2020 (10) TMI 753 - ITAT DELHI

Disallowance of salary paid overseas to expatriates of the Appellant working in India by the Head Office (“HO’) and the Indian taxes paid thereon by the HO - head office of the assessee is situated in Japan and has deputed certain employees to work in its branches situated in India whose sole responsibility is to exclusively manage the business operation of the branches of the assessee in India. - HELD THAT:- Expatriate employees deputed by the HO are working exclusively for the Indian branches. Therefore, the salary paid to expatriates is incurred wholly and exclusively for the purpose of carrying on the business of branches in India and thus, the salary paid to expatriate is deductible as an expense under section 37(1) of the Act and not covered within the scope of ‘head office expenditure’ under section 44C of the Act. It is submitted that this issue is now covered by the order of the High Court in [2016 (4) TMI 817 - DELHI HIGH COURT] wherein the High Court dismissed the appeal of the Department - we direct the learned assessing officer to delete the disallowance of salary paid overseas to the expatriates of the appellant working in India by the head office and the Indian taxes paid thereon by that office.

Addition on account of the interest received by Indian branches from head office and other overseas branches - HELD THAT:- Income earned from head office and overseas branches is not taxable in the hands of the PE in India since they are not separate legal entities and are part of the same foreign company therefore no income can arise when the transactions are carried out by different parts of the same legal entity. It is a settled principle of law that no man can make profit out of himself. Therefore, the interest income earned from head office and overseas branches is not chargeable to tax.

Disallowance u/s 14 A on account of the exempt interest income earned on pass-through certificates claimed as exempt u/ 10 [35A] - HELD THAT:- Difference if the income is received as a dividend u/s 10 (34) or is distributed by a securitisation trust which is also exempt u/s 10 (35A) - we are of the view that if these passthrough certificates are held as stock in trade by the assessee and distribution of income is also exempt in the hands of the assessee, it is also on the same footing as in case of other banks which are receiving the dividend from securities held as stock in trade. Therefore, we hold that in this case, provisions of Section 14 A does not apply. Hence no disallowance is called for under that Section. Accordingly, made by the learned assessing officer u/s 14A of the income tax act of ₹ 22,521,366/– is unwarranted. Further, as the assessee is granted relief on the first argument that Section 14 A is not applicable in case of bank when the investments are held as stock in trade, other arguments raised are merely academic.

Taxability of interest earned on external commercial borrowing to Indian customers - HELD THAT:- Assessee has received interest from external commercial borrowing loan given by the head office/overseas branches to various customers in India. AO has taxed this income at the rate of 10% applying the article 11 (2) of double Taxation Avoidance Agreement. In view of this we dismiss ground number [4] of the appeal to that extent.

Deduction u/s 44C - AO has held that since the interest on external commercial borrowing loans are taxed on gross basis, therefore there is no question of allowing any deduction from such income and accordingly did not consider the interest on external commercial borrowing loans for the purpose of computing deduction under that Section - HELD THAT:- It is the option of the assessee to govern by the provision of the Domestic tax Laws or DTAA, whichever is more beneficial to assessee. But there is no mandate that assessee can opt for lower taxes as per DTAA and claim expenses as per Domestic tax laws. Therefore there cannot be any further expenditure claimed as deduction from that income. That will dilute the amount of tax payable on interest income in the source country as payable according to the Double Taxation Avoidance Agreement - no mandate in the DTAA to grant any such deduction from income taxed u/s 11 (2) - No infirmity in the order of AO in not granting deduction u/s 44C of the act from the above income which is taxed under article 11 (2) of the DTAA on gross basis at the rate of 10%. As we hold that there is no need to go to Section 44C of the act in this case, reliance placed by the assessee on the several judicial precedents with respect to the definition of meaning of total income/ adjusted income is not relevant.

Taxation of interest received by the assessee u/s 244A of the income tax act on income taxes refund received during the year - in the return of income the interest was offered to tax at the rate of 10% under article 11 (2) of the DTAA - HELD THAT:- This issue squarely covered in favour of the assessee by the decision of the Honourable Bombay High Court in CREDIT AGRICOLE INDOSUEZ [2015 (6) TMI 974 - BOMBAY HIGH COURT]wherein the issue has been set aside to the file of the learned assessing officer to determine/adopt the rate of tax on refund in the light of relevant clauses of the DTAA . Therefore, we also set aside this issue to the file of the learned assessing officer to decide on the rate of tax on interest on income tax refund received by the assessee.

TP Adjustment - segregating the international transaction of the receipt of the guarantee commission and benchmarking the same separately - HELD THAT:- We allow this ground of appeal of the assessee holding that as the banking business of the assessee and the transactions related to the issue of guarantee commission on by the assessee are interlinked and closely connected, they should have been benchmarked in a bundled manner. Accordingly ground number 9 of the appeal of the assessee is allowed.

Liability for education cess on income-tax levied for AY 2015-16 ought to be allowed as a deduction under the head income from business and profession.’ - HELD THAT:- Whether education cess is allowable as a deduction to the assessee u/s 37 (1) of the income tax act the issue has been decided in Sesa Goa Ltd. [2020 (3) TMI 347 - BOMBAY HIGH COURT] - we set aside the issue back to the file of the learned assessing officer directing him to allow the education cess as deduction u/s 37 (1) of the act after verifying the computation of the same. Accordingly additional ground raised by the assessee is allowed with above direction.