TMI Blog2023 (11) TMI 1250X X X X Extracts X X X X X X X X Extracts X X X X ..... nd find that amendment in section 40(a) (i) is retrospective in nature. Therefore, the provisions of section 40(a) (ia) are equally applicable u/s. 40 (a) (i) of the Act. In view of this, ground raised by the assessee is allowed. Direct expenses incurred outside India - disallowance towards part of the expenses directly attributable to operations in India - Appellant submits before us to allow the deduction towards Advisory services expenses and Singapore IT Hubbing cost under section 37(1) - HELD THAT:- We agreed with the logics put forward by the assessee and not in favour of additional contentions raised by the Ld. CIT (A). Moreover, similar issue is covered in the Appellant s own case in A.Y. 1999-00, wherein with respect to the similar nature of services, the Hon ble ITAT held that the said expenditure is allowable u/s 37(1) and should not be restricted under section 44C of the Act. Respectfully following the decision of coordinate bench and judicial pronouncements relied upon by the assessee, we are in agreement with the contentions of assessee and ground raised by the assessee is allowed. Interest paid to Head office / Overseas Branches - AO disallow interest payable to head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artly allowed. Recoveries made against securities losses - AO made addition of recovery of securities losses - as argued losses incurred by the Appellant pertaining to the earlier years is subject matter of litigation - HELD THAT:- As gone through the submissions of assessee and order of coordinate bench for A.Y. 1993-94, wherein the loss claimed by the assessee has been allowed on its own facts, but as the department is in further appeal before the Hon ble jurisdictional High Court, we agree with the contentions raised by the assessee, that in case Hon ble High Court reversed the decision of coordinate bench on the ground of crystallization of loss in A.Y. 1998-99, same will be allowed in current A.Y. under consideration as the same has been settled with the parties and final figure of loss has been crystallized in this year. This ground of appeal is allowed for statistical purposes and AO is directed to allow the same in A.Y. 2001-02, if Hon ble High Court reversed the decision of coordinate bench for A.Y. 1993-94, then only on the basis of crystallization, same will be allowed in current assessment year. Taxability u/s 115JB on assessee banking company - HELD THAT:- As provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f that expenditure by the PE is treated as a source of income of the foreign company itself- particularly when, from the income tax perspective, the taxable unit is the foreign company and not the PE. It is also important to bear in mind the fact that, in the light of the five-member bench decision of this Tribunal, in the case of Sumitomo Mitsui Banking Corpn. [ 2012 (4) TMI 80 - ITAT MUMBAI] the intraorganization transactions, as non-reimbursement of employee costs by the PE to HO, is, are tax neutral. In any case, there cannot be a benefit accruing to the Korean company when the Indian PE of the assessee company does not reimburse its Korean company, because the assessee itself is the Korean company and the transaction in question is a wholly non-business and internal transaction of the Korean company. Decided against revenue. Indirect Income - CIT(A) directing deletion of indirect income earned by the Head Office by relying on submission admitted in contravention to Rule 46A of the Income-tax Rules, 1962 - HELD THAT:- Since the indirect income of the Head Office already forms part of profit and loss account of the Assessee and offered to tax in the computation of income, the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovides that interest paid by the Permanent Establishment (PE) on moneys lent to it by the Head Office / overseas branches of any banking enterprise would be taken into consideration in determining the profits attributable to that PE. 3.3 The learned CIT (A) ought to have allowed deduction for interest payment by the Appellant to its Head Office / overseas branches and accordingly, disallowance should be deleted. 4. 4.1 The learned CIT (A) erred in law and on facts to disallow 25% of the expenditure incurred on refurbishment of leasehold premises as capital in nature. 4.2 The learned CIT (A) ought to have allowed the said expenditure as revenue in nature and accordingly, disallowance should be deleted. 5. 5.1 The learned CIT (A) erred in law and on facts that Rule 8D is to be applied for arriving at the disallowance of expenditure attributable to earning taxable income. 5.2 The learned CIT(A) ought to have considered the Appellant's submission that the expression 'in relation to' under section 14A of the Act means dominant and immediate connection which is not applicable in the case of the Appellant as no expenditure has been incurred by the Appellant in relation to ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erride the provisions of Section 90 of the Act and therefore, by implication, the provisions of applicable tax treaties by the introduction of Section 115JB of the Act. 7.3 Without prejudice to the above and notwithstanding that the provisions of section 115JB of the Act are not applicable to DTAA entered into by India with UK, the CIT (A) erred in disregarding the submission of the Appellant that modified provisions of section 115JB of the Act (as amended by the Finance Act 2012) are applicable to the banking companies only from Assessment Year 2013-14 on prospective basis. 7.4 Without prejudice to the above the learned CIT(A) erred in confirming the action of the Assessing Officer of making an addition to the Book Profit of Rs. 1,26,28,068/- being expenses related to exempt income under section 14A of the Act and not reducing the exempt income of Rs. 3,41,29,914/-. 7.5 The learned CIT (A) ought to have not applied the provisions of section 115JB of the Act as they are not attracted to the facts of the case. 8. 8.1 The learned CIT(A) erred in disallowing the claim of the appellant towards Head Office Expenditure of Rs. 77,08,83,765/- in entirety on the ground that no revised retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee did receive the services of such value through its HO, simultaneously there was equivalent income also accruing to assessee u/s. 28(iv) of the Act and once the AO having not made any separate addition u/s 28(iv) of the Act, the disallowance of expenses claimed directly in computation of income was merely to bring tax neutrality. 2. Without prejudice to ground above, on the facts of the case and in law, the Ld. CIT(A) erred in allowing additional claim of direct expenses incurred outside India amounting to Rs. 24,79,25,160/- which were not recorded in accounts maintained in India, thereby ignoring the ratio of the decision of the Hon'ble Supreme Court in its judgment in the case of Goetze (India) Ltd Vs CIT(2006) 284 ITR 323(SC) wherein it is held that the Assessing Officer has no power to entertain a claim made otherwise than by filing a revised return of income. 3. Without prejudice to grounds above, on the facts of the case and in law, the Ld. CIT (A) erred in allowing additional claim of direct expenses incurred outside India amounting to Rs. 24, 79, 25,160/- merely relying upon the additional evidence based on certificate of the auditors and ignoring rule 46A, without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of the case and in law, the Ld. CIT(A) erred in directing deletion of Rs. 2,45,60,214/- treated as indirect income earned by the Head Office by relying on submission admitted in contravention to Rule 46A of the Income-tax Rules, 1962. The brief facts of the case are that the Appellant is a foreign bank incorporated in United Kingdom (UK) and has been carrying banking business in India through branches. The Appellant is a tax resident of UK and is eligible to claim the benefits of the Double Taxation Avoidance Agreement entered into between India and UK ( the tax treaty ). India branches of the Appellant are treated as permanent establishment in India under the tax treaty. During the year under consideration, the Appellant has raised various grounds of appeals before the Hon ble ITAT against the order of Hon ble CIT(A) dated 28 April 2017 passed under section 250 of The Income-tax Act, 1961 ( the Act ). The Appeal was also filed by the Department before the Hon ble ITAT against the above Ld. CIT (A) order. The Appellant has filed the legal and factual paperbook with respect to both the appeals (i.e., the Appellant s as well as the department s appeal) on 23 January 2023. The App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was taxable in India, no tax was required to be deducted in view of Article 26(3) of India US tax treaty, which protects non-resident against any discrimination vis- -vis residents. Article 26(3) provides that payment made to a non-resident will be deductible under the same condition as if payment were made to a resident. As per provisions of section 40(a) (i) applicable for the relevant year, no disallowance could be made in respect of payments to residents on the ground of non-deduction of tax. 1.3 AO s contention (Page 5) The AO relied on the Appellant s own case Assessment order passed u/s. 143(3) for the A.Y. 1996-97 and held that the services rendered by MasterCard to the Appellant are technical services in nature and hence the Appellant was liable to deduct tax on the same. Since the Appellant failed to deduct tax u/s. 195, the payment made to Master Card is disallowed under section 40(a) (i) of the Act. Also, the AO mentioned that in case of the Appellant, the issue of TDS on payments to MasterCard has been examined in detail by DCIT in detail in his order u/s. 201(1) of the Act and has held that income of MasterCard is taxable in India. Therefore, in absence of TDS, the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee is allowed and we do not wish to consider the proposition No. 2 raised by the assessee at this point of time. In view of the above, the Appellant submits before us to follow its own case vide ITAT order for A.Y. 1999-00, dated 17 October 2022, and delete the disallowance of INR 2,41,51,287/- made under section 40(a)(i) of the Act. Respectfully following the decision of coordinate bench in the case of assessee on similar issue, we don t see any force in the orders of authorities below and find that amendment in section 40(a) (i) is retrospective in nature. Therefore, the provisions of section 40(a) (ia) are equally applicable u/s. 40 (a) (i) of the Act. In view of this, ground raised by the assessee is allowed. Ground No. 2 Direct expenses incurred outside India 2.1 Grounds 2.1 The learned CIT (A) erred in law and on facts to confirm the disallowance towards part of the expenses directly attributable to operations in India. 2.2 The learned CIT(A) erred on facts that the Advisory and Business support costs in connection with the acquisition of Indian branches of ANZ Grindlays Bank Ltd are not in nature of revenue expenditure with respect to the business activity ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant s submissions Advisory and Business support costs: The Appellant submits that this issue is covered in favor of the Appellant, in the case of CIT vs. Bombay Dyeing Mfg. Co. Ltd [1996] 85 Taxman 396 (SC) [Handed over during the hearing on 5 October 2023- refer page 3], wherein it was held that professional fees incurred for effecting amalgamation of a company was necessary for smooth and efficient conduct of assessee s business and held as allowable under section 37(1) of the Act (relevant part extracted as under): The facts concerning the first question are the following: a company named Nawrosjee Wadia Ginning Pressing Company was amalgamated with the assessee-company. In that connection an expenditure of Rs. 10,350/- was incurred by the assessee-company towards the professional charge paid to the firm of Solicitors. In the assessment proceedings the said amount was claimed as revenue expenditure. The assessee's case was that Nawrosjee Wadia Ginning Pressing Company was engaged in the same business as the assessee. In other words, the businesses of both the companies were 'complimentary'. The directors of both the companies thought that it would be advantage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal asset is deductible as revenue expenditure. It is true, that in the said decision this Court re-affirmed the well established principle that any expenditure laid out for acquiring an asset of a permanent character would be capital expenditure, held at the same time that inasmuch as the acquisition of the other company was in the course of carrying on of the assessee's business, the interest paid thereon was deductible under section 10(2)(xv) of the Act. In this case too, the Tribunal has recorded a finding that the acquisition of Nawrosjee Wadia Ginning Pressing Company was necessary for the smooth and efficient conduct of the assessee's business. Following the ratio of the aforementioned decisions of the Court, we hold that the expenditure incurred towards professional charges of the Solicitors' firm for the services rendered in connection with the said amalgamation was in the course of carrying on of the assessee's business and, therefore, deductible as a revenue expenditure. In this view of the matter, it is not necessary for us to deal with the other decisions cited before us on this question. Singapore IT Hubbing/ IT Cable Wireless costs: At the outset, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional contentions raised by the Ld. CIT (A). Moreover, similar issue is covered in the Appellant s own case in A.Y. 1999-00, wherein with respect to the similar nature of services, the Hon ble ITAT held that the said expenditure is allowable under section 37(1) and should not be restricted under section 44C of the Act. Respectfully following the decision of coordinate bench and judicial pronouncements relied upon by the assessee, we are in agreement with the contentions of assessee and ground raised by the assessee is allowed. Ground No. 3: Interest paid to Head office / Overseas Branches 3.1 Ground 3.1 The learned CIT(A) erred in law and on facts to disallow interest payable to head office/ overseas branches on the ground that the Act does not allow deduction of interest paid by Branch to Head office. 3.2 The learned CIT(A) ought to have considered that a combined reading of Articles 7(2) and 7(5) of DTAA entered into by India with UK provides that interest paid by the Permanent Establishment (PE) on moneys lent to it by the Head Office / overseas branches of any banking enterprise would be taken into consideration in determining the profits attributable to that PE. 3.3 The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 domestic law. Even otherwise, there is no express provision contained in the relevant tax treaty which is contrary to the domestic law in India on this issue. This position applicable in the case of interest paid by Indian branch of a foreign bank to its Head Office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the Head Office. At the time of hearing before us, the learned representatives of both the sides have also not made any separate submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein is found to be repetitive in nature which has already been considered by us. We take this opportunity to place on record our appreciation for the assistance provided by the learned representatives of both the sides by making elaborate submissions which has helped us to analysis the legal position emanating from the interpretation of the relevant provisions of the domestic law as well as the relevant tax treaties and apply the same to the facts of the cases before us. 91. The matter will now go before the respective Division Bench for disposing off the appeals keeping in view our decision rendered above. In view of the above, the Appellant submits before us to allow the deduction of interest paid of INR 32, 44,183/- to HO/OB in line with the decision of the Mumbai Special Bench in case of in case of Sumitomo Mitsui Banking Corporation (supra). Further, the Appellant submit that Special Bench decision in case of Sumitomo (supra) is not only dealing with India-Japan Tax Treaty but also dealt with India Netherland Tax Treaty. Your Honour will appreciate that the language of India-UK Tax Treaty (applicable in case of the Appellant) is in line with India-Netherland Tax Treaty. Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision is enclosed in the Bank s legal paper book at page 336) allowed the deduction for the entire refurbishment expenses (Copy of A.Y. 1999-00 ITAT order is enclosed in the Bank s legal paper book -refer page 157, para 13 and 14) which reads as under: 13. Considered the rival submissions and material placed on record, we observed that Hon'ble Supreme Court in the case of Madras Auto Services Pvt. Ltd., (supra) on similar issue adjudicated in favour of the assessee. While holding so Hon'ble Supreme Court held as under: - The assessee is a limited company carrying on the business of sale of motor parts. Its head-office is at Madras. It has a branch at Bangalore. Under an agreement of lease dated 1st of February, 1966, the assessee obtained from M/s. Hajira Comer and Mrs. Rabia Bai Razack a lease of premises Nos. 64 and 64/1 situated at Sri Narasimharaja Road, Bangalore for a period of 39 years commencing from 1st of January, 1966. Under the terms and conditions of the lease, the lessee (that is to say the assessee), had the right to demolish at its own expense the existing premises and appropriate to itself all the material thereof without paying to the lessors any compens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure in arriving at the real income of the assessee for the assessment year 1968-69? For the next assessment year, a similar question was raised in regard to the second sum of Rs. 50,937/-The High Court has, by the impugned judgment, upheld the view of the Tribunal and has held that the two amounts constitute revenue expenditure for the concerned assessment years and are deductible in order to arrive at the income of the assessee for the said assessment years. The present appeals are filed by the department from the impugned judgment of the High Court. The assessee in the present case has spent the amounts in question in order to construct a new building after demolishing the old building. The new building, however, from inception was to belong to the lessor and not to the assessee. The assessee, however, had the benefit of the existing lease in respect of the new building at the agreed rent for a period of 39 years. The Tribunal has found, as a fact, that the rent as stipulated in the lease was extremely low. It rental rate for the area in which the building was situated was much higher and would be not less than Rs. 12,000/- as against which the maximum rent the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capita. Whether by spending the money any advantage of an enduring nature has been obtained or not will depend upon the facts of each case. Moreover, as the above passage itself provides, this test would not apply if there are special circumstances pointing to the contrary. This Court in the above case summarised the tests as follows :( p. 44): 1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment. 2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade...........If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of facilitating the running of the assessee's motor vehicles and other means employed for transportation of sugarcane to its factories. In the case of L.H. Sugar Factory and Oils Mills (P) Ltd. v. Commissioner of Income-tax, U.P. (125 ITR 293), the assessee was carrying on the business of manufacture and sale of sugar. It has its factory in U.P. The assessee paid a contribution towards meeting the cost of construction of roads in the area around its factory under a sugarcane development scheme. The question was whether this amount was deductible in computing the assessee's profits. The Court held that it was. Because although the advantage secured was of long duration, it was not an advantage in the capital field because no tangible or intangible asset was acquired by the assessee; nor was there any addition to or expansion of the profit making apparatus of the assessee. The amount was contributed for the purpose of facilitating the business of the assessee and making it more efficient and profitable. It was, therefore, revenue expenditure. In the case of Commissioner of Income-tax, Bombay City- I v. Associated Cement Companies Ltd. (172ITR 257) the respondent-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenditure should be looked upon as revenue expenditure. In the premises, the appeals are dismissed with costs. 14. respectfully following the above said decision, we allow ground No.2 raised by the assessee . In view of the above, the Appellant submits before us to follow its own case vide ITAT order for A.Y. 1999-00 dated 27 September 2022 and allow deduction for the entire amount incurred on refurbishment of premises. Revenue is not able to produce any argument to controvert the facts of the ground raised by the assessee and also not able to controvert the stand taken by the coordinate bench in assessee s own case. Hence, in the given situation respectfully following the decision of coordinate bench in assessee s own case for A.Y. 1999-00, dated 17 October 2022, ground raised by the assessee is allowed. Ground No. 5: Expenses attributable to exempt income 5.1 Ground 5.1 The learned CIT (A) erred in law and on facts that Rule 8D is to be applied for arriving at the disallowance of expenditure attributable to earning taxable income. 5.2 The learned CIT(A) ought to have considered the Appellant's submission that the expression 'in relation to' under section 14A mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground raised by the assessee Further, the Appellant submits that the Hon'ble Supreme Court in the case of South Indian Bank Ltd [2021] (130 taxmann.com 178) held that disallowance u/s. 14A of the Act is not warranted for investments made in tax-free bonds/ securities which yield tax-free dividend and interest in those situation wherein interest free own funds available to the assessee exceeded their investments (Copy of decision is enclosed in the Bank s Appeal legal paperbook - refer para 27, page 414), which reads as under: 27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A of Income Tax Act for investments made in tax-free bonds/securities which yield tax-free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favoring the assesses In view of the above, the Appellant submits before us to follow its own case vide ITAT order for A.Y. 1999-00, dated 27 September 2022, and delete the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 1993-94, the recovery against the same were not offered to tax by the Appellant in AY 2001-02. The ITAT has allowed the entire securities losses in AY 1993-94 vide its order dated 18 February 2008 and 27 July 2023 respectively. 6.3 Appellant s Submissions The Appellant seeks a direction that in case, the Department succeed in its appeal before the Hon ble High Court / Supreme Court in assessment year 1993-94, that loss is not allowable in the said year as the loss is not crystallized in the said year, then the Assessing Officer be directed to not to tax recoveries against the said securities losses in A.Y. 2001-02. We have gone through the submissions of assessee and order of coordinate bench for A.Y. 1993-94, wherein the loss claimed by the assessee has been allowed on its own facts, but as the department is in further appeal before the Hon ble jurisdictional High Court, We agree with the contentions raised by the assessee, that in case Hon ble High Court reversed the decision of coordinate bench on the ground of crystallization of loss in A.Y. 1998-99, same will be allowed in current A.Y. under consideration as the same has been settled with the parties and final figure of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case. 7.2 Brief facts During the year under consideration, the Appellant claimed before the Ld. AO that its income is taxable basis the tax treaty between India and UK. Article 7 of the tax treaty provides mechanism for computation of profit of the PE and therefore, the provisions of section 115JB are not applicable to the Appellant. Further, it was claimed by the Appellant before the Ld. CIT (A) that provision of section 115JB of the Act are not applicable in the present case since the Appellant is not required to maintain books of accounts as per the Companies Act. 7.3 AO s contention (Page 35, para 14) The AO held that Article 7 of the DTAA between India and UK clearly provides that the profit of the PE is to be computed subject to limitation of the domestic law. Section 115JA of the Act is part of domestic law and hence applicable to PE also. 7.4 CIT(A) decision (Page 54, para 16.8) Article 7 mandates that the computation of the income has to be in accordance with the provisions of the domestic law. Hence, when the DTAA itself mandates that the computation of income of the PE will be in accordance with the domestic law, treating the PE as an independent standalone entity, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessee is required to prepare its Profit Loss Account in accordance with the provisions of Part-II III of Schedule-VI of the Companies Act, 1956. It was observed by the Bench that the starting point of computation of minimum alternate tax (MAT) is the result shown by such Profit Loss Account. Since, in case of Banking company, the provisions of Schedule-VI of the Companies Act, 1956 are not applicable, as, they are required to prepare their accounts under the provisions of Banking Regulations Act, the provision of section 115JB will not be applicable. The other decisions cited by the learned Sr. Counsel for the assessee also support this view. Further, the Tribunal, Mumbai Bench, in MSEB (supra), has held that since the assessee is not constituted as a company under the Companies Act, 1956, the provisions of section 115JA of the Act cannot be applied. While doing so, the Bench further observed that since the assessee Corporation is not required to distribute any dividend, it cannot be considered to be a company under the Companies Act, 1956. The facts involved in assessee's case are more or less identical to the facts of MSEB (supra). In view of the aforesaid, we hold t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeding in view of the decision of the Mumbai Tribunal in the case of Metchem Canada Inc. v/s. DCIT [284 ITR (A.T.) 196], wherein after referring to Article on non-discrimination, it has been held that provisions of section 44C of the Act will have no application. 8.3 Without prejudice to the above, the learned CIT(A) also erred in holding that Article 26 of the DTAA entered into by India with UK is not applicable to the provisions of section 44C of the Act and the provisions of section 44C of the Act does not create a situation of discrimination vis-a-vis an Indian resident taxpayer. 8.4 The learned CIT (A) ought not to have restricted the claim of head-office expenses to 5% under section 44C of the Act and accordingly, should have allowed the head-office expenses in entirety. 8.2 Brief facts For the F.Y. under consideration, the Head Office ( HO ) allocated Head Office Expenditure ( HOE ) of INR 77, 08, 83,765/- to the Appellant on the basis of the Auditor s certificate. The Appellant, in its return of income, had claimed a deduction of HOE under section 44C of the Act (being 5% of Adjusted Total Income) The Appellant had raised the additional ground before the Ld. CIT (A) that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxable only in that State unless the enterprise carries on business in the other Contracting State through a PE situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to: (a) That PE, and (b) Sales of goods and merchandise of the same or similar kind as those sold, or from other business activities of the same or similar kind as those effected, through that PE. 2. Subject to the provisions of para 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a PE situated therein, there shall in each Contracting State be attributed to that PE, the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. In any case, where the correct amount of profits attributable to a PE is incapable of determination or the ascertainment thereof presents exceptional difficulties, the profits attributable to the PE may be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4C of the Act, constitutes taxation on a PE which an enterprise of a Contracting State has in the other Contracting State as less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities . Another aspect which requires to be considered by us is whether the provisions of computation of business profits in Article 7 are to viewed as subject to the application of nondiscrimination clause in Article 24(2), or is it the other way round i.e., nondiscrimination clause to be read as subject to the clause regarding computation of business profits. There are other peripheral or subsidiary issues raised before us, such as, whether the provisions of Section 44C of the Act can be viewed as a restriction on admissibility of deduction of head office expenditure at, and, whether the provisions of Section 44C of the Act, only provide for a fair method of estimation of deductible head office expenses and are enabling provisions in nature. 6. Article 24(2) of the Indo-Canadian DTAA is worded on the lines of Article 24(3) of the OECD Model Convention. In fact, it is verbatim extract from the Model Convention. While elaborating up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as much as the meaning indicated in these documents to the clauses and expressions in the tax treaties can be inferred as the meaning normally understood in, to use the words of Lord Redcliff, 'international tax language' developed by the organizations like OECD. This is so held in the case of Graphite India Ltd. v. Dy. CIT (2003) 78 TTJ (Cal) 418 : (2003) 86 ITD 384 (Cal). When an expression or a clause is picked up from the OECD Model Convention, the normal presumption is that the persons using the said clause or expression are also aware about the meanings assigned to the said clause or expression by the OECD and have used it in the same sense and for the same purpose. Unless a contrary intention is specifically expressed, say by a protocol attached to the DTAA, it is only axiomatic that the clause or the expression will have the same meaning as normally assigned in the tax literature by the OECD. Therefore, when an expression or a clause from the OECD Model Convention is used even in a bilateral tax treaty involving a non OECD country, one has to proceed on the basis that it is used in the same meaning and with the same connotations as assigned to it by the OECD Model ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rises of that other State carrying on the same activities. On the issue whether the general provisions will prevail over the special provision or vice versa, the law is fairly well settled. As aptly conveyed by the legal maxim generalia specialibus non derogant', i.e., special things derogate from general things. As observed by a co-ordinate Bench, in the case of ITO v. Titagarh Steels Ltd. (2001) 73 TTJ (Cal) 297 : (2001) 79 ITD 532 (Cal) and relying upon Hon'ble Supreme Court judgment in the case of South India Corporation (P) Ltd. v. Secretary, Board of Revenue AIR 1964 SC 207, 'a special provision normally excludes the operations of general provision'. The provisions of Article 7 being general in nature are therefore, required to be read as subject to the provisions of Article 24. Revenue's argument that since the business profits are to be computed in accordance with the provisions of and subject to the limitations of the taxation laws of that State under Article 7(3) and, therefore, limitation placed under Section 44C of the Indian IT Act cannot be ignored, cannot, therefore, be accepted. What Article 24(2) seeks to remove is the discrimination to the perm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , only such expenses are to be allowed as a deduction on account of head office expenses as can be fairly allocated to the PE. The only impact of the applicability of non-discrimination clause will be that the scope of deduction under Section 37(1) of the Act will not stand curtailed by the restriction placed under Section 44C of the Act. In our considered view, this direction of the Ld. CIT (A) is justified and calls for no interference. 10. As far as asst. yr. 1993-94 is concerned, the CIT(A) has held that the provisions of Section 44C of the Act will apply but then, for the reasons set out above, we are of the considered view that Section 44C has no application in the matter and that the assessee is to be allowed deduction of such head office expenses as can be fairly allocated to the PE. Accordingly, as for the asst. yr. 1993-94, the matter is to be restored to the file of the AO for adjudication de novo in the light of the above observations. 22. Respectfully following the above said decision, we allow the ground raised by the assessee. In view of the above, the Appellant submits before Hon ble ITAT to follow the own case above ITAT order for AY 1999-00 and allow the head offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y. 1996-97 and INR 1,17,85,085/- for A.Y. 1992-93. The Appellant had raised the additional ground before the Ld. CIT(A) that interest on income tax refund ought to be excluded from taxable income and should be taxed, if necessary, only when the issue of income-tax refund reaches finality. Without prejudice, interest should be taxable at the rate of 10% under Article 12 of the tax treaty. 9.3 CIT(A) s decision (page 68, Para 22.2) The Ld. CIT (A) did not admit the additional ground on account of following: The ground relating to taxability of interest paid to the Appellant is a factual ground based on the amount received by the Appellant during the year as interest on refunds granted Such income is connected with the PE and is liable to be included in the income of the Appellant in the year of receipt This is an issue of fact and cannot be raised by the Appellant at this stage. The factum of various issues to which such income pertains being subjudice has no relevance with taxation of such amount in the hands of the Appellant. 9.4 Appellant s submissions In this connection, the Appellant submit as under: Interest is taxable in the year of finality / final output of the appellant pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the said additional grounds are legal grounds, wherein, the facts are on record and facts do not require fresh investigation, following the decision of Hon ble Supreme Court in the case of National Thermal Power Co., Limited v. CIT 229 ITR 383 (SC), we admit the said additional grounds of appeal. Further, the Hon ble ITAT in AY 1999-00, by following the Mumbai ITAT decision in the case of Avada Trading Vs. ACIT 284 ITR (A.T) 73 has held that the interest on IT refund would be assessable in the year in which it is granted [Page 184, para 26], which read as under: 26. Respectfully following the above said decision, additional ground no. (i) is allowed as per the stated direction in the above decision of the Coordinate Bench. With regard to the applicable rate, the Hon ble ITAT followed the Bombay HC decision in the case of DIT vs. Credit Agricole Indosuez [377 ITR 102] and held that interest should be taxable as per the DTAA at the rate of 10%. The observation of the Tribunal at page 184, para 27 are as under: 27. With regard to Additional ground (ii) which is in respect of interest on tax refund be taxed at 10% as per India-UK Treaty , we observe that the Hon'ble Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) of the Special Bench had been followed by the Tribunal in ITA No.183/Mum/2010 [M/s DHL Operations B.V., the Netherlands vs. Dy. Director of Income Tax]. The issue before the Tribunal was the rate of tax on which Income tax refund is to be taxed i.e. on the basis of the Articles of DTAA or under the Act. The Tribunal on examination of the DTAA in the above case concluded that interest on income tax refund is not effectively connected with the PE (Permanent Establishment) either on asset test or activity test. Therefore, taxable under the Article 11(2) of Indo-Netherlands tax treaty. The Revenue carried the aforesaid decision of M/s. DHL Operations B.V. (supra) in appeal to this Court, being Income Tax Appeal No.431 of 2012. This Court by order dated 17 July 2014 refused to entertain the appeal. In the circumstances no fault can be found with the impugned order of the Tribunal in restoring the issue to the Assessing officer to determine / adopt the rate of tax on refund in the light of the relevant clauses of Indo-France DTAA and the decision of Special Bench in Clough Engineering (supra) Accordingly, question 4 does not raise any substantial question of law so as to be entertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 323(SC) wherein it is held that the Assessing Officer has no power to entertain a claim made otherwise than by filing a revised return of income. 2. Without prejudice to grounds above, on the facts of the case and in law, the Ld. CIT (A) erred in allowing additional claim of direct expenses incurred outside India amounting to Rs 24, 79, 25,160/- merely relying upon the additional evidence based on certificate of the auditors and ignoring rule 46A, without appreciating that such an evidence could not have been admitted once the expenses claimed were not at all recorded in books of assessee maintained in India. 3. Without prejudice to the above grounds, on the facts of the case and in law, the Ld. CIT(A) erred in holding that the expenditure incurred by the HO under the head GTS, IT Cable and wireless and corporate and institutional banking represent payments made to self without appreciating the fact that these transactions between the PE and HO would not be treated as payment to self as per the principle of mutuality, as under International taxation principles the income of the PE has to be computed as independent entity. 1.2 Brief facts During the F.Y. under consideration, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contention raised by the department for the very first time directly before the ITAT in the Ground No. 1 that simultaneously there was equivalent income also accruing to the Appellant under section 28(iv) of the Act and once the AO having not made any separate addition u/s. 28(iv) of the Act, the disallowance of expenses claimed directly in the computation of income was merely to bring tax neutrality, the Appellant submit as under: o This issue is covered in favor of the Appellant by the decision of the Mumbai Tribunal in case of Shinhan Bank vs. DCIT [2022] 144 taxmann.com 182 (Mumbai ITAT) (Copy of the decision is enclosed in the Department s appeal legal paper book at page no. 1), wherein the Hon ble Tribunal has inter alia held that non-reimbursement of expenses incurred by HO for salary of employees of Indian PE did not result in taxable income in the hands of PE/HO under section 28(iv) of the Act. Relevant para is reproduced as under: 9. We find that Article 7(1) of India Korea Double Taxation Avoidance Agreement [(1987) 165 ITR Stat 191; the then Indo-Korea tax treaty, in short], provides that The profits of an enterprise of a Contracting State shall be taxable only in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablishment. The entire profit computation is thus based on this fiction. We must also remember that the taxable unit is the foreign company itself, and not the Indian PE. As observed by the Hon'ble Supreme Court in the case of CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 161 Taxman 191/291 ITR 482, it is clear that under the Act, a taxable unit is a foreign company and not its branch or PE in India . It is in this light that one has to analyze the fact situation that we are dealing with. The assessee has eleven Korean expatriates working in India and running the entire show with respect to its Indian banking operations. These persons are employees of the assessee company, but they work exclusively for the Indian PE. As employees of the Assessee Company and working for its head office, these employees get salaries in Korea and, in addition to that salary, when they come to India, they get a certain additional amount as compensation for working in India. While the Indian salaries of these eleven expatriates are paid in India, and shown in the books of accounts in India, and, as such duly reflected in the profit and loss account of the PE in India, so far as the salaries paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... five-member bench decision of this Tribunal, in the case of Sumitomo Mitsui Banking Corpn. V. Dy. CIT (IT) [2012] 19 taxmann.com 364/136 ITD 66 (Mum.), the intraorganization transactions, as non-reimbursement of employee costs by the PE to HO, is, are tax neutral. In any case, there cannot be a benefit accruing to the Korean company when the Indian PE of the assessee company does not reimburse its Korean company, because the assessee itself is the Korean company and the transaction in question is a wholly non-business and internal transaction of the Korean company. With respect to the Ground 2 to 4, the Appellant submits that this issue is covered in favor of the Appellant by a decision of the Co-ordinate bench of the Tribunal in the Appellant s own case for the assessment year 19992000, wherein the Tribunal followed the Appellant s own case Tribunal order of A.Y. 1997-98 and dismissed the ground raised by the Revenue (Copy of A.Y. 1999-00 ITAT order is enclosed in the Bank s legal paper book - refer Page 191, para 34) which reads as under: 34. since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO s contention (page 7, para 4) The AO disallowed the entire expenditure under section 37(1) of the Act as expense is not laid-out/ incurred wholly and exclusively for purpose of SCB India and not debited in books. However, the AO treated the expenses as Head Office expenditure and allowed the deduction for this expenditure under section 44C of the Act (restricted the claim to 5% of adjusted total income). 5.4 CIT(A) s decision (page 22, para 7.6) The Ld. CIT (A) following earlier year's decisions in the Appellant s case and decision of Bombay High Court in case of CIT vs. Emirates Commercial Bank Ltd. (262 ITR 55) (Bombay HC), held that the expenses incurred are exclusively for the purpose of business of the Appellant in India and not in nature of Head Office expenses and allowed the deduction of the expenses under section 37(1) of the Act. 5.5 Assessee s submission The Assessee submits that this issue is covered in favor of the Assessee by a decision of the Co-ordinate bench of the Tribunal in the Assessee s own case for the assessment year 1999-2000, wherein the Tribunal followed the Assessee s own case Tribunal order of A.Y. 1997-98 and dismissed the ground raised by the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l independence of a PE, as inherent in the scheme of Article 7(2), is confined to the computation of PE profits under Article 7(2). Under the scheme of Article 7(2), one has to visualize a situation of hypothetical independence of the source jurisdiction's PE vis-a-vis it's GE (i.e. the foreign company, which is also referred to a the 'general enterprise') and other PEs outside the source jurisdiction, but then such a visualization of the state of things is only to compute the profits which the source jurisdiction PE might have made if such hypothetical independence was to exist. This fiction, however, is confined to the computation of profits attributable to the permanent establishment, and, in our considered view, it does not go beyond that. There is no dispute that the assessee company has a PE in India and therefore, the assessee is taxable in India in respect of the profits attributable to the PE. While the taxability is of the foreign company and as such tax subject is the foreign company, the taxation is only in respect of the profits attributable to the Indian PE, and the tax object, as such, is the profits that the PE might be expected to make it were a dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction in the computation of income attributable to the PE. The next question is as to what is the impact of the Indian PE not reimbursing the costs so incurred, for the benefit of the Indian PE, by the Korean HO. In our considered view it has no impact on income computation so far as PE profits are concerned, as a taxable unit is only the HO or the Korean company. Its importance, if at all, is only from the point of view of cash flow, but then a cash flow, or absence thereof, is not a critical factor from the taxation point of view since an intra-company cash flow simpliciter is tax neutral- unless it can be seen as a standalone transaction of funding. Quite contrary to the stand of the Assessing Officer, by treating nonreimbursement of expenses by the PE as a cause of action for independent income in the hands of the HO, the hypothetical fiction envisaged in article 7(2) is de facto negated. That is incongruous. There cannot be any purpose of expenses incurred by the HO, which are relatable to the Indian PE, being allowed as a deduction in the computation of income of the PE when non-reimbursement of that expenditure by the PE is treated as a source of income of the foreign comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 12 of the tax treaty between India and UK. 6.4 CIT(A) s Decision (Page 28, para 9.3) The Ld. CIT (A) relied on the decision of special Bench of Mumbai ITAT in case of Sumitomo Bank vs. DDIT (2012) (136 ITD 66) (SB-Mumbai ITAT) and Decision of Calcutta High Court in case of ABN AMRO Bank vs. CIT (343 ITR 181) and held that amount paid by the Assessee to HO as interest cannot be treated as income of the HO. 6.5 Assessee s submissions The Assessee submits that this issue is covered in favor of the Assessee by the decision of the Special bench of the Mumbai Tribunal in case of Sumitomo Mitsui Banking Corporation vs. DDIT (2012) (136 ITD 66).The Hon ble Tribunal has inter alia held that since the interest payment by branch to HO is in the nature of payment to self, (the HO and branch being one legal entity), the same should not be chargeable to tax in the hands of the HO under the provisions of the Act. It was also held that this interest cannot be taxed in the hands of the HO / overseas branch of the Bank even under the provisions of the tax treaty. (The relevant portion of Mumbai Special Bench order is already reproduced at para 3.5 of Ground 3 above.) Further, the Assessee su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to Rule 46A of the Income-tax Rules, 1962. 8.2 Brief facts The Assessee submits that the indirect income falling within the scope of Article 7 of the India UK tax treaty has been offered for tax. The Assessing Officer considered INR 2,45,60,214/- as indirect income arising to the Assessee on the similar activities as that of Indian Permanent Establishment undertaking by the Head Office directly with the Indian customer as taxable under Article 7 of India-UK tax treaty under the force of attraction rule. The said income was already forming part of profit and loss account and offered to tax in the computation of income. 8.3 AO s contention (Page 22, para 9) Relying on International Taxation Commentaries, Klaus Vogel, and AO held that the income of the head office would be taxable in India even when the head office is engaged in the same or similar activities even though it might not be attributable to the PE and taxable under Article 7 of the tax treaty. Accordingly taxed, the said income in the hands of the Assessee. 8.4 CIT(A) s Decision (Page 34, para 12.4) The Ld. CIT(A) deleted the additions made by the AO as the said income of INR 2,45,60,214/- was already offered by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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