2022 (11) TMI 719 - AT - Income Tax

Income deemed to accrue or arise in India - benefit of the Article 24 of the DTAA - denial of benefit of the non-discrimination clause of the India-Korea Double Taxation Avoidance Agreement ('DTAA') and taxing the Appellant's income at the rate 40% (plus surcharge and education cess) instead of at the rate applicable to a resident tax payer (i.e 30% plus surcharge and education cess) - HELD THAT - This issue is now covered, against the assessee, by a coordinate bench decision in the assessee's own case for the assessment year 2007-08 2022 (6) TMI 1329 - ITAT MUMBAI thus hold that the applicable rate of taxation, under the Income Tax Act 1961, for the assessee company cannot be read down in the light of the provisions of a double taxation avoidance agreement, as is the specific mandate of Explanation 1 to Section 90 or even on the first principles without the benefit of this Explanation. We confirm the action of the Assessing Officer and the DRP and decline to interfere in the matter. Addition u/s 28(iv) - salary paid to expatriates - salary paid by the Shinhan Bank - Head office to expatriates exclusively working for India operations/branch during the year under consideration - HELD THAT - 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 Corp Vs DDIT 2012 (4) TMI 80 - ITAT MUMBAI the intra-organization 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. In view of these discussions, as also bearing in mind the entirety of the case, we uphold the plea of the assesse on this point. The Assesing Officer is thus directed to delete the impugned disallowance - The assessee gets the relief accordingly. As we have upheld the plea of the assessee on the short ground explained above, all other pleas of the assessee are dismissed as infructuous as of now, but these contentions shall remain open for adjudication in a fit case. Transfer pricing adjustment with respect to interest paid to Head Office - HELD THAT - We deem it fit and proper to delete the impugned ALP adjustments for the short reason that the LIBOR, even amongst the independent banks, cannot always be the rate at which the intra-bank transactions must take place, and it cannot be open to the TPO to reject the independent party transactions, which are valid input for application of Comparable Uncontrolled Price Method (CUP), simply because the transactions are entered at a rate higher than LIBOR. Such a simplistic approach cannot meet any judicial approval. The ALP adjustment in respect of taking loans at a rate higher than LIBOR is thus deleted. As regards the ALP adjustment in respect of the loans given, the amount involved is only Rs 17,896, and looking to the smallness of the amount, we treat this grievance as not pressed. Addition treating the interest paid by Indian branch of the Bank to its overseas branches as taxable in the hands of the Indian branch - HELD THAT - As per assessee own case 2022 (6) TMI 1329 - ITAT MUMBAI we uphold the plea of the assessee that the interest paid by the PE to the GE cannot be brought to tax in the hands of the assessee company, even though it is to be allowed as a deduction in the computation of profits attributable to the permanent establishment. The Assessing Officer is directed to grant the relief accordingly. The assessee has already offered to tax the interest income received from its head office, and there is no surviving dispute in respect of the same.

Issues Involved:
1. Applicable rate of tax under the India-Korea Double Taxation Avoidance Agreement (DTAA).
2. Addition under section 28(iv) relating to salary paid to expatriates.
3. Calculation of deduction under section 44C.
4. Transfer pricing adjustment with respect to interest paid to and received from Head Office.

Issue-wise Detailed Analysis:

1. Applicable Rate of Tax:
The assessee argued that its income should be taxed at the rate applicable to a resident taxpayer (30%) instead of the higher rate for foreign companies (40%), invoking the non-discrimination clause of the India-Korea DTAA. The Tribunal rejected this plea, referencing a prior decision in the assessee's own case for the assessment year 2007-08. The Tribunal emphasized that the insertion of Explanation 1 to Section 90 of the Income Tax Act, 1961, which states that a higher tax rate for foreign companies does not constitute discrimination, was retrospective from 1st April 1962. The Tribunal found no merit in the assessee's argument and upheld the higher tax rate.

2. Addition Under Section 28(iv) in Relation to Salary Paid to Expatriates:
The assessee claimed a deduction for salaries paid to expatriates working for its Indian branch, which were paid by the Head Office (HO) in Korea. The Assessing Officer and the Dispute Resolution Panel (DRP) disallowed this deduction, arguing that the Indian Permanent Establishment (PE) did not incur these expenses. The Tribunal overruled this disallowance, stating that under Article 7(2) of the India-Korea DTAA, the profits attributable to the PE should include expenses incurred by the HO for the benefit of the PE. The Tribunal directed the deletion of the disallowance, emphasizing that the taxable unit is the foreign company, and not the PE.

3. Calculation of Deduction Under Section 44C:
The assessee contested the non-consideration of income from overseas branches while computing the "adjusted total income" for deduction under section 44C. Additionally, the assessee raised an additional ground seeking the allowance of the entire expenses incurred at the HO attributable to the Indian business, invoking the non-discrimination clause of the DTAA. The Tribunal remitted these issues back to the Assessing Officer for fresh adjudication, following the precedent set in the assessee's own case for earlier years.

4. Transfer Pricing Adjustment with Respect to Interest Paid to and Received from Head Office:
The Tribunal addressed the arm's length price (ALP) adjustments for interest on foreign currency borrowings and lending between the Indian PE and its associated enterprise (Shinhan Bank Europe GmbH). The Tribunal found that the TPO's approach of applying the London Inter-Bank Offered Rate (LIBOR) was simplistic and did not consider the commercial realities and comparable transactions with independent parties. The Tribunal deleted the ALP adjustment for interest paid and treated the adjustment for interest received as not pressed due to the small amount involved.

Additional Grounds and Cross-Objections:
The Tribunal admitted additional grounds related to the application of section 44C and remitted them for fresh adjudication. The cross-objections raised by the Assessing Officer concerning the disallowance of interest paid to the HO and the applicability of the principle of mutuality were dismissed, following the decisions in the assessee's own cases for preceding assessment years.

Conclusion:
The appeals were partly allowed, with specific directions for fresh adjudication on certain issues, while the cross-objections filed by the Assessing Officer were dismissed. The Tribunal's decisions were consistent with the precedents set in the assessee's own cases for earlier assessment years.

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