2017 (9) TMI 1154 - AT - Income Tax

Salaries paid by the Head Office overseas in foreign currency to the expatriates working in India - Permanent establishment ( PE ) of the Appellant in India - Held that - This issue is covered in favour of assessee by the Delhi High Court order in own case 2016 (4) TMI 817 - DELHI HIGH COURT relying on decision of ABN Amro Bank(2010 (12) TMI 340 - CALCUTTA HIGH COURT ). Applicability of Section 115JB - Held that - This issue is covered in favour of assessee by the Delhi High Court order in own case 2016 (4) TMI 817 - DELHI HIGH COURT concluding that the Assessee s claim for lower tax will have to be accepted because Section 115JB is subject to Section 90(2) of the Act and the taxable income of the Assessee would have to be computed in terms of Article 7(3) of the DTAA. What is significant is that the profit and loss account of the Assessee has not been prepared in terms of Part II of Schedule VI of the Companies Act, 1956 and in fact could not have been prepared in terms thereof. Consequently, the question of applicability of Section 115JB did not arise. As rightly pointed out till the insertion of Section 115JB, banking companies were required to prepare their accounts in terms of special acts that they were governed by, and therefore there were no computation provisions as regards such banking companies. The change brought out by Section 115JB was therefore not retrospective. Applicability of rate of tax - Held that - We find that this issue is covered against the assessee by Explanation 1 to section 90(2), which read as under - Explanation 1.-For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.

Summary

Issues Involved:
1. Disallowance of salary paid overseas to expatriates.
2. Non-applicability of the provisions of Sec 115JB relating to Minimum Alternate Tax (MAT).
3. Reduction for write-back of provision for bad and doubtful debts and depreciation on investment.
4. Deduction for expenditure incurred on Japanese Foodstuff.
5. Applicable rate of tax.
6. Addition of provision for wealth tax while computing book profit.
7. Deduction for interest paid by Indian branches to Head Office and taxability of interest received by Head Office from Indian branches.
8. Allowance of deduction under Section 44C.

Detailed Analysis:

1. Disallowance of Salary Paid Overseas to Expatriates:
The assessee contested the disallowance of ?14,26,64,438 paid as salaries by the Head Office overseas to expatriates working in India. The CIT(A) had confirmed the AO's action, but the Delhi High Court had previously ruled in favor of the assessee, stating that such expenses were incurred wholly and exclusively by the Indian branch and were allowable under Article 7(3) of the DTAA. The ITAT followed this precedent and allowed the ground in favor of the assessee.

2. Non-Applicability of Provisions of Sec 115JB (MAT):
The assessee argued that being a banking company, the provisions of Section 115JB were not applicable. The CIT(A) had upheld the AO's contention. However, the Delhi High Court had decided in favor of the assessee, noting that the profit and loss account was not prepared in terms of Part II of Schedule VI of the Companies Act, 1956. The ITAT agreed with this reasoning and allowed the ground.

3. Reduction for Write-Back of Provision for Bad and Doubtful Debts and Depreciation on Investment:
The CIT(A) had not adjudicated the issue, but in a rectification order dated 26.10.2015, the issue was granted in favor of the assessee. Thus, the ITAT did not press these grounds.

4. Deduction for Expenditure Incurred on Japanese Foodstuff:
The CIT(A) had dismissed the ground, but the issue was not pressed by the assessee as it had already been granted in their favor in a rectification order. Therefore, the ITAT dismissed this ground.

5. Applicable Rate of Tax:
The CIT(A) had not upheld the assessee's contention regarding the applicable rate of tax under Article 24 of the India-Japan DTAA. The ITAT referred to its previous decision for A.Y. 2007-08 & 2008-09, which was against the assessee, and dismissed this ground.

6. Addition of Provision for Wealth Tax While Computing Book Profit:
The CIT(A) had deleted the addition made by the AO. The ITAT noted that if the ground regarding the non-applicability of MAT was allowed, this issue would become academic. Since the MAT ground was allowed, this ground was dismissed.

7. Deduction for Interest Paid by Indian Branches to Head Office and Taxability of Interest Received by Head Office from Indian Branches:
The CIT(A) had deleted the addition made by the AO. The Delhi High Court had ruled in favor of the assessee, stating that the interest payment made by the Indian branch to its Head Office was deductible and not subject to TDS under Section 195. The ITAT followed this precedent and dismissed the ground.

8. Allowance of Deduction Under Section 44C:
The CIT(A) had allowed the deduction, and the ITAT noted that this issue was covered in favor of the assessee by DRP directions for A.Y. 2007-08. Therefore, the ITAT dismissed this ground.

Conclusion:
The ITAT allowed the appeal of the assessee partly for statistical purposes and dismissed the appeal of the Revenue. The order was pronounced in the Open Court on 19th September 2017.