2018 (2) TMI 1927 - AT - Income Tax

Addition on account of interest received on External Commercial Borrowings ( ECBs ) extended to Indian borrowers - interest under section 234B - HELD THAT - Identical issue having similar facts was a subject matter of the departmental appeal for the AY 2011-12 wherein the issue has been decided in favour of the department and against the assessee the present case the Assessing Officer himself had admitted by grossing up the ECB interest by the amount of tax borne by the borrowers that tax at source has been deducted. We are thus of the view that no interest under section 234B of the Act can be levied for the tax demand on account of ECB interest and interest under section 234B is also not chargeable since ECB interest received by the assessee from the borrowers was subject to tax deduction at source under section 195 of the Act. The Assessing Officer is thus directed to delete the addition made on account of interest received from ECB given to Indian borrowers Excess levy of the tax under section 234D - AO levied the interest under section 234D of the Act on the amount of refund granted to the assessee in the intimation under section 143(1) of the Act from the date of intimation i.e. 7th October 2009 to the date of assessment order i.e. 28th July 2016 passed pursuant to the remand back proceedings i.e. for a period of 82 months. - HELD THAT - In the present case the AO considered the regular assessment which was passed by the AO on 28th July 2016 pursuant to the remand back proceedings on the direction of the ITAT. However in the present case the regular assessment was framed by the AO on 29th August 2012 in pursuant to the direction issued by the learned DRP therefore the interest on the excess refund was to be charged up to the date of regular assessment i.e. 29th August 2012 and not to the assessment made on 28th July 2016 in pursuant to the appellate order passed by the ITAT. We therefore direct the AO to charge the interest under Section 234D if any up to the date of regular assessment i.e. 29.8.2012 and not up to the date of subsequent assessment order passed i.e. 28.07.2016 in pursuant to the order of the higher authority i.e. the ITAT in this case. Set off brought forward business loss and unabsorbed depreciation - HELD THAT - It was the common contention of both the parties that it is to be allowed as per law. We direct the AO to decide this issue in accordance with law.

Summary

Issues Involved:
1. Addition on account of interest received on External Commercial Borrowings (ECBs) extended to Indian borrowers.
2. Deduction under section 44C of the Act.
3. Excess levy of interest under section 234D of the Act.
4. Set off of brought forward business loss and unabsorbed depreciation.

Issue-wise Detailed Analysis:

1. Addition on account of interest received on External Commercial Borrowings (ECBs) extended to Indian borrowers:
The primary issue in this case was the addition of ?114,43,54,024/- towards interest received by the assessee’s Head Office/overseas branches on ECBs extended to Indian borrowers. The assessee argued that this interest should not be taxed in India as it had already been taxed under Article 7 of the India-Japan DTAA, which deals with the Permanent Establishment (PE). However, the AO and DRP contended that the interest was taxable under Article 11 of the DTAA, which pertains to interest income. The ITAT upheld the department’s view, citing a previous decision in the assessee’s own case for AY 2011-12, where it was held that ECB interest is not attributable to the Indian branches of the assessee and only the syndication fee is taxable in the hands of the Indian branches for their role in arranging the ECBs. The ITAT also noted that the AO had grossed up the ECB interest by the amount of tax borne by the borrowers and directed that no interest under section 234B could be levied since the ECB interest was subject to tax deduction at source under section 195 of the Act.

2. Deduction under section 44C of the Act:
The assessee contended that the addition made towards ECB interest should be considered while determining the amount of deduction allowable under section 44C of the Act. However, since the ground related to ECB interest was decided in favor of the department, this issue became academic and was not further deliberated upon.

3. Excess levy of interest under section 234D of the Act:
The assessee challenged the levy of interest under section 234D for the period from the date of intimation (7th October 2009) to the date of the assessment order (28th July 2016). The assessee argued that the interest should be charged only up to the date when the refund was actually granted (19th March 2012) and not from the date of intimation. The ITAT agreed with the assessee, citing the Supreme Court’s decision in Modi Industries Limited, which clarified that "regular assessment" refers to the first assessment made under section 143 or 144. Consequently, the ITAT directed the AO to charge interest under section 234D only up to the date of the regular assessment (29th August 2012) and not up to the date of the subsequent assessment order passed pursuant to the ITAT’s order.

4. Set off of brought forward business loss and unabsorbed depreciation:
The assessee contended that the AO had erred in not allowing the set-off of brought forward losses amounting to ?34,49,96,933/- against the taxable income for the subject assessment year. Both parties agreed that this issue should be decided as per law. The ITAT directed the AO to allow the set-off of brought forward business loss and unabsorbed depreciation in accordance with the law.

Conclusion:
The appeal was partly allowed, with the ITAT upholding the department’s view on the taxability of ECB interest and directing the AO to charge interest under section 234D only up to the date of the regular assessment. The AO was also directed to allow the set-off of brought forward business loss and unabsorbed depreciation as per law.