2013 (12) TMI 999 - AT - Income Tax

Technical Expenditure Held that - Following Sumitomo Mitsui Banking Corporation v. Deputy DIT 2012 16 ITR (Trib) 116 - The principle of mutuality applies in respect of transactions between the permanent establishment and its head office - There can be no profit from transactions with self in as much as neither there can be any deduction in the hands of the permanent establishment nor there can be any income in the hands of the head office in respect of such mutual transactions - The learned CIT(A) was justified in holding that a sum of ₹ 4.23 crores can neither be allowed as deduction in the hands of Indian branch nor be considered as income in the hands of the head office. Following CIT v. P. V. A. L. Kulandagan Chettiar 2004 267 ITR 654 (SC) - The provisions of sections 4 and 5 are subject to the contrary provision, if any, in the Double Taxation Avoidance Agreement - The provision of the Act or that of the Double Taxation Avoidance Agreement, whichever is more beneficial to the assessee, shall apply - The payment of ₹ 4.23 crores by the permanent establishment to the head office is a payment to self and hence cannot be allowed as deduction in the hands of permanent establishment - As a result thereof, the provisions of section 40(a)(i) were held to be not applicable. Since the assessee is a non-resident governed by the provisions of the Double Taxation Avoidance Agreement, it is entitled to the benefits of the Double Taxation Avoidance Agreement, if the quantum of income or the overall tax liability turns out to be less as per the Double Taxation Avoidance Agreement vis-a-vis the domestic law - It is not possible to determine as to whether or not the computation under the Double Taxation Avoidance Agreement is more beneficial to the assessee The issue was restored for fresh adjudication. Fee for technical services DTAA Held that - Though there is a discussion about article 13(4)(c) of the Indo-U.K. Double Taxation Avoidance Agreement but the decision has been rendered only under the domestic law - There is no finding of the learned Commissioner of Income-tax (Appeals) that the amount is chargeable to tax as per the Double Taxation Avoidance Agreement - The amount is not chargeable to tax in the hands of the head office under the domestic law The issue was restored for fresh decision. Interest u/s 234B and 234C Held that - The assessee is a non-resident, naturally any amount payable to it which is chargeable to tax under the Act, is otherwise liable for deduction of tax at source Following Director of Income-tax (International Taxation) v. NGC Network Asia LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT - When the duty is cast on the payer to deduct tax at source, on failure of the payer to do so, no interest can be charged from the payee-assessee under section 234B Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Rs. 4,23,93,911 as head office expenditure.
2. Treatment of Rs. 4,23,93,911 as fees for technical services under the Double Taxation Avoidance Agreement (DTAA) between India and the U.K.
3. Levy of interest under sections 234B and 234C.
4. Taxation of technical expenditure at the rate of 15% in the hands of the head office.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 4,23,93,911 as head office expenditure:
The assessee, engaged in providing shipping-related services, claimed a deduction for head office expenditure, which included technical expenses. The Assessing Officer (AO) disallowed this deduction, treating the amount as "fees for technical services" and citing the failure to deduct tax at source under section 40(a)(i). The Commissioner of Income-tax (Appeals) (CIT(A)) upheld this disallowance, referencing the principle of mutuality and the Special Bench decision in ABN Amro Bank NV, which held that payments between a head office and its branches are not deductible as they are considered payments to self. The Tribunal agreed, noting the lack of correlation between actual expenses and the amount charged by the head office, which included a profit element.

2. Treatment of Rs. 4,23,93,911 as fees for technical services under the DTAA:
The CIT(A) treated the amount as fees for technical services under the DTAA between India and the U.K., which the assessee contested. The Tribunal noted that the CIT(A)'s decision was based on domestic law, not the DTAA. The Tribunal remitted the matter to the AO to compute the income under the DTAA and compare it with the domestic law to determine which is more beneficial to the assessee, as per section 90(2) of the Act.

3. Levy of interest under sections 234B and 234C:
The AO levied interest under sections 234B and 234C, which the assessee contested. The Tribunal referred to the jurisdictional High Court's decision in NGC Network Asia LLC, which held that when the payer fails to deduct tax at source, no interest can be charged from the payee-assessee under section 234B. As the assessee is a non-resident, the Tribunal held that no interest can be charged under sections 234B and 234C, allowing this ground of appeal.

4. Taxation of technical expenditure at the rate of 15% in the hands of the head office:
The AO taxed the technical expenditure at 15% in the hands of the head office, separate from the permanent establishment's income. The CIT(A) disagreed, holding that the amount was not chargeable to tax under domestic law, a view upheld by the Tribunal. The Tribunal emphasized that the DTAA cannot impose a tax obligation independent of domestic law.

Conclusion:
The Tribunal upheld the CIT(A)'s order regarding the non-deductibility of the head office expenditure and the non-taxability of the amount in the hands of the head office under domestic law. The matter was remitted to the AO to compute the income under the DTAA and compare it with domestic law. The levy of interest under sections 234B and 234C was disallowed. The appeal of the assessee was partly allowed, and that of the Revenue was dismissed.