2023 (11) TMI 1250 - AT - Income Tax

TDS u/s 195 - Payment to Master card International Incorporated, USA without deduction TDS - Taxability of income of Master Card in India - scope of amendment in the provision of section 40(a)(i) -HELD THAT - This issue is covered in favor of the Appellant by the decision of the Co-ordinate bench of the Tribunal in the Appellant s own case for the assessment year 1999-2000 2022 (9) TMI 1577 - ITAT MUMBAI wherein the Tribunal followed the decision of Celltick Mobile Media (India) (P.) Ltd. 2021 (3) TMI 1121 - ITAT MUMBAI wherein it was held that the amendment in the provision of section 40(a)(i) of the Act, which states that no disallowance u/s. 40(a)(i) is warranted in the hands of payer of income where payee has already discharged the tax liability on the said income, is retrospective in nature. Respectfully following the decision of coordinate bench in the case of assessee on similar issue, we don t see any force in the orders of authorities below and find that amendment in section 40(a) (i) is retrospective in nature. Therefore, the provisions of section 40(a) (ia) are equally applicable u/s. 40 (a) (i) of the Act. In view of this, ground raised by the assessee is allowed. Direct expenses incurred outside India - disallowance towards part of the expenses directly attributable to operations in India - Appellant submits before us to allow the deduction towards Advisory services expenses and Singapore IT Hubbing cost under section 37(1) - HELD THAT - We agreed with the logics put forward by the assessee and not in favour of additional contentions raised by the Ld. CIT (A). Moreover, similar issue is covered in the Appellant s own case in A.Y. 1999-00, wherein with respect to the similar nature of services, the Hon ble ITAT held that the said expenditure is allowable u/s 37(1) and should not be restricted under section 44C of the Act. Respectfully following the decision of coordinate bench and judicial pronouncements relied upon by the assessee, we are in agreement with the contentions of assessee and ground raised by the assessee is allowed. Interest paid to Head office / Overseas Branches - AO disallow interest payable to head office/ overseas branches on the ground that the Act does not allow deduction of interest paid by Branch to Head office - Appellant submits before us to allow the deduction of interest paid to HO/OB in line with the decision of Sumitomo Mitsui Banking Corporation 2012 (4) TMI 80 - ITAT MUMBAI as it is not only dealing with India-Japan Tax Treaty but also dealt with India Netherland Tax Treaty. Your Honour will appreciate that the language of India-UK Tax Treaty (applicable in case of the Appellant) is in line with India-Netherland Tax Treaty - HELD THAT - As revenue is not able to produce any argument to controvert the facts of the ground raised by the assessee and also not able to controvert the stand taken by the special bench in the case of Sumitomo Mitsui Banking Corporation 2012 (4) TMI 80 - ITAT MUMBAI . Hence, in the given situation respectfully following the decision of special bench (supra), ground raised by the assessee is allowed. Nature of expenses - Expenditure on refurbishment of premises - CIT(A) disallowed 25% of the expenditure incurred on refurbishment of leasehold premises as capital in nature - HELD THAT - As Appellant submits before us to follow its own case vide ITAT order for A.Y. 1999-00 2022 (9) TMI 1577 - ITAT MUMBAI and allow deduction for the entire amount incurred on refurbishment of premises. Revenue is not able to produce any argument to controvert the facts of the ground raised by the assessee and also not able to controvert the stand taken by the coordinate bench in assessee s own case. Hence ground raised by the assessee is allowed. Expenses attributable to exempt income - CIT(A) held Rule 8D is to be applied for arriving at the disallowance of expenditure attributable to earning taxable income - Appellant submits before us to follow its own case vide ITAT order for A.Y. 1999-00, 2022 (9) TMI 1577 - ITAT MUMBAI and delete the disallowance made by the Ld. CIT(A) - HELD THAT - Assessee s own case pertains to A.Y. 1997-98 and A.Y. 1999-00, as there is no change in the facts of the case and law laid down by the Hon ble Apex court in the case of South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT is squarely applicable to the assessee, we agreed with the plea taken by the assessee and to be just and fair in the matter, disallowance is restricted upto 1% of the exempted income. Ground raised by the assessee is partly allowed. Recoveries made against securities losses - AO made addition of recovery of securities losses - as argued losses incurred by the Appellant pertaining to the earlier years is subject matter of litigation - HELD THAT - As gone through the submissions of assessee and order of coordinate bench for A.Y. 1993-94, wherein the loss claimed by the assessee has been allowed on its own facts, but as the department is in further appeal before the Hon ble jurisdictional High Court, we agree with the contentions raised by the assessee, that in case Hon ble High Court reversed the decision of coordinate bench on the ground of crystallization of loss in A.Y. 1998-99, same will be allowed in current A.Y. under consideration as the same has been settled with the parties and final figure of loss has been crystallized in this year. This ground of appeal is allowed for statistical purposes and AO is directed to allow the same in A.Y. 2001-02, if Hon ble High Court reversed the decision of coordinate bench for A.Y. 1993-94, then only on the basis of crystallization, same will be allowed in current assessment year. Taxability u/s 115JB on assessee banking company - HELD THAT - As provisions of section 115JA of the Act is not applicable in the case of assessee being banking company duly regularized by the provisions of Banking Regulations Act, 1949 and is not required to prepare its Profit Loss Account under the provisions of Part-II III of Schedule-VI of the Companies Act, 1956. In view of the above, ground raised by the assessee is allowed. Head Office Expenditure - CIT(A) denied Head Office Expenditure in all as no revised return of Income was filed for such claim and thus, restricted the claim under section 44C - HELD THAT - This issue is covered in favor of the Appellant by the decision of the Co-ordinate bench of the Tribunal in the Appellant s own case for the A.Y. 1999-2000 2022 (9) TMI 1577 - ITAT MUMBAI wherein the Tribunal, following the decision of Metchem Canada Inc. v DCIT 2005 (9) TMI 227 - ITAT BOMBAY-F has held that in view of Article 26 of the India-UK DTAA, provisions of section 44C of the Act will not be applicable to the Appellant We agree that as decided by the coordinate bench, in the case of assessee that the Head office expenditure is allowed in entirety under the provisions of Article 26 of the tax treaty without the applicability of restriction under section 44C of the Act, and as the submissions by assessee not controverted by the Revenue, In view of this, ground of appeal of the assessee is allowed following the precedent discussed. Taxability of interest income received on tax refund - HELD THAT - As we agreed with the contentions of the assessee that the interest on income tax refund is taxable, once it reaches finality and not in A.Y. 2001-02 i.e., A.Y. under consideration and as the submissions by assessee are not controverted by the Revenue in principle, in view of this, AO is directed to delete the addition made on this count till finality on this issue been attained. In the result, this ground of appeal is allowed. Allowability of Direct expenses incurred outside India and Salary paid to expatriate employees - HELD THAT - As in own case ITAT order 2022 (9) TMI 1577 - ITAT MUMBAI for A.Y. 1999-00 and decision of Mumbai Tribunal in case of Shinhan Bank 2022 (11) TMI 719 - ITAT MUMBAI allow the deduction as held there cannot be any purpose of expenses incurred by the HO, which are relatable to the Indian PE, being allowed as a deduction in the computation of income of the PE when non-reimbursement of that expenditure by the PE is treated as a source of income of the foreign company itself- particularly when, from the income tax perspective, the taxable unit is the foreign company and not the PE. It is also important to bear in mind the fact that, in the light of the five-member bench decision of this Tribunal, in the case of Sumitomo Mitsui Banking Corpn. 2012 (4) TMI 80 - ITAT MUMBAI the intraorganization transactions, as non-reimbursement of employee costs by the PE to HO, is, are tax neutral. In any case, there cannot be a benefit accruing to the Korean company when the Indian PE of the assessee company does not reimburse its Korean company, because the assessee itself is the Korean company and the transaction in question is a wholly non-business and internal transaction of the Korean company. Decided against revenue. Indirect Income - CIT(A) directing deletion of indirect income earned by the Head Office by relying on submission admitted in contravention to Rule 46A of the Income-tax Rules, 1962 - HELD THAT - Since the indirect income of the Head Office already forms part of profit and loss account of the Assessee and offered to tax in the computation of income, the same should not be taxed again. Decided against revenue.

Summary

Issues Involved:
1. Disallowance of payments to Master Card International Inc., USA.
2. Disallowance of direct expenses attributable to operations in India.
3. Disallowance of interest payable to head office/overseas branches.
4. Disallowance of 25% of the expenditure on refurbishment of leasehold premises as capital in nature.
5. Disallowance of expenditure under section 14A of the Act.
6. Additions of recovery of securities losses.
7. Application of provisions of section 115JB.
8. Disallowance of the claim towards Head Office Expenditure.
9. Non-adjudication of the ground of taxability of interest on tax refund.

Summary:

Issue 1: Disallowance of Payments to Master Card International Inc., USA
The Tribunal allowed the assessee's appeal, noting that the amendment in section 40(a)(i) is retrospective. The provisions of section 40(a)(ia) apply equally under section 40(a)(i), and since taxes were paid by Master Card, no disallowance should be made.

Issue 2: Disallowance of Direct Expenses Attributable to Operations in India
The Tribunal allowed the assessee's appeal, referencing the Supreme Court decision in Bombay Dyeing & Mfg. Co. Ltd. and previous Tribunal decisions. It held that advisory and business support costs and Singapore IT Hubbing costs are allowable under section 37(1) and not restricted under section 44C.

Issue 3: Disallowance of Interest Payable to Head Office/Overseas Branches
The Tribunal allowed the assessee's appeal, relying on the Special Bench decision in Sumitomo Mitsui Banking Corporation, which held that interest paid to the head office is not taxable in India and thus not subject to disallowance under section 40(a)(i).

Issue 4: Disallowance of 25% of the Expenditure on Refurbishment of Leasehold Premises as Capital in Nature
The Tribunal allowed the assessee's appeal, following its own previous decision and the Supreme Court ruling in Madras Auto Service Pvt. Ltd., which treated such expenditure as revenue in nature.

Issue 5: Disallowance of Expenditure Under Section 14A of the Act
The Tribunal partly allowed the assessee's appeal, restricting the disallowance to 1% of the exempt income, in line with the Supreme Court decision in South Indian Bank Ltd.

Issue 6: Additions of Recovery of Securities Losses
The Tribunal allowed the assessee's appeal for statistical purposes, directing the AO to allow the recovery amounts if the High Court reverses the Tribunal's decision for AY 1993-94.

Issue 7: Application of Provisions of Section 115JB
The Tribunal allowed the assessee's appeal, stating that section 115JB does not apply to banking companies not required to prepare accounts under the Companies Act, following previous Tribunal decisions in the assessee's own case.

Issue 8: Disallowance of the Claim Towards Head Office Expenditure
The Tribunal allowed the assessee's appeal, holding that section 44C does not apply due to the non-discrimination clause in the India-UK DTAA, following the Tribunal's decision in Metchem Canada Inc. and the assessee's own case for AY 1999-2000.

Issue 9: Non-Adjudication of the Ground of Taxability of Interest on Tax Refund
The Tribunal allowed the assessee's appeal, directing the AO to tax the interest on tax refund only when the issue reaches finality. If taxed in AY 2001-02, it should be at the rate of 10% as per Article 12 of the India-UK DTAA.

Department's Appeal:
The Tribunal dismissed the department's appeal on all grounds, including the disallowance of direct expenses incurred outside India, salary paid to expatriate employees, interest income of the head office, expenditure on refurbishment of premises, and indirect income, citing consistent decisions in favor of the assessee in previous years and lack of contrary higher judicial forum decisions.

Conclusion:
The assessee's appeal was partly allowed, and the department's appeal was dismissed. The Tribunal's decisions were largely based on precedents in the assessee's own cases and relevant judicial pronouncements.