9911796707
TMI Blog2024 (1) TMI 414X X X X Extracts X X X X X X X X Extracts X X X X ..... that interest of Rs 28,077,819 paid by the Indian branches of the Appellant to its head office/ overseas branches, is taxable as interest income in the Appellant's hands under the provisions of the Double Taxation Avoidance Agreement entered into between India and Canada ('India Canada treaty'). 4. In treating the mark-up amount of Rs 588,171 as being taxable as business profits and ignoring the provisions of Article 7(3) of the India-Canada treaty." 3. Shri Nishant Thakkarappearing on behalf of the assessee submitted that ground No.1 to 3 of appeal are similar to the grounds raised in appeal by the assessee before the Tribunal in ITA No.6818/Mum/2006 for Assessment Year 2002-03 decided on 21/04/2023. Briefly stating facts in respect of ground No.1 and 2, he submitted that during the period relevant to the assessment year under appeal the assessee earned interest income of Rs. 1,08,75,000/- on 1996-97 and 1997-98 series of NABARD Bond. The said interest income is exempt from tax u/s. 10(15)(iv)(h) of the Income Tax Act,1961 [ in short 'the Act']. The Assessing Officer invoked the provisions of section 14A of the Act and made disallowance of Rs. 74,80,677/-. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h deduction shall he allowed in respect of amounts, if any, paid (otherwise than as a reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of... other charges, for specific services performed ... Likewise, no account shall be taken in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of ... other charges for specific services performed" Article 7(3) of the Indo-Canada DTAA is based on the UN Model Convention, the Appellant during the course of the hearing has submitted the UN Commentary on the UN Model Convention which reiterates the above understanding. 4. The Appellant submits that the meaning of specific services performed has been misconstrued by the lower authorities. It is submitted that the appellant has added backthecosts of the services rendered as provided under Article 7(3) of the India - CanadaDTAA. If the Appellant was to have charged a mark-up then such amounts would be regarded as being fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the Department vehemently defended the assessment order and the findings of the CIT(A) against which the assessee is in appeal. In so far as ground No.1 to 3 of appeal, he stated that the issues have been considered by the Tribunal in assessee's own case in Assessment Year 2002-03. In respect of ground No.4 of appeal, the Ld. Departmental Representative placed reliance on the findings of the CIT(A) in Para-12 of the impugned order. 5. We have heard the submissions made by rival sides and have examined the orders of authorities below. The ground No.1 and 2 of appeal by the assessee are against disallowance made u/s. 14A of the Act. We find that the manner and reasons for disallowance u/s. 14A of the Act in the impugned assessment year is similar to the one in Assessment Year 2002-03. The Coordinate Bench deleted the disallowance by observing as under: " 6.2 We have heard the submissions made by rival sides and have examined the orders of authorities below. The CIT(A) in the impugned order has given finding offact that the assessee has surplus interest free funds in the form of capital and reserves to cover the investment made. Purportedly, no fresh investments were made i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est payment holding that the interest payment by the Indian PE/Branch to the head office is not a allowable deduction. The decision by Special Bench in the case of Sumitomo Mitsui Banking Corporation vs. DCIT(supra) has clinched both the issues. The relevant extract of the decision of Special Bench is reproduced herein below: "88. Keeping in view all the facts of the case and the legal position emanating from the interpretation of the relevant provisions of domestic law as well as that of the treaty as discussed above, we are of the view that although interest paid to the head office of the assessee bank by its Indian branch which constitutes its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the PE which is taxable in India as per the provisions of article 7(2) & 7(3) of the Indo-Japanese treaty read with paragraph 8 of the protocol which are more beneficial to the assessee. The said interest, however, cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -7(3) of India-Canada treaty. There same was rejected by the CIT(A). Before us, the assessee has reiterated the submissions made before the CIT(A). The entire emphasis of the assessee is that the services rendered in the form of liaisoning activities are "Specific Services". To explain the expression "Specific Services" the assessee has placed reliance on the provisions of section 28(iii) of the Act and the decision rendered by Hon'ble Apex Court and the Hon'ble Delhi High Court. At the outset we observe that "Specific Services" as referred to in section 28(iii) of the Act are in a context absolutely different and has no corelation with "Specific Services" referred to Article -7(3) of the DTAA. The expression "Specific Services" used in clause-(iii) of section 28 applies to income derived by a trade, professional or similar association from "Specific Services" performed for its members. The clause is in the nature of charging provision and has limited application on contextual transaction. The expression "Specific Services" used in Clause -(iii) is applicable only where the association performs services to its members and not others. Therefore, in our considered view refere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices." We find that clause (3) of Article-7 does not in any manner grant immunity to the assessee from taxation of correspondent banking charges. In any case, the issue before TPO was determination of ALP of correspondent banking services. The TPO made upward adjustment, the same has been upheld by the CIT(A). It is the case of Transfer Pricing adjustment and not a case of determination of taxability of income in international taxation, as has been tried to be portrayed by the assessee. The TPO while analyzing the transaction came to the conclusion that if the same services were to be rendered by the Indian Branch in an uncontrolled environment with the third party, the Indian Branch would have added markup to the cost, hence, the payment for correspondent banking charges is not at arm's length. It was not the case of assessee before the TPO that receipt from correspondent banking charges is not taxable by virtue of DTAA. We find no infirmity in the findings of CIT(A) on this issue, hence, ground No.4 of appeal is dismissed. 8. In the result, appeal of the assessee is partly all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer, the CIT(A) deleted the same, the Revenue carried the issue in appeal before the Tribunal in ITA No.306/Mum/2001. The Co-ordinate Bench vide order dated 21/04/2004 dismissed the ground raised in the appeal of Revenue by observing as under:- "3. We have heard the rival submissions and also perused the orders of authorities below. Parties appearing before us have respectively relied upon the order of A.O and CIT(A). Since the introduction of section 115A certain changes have been made and with the passage of time the Finance Act 1994 has also carried out certain amendments in the said section w.e.f. 1/4/95 the scope and effect of the amendments was explained by CBDT in Circular No.684 dated 6/6/94(208 ITR 08(St.), relevant page-43. This CBDT circular and related provisions of IT Act has been elaborately discussed by the first appellate authority. On careful examination of the entire issue it is abundantly clear that the legislature has intended to tax the interest only on gross basis. Further in support of his arguments ld. A.R has also cited Article 10& 11 of DTAA with Canada. Notification No.10503(F No.505/2/87-FTD) reference 229 ITR 44(St.) Further it has also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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