The ld. CIT (A) confirmed the addition to the extent of ₹ 2,50,000/- on estimate basis. 15. Before us, the ld. AR relied on the order of the Hon ble Supreme Court in the case of Walfort Shares Stock Brokers Pvt. Ltd. 326 ITR 1. The ld. DR relied on the order of the ld. CIT (A). 16. The relevant portion of the judgment of the Hon ble Supreme court is as under: Section 14A of the Income-tax Act, 1961, clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act for following reasons: (a) that the payments totaling to ₹ 68,10,18,767/- were not made by Indian PE of appellant but by the HO of appellant in Melbourne (b) that the payments totaling to ₹ 68,10,18,767/- were not debited in books of account of appellant for the year. (c) that payment made on behalf of appellant suffered withholding taxes @ 15% whereas claim of deduction of these payments resulted in reduction of tax liability of appellant @ 48% which incurred revenue loss of 33% on such claim. 20. The ld. CIT (A) was confirmed the addition to the tune of ₹ 30,15,52,101/- and granted the relief of ₹ 37,94,66,666/-. The revenue is in appeal against the relief granted and the assessee s in appeal against the addition confirmed by the ld. CIT (A). 21. For the sake of ready reference and for detailed facts, the order of the ld. CIT (A) is reproduced as under: 10.3.2 The AR stated that the appellant had made payments totaling to ₹ 68,10,18,767/- to Australia and New Zealand and Banking Group (in short ANZ) through HO of appellant in Melbourne Australia, after deduction of withholding tax in the year under consideration in lie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Original challans evidencing payment of withholding tax of ₹ 2,01,05,000 alongwith interest u/s 201(1A) of ₹ 14,88,000/- is attached as Annexure A-3 The Bank had duly deducted taxes at source on the payments in to the paid in accordance with Article 11 of Indo-Australian Double Tax Treaty and paid interest u/s 201(1A) and made payment Government on 31st May 2000. Since such taxes have been the current accounting period, the above expenses are deductible as business expenditure from the Profits and Gains of Business in accordance with Proviso to section 40(a)(i). (i) Original challans evidencing payment of withholding taxes are attached. (ii) Report of External Auditors - KPMG certifying the payments made for availing of technical services are attached. (ii) For the period 1.4.2000 to 31.7.2000 the Bank continued to avail of the technical services from ANZ Banking Group Ltd. Of: (a) Commercial Banking system (CBS) for its Indian operations (b) Operations and Technology services for its Indian operations (c) Cards Technology services for its Indian operations For which payment of ₹ 16,48,46,668/- was made during the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.2 The right of the 2nd party Bank to use the CBS System for its operations in India was exclusive, and non-transferable. 1.3 The entire ownership rights in the CBS System has at all points of time vested with the 1st Party. The 2nd Party had only access to, and use of this system during the term of the Agreement between the parties. (extracted from CBS agreement between HO of appellant and ANZ dated 1.4.1999) The operations and technology support and services and licence agreement also stipulates operation and support services in India. THE PARTIES AGREED UPON THE FOLLOWING: 1. OPERATIONS TECHNOLOGY SUPPORT SER VICES AND SOFTWARE LICENCES AND MAINTENANCE PROVIDED BY THE 1st PARTY TO THE 2nd PARTY FOR ITS BANKING OPERATIONS IN INDIA: The 1st Party provided the following operations and technology support services including software licences to the 2nd Party, for its business in India during the extended period of 4 months. Maintenance Based Systems: The lsl Party has developed and maintained various Mainframe based Computer systems at Melbourne such as: - IT Service Delivery - IT Software Solutions (other than CBS Fail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of PE of appellant in India whereas the claim of appellant that payment of ₹ 13,40,53,333/-, ₹ 26,72,100/- and ₹ 16,48,46,668/- were incurred on credit card support service to PE of appellant in India was not proved before me as the relevant agreement does not stipulate credit card support service in India. The AR did not file any other evidence to prove if credit card services were actually rendered in India for the PE of appellant. In light of these findings it is held that payment totaling to ₹ 301552101 was not incurred for the purpose of business of the appellant and was not deductible u/s 37(1) of the Act. For aforestated reasons, I am of considered view that out of total expenditure of ₹ 68,10,18,767/- payments of ₹ 7,51,13,333/- for operation and technology support in India and ₹ 30,43,53,333/- for CBS technical services in India were incurred wholly and exclusively for the purpose of the business of the PE of appellant in India and were allowable deduction u/s 37(1) of the Act and balance amount of payment of ₹ 30,15,52,101/- was not proved to be incurred for the purpose of the business of appellant in India and the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preposition which is not stipulated u/s 37(1) of the Act. I have further noted that a part of the expenditure claimed as deduction in the year pertained to the earlier year on which the appellant had deducted and paid TDS in the year under consideration accordingly the proviso to section 40(a)(i) is attracted and the claim of appellant was allowable u/s 37(1) read with proviso to section 40(a)(i). 10.3.7 After having considered aforesaid findings and circumstances, 1 am of the considered view that appellant had proved that expenditure of ₹ 7,51,13,333/- and ₹ 30,43,53,333/- was genuine revenue expenditure which were incurred wholly and exclusively for the purpose of the business of the PE of appellant in India and appellant had discharged its onus u/s 37(1) of the Act. Accordingly, AO was not justified in making disallowance of ₹ 30,43,53,333/- and ₹ 7,51,13,333/-. I have also held that appellant had not discharged its onus to prove that balance expenditure of ₹ 30,15,52,101/- incurred for the purpose of the business of the appellant in India. Accordingly, disallowance of ₹ 68,10,18,767/- made by the AO is restricted to ₹ 30,15,52,101 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nths w.e.f. 1st April 2000 to 31st July 2000. C. This Memorandum records and details the support services provided to the 2nd Party by the 151 Party during the extended four month period from 1st April 2000 to 31st July 2000. 1. CREDIT CARDS SUPPORT SERVICES PROVIDED BY THE 1ST PARTY TO THE 2ND PARTY: The 1st Party had provided the following support services to the 2nd Party for its Credit Cards business operations: 1.1 Risk Management Compliance- The risk management compliance services which included monthly credit portfolio reviews, advice on fraud collection matters, advice regarding portfolio improvement strategies, advice regarding the establishment of external debt collection agents, development of an operations manual, technological support for international cards operations, scorecard policy development, design documentation of collection system. 1.2 International Cards Operations:- The international cards operations services comprised the providing of consultancy for delivery of card operation services, support to resolve operational issues, consistency of processes, cost reduction, coordination of projects, the proposed centralized proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with Art. 12 of the Indo-Australian Double Tax Avoidance Treaty @ 15% on the abovementioned amount, and remitted taxes to the Indian Government, as per the tax laws prevailing in the country. 2.3 The telegraphic transfer buying rate of State Bank of India on the specified date on which tax is required to be deducted at source was used as the exchange rate for conversion of Australian Dollars into Indian Rupees. 27. We have gone through the notes attached to and forming part of the computation of income for the year ended 31 March 2001 which is as under: 1) The name of ANZ Grind lays Bank Limited has been changed to Standard Chartered Grind lays Bank Limited effective 23 September 2000. 2) (i) During the Financial year 1.4.99 to 31.3.2000 the Bank had made the following payments for obtaining technical services for its Indian operations from ANZ Banking Group for access and use of : (a) Commercial Banking System for its Indian operations- ₹ 304,353,333 Original challans evidencing payment of withholding tax of ₹ 4,56,53,000 along with interest under section 201(1A) of ₹ 44,99,000 is attached as Annexure A-1. (b) Operation and Technology service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above payments made for availing of the said 'technical services' are attached. 3) The reversal of excess provisions in respect of the following are not taxable, since the said provisions were added back to the taxable income in the year of creation of such provisions. Accordingly, the same are not taxable on reversal /write back during the year: (a) Excess provision for bad doubtful debts written back ₹ 124,787,880 (b) Reversal of interest tax provision ₹ 17,000,000 (c) Reversal of excess general provision for standard assets Rs 11,014,750 (d) Reversal of excess provision for other operating losses ₹ 94,442,913 4) (i) In March/April 1992, the Bank purchased from Mr. L.R. Gupta family (LRG) 9% NHPC (Tax free) bonds of Face Value ₹ 16.16 crores (in three transactions of FV ₹ 4.50 crore, ₹ 2.58 crore ₹ 9.06 crore). The interest warrants were not delivered except for the coupon date 31/3/92 in respect of FV ₹ 4.50 crore ₹ 9.06 crore bonds. All the bonds were maturing on 11 December 1997. (ii) In June/ July 1992, the bonds were submitted for registration to NHPC. While the bonds with FV of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been formed on the above basis. Audit opinion In our opinion, the attached Schedule presents fairly, in accordance with the generally accepted accounting principles, charges which relate to production support, recovery from system failures, troubleshooting, problem investigation, user assistance, right to use the system software and services provided in respect of Credit Cards, CBS and other Operation and Technology support, and have been incurred on behalf of the Indian branch of ANZ Grindlays Bank Limited for the period from 1 April 1999 to 31 March 2000. Schedule of Charges for the Access and Use of the Commercial Banking System Allocated to the ANZ Grindlays Bank Limited - India Branch For the year ended 31 March 2000 Charges for A$ - providing the access to and use of the CBS system for Indian banking operation for the year 1 April 1999 to 31 March 2000 6,800,000 - providing software maintenance and other technical support services for the use of the CBS system 4,063,000 TOTAL 10,863,000 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,051,000 -providing consultancy and support services in connection with 'International Cards Operations' 938,000 - International Cards Marketing 1,157,000 - providing operations and technological support in connection to 'Partnership Relationship' 159,000 -providing support services related to 'Vision Plus Project Development,' a credit cards software 535,000 - IT Software Solutions 800,000 -providing processing services through 'IT Service Delivery,' in connection with the above mentioned softwares 238,000 TOTAL 4,878,000 The local currency allocation amount to INR135,866,934 Independent audit report to management of Australia and New Zealand Banking Group Limited Scope We have audited the schedule of charges of Operations and Technology Support Services (Operation and Technology), Credit Cards Support Services (Credit Cards) and Access to an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 31 July 2000 - providing software maintenance and other technical support 1,551,000 services for the use of the CBS system TOTAL 3,512,000 The local currency allocation amount to INR91,601,740. Schedule of Operations and Technology Charges Allocated to the ANZ Grindlays Bank Limited -India Branch For the four months ended 31 July 2000 Charges for A$ - providing Operation and Technology support and access to and use of 'IT Service Delivery: Mainframes' (8,000) -providing Operation and Technology support and access to and use of 'IT Service Delivery: AS400, Unix, etc' 454,000 - support services in the nature of 'IT Software Solutions (other than CBS Fail Fix)' 26,000 - providing access to and use of 'Payment Services' 40,000 - providing 'Telecommunications and Interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f agreement, tax report, notes to account and the details of the tax payment under Article 12 of the Indo-Australian Treaty and on going through the challans enclosed at 77 to 84 of the paper book, we hereby hold that the fees for access and user technology related to services for Credit Cards Services is meant for the business of the assessee s in India and such expenses are allowable to be claimed by the assessee u/s 37(1). 31. The appeal of the assessee on this ground is allowed. 32. The similar issue is also involved in the appeal of the revenue. With regard to the appeal of the revenue for the similar expenses which have been deleted by the ld. CIT (A), we concur with the reasoning given by the ld. CIT (A) which has been duly mentioned above. Hence, the appeal of the revenue on this ground [Ground No. 1(d)] is hereby dismissed. 33. Ground No. 10 of the assessee deals with rectification of the computational errors for which we direct the revenue to dispose off the rectification application. 34. The consequential benefits of the order giving effect to the order of the ITAT be allowed to the assessee. ITA No. 2995/Del/2008 (Revenue s Appeal) 35. In ITA No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in A.Y. 1998-99. 38. The ld. CIT (A) deleted the addition holding that the question of attributing income to the PE, under the DTAA, it has to be said that as per Article 7, only such income can be brought to tax as can be attributed to its assets and activities in India. In India its income has been earned as commission received by it for honoring the transaction in India on behalf of the foreign branch. This commission is earned from its activity as an Acquiring bank and has to be taxed in the country where the PE is situated. The income earned by the foreign bank from its client outside India on the credit given by it there and recovered there, cannot be said to have arisen in India. But the commission received from the merchant in India can be said to have arisen in India, as mentioned by the Assessing Officer, and this has been retained by the Acquiring bank, while making the acquiring bank would have been received by the foreign bank, But since the Indian branch, being a PE played a role, this income will be taxed in India in the hands of the Indian branch, being attributable to its activities in India. But, this in fact is the income which has already been included b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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