2016 (5) TMI 711 - AT - Income Tax

Income attributed to the PE - rate of tax applicable to bank - Held that - The assessee bank is incorporated in Netherlands and is engaged in banking operations across the globe through various branches worldwide, including India. In India, the assessee (branches / permanent establishment) is registered as a Scheduled Bank in terms of Schedule II of the Reserve Bank of India Act, 1034. Article 7 of the Double Taxation Avoidance Agreement (DTAA) provides for taxation in India of a foreign enterprise in respect of profits attributable to its Permanent Establishment (PE) in India. Since the assessee (The Royal Bank of Scotland ) is having a PE in India, the assessee is liable to tax in respect of income attributed to the PE. The assessee charged tax at 36.5925% on its profits on the ground that in view of Article 24 of DTAA with Netherlands, the tax rate applicable to it is the rate applicable to domestic companies i.e at 36.5925%. However, the Learned AO held that assessee being nonresident foreign company, the applicable tax rate as per the relevant Finance Act would be 40% plus surcharge. This action was upheld by the Learned CIT(A) in first appeal.This issue is covered against the assessee by the order of this tribunal in assessee s own case for Asst Year 2004-05. Disallowance of offshore remuneration to the expatriate employees rendering services in Indian branches of the assessee - Held that - Identical issue has been decided by the ITAT , Kolkata Bench in assessee s own case pertaining to the Assessment Years 2002-03 and 2003-04 respectively, wherein the ITAT by following earlier order of the Tribunal has allowed the claim of the assessee subject to verification whether the expenditure was included for the purposes of section 44C. In this view of the matter, by following the earlier orders of the Tribunal (supra), we remit this issue back to the file of the Assessing Officer to allow the claim of the assessee subject to verification whether the expenditure was included for the purposes of section 44C of the Act. Deduction on interest payments made by the assessee (Indian Branch) to its Head Office - Held that - We find that the Hon ble Calcutta High Court had held in asesssee s own case 2010 (12) TMI 340 - CALCUTTA HIGH COURT that no tax need to be deducted on interest payments made by the assessee (Indian Branch) to its Head Office and various branches outside India. We feel that the assessee had duly made out of a case for admission of its additional ground and hence the same are admitted herein for adjudication. However, in case the assessee had deducted taxes thereon and remitted to the account of Central Government, then the assessee is rightly entitled for refund of the same. However, as conceded by the Learned AR, this limited aspect requires factual verification by the Learned AO as Learned DR had raised a doubt about the same. Hence we deem it fit and appropriate to set aside this issue to the file of the Learned AO for the limited aspect of verification of deduction of tax at source and remittance thereon by the assessee. Thus we hold that there is no need to deduct tax at source on interest payments made by the assessee Computing profits attributable to PE in India - Held that - Interest paid to Head office and various branches outside India are allowable as deduction while computing the profits attributable to PE in India Depreciation on ATM machines - Held that - Depreciation at the rate of 60% on ATMs allowed Deduction towards lease rentals - Held that - There was a clause in the lease agreement giving an option to the lessee to buy back the asset on termination of the lease agreement. In the instant case, the assessee (lessee) falls in a better footing , in as much as there is no clause in the lease agreement, enabling the lessee to buy back the assets on termination of the lease arrangement. In view of the aforesaid facts and findings we hold that the assessee is entitled for deduction towards lease rentals.

Issues Involved:
1. Rate of Tax Applicable to the Bank
2. Disallowance of Offshore Remuneration
3. Interest Paid to Head Office
4. Claim of Refund of Tax Deducted at Source on Interest Payments Made to Head Office and Other Branches
5. Interest Received from Head Office
6. Higher Rate of Depreciation on ATMs
7. Disallowance of Lease Rentals on Vehicles
8. Disallowance of Offshore Expenses
9. Addition of Offshore Expenses u/s 28(iv) of the Act
10. Levy of Interest u/s 234B, 234C, 234D, and Penalty Proceedings u/s 271(1)(C) of the Act on Account of Offshore Expenses

Issue-wise Detailed Analysis:

1. Rate of Tax Applicable to the Bank:
The assessee, a bank incorporated in the Netherlands, argued for a tax rate of 36.5925% based on Article 24 of the DTAA with the Netherlands, claiming it should be taxed at the rate applicable to domestic companies. However, the AO and CIT(A) held that the applicable tax rate for a non-resident foreign company is 40% plus surcharge. The tribunal, following its own decision from the previous year, dismissed the assessee's ground.

2. Disallowance of Offshore Remuneration:
The assessee claimed offshore remuneration paid to expatriate employees as a deduction. The AO disallowed this claim, citing the lack of evidence that the remuneration was not included in the deduction u/s 44C. The CIT(A) upheld this decision. The tribunal remitted the issue back to the AO for verification, following its earlier orders which allowed the claim subject to verification.

3. Interest Paid to Head Office:
The AO disallowed the interest paid to the head office and other branches outside India, citing non-deduction of tax at source as per section 40(a)(i). The CIT(A) upheld this decision. However, the tribunal allowed the assessee's claim, following the decision of the Hon’ble Calcutta High Court, which held that no tax needed to be deducted on such payments under the DTAA between India and the Netherlands.

4. Claim of Refund of Tax Deducted at Source on Interest Payments Made to Head Office and Other Branches:
The assessee sought a refund of TDS on interest payments made to the head office, arguing that no tax was required to be deducted as per the Calcutta High Court's decision. The tribunal admitted the additional ground for verification by the AO to check if TDS was indeed deducted and remitted. If so, the assessee would be entitled to a refund.

5. Interest Received from Head Office:
The assessee conceded that this ground was interlinked with the interest paid to the head office. Since the tribunal allowed the interest paid as a deduction, this ground was dismissed as not pressed.

6. Higher Rate of Depreciation on ATMs:
The assessee claimed depreciation on ATMs at 60%, treating them as computers. The AO allowed only 25%, treating them as plant and machinery. The tribunal, following decisions from the Delhi Tribunal and the Bombay High Court, held that ATMs qualify for 60% depreciation as they function as computers, and directed the AO to allow the higher rate.

7. Disallowance of Lease Rentals on Vehicles:
The AO disallowed lease rentals on vehicles, treating the principal component as capital in nature. The CIT(A) upheld this decision. However, the tribunal, following the Supreme Court's decision in I.C.D.S. Ltd vs CIT and other precedents, held that the assessee was entitled to deduct the lease rentals as revenue expenditure.

8. Disallowance of Offshore Expenses:
The assessee chose not to press this ground. Consequently, the tribunal dismissed it as not pressed.

9. Addition of Offshore Expenses u/s 28(iv) of the Act:
Similar to the previous issue, the assessee did not press this ground, leading to its dismissal by the tribunal.

10. Levy of Interest u/s 234B, 234C, 234D, and Penalty Proceedings u/s 271(1)(C) of the Act on Account of Offshore Expenses:
These grounds were deemed consequential and did not require separate adjudication.

Conclusion:
The appeals of the assessee were partly allowed, with the tribunal providing specific directions for each issue based on the existing legal precedents and detailed factual analysis. The order was pronounced in open court on 13-4-2016.

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