2012 (8) TMI 450 - AT - Income Tax

Rate at which tax is leviable - AO s action of taxing the Appellant at the rate normally applicable to non-resident companies - Held that - As assessee s appeal is stated to be covered against the assessee by the decision of the Tribunal in assessee s own case as charging of the assessee as foreign banking company at higher rate applicable to non-domestic company was not hit by non-discrimination clause of Article-25 of DTAA - Insertion of Explanation to section 90 makes it clear that a higher rate of law for foreign companies is not to be regarded as violating non-discrimination clause - against assessee. Disallowance of interest payable on inter office accounts - non deduction of tax at sources - Held that - The interest paid to the head office of the assessee bank by its Indian branch 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 - as interest paid by the Indian branch is not chargeable to tax in India, it follows that the provisions of section 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the PE - in favour of assessee. TP Adjustments - Held that - Considering the assessee submission that direct salary cost should be considered and indirect overhead cost should not be considered as concerned employees performed insignificant role for the credit monitoring assistance done for the overseas associate enterprises. However no fresh ECB loans have been granted during the year under consideration but services indeed have been rendered by the assessee to its overseas entities. The cost of the two employees for this has been evaluated at ₹ 1,49,767/-, which is even admitted by the assessee. The question remains only for the allocation of indirect expenses which have been estimated by CIT(A) at ₹ 2,50,000/- and on the aggregate of salary and indirect expenses 10% mark up has been applied - partly in favour of assessee. Liability u/s.234b & 234C - Held that - CIT(A) has deleted the interest levied on the assessee under section 234B & 234C on the ground as that the entire income of the assessee was subject to deduction of tax at source under section 195 therefore, there was no liability to pay advance tax under section 208/209 (1)(d) - in favour of assessee.

Summary

Issues Involved:
1. Rate at which tax is leviable.
2. Disallowance of interest payable on inter-office accounts.
3. Transfer Pricing (TP) adjustments.
4. Interest under sections 234B and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Rate at which tax is leviable:
The assessee contested the CIT(A)'s decision confirming the AO's action of taxing the appellant at the rate applicable to non-resident companies. The appellant argued that, based on the Double Taxation Avoidance Agreement (DTAA) between India and Japan, the tax rate should be the same as that for an Indian company in similar circumstances. The tribunal referred to its previous decision in the assessee's own case, where it was held that the higher tax rate for foreign companies does not violate the non-discrimination clause of the DTAA. Consequently, the tribunal dismissed the assessee's appeal on this ground.

2. Disallowance of interest payable on inter-office accounts:
The assessee argued that the interest payable to its head office and other overseas offices should be deductible in computing its total income. The tribunal referred to a Special Bench decision in the assessee's own case, which concluded that although interest paid to the head office by its Indian branch is not deductible under domestic law, it is deductible under the Indo-Japanese treaty. The interest cannot be taxed in India as it is a payment to self, and there is no failure to deduct tax at source. Therefore, the tribunal allowed the assessee's appeal on this ground.

3. Transfer Pricing (TP) adjustments:
The assessee challenged the TP adjustment made by the AO, arguing that the allocation of indirect costs by the TPO was excessive. The CIT(A) had reduced the indirect cost allocation but still upheld a portion of the adjustment. The tribunal reviewed the facts and reduced the indirect expenses further, estimating them at Rs. 1,50,000 instead of Rs. 2,50,000. Consequently, the tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal on this ground.

4. Interest under sections 234B and 234C:
The revenue contested the CIT(A)'s decision to delete the interest levied under sections 234B and 234C, arguing that the assessee was obligated to pay advance tax. The CIT(A) had relied on the fact that the entire income was subject to TDS under section 195, and thus, no advance tax liability arose. The tribunal upheld the CIT(A)'s decision, citing similar judgments in other cases, and dismissed the revenue's appeal on this ground.

Conclusion:
The tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal. The key points of the judgment were the affirmation of the higher tax rate for non-resident companies, the deductibility of interest under the Indo-Japanese treaty, the partial relief granted in TP adjustments, and the deletion of interest levied under sections 234B and 234C.