2020 (10) TMI 1189 - AT - Income Tax

NRI expenses - Ad hoc surmiseful addition of 20% - Assessee is a non-resident banking company which carries on the business of banking and other related activities through its branches in India in accordance with the provisions of Banking Regulation Act 1949 - HELD THAT - Revenue has allowed the complete expenses including the 20% expenses disallowed in the earlier years. Hence this issue is no more res integra. The appeal of the assessee on this ground is allowed. Disallowance of Expenses - Assessee interest income from foreign currency loans to its Indian customers taxable u/s 115A(3) - AO held that under section 115A(3) no deduction is permissible for the income covered under the said provision and the corresponding expenditure is to be disallowed - HELD THAT - As relying on own case we direct the AO to adopt the following method for working out the disallowance of indirect expenses incurred in relation to such impugned interest income. i) Work out the ratio between the total revenue viz a viz the gross income earned by the assessee on foreign currency loan. ii) Based on the above ratio the indirect expenses will be determined for four months for the purpose of disallowance u/s 115A of the Act. Addition u/s 14A - Disallowance of Expenses on Tax Free interest are foreign currency Syndicated Term Loan AND Disallowance of Expenses out of Dividend Income - HELD THAT - While there is no dispute regarding the disallowance of expenditure incurred in relation to exempt income under both the heads the Act prescribes proper procedure of computing such disallowance u/s 14A(2). We find that the revenue has not invoked the procedure as specified under the said section wherein the AO has to record his dissatisfaction as to the correctness of the claim with regard to the accounts of the assessee. Owing to the procedural tumble we hereby delete the disallowance made by the Assessing Officer. Disallowance of Club Expenditure - HELD THAT - The club membership fee is taken for promoting business of the bank and for better customer relationship. No asset of enduring in nature has been created. Hence following the order of the ITAT for the assessment 1996-97 dealing with expenses of club membership fee and keeping in view the fact that no new asset has come into existence we hereby delete the addition confirmed by the ld. CIT (A). Disallowance of Fee for Technical Services u/s 37(1) - CIT-A confirmed part addition - HELD THAT -Expenses have been incurred for Indian Banking business - on going through the Memorandum of agreement tax report notes to account and the details of the tax payment under Article 12 of the Indo-Australian Treaty and on going through the challans enclosed we hereby hold that the fees for access and user technology related to services for Credit Cards Services is meant for the business of the assessee s in India and such expenses are allowable to be claimed by the assessee u/s 37(1). Attributing income to the PE under the DTAA - HELD THAT - While the Assessing Officer is right that the income arising in India from transactions in India by using credit cards of foreign branches should be taxed in India this income can only be the commission income received by the Indian branch and such commission income already stands included in the hands of the Indian branch acting as an Acquiring bank. The income to the foreign branch from the credit given to its card holders outside India cannot be taxed in the hands of the Indian branch since it has not arisen in India and also it cannot be attributed to the assets and activities of the Indian branch as is required by Article 7 of the DTAA. - Decided against revenue. Club expenses have been allowed as allowable business expenses by the ITAT from the assessment years 1992-93 to 1998-99.

Summary

Issues Involved:
1. NRI Expenses
2. Disallowance of Expenses
3. Disallowance of Expenses on Tax-Free Interest and Foreign Currency Syndicated Term Loan
4. Disallowance of Expenses out of Dividend Income
5. Disallowance of Club Expenditure
6. Disallowance of Fee for Technical Services
7. Commission Payment

Issue-wise Detailed Analysis:

NRI Expenses:
The assessee, a non-resident banking company, claimed NRI expenses for mobilizing deposits in foreign currency from NRIs. The Assessing Officer (AO) disallowed these expenses, treating them as 'head office expenses' under section 44C. The ITAT had previously ruled in favor of the assessee, allowing these expenses as they were incurred for the Indian business. Following this precedent, the Tribunal remanded the matter to the AO for re-examination, directing that if the deposits were raised abroad and accounted for by Indian branches, the expenses should be allowed. The Tribunal allowed the appeal of the assessee, noting that the revenue had allowed the complete expenses in earlier years.

Disallowance of Expenses:
The AO disallowed expenses related to interest income from foreign currency loans under section 115A(3), estimating the expenditure at 94% of the gross receipts. The ITAT had previously directed a different method for calculating disallowance, considering only the relevant period and fixed costs. Following this method, the Tribunal directed the AO to compute the disallowance accordingly, allowing the appeal for statistical purposes.

Disallowance of Expenses on Tax-Free Interest and Foreign Currency Syndicated Term Loan:
The AO disallowed expenses incurred on earning foreign currency syndicated term loan and dividend income, invoking section 14A. The Tribunal noted that the AO had not followed the prescribed procedure under section 14A(2) and deleted the disallowance due to procedural lapses.

Disallowance of Expenses out of Dividend Income:
The AO disallowed expenses related to dividend income, treating it as tax-free. The Tribunal, referring to the Supreme Court's judgment in Walfort Shares & Stock Brokers Pvt. Ltd., noted that the AO did not follow the proper procedure under section 14A(2) and deleted the disallowance.

Disallowance of Club Expenditure:
The CIT(A) confirmed the disallowance of club membership fees, treating it as capital expenditure. The Tribunal, following its earlier order, held that no asset of enduring nature was created, and the expenses were for promoting business. The disallowance was deleted.

Disallowance of Fee for Technical Services:
The AO disallowed expenses related to technical services, arguing that they were not incurred by the Indian PE and were not debited in the books. The CIT(A) partially allowed the expenses, disallowing those related to credit card support services. The Tribunal, after examining the agreements and audit reports, held that the expenses were incurred for the Indian business and allowed the deduction under section 37(1).

Commission Payment:
The AO estimated an addition of Rs. 10 crores as commission earned by foreign branches on credit cards used in India. The CIT(A) deleted the addition, holding that the commission income was already included in the Indian branch's income. The Tribunal, following its earlier order, upheld the deletion, noting that the income earned by the foreign branch could not be taxed in India.

Conclusion:
The appeal of the assessee was allowed, and the appeal of the revenue was dismissed. The Tribunal directed the revenue to rectify computational errors and allow consequential benefits. The order was pronounced in the open court on 26/10/2020.