2014 (10) TMI 150 - AT - Income Tax

Salary paid overseas to expatriate of assessee disallowed - Working in India by the head office and the Indian tax paid there on by the head office Held that - The expatriates were working in India and salary had been subjected to tax for which form no. 16 was also issued to the expatriates - there cannot be any dispute regarding verifiability of thes expenses Following the decision in Abn Amro Bank N. Versus Joint Commissioner Of Income-tax, Spl. Range 3. 2005 (6) TMI 218 - ITAT CALCUTTA-E - The expenses had been incurred wholly and exclusively for the Indian branch and no part of thee expenses could be allocated to any other branch by head office - there was no dispute amongst the members in regard to non-applicability of provisions u/s 44C - Decided in favour of assessee. Interest paid to head office and other overseas branches - receipt of interest from Indian branches Held that - Following the decision in Sumitomo Mitsui Banking Corporation vs. DDIT 2012 (8) TMI 450 - ITAT, MUMBAI 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 - a distinction has to be kept in mind between banking and financial institutions and non-banking and financial institutions - If entity is not in the business of giving commercial loans, no notional interest charged is allowed as a deduction to the intra entity borrowing - If the entity is a bank or other financial institution and, therefore, in the business of giving commercial loans, the current interest rate applicable to the funds lend to the PE is deductible to the borrower (PE) - However, as far as assessability in the hands of lender (HO) is concerned the same has to be excluded on the ground of mutuality Decided in favour of assessee. Interest accrued/received to the Indian PE from its head office/overseas branches Held that - Following the decision in Assistant Director of Income-tax (International Taxation) Versus Credit Agricole Indosuez 2013 (9) TMI 364 - ITAT MUMBAI - the assessee himself had submitted that the amount paid by PE to its HO/branches should not be allowed as deduction so as to bring symmetry between interest income and interest accrued from or to HO - The next limb of submission of revenue is that specific deeming provision u/s 9(1)(v) will override the concept of mutuality the contention of the revenue is accepted because concept of mutuality cannot override specific provision of law - once the interest received by PE is deemed to be income of PE and there is no bar in the treaty on its taxability then it cannot be excluded from computation of income earned by PE Decided against assessee. Applicability of the provisions of section 115JB Minimum Alternate Tax Held that - The assessee had prepared its accounts as per the requirements of Banking Regulation Act and while filing the return of income, though it had computed the book profits as per the provisions of section 115JB also, but had given a note that the provisions of section 115JB were not applicable. It is also not disputed that profit and loss account of assessee had not been prepared as per part II & III of schedule VI to the Companies Act - The MAT provisions were brought in statute by the Income Tax Act by Finance Bill, 1996 and it has been observed that company engaged in the power and infrastructure sector will remain exempt from the levy of MAT - This provision was brought in to bring within the tax net the zero tax companies - this makes the intention of legislature very clear that the MAT provisions are applicable only to domestic companies and not to the foreign companies - section 115JB is not applicable in case of banking companies - it has been clarified by the assess that the taxable income had been computed as per the provisions of article 7(3) of the DTAA Decided in favour of assessee. Interest received on external commercial borrowings given to Indian borrowers deduction u/s 44C - Held that - The Indian branch of assessee was performing the services relating to marketing/sales promotion, passing on the lead to the overseas branches, Indian branches did the credit evaluation of the Indian customers and used to send an evaluation report to the head office/overseas branches and Review of terms and conditions of the approval with respect to ECB loan - The syndication fee was received by Indian Branch for the services - But that part of interest earned by head office/foreign branches which was attributable to the PE in India was not returned by assessee - the assessee has admitted that the Indian branches of the bank play an active role in the disbursement of ECB loan and also regularly monitor the same - Therefore, the ECB loans disbursed by the Head office/foreign branches were effectively connected with the Indian branches interest income had to be appropriated to the PE in India as it had accrued and arisen in India - The AO has taxed 10% of the gross interest assessee contended that the interest paid to head office/foreign branches are net of tax for which the loan agreements have to be examined which has been filed by way of additional evidence thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of assessee. Treatment of deferred bank guarantee commission Held that - Following the decision in CIT vs. Bank of Tokyo Ltd. 1993 (5) TMI 172 - CALCUTTA HIGH COURT - full commission though payable at the outset did not crystallize into perfect right to receive so far as un-expired period was concerned because the payability or receivability from the view of the assessee bank was counter balanced by the refundability diluting the right to receive into a contingent right as regards un-expired period of the guarantee - The assessee clarified that FEDAI Guidelines places an obligation on the assessee to refund the proportionate commission for the un-expired period Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of salary paid overseas to expatriates working in India.
2. Addition on account of interest paid to Head Office and other overseas branches.
3. Addition on account of interest received from Indian branches.
4. Addition on account of interest accrued/received by the Indian PE from its HO/overseas branches.
5. Applicability of the provisions of section 115JB (MAT).
6. Addition on account of interest received on External Commercial Borrowings (ECBs).
7. Deduction under section 44C.
8. Treatment of Deferred Bank Guarantee Commission.
9. Applicable rate of tax.
10. Initiation of penalty proceedings under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Disallowance of Salary Paid Overseas to Expatriates Working in India:
The AO disallowed the salary paid to expatriates working in India by the Head Office, treating it as covered under section 44C. The assessee argued that these expenses were directly attributable to the Indian operations and not administrative expenses covered under section 44C. The tribunal found that these expenses were wholly and exclusively for the Indian branch and were verifiable, thus allowing the deduction. This decision was supported by various precedents including the case of ABM Amro Bank vs. JCIT.

2. Addition on Account of Interest Paid to Head Office and Other Overseas Branches:
The AO disallowed the interest paid to the Head Office and overseas branches due to non-deduction of tax at source under section 195. The tribunal referred to Article 7(2) and 7(3) of the Indo-Japan DTA, which treats the PE as a distinct and separate enterprise, allowing the deduction of interest paid to the Head Office. However, the tribunal also noted that under the concept of mutuality, interest received by the Head Office from the PE could not be taxed.

3. Addition on Account of Interest Received from Indian Branches:
The AO added the interest received by the Head Office from Indian branches to the income of the PE. The tribunal held that such interest could not be taxed under the concept of mutuality, as the transaction was between the same entity.

4. Addition on Account of Interest Accrued/Received by the Indian PE from its HO/Overseas Branches:
The tribunal rejected the AO's addition of interest accrued/received by the Indian PE from its Head Office/overseas branches, following the principle of mutuality and the precedent set by the Special Bench in the case of Sumitomo Mitsui Banking Corporation.

5. Applicability of the Provisions of Section 115JB (MAT):
The AO applied section 115JB (MAT) to the assessee, treating it as a company under section 2(17). The tribunal, however, found that the accounts were prepared as per the Banking Regulation Act and not as per Schedule VI of the Companies Act, thus section 115JB was not applicable. The tribunal also noted that the amendment by Explanation 3 to section 115JB was prospective and did not apply to the assessment year in question.

6. Addition on Account of Interest Received on External Commercial Borrowings (ECBs):
The AO taxed the interest on ECBs on a gross basis. The tribunal admitted additional evidence in the form of loan agreements to determine if the interest was net of tax and restored the matter to the AO for de novo consideration.

7. Deduction under Section 44C:
The tribunal restored the matter to the AO to determine the correct amount of deduction under section 44C, in line with the decision on the ECB interest income.

8. Treatment of Deferred Bank Guarantee Commission:
The AO treated the commission received on guarantees as taxable on receipt basis. The tribunal followed the decision of the Hon'ble Kolkata High Court in the assessee's own case, which held that the commission did not crystallize into a perfect right to receive for the unexpired period, thus allowing the assessee's treatment.

9. Applicable Rate of Tax:
The tribunal rejected the assessee's contention that the applicable rate of tax on the income attributable to its PE in India should not exceed the rate applicable to domestic companies, citing Explanation 1 to section 90(2).

10. Initiation of Penalty Proceedings under Section 271(1)(c):
The tribunal dismissed the ground related to the initiation of penalty proceedings as premature.

Conclusion:
The tribunal provided a detailed analysis and rulings on each issue, often relying on precedents and specific provisions of the Indo-Japan DTA and the Income Tax Act. The decision highlights the importance of the principle of mutuality, the applicability of specific sections like 44C and 115JB, and the treatment of cross-border transactions within the framework of tax treaties.