2013 (8) TMI 445 - AT - Income Tax

Non Deduction of TDS - Nature of payment - Head Office expenditure or Royalty Held that - Action of the revenue authorities on treating the amount being in the nature of royalty and hence not allowable under section 40(a)(i) cannot be allowed - By no standard this amount can be considered as royalty as a consideration for the use of the assets specified under Explanation 2 to section 9(1)(vi). This amount is in the nature of head office expenses - It would be in the interest of justice if the impugned order on this issue is set aside and the matter is restored to the file of the AO direction is given to the AO to consider the deductibility or otherwise of such amount by treating it as head office expenses. Invocation of Section 14A read with exemption under section 10(15) and (33) Held that - After noticing that the funds for investment in securities fetching exempt income were out of own funds it has been held that no disallowance under section 14A on account of interest is called for. As regards the amount of other expenses disallowable tribunal has upheld disallowance @ 2% of exempt income. Rate of Tax - Article 26 of the DTAA with France - claim of the assessee that tax to imposed as per rate of tax applicable to Indian Banks - Permanent establishment (PE) - Held that - CIT(A) has sustained the order of the AO by applying rate of tax @ 48% instead of 35% as asked for by the assessee. Now that the assessee has accepted that the coordinate Bench of Kolkata has dealt with the issue and for the reasons mentioned therein the AR accepts the rate as applied by the AO. - Decided against the assessee. Allowance of broken period interest as expenditure Held that - Similar issue was there in the appeal for the immediately preceding year and the Tribunal following its decision for assessment year 1991-92 has decided this issue against the Revenue. In view of the fact that the facts and circumstances for the previous year relevant to the assessment year under consideration are similar and no distinguishing feature has been brought to our notice by the learned Departmental Representative respectfully following the precedent impugned order on this issue is upheld by directing that the interest paid in respect of the broken period be set off against the interest received in respect of the broken period. Income tax chargeability on writing off provision of of bad debts - section 41(1) Held that - When the provisions for doubtful debts were added back in the computation of income in the respective years there is no question of taxing them again in the year when they are written back.

Issues Involved:
1. Justification of AO's right to make alternate computation.
2. Application of Section 14A regarding disallowance of interest on FCNR(B) deposits.
3. Allocation of general administration expenses under Section 14A.
4. Taxation of interest/commission received from HO/branches.
5. Deduction of interest paid to HO/branches under Section 40(a)(i).
6. Disallowance of data processing charges under Section 40(a)(i).
7. Tax rate applicable to non-resident company under Article 26 of the Indo-France DTAA.
8. Additional ground of double taxation of interest income.
9. Exemption of gross interest under Sections 10(15) and 10(33).
10. Allowance of broken period interest as expense.
11. Deduction of expenses incurred by HO on credit risk assistance.
12. Reincorporation of provisions written back as bad debts.

Detailed Analysis:

1. Justification of AO's right to make alternate computation:
The CIT(A) upheld the AO's right to make alternate computation if disallowances were deleted by appellate authorities. The Tribunal found this ground to be general and did not provide a specific ruling on it.

2. Application of Section 14A regarding disallowance of interest on FCNR(B) deposits:
The CIT(A) upheld the AO's invocation of Section 14A, disallowing interest of Rs. 4,21,73,860. The Tribunal noted that the issue had been settled in previous years, where interest on NOSTRO accounts was taxable, making Section 14A disallowance inapplicable. Thus, the disallowance was directed to be deleted.

3. Allocation of general administration expenses under Section 14A:
The CIT(A) upheld the AO's allocation of Rs. 36,64,040 from general administration expenses under Section 14A. The Tribunal, following its decision on the interest disallowance, found this allocation infructuous and directed its deletion.

4. Taxation of interest/commission received from HO/branches:
The CIT(A) upheld the AO's decision to tax interest/commission from HO/branches. The Tribunal noted that similar grounds were not pressed by the assessee for the current year, thus upholding the CIT(A)'s order and confirming the taxability of interest income.

5. Deduction of interest paid to HO/branches under Section 40(a)(i):
The CIT(A) upheld the disallowance of Rs. 33,55,026 under Section 40(a)(i). The Tribunal corrected the amount to Rs. 21,51,539 and directed the AO to grant the correct deduction.

6. Disallowance of data processing charges under Section 40(a)(i):
The CIT(A) upheld the disallowance of Rs. 91,03,072 under Section 40(a)(i), treating it as royalty. The Tribunal disagreed, stating the amount was head office expenses, not royalty, and remanded the issue back to the AO for fresh consideration under Section 44C.

7. Tax rate applicable to non-resident company under Article 26 of the Indo-France DTAA:
The CIT(A) applied a tax rate of 48% for non-resident companies, rejecting the assessee's claim for a rate applicable to domestic companies. The Tribunal upheld this decision, noting no discrimination under Article 26 of the DTAA.

8. Additional ground of double taxation of interest income:
The AO taxed Rs. 33,55,026 as interest income from HO/branches. The Tribunal, following the Special Bench decision in Sumitomo Mitsui Banking Corp., deleted the double taxation of this amount.

9. Exemption of gross interest under Sections 10(15) and 10(33):
The CIT(A) allowed exemption of gross interest under Sections 10(15) and 10(33). The Tribunal upheld this, directing a 2% disallowance under Section 14A for other expenses.

10. Allowance of broken period interest as expense:
The CIT(A) allowed broken period interest as an expense. The Tribunal upheld this decision, following precedent from previous years.

11. Deduction of expenses incurred by HO on credit risk assistance:
The CIT(A) allowed deduction of Rs. 1,16,62,285 incurred by HO on credit risk assistance. The Tribunal upheld this decision, following precedent from the case of American Express Bank Ltd.

12. Reincorporation of provisions written back as bad debts:
The CIT(A) deleted the addition of Rs. 5,76,81,812, finding the provisions were previously offered for tax. The Tribunal upheld this decision, agreeing with the CIT(A)'s reasoning.

Conclusion:
The appeals filed by the assessee and the department were partly allowed, with specific directions and remands for fresh consideration on certain issues. The Tribunal's detailed analysis provided clarity on the application of various sections of the Income-tax Act and the Indo-France DTAA, ensuring a fair and just resolution of the disputes.

← Previous Next →