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2012 (8) TMI 517 - AT - Income TaxClaim for the lower rate of tax at 35% in the light of the amendment of section 90 with retrospective effect from 1st April, 1962 - claim for benefit of non-discrimination as per Article 25 of the India Korea DTAA - Held that - As decided by tribunal in assessee s own case in A.Y. 2002-03 DTAA recognizes the fact that the amendments made in the IT Act are not affected in so far or they are not in conflict with the specific provisions of the DTAA. Therefore the amendment made in section 90 (2) by way of insertion of explanation is applicable in so far as it is not in conflict with the provision of DTAA - in the event of conflict between international law, the Court must follow municipal law - DTAA did not prescribe any separate or specific rate or any particular criteria to be applied on income of Korean companies assessed in India - The word less favourable has not been defined either in the DTAA or in IT Act. Therefore, it cannot be constructed to mean that levy of higher rate on the income on non-domestic company would be less favorable - against assessee. Addition on account of unrealized profits on revaluation of securities - Held that - As the assessee has valued its closing stock scrip-wise by following cost or market price, whichever is less method as per which the appreciation in the value due to the higher market value has been ignored but the depreciation in the value of the other items of stock has been reflected. Thus amount on revaluation of securities represents the excess of market price over the cost price in respect of certain scrips and further going by the method of valuation adopted by the assessee the same cannot be added to the total income - in favour of assessee. Addition on account of upfront guarantee commission - Held that - As decided in Dy. DIT (International Taxation) v. Chohung Bank 2009 (6) TMI 693 - ITAT MUMBAI the period of guarantee had nothing to do with the assessee s right to receive the commission and accordingly the amount was brought to tax by him in the hands of the assessee for A.Y in question holding that the said income was accrued to the assessee at the time when the corresponding guarantees were issued - accepted the alternative contention of the assessee relating to double taxation of the same amount in two years and accordingly directed the A.O. to exclude from the income of the assessee the amount of upfront guarantee commission offered in the subsequent year on accrual basis which was already taxed on receipt basis - against assessee. Disallowance of interest paid by the Indian Branch of the assessee bank to its Head office - Held that - As decided in Sumitomo Mitsui Banking Corpn. v. Dy. DIT (IT) 2012 (8) TMI 450 - ITAT, MUMBAI that although the interest paid to the Head office of the assessee bank by the Indian branch which constitutes its PE in India is not deductible as expenditure in the domestic law being payment to self, the same is deductible while determining the profit attributable to the PE which is taxable in India as per the provisions of article 7(2) and 7(3) of the relevant Tax Treaty read with Paragraph 8 of the Protocol which are more beneficial to the assessee - in favour of assessee. Disallowance of salary paid to expatriate employees from Head Office to the Indian Branch u/s 44C - Held that - Section 44C includes expenditure that is common in nature & that the benefit of the said expenditure is derived both by the Head Office and the Branch - that payment of salary made in the case of the assessee was to expatriate employees who were working actually with the assessee in India though the payment was made to them by the Head Office outside India the expenditure incurred on such payment thus was incurred exclusively for the branch in India and the same was not covered within the purview of sec. 44C - salary paid to expatriate employees deputed from Head Office to Indian Branch was an expenditure to be allowed in full - in favour of assessee.
Issues Involved:
1. Tax rate applicable to the assessee under the India-Korea Double Taxation Avoidance Agreement. 2. Addition on account of unrealized profits on revaluation of securities. 3. Addition on account of upfront guarantee commission. 4. Disallowance of interest paid by the Indian Branch to its Head Office. 5. Loss claimed on account of revaluation of foreign-exchange contracts. 6. Interest paid by the Indian Branch to its Head Office treated as income. 7. Salary paid to expatriate employees and its treatment under Section 44C. Detailed Analysis: 1. Tax Rate Applicable to the Assessee: The issue pertains to the tax rate applicable to the assessee, a resident taxpayer, under the India-Korea Double Taxation Avoidance Agreement (DTAA). The assessee claimed a lower tax rate of 35% under Article 25 of the DTAA, whereas the Assessing Officer (A.O.) and CIT(A) applied a rate of 40% (+ surcharge). The Tribunal referred to its previous decision in the assessee's case for A.Y. 2002-03, which upheld the higher tax rate, stating that the DTAA does not conflict with the amendments in the Income Tax Act. Consequently, the Tribunal dismissed the assessee's appeal on this ground for A.Y. 2004-05 and A.Y. 2006-07. 2. Addition on Account of Unrealized Profits on Revaluation of Securities: The assessee, a banking company, did not recognize net appreciation in securities categorized as "available for sale" as income, considering it unrealized and notional. The A.O. added this appreciation to the taxable income, which was upheld by CIT(A). However, the Tribunal followed its earlier decision, which allowed relief to the assessee by deleting similar additions for previous years. The Tribunal upheld that the method of valuation adopted by the assessee was consistent and recognized, thus deleting the addition for A.Y. 2004-05. 3. Addition on Account of Upfront Guarantee Commission: The assessee recognized guarantee commission over the life of the guarantee on an accrual basis. The A.O. added the commission received during the year to the taxable income, which was confirmed by CIT(A). The Tribunal, referring to its earlier decision, upheld the addition but directed the A.O. to exclude the amount from the subsequent year's income if already taxed. This decision was applied for A.Y. 2004-05. 4. Disallowance of Interest Paid by the Indian Branch to its Head Office: The A.O. disallowed the interest paid by the Indian branch to its Head Office, treating it as a payment to self. The Tribunal referred to the Special Bench decision in Sumitomo Mitsui Banking Corpn., which allowed such deductions under Article 7(2) and 7(3) of the relevant Tax Treaty. Consequently, the Tribunal deleted the disallowance for A.Y. 2004-05, A.Y. 2005-06, and A.Y. 2006-07. 5. Loss Claimed on Account of Revaluation of Foreign-Exchange Contracts: The A.O. disallowed the loss claimed by the assessee on revaluation of foreign-exchange contracts. The Tribunal referred to the Special Bench decision in Bank of Bahrain & Kuwait, which allowed such losses, recognizing the binding obligation and consistent accounting method. The Tribunal upheld CIT(A)'s decision allowing the loss for A.Y. 2004-05. 6. Interest Paid by the Indian Branch to its Head Office Treated as Income: The A.O. treated the interest paid by the Indian branch to its Head Office as taxable income. The Tribunal referred to the Special Bench decision in Sumitomo Mitsui Banking Corpn., which held that such payments do not constitute taxable income under domestic law or the relevant Tax Treaty. The Tribunal upheld CIT(A)'s decision, dismissing the revenue's appeal for A.Y. 2004-05. 7. Salary Paid to Expatriate Employees: The revenue challenged the CIT(A)'s decision allowing full deduction of salary paid to expatriate employees without restriction under Section 44C. The Tribunal referred to its earlier decision, upheld by the Bombay High Court, which allowed such deductions as the expenditure was incurred exclusively for the Indian branch. The Tribunal upheld CIT(A)'s decision for A.Y. 2006-07. Conclusion: The Tribunal's judgment addressed multiple issues involving tax rates, additions on unrealized profits, guarantee commissions, interest payments, and salary deductions. The decisions largely followed precedents set in earlier years or by Special Benches, providing consistency and clarity in the application of tax laws and treaties. The assessee's appeals were partly allowed, and the revenue's appeals were dismissed.
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