2014 (1) TMI 595 - AT - Income Tax

Deletion of disallowance u/s 10(33) of the Act - Eligibility for exemption - Disallowance as interest expenditure Expenses incurred for earning dividend on shares - Nexus between tax free income and interest bearing funds Held that - The decision in BNP Paribas SA, Versus Deputy Director of Income-tax (International Taxation)-3(2), & Others 2012 (8) TMI 329 - ITAT, MUMBAI followed - the investments are made by the assessee form its own funds - The Hon ble High Court of Judicature at Mumbai has upheld the order of the ITAT on the ground that the finding of fact that the investments were made out of assessee s own funds was not challenged even revenue could not furnish any evidence to show that interest bearing funds were utilised for the purpose of making investments to earn tax free income Decided against Revenue. Deletion made in respect of guarantee commission Held that - The Bench called upon the assessee to furnish the agreements which gave rise to commission in the year under consideration, i.e. for A.Y. 2001-02 and also the agreements for subsequent two years so that it can be compared and if the conditions are the same the order or the Tribunal as well as the order of the Hon ble High Court can be followed - Copies of the agreements were not immediately available with both the parties Matter remitted back to the AO to verify the agreements Decided partly in favour of Assessee. Applicability of Rate of Tax to domestic companies Held that - The decision in BNP Paribas SA, Versus Deputy Director of Income-tax (International Taxation)-3(2), & Others 2012 (8) TMI 329 - ITAT, MUMBAI followed with the insertion of explanation in section 90 with retrospective effect from 01.04.1962 the matter decided in favour of Revenue and against the assessee. Interest paid to head office/overseas branches Held that - The decision in BNP Paribas SA, Versus Deputy Director of Income-tax (International Taxation)-3(2), & Others 2012 (8) TMI 329 - ITAT, MUMBAI followed - interest paid to the head office of the assessee bank as well as its overseas branches by the Indian branch cannot be taxed in India being payment to self which does not give rise to income that is taxable in India as per the domestic law or even as per the relevant tax treaty Decided in favour of Assessee.

Summary

Issues:
1. Disallowance of interest expenditure for earning dividend on shares.
2. Disallowance of guarantee commission and disallowance under section 10(33).
3. Applicability of tax rate for non-resident companies.
4. Taxation of interest paid to head office/overseas branches.

Issue 1: Disallowance of interest expenditure for earning dividend on shares:
The Revenue appealed against the disallowance of interest expenditure incurred for earning dividend on shares. The CIT(A) held that there was no nexus between tax-free income and interest-bearing funds. The Revenue contended that interest-bearing funds were used for earning interest-free income, which the CIT(A) found incorrect. The ITAT upheld the CIT(A)'s order, stating that no evidence proved the utilization of interest-bearing funds for earning tax-free income. The decision was based on precedents and lack of evidence supporting the Revenue's claim.

Issue 2: Disallowance of guarantee commission and disallowance under section 10(33):
The Revenue appealed against the deletion of additions made for guarantee commission and under section 10(33). Regarding guarantee commission, the Revenue argued that income should be spread over the guarantee period, not assessed in one year. The ITAT directed the AO to verify agreements to determine if they were similar to previous cases where income was spread over specific periods. The appeal was partly allowed for statistical purposes. The issue of disallowance under section 10(33) was dismissed due to identical circumstances.

Issue 3: Applicability of tax rate for non-resident companies:
The assessee contended that the tax rate applicable to domestic companies should apply to them as a non-resident company under the Indo-France double tax avoidance agreement. However, the CIT(A) and AO determined that the assessee should be taxed at the rate for non-resident companies. The decision was based on retrospective amendments and legal precedents favoring the Revenue, despite contrary views from the ITAT. The appeal was rejected in favor of the Revenue.

Issue 4: Taxation of interest paid to head office/overseas branches:
The assessee challenged the taxation of interest paid to head office/overseas branches. The ITAT ruled in favor of the assessee, citing a previous case where such payments did not give rise to taxable income in India. The Revenue admitted the issue was in favor of the assessee, and the addition made by the AO was deleted. The appeal was allowed in favor of the assessee.

In conclusion, the ITAT Mumbai addressed various issues related to income tax appeals, disallowances, tax rates, and taxation of interest payments to overseas branches, providing detailed analysis and legal interpretations for each issue raised in the appeals.