2024 (4) TMI 737 - AT - Income Tax

Expenditure incurred by the HO for salary paid to the expatriate employees for rendering services to PE - as per revenue these expenses being not recorded in books of assessee (PE) in India, were neither actually paid nor shown payable in books of Indian PE and as the assessee did receive the services of such value through its HO, simultaneously there was equivalent income also accruing to assessee u/s 28(iv) and once the AO having not made any separate addition u/s 28(iv), the disallowance of expenses claimed directly in computation of income was merely to bring tax neutrality - HELD THAT - We observe from the record that identical issue is decided in favour of the assessee in the A.Y. 2001-02 2023 (11) TMI 1250 - ITAT MUMBAI wherein held that non-reimbursement of expenses incurred by HO for salary of employees of Indian PE did not result in taxable income in the hands of PE/HO under section 28(iv). Taxability of interest income in the hands of Head Office - HELD THAT - Identical issue is decided in favour of the assessee in the A.Y. 2001-02 2023 (11) TMI 1250 - ITAT MUMBAI interest paid by Branch to the Head office is not taxable under the domestic laws for the year under consideration. Disallowance of interest paid to Head Office - assessee submitted that Assessing Officer held that interest income is taxable under DTAA at 10% in the hands of the HO and disallowed the claim of deduction on account of non-deduction of tax which is allegedly deductible at source - HELD THAT - Identical issue is decided in favour of the assessee for the A.Y. 2001-02 2023 (11) TMI 1250 - ITAT MUMBAI to allow the deduction of interest paid to HO/OB in line with the decision of the Mumbai Special Bench in case of in case of Sumitomo Mitsui Banking Corporation 2012 (4) TMI 80 - ITAT MUMBAI Further, the Appellant submit that Special Bench decision in case of Sumitomo (supra) is not only dealing with India-Japan Tax Treaty but also dealt with India-Netherland Tax Treaty. Your Honour will appreciate that the language of India-UK Tax Treaty (applicable in case of the Appellant) is in line with India-Netherland Tax Treaty. Revenue is not able to produce any argument to controvert the facts of the ground raised by the assessee and also not able to controvert the stand taken by the special bench in the case of Sumitomo Mitsui Banking Corporation (supra). Nature of expenditure on Refurbishment - assessee submitted that these expenses incurred on refurbishment of various branch premises like electrical works, cabling and wiring, etc. Assessing Officer held that these expenses are capital in nature (and not revenue) disallowed the same - HELD THAT - Identical issue is decided in favour of the assessee for the A.Y. 2001-02 2023 (11) TMI 1250 - ITAT MUMBAI as held looked upon expenditure which did bring about some kind of an enduring benefit to the company as revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expense has been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, thus the expenditure should be looked upon as revenue expenditure. TP Adjustment - Disallowance of expenses directly attributable to operation in India - Whether the allocation of cost by the Head Office are eligible and whether it is covered within the provisions of section 44C ? - HELD THAT - These costs are allocated between the Head office and branches which are nothing but allocation of costs within the cost centers of same assessee, allocated the cost on the basis of allocation key, which are accepted principles without any profit element on it. The arrangements are within the organization and there cannot be any agreement, strictly speaking the agreement on allocation key is itself on an agreed terms between the branches. It is not necessary that it should have a separate agreement between the branches and also there is no requirement of invoices between the branches it is enough that there are approved internal memo. It is agreed that it is an international transaction there has to be certain documents justifying the allocation with proper allocation key, which has to be documented with mutual agreement for demonstration of acceptance of such allocation key. Once the branches and head office justifies the allocation key for allocation of various expenses, it justifies the purpose of sharing the internal costs. We observe that these costs are not just shared this year, it is a regular practice over the years by the head office or relevant branches which does services by submitting the various costs with proper allocation key. It is brought to our notice that various services are offered by the head office and relevant branches which also demonstrates the increase in the volume of business as well as services to Indian customers, this itself a benefit derived by the Indian branch. Therefore, in sum and substance, we observe that AO has intended to disallow the whole cost allocation made by the Head office to toe along with the findings in the earlier assessment years and not inclined to relook at the actual material or facts on record. In our view, he has grossly rejected the documents and justification submitted by the assessee. We do not see any reason to differ from the findings of the Coordinate Bench in the earlier assessment years - AO himself partially accepted the findings of TPO and proceeded to disallow the whole allocation of costs, which demonstrates that he has no inclination to allow the costs incurred by the assessee. Even the TPO partially recognizes the allocation of costs and rejects the cost which according to him not supported by the sufficient documents. It is Transfer Pricing Officer's obligation to call for the whole documents before closing the Transfer Pricing assessments and also he cannot treat any TP adjustment without properly justifying the reasons for such rejection. In this case, we observe that he has merely considered the submissions made by the assessee and he partially accepted the allocation and other part, he has proceeded to treat them as nil with the observation that there is no proper documents submitted before him. The revenue cannot reject the CPA certificate since the same are specific and authenticated. As per Rule 10D(2)(A), the document must be supported by authentic documents, which includes authentication by the CPA. Therefore, the certification of allocation key and the same was authenticated by the CPA is proper documents as per Reule 10(2)(A) of the I.T. Rules. Respectfully following the above decision, we observe that in the given case also, the assessee has provided informations under Rule 10D(2)(A) and the cost allocation was also certified by the statutory auditors (CPA) of the Head Office and the service branches are submitted before tax authorities. However, this was not taken cognizance by the tax authorities. Therefore, we direct the Assessing Officer to verify the CPA certificate and verify the allocation key and relevant allocation of the cost to the Indian entity. Disallowance u/s 14A - HELD THAT - As following the principle of consistency, the view taken by the Tribunal in A.Y. 2001-02 is respectfully followed, accordingly, Assessing Officer is directed to restrict the disallowance to 1% of exempt income and ground raised by the assessee is partly allowed. Premium paid on acquisition of retail asset portfolio - HELD THAT - We observe from the record that the assessee has acquired the retail loan portfolio from Standard Chartered Grindlays Bank Ltd, which is a separate legal entity on the proprietary basis, it is also relevant to note that it has acquired the running retail portfolio business. Therefore, it is only a trading assets acquired by it. In our view, the assessee will get the benefit based on the tenure of this trading assets. It was submitted by the Ld AR that the tenure of this retail loans are for the period 2 to 5 years. Therefore, cost verses benefit has to be recognized in this transaction. The assessee has benefitted and recognized the income in the next 5 years, hence, in our view, it should be treated as deferred revenue expenditure and allocated in 5 equal installments. Therefore, we direct the AO to allow 1/5th of the cost in this assessment year and balance can be carried forward to the subsequent years. Accordingly, the ground raised by the assessee is partly allowed. Deduction of Head office expenditure - HELD THAT - Head office expenditure is allowed in entirety under the provisions of Article 26 of the tax treaty without the applicability of restriction under section 44C of the Act, and as the submissions by assessee not controverted by the Revenue, In view of this, ground of appeal of the assessee is allowed.

Summary

Issues Involved:

1. Salaries Paid to Expatriates
2. Taxability of Interest Income in the Hands of Head Office
3. Disallowance of Interest Paid to Head Office
4. Disallowance of Expenditure on Refurbishment
5. Disallowance of Expenses Directly Attributable to Operations in India
6. Disallowance under Section 14A
7. Recoveries Against Securities Loss
8. Premium Paid on Acquisition of Retail Asset Portfolio
9. Deduction of Head Office Expenditure

Summary:

1. Salaries Paid to Expatriates:
The issue pertains to the taxability of salaries paid to expatriate employees seconded to India. The tribunal observed that these salaries were subjected to tax in India and were claimed as deductions by the India Branch. The Coordinate Bench had previously decided this issue in favor of the assessee, and the tribunal followed this precedent, dismissing the revenue's ground.

2. Taxability of Interest Income in the Hands of Head Office:
The tribunal addressed whether interest received by the Head Office from its PE in India is taxable. The CIT(A) had held that such interest is not taxable under the Act, relying on previous decisions. The tribunal upheld this view, dismissing the revenue's grounds.

3. Disallowance of Interest Paid to Head Office:
The issue involved the disallowance of interest paid by the Branch office to the Head Office without deduction of tax. The tribunal referred to the Sumitomo Mitsui Banking Corporation case, which held that such interest is not chargeable to tax in India and thus not subject to TDS. The tribunal followed this precedent, dismissing the revenue's grounds.

4. Disallowance of Expenditure on Refurbishment:
The tribunal considered the disallowance of expenses incurred on refurbishment of leasehold premises. The CIT(A) had allowed a portion of these expenses as revenue expenditure. The tribunal referred to the Madras Auto Service Pvt. Ltd. case and previous tribunal decisions, allowing the assessee's claim and dismissing the revenue's grounds.

5. Disallowance of Expenses Directly Attributable to Operations in India:
This issue involved the disallowance of costs allocated by the Head Office to the Indian Branch. The tribunal noted that the Transfer Pricing Officer had accepted a portion of these costs as being at arm's length. The tribunal followed previous decisions, holding that such costs are allowable under section 37(1) and not disallowable under section 40(a)(i).

6. Disallowance under Section 14A:
The tribunal addressed the disallowance of expenses attributable to exempt income under section 14A. It referred to previous decisions and the South Indian Bank Ltd. case, directing the Assessing Officer to restrict the disallowance to 1% of the exempt income.

7. Recoveries Against Securities Loss:
The tribunal noted that this ground was academic in nature and required no specific adjudication.

8. Premium Paid on Acquisition of Retail Asset Portfolio:
The issue involved the disallowance of premium paid on acquiring a retail loan portfolio. The tribunal held that such premium should be treated as deferred revenue expenditure, allowing it to be spread over the loan tenure.

9. Deduction of Head Office Expenditure:
The tribunal considered the disallowance of Head Office expenditure under section 44C. It referred to the Metchem Canada Inc. case and previous tribunal decisions, allowing the deduction in entirety under the provisions of Article 26 of the India-UK tax treaty without applying the restriction under section 44C.

Conclusion:
The appeals filed by the revenue were dismissed, and the appeals filed by the assessee were partly allowed, following the principles of consistency and previous tribunal decisions.