2024 (1) TMI 414 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - expenditure incurred earning exempt income - sufficiency of own funds - HELD THAT - In the instant case, the Revenue has not been able to controvert the fact that own funds of assessee are much more than the investments made. There being no distinction in facts in the impugned assessment year, following the decision of Co-ordinate Bench in assessee's own case Assessment Year 2002-03 2023 (4) TMI 1284 - ITAT MUMBAI the disallowance made u/s. 14A of the Act is directed to be deleted for parity of reasons. As regards application of Rule 8D , it is no more res-integra that Rule 8D would apply from Assessment Year 2008-09 onwards and would not apply retrospectively. Re. Godrej Boyce Mfg. Co. Ltd. vs. DCIT, 2010 (8) TMI 77 - BOMBAY HIGH COURT . Hence, the provisions of Rule 8D cannot be invoked in the impugned Assessment Year. In the result ground No.1 2 of appeal are allowed. Income taxable in India - interest paid by Indian branch to its Head Office /Overseas branches is taxable in the hands of assessee under the provisions of DTAA - HELD THAT - We find that similar issue was raised in the appeal by the Revenue 2023 (4) TMI 1284 - ITAT MUMBAI analyzed the issue of interest paid by Indian Branchto Head Office/ Overseas Branches with reference to provisions of the Act as well as DTAA and concluded such payment of interest by Indian Branch is not chargeable to tax in India. In the absence of any contrary material we see no reason to take a different view, hence, ground No.3 of the appeal is allowed for parity of reasons. TP adjustment made in respect of correspondent banking services - HELD THAT - It is the case of Transfer Pricing adjustment and not a case of determination of taxability of income in international taxation, as has been tried to be portrayed by the assessee. TPO while analyzing the transaction came to the conclusion that if the same services were to be rendered by the Indian Branch in an uncontrolled environment with the third party, the Indian Branch would have added markup to the cost, hence, the payment for correspondent banking charges is not at arm s length. It was not the case of assessee before the TPO that receipt from correspondent banking charges is not taxable by virtue of DTAA. We find no infirmity in the findings of CIT(A) on this issue, hence, ground No.4 of appeal is dismissed. Disallowance of interest expenditure towards earning income on foreign currency loan - HELD THAT - We find that this issue is recurring and was considered by the Tribunal in Assessment Years 1997-98, 1998-99 and 2002-03 in appeal by the Department for the respective Assessment Years as held that the legislature has intended to tax the interest only on gross basis. Further in support of his arguments ld. A.R has also cited Article 10 11 of DTAA with Canada. Notification No.10503(F No.505/2/87-FTD) reference 229 ITR 44(St.) Further it has also been mentioned that section 90(2) of IT Act also provides that the provisions of this Act shall apply to the extent they are more beneficial to that assessee. The order of the first appellate authority is quite elaborate on this subject and needs no interference, therefore, under the totality of the circumstances and in view of the specific provisions of the Act we hereby dismiss this ground of the Revenue. Addition in respect of salary paid to expatriate employees working in India - CIT(A) deleted the addition - HELD THAT - We find that the issue in the impugned assessment year is similar to the one considered by the Co-ordinate Bench in Assessment Year 2002-03 2023 (4) TMI 1284 - ITAT MUMBAI wherein Tribunal decided the issue against the Revenue to conclude that payment of salary to expatriate employees paid by the head office is an allowable expenditure in view of Article 7(3) of the DTAA and section 37 of the Act and such expenditure does fall within the ambit of section 44C of the Act. We find no infirmity in the findings of CIT(A) on this issue. Computation of deduction u/s. 36(1)(vii) - consideration of closing balances for provision for bad debt - HELD THAT - We find that the issue in the present appeal is similar to the one considered by the Co-ordinate Bench in appeal of the Revenue for Assessment Year 2002-03 2023 (4) TMI 1284 - ITAT MUMBAI placing reliance on the decision in the case of CIT vs. UTI Bank Ltd., 2013 (1) TMI 209 - GUJARAT HIGH COURT and CBDT Instruction No.17/2008 dated 26/11/2008 dismissed the ground raised in appeal by the Department. No fresh material has been placed on record by the Revenue to distinguish the findings of the Co-ordinate Bench on this issue, hence, following the decision of Co-ordinate Bench ground No.3 of appeal is dismissed.

Summary

Issues Involved:
1. Disallowance under section 14A of the Act.
2. Retrospective application of Rule 8D of the Income-tax Rules, 1962.
3. Taxability of interest paid by Indian branches to its head office/overseas branches under the India-Canada treaty.
4. Taxability of mark-up amount as business profits under Article 7(3) of the India-Canada treaty.
5. Computation of interest under section 115A.
6. Addition regarding salary paid to expatriate employees.
7. Computation of deduction under section 36(1)(vii).

Summary:

1. Disallowance under section 14A of the Act:
The assessee challenged the disallowance made under section 14A of the Income Tax Act. The Tribunal found that the assessee had sufficient interest-free funds to cover the investments in tax-free bonds, and thus, no borrowed capital was used. The Tribunal directed the deletion of the disallowance, noting that Rule 8D does not apply retrospectively.

2. Retrospective application of Rule 8D:
The Tribunal reiterated that Rule 8D of the Income-tax Rules, 1962, applies prospectively from Assessment Year 2008-09 onwards and not retrospectively. Consequently, the provisions of Rule 8D could not be invoked for the impugned Assessment Year 2004-05.

3. Taxability of interest under the India-Canada treaty:
The assessee contested the addition of interest paid by Indian branches to its head office/overseas branches. The Tribunal referred to the Special Bench decision in the case of Sumitomo Mitsui Banking Corporation, which concluded that such interest payments are not chargeable to tax in India under the provisions of the DTAA. Therefore, the Tribunal allowed the assessee's appeal on this ground.

4. Taxability of mark-up amount under Article 7(3) of the India-Canada treaty:
The assessee argued that the mark-up on correspondent banking services should not be taxed as business profits under Article 7(3) of the India-Canada treaty. The Tribunal found that the assessee's reliance on Article 7(3) was misplaced and upheld the Transfer Pricing Officer's adjustment, stating that the transaction was not at arm's length. The appeal on this ground was dismissed.

5. Computation of interest under section 115A:
The Revenue challenged the computation of interest under section 115A on the gross interest income. The Tribunal upheld the CIT(A)'s decision that interest should be computed on the gross interest income, following the Tribunal's earlier rulings in the assessee's own case for previous years.

6. Addition regarding salary paid to expatriate employees:
The Revenue disputed the deletion of the addition related to the salary paid to expatriate employees. The Tribunal found that the salary expenditure was for services rendered wholly and exclusively for the assessee in India and upheld the CIT(A)'s decision, dismissing the Revenue's appeal on this ground.

7. Computation of deduction under section 36(1)(vii):
The Revenue contested the CIT(A)'s decision regarding the computation of deduction under section 36(1)(vii). The Tribunal, following its earlier decision and relevant case law, dismissed the Revenue's appeal, holding that only the opening balance of provision for bad debts should be considered.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the Revenue was dismissed. The Tribunal's decision was pronounced in the open court on December 22, 2023.