2019 (1) TMI 1831 - AT - Income Tax

TDS u/s 195 - Data Processing Cost paid by the assessee branch to its Head Office HO - whether such payment is based and determined on the usage of space/capacity and other keys towards usage of ICT infrastructure and further holding that the payment of Data Processing Cost is reimbursement of expenses and the provisions of Tax Deducted at Source (TDS) are not applicable - HELD THAT - Since the facts in the instant year are identical to ones as in the earlier years and accordingly we respectfully following the decision of the Co-ordinate Benches hold that assessee is entitled for deduction of data processing cost as the same is not royalty but reimbursement of Data Processing Charges and therefore there is no requirement of deduction of tax at source from the said reimbursement. This ground of Revenue is dismissed. Assessee-branch in India paid interest to its HO - HELD THAT - We find that the issue has been decided by the Co-ordinate Benches in the earlier years 2005 (8) TMI 294 - ITAT CALCUTTA-E wherein the Co-ordinate Benches have allowed the claim for deduction of interest paid by the branch office to its HO considering the fact that the assessee a banking company. The Calcutta High Court has held in the case of ABN Amro Bank 2010 (12) TMI 340 - CALCUTTA HIGH COURT where an assessee is an branch (PE) of non resident entity i.e its Head Office(G.E.) and the interest paid by the P.E. to G.E. allowable since branch (P.E.) is separate and distinct from head office(G.E.)for the purpose of assessment under the I.T.Act and also held that interest earned by the head office (G.E.) from branch office(P.E.) is not chargeable to tax in view of the specific provisions of Article 11 of DTAA between India and Netherland. Therefore respectfully following the decisions of the Co-ordinate Benches we dismiss the ground raised by Revenue. Disallowance u/s. 14A - CIT(A) deleted the disallowance on the ground that if there is any exempt income earned by the branch which is exempt under the Income Tax Act only then the provisions of Section 14A could be applied - HELD THAT - As relying on own case we found substantial merit in the contention of learned AR however in the interest of justice we restore the matter back to the file of the AO to find out if assessee was in receipt of any exempt income vis-a-vis interest paid to head office. If the AO found that assessee was not in receipt of any exempt income no disallowance is to be made. Accordingly AO is directed to decide afresh after verification. Interest income on Income Tax refund - to be charged only under Article 11(2) and not under Article 11(4) of Indo Belgium DTAA despite the interest income being effectively connected with Permanent Establishment (PE) - CIT(A) held issue in favour of assessee by holding that under Article 11(2) of DTAA gross amount of interest in all other cases may be taxed @ 15% and hence the rate of 15% is more beneficial than rate of 40% prescribed in the Finance Act 2011 for Assessment Year. 2012-13 - HELD THAT - After perusing the facts of the case of assessee and Article 11 of DTAA we are of the considered view that interest income on income tax refund has to be taxed at the rate which is beneficial to assessee as the assessee is tax agent of Belgium. Apparently the beneficial rate is 15% under Article 11(2) of DTAA which is lower than the 40% prescribed in the Finance Act 2011 from AY. 2012-13 and therefore in view of the provisions of Section 90 the rate applicable would be 15% surcharge. The case of assessee is squarely covered by the decisions as cited above wherein the Co-ordinate Benches have held that the interest on IT refund received u/s. 244A has to be taxed at the rate which is beneficial to assessee

Summary

Issues Involved:
1. Whether Data Processing Cost paid by the assessee-branch to its Head Office amounts to 'Royalty' under Section 9(1)(vi) of the Act and is subject to TDS under Section 40(a)(ia)?
2. Whether interest paid by the assessee-branch to its Head Office is taxable and subject to disallowance under Section 40(a)(ia)?
3. Whether disallowance under Section 14A of the Act is applicable for interest paid by the branch office to the Head Office?
4. Whether the interest income on Income Tax refund should be charged under Article 11(2) or Article 11(4) of Indo Belgium DTAA?

Analysis:

Issue 1:
The Revenue challenged the CIT(A)'s order regarding Data Processing Cost, claiming it to be 'Royalty'. The ITAT held that Data Processing Cost is not 'Royalty' but a reimbursement of expenses, thus not subject to TDS under Section 40(a)(ia). The decision was based on previous Co-ordinate Bench rulings favoring the assessee, leading to the dismissal of the Revenue's appeal.

Issue 2:
Regarding interest paid by the branch to its Head Office, the AO disallowed it, but the CIT(A) ruled in favor of the assessee based on past Co-ordinate Bench decisions. The ITAT upheld the CIT(A)'s order, stating that interest paid by the branch to the HO is allowable as the branch is a separate entity, leading to the dismissal of the Revenue's appeal.

Issue 3:
The disallowance under Section 14A was contested by the Revenue, but the CIT(A) deleted it, stating that if there is no exempt income, Section 14A cannot be applied. The ITAT upheld the CIT(A)'s decision based on previous Co-ordinate Bench rulings, resulting in the dismissal of the Revenue's appeal.

Issue 4:
The dispute over the tax rate on interest income from Income Tax refund was resolved in favor of the assessee by the CIT(A), applying Article 11(2) of the DTAA. The ITAT upheld this decision, stating that the interest should be taxed at the more beneficial rate of 15% under the DTAA, dismissing the Revenue's appeal.

In conclusion, the ITAT dismissed the Revenue's appeal in all four issues, upholding the CIT(A)'s orders based on legal interpretations and precedents set by previous Co-ordinate Bench decisions.