2013 (5) TMI 639 - AT - Income Tax

Exemption to interest income u/s 10(15)(iv)(h) - Revenue appeal against granting full exemption - Held that - AO made disallowance on account of interest and operating expenses on pro-rata basis. Insofar as the disallowance of interest is concerned, it is an admitted position that the assessee s capital and free reserves are far in excess of the amount invested in securities earning interest free income. That being the position, there cannot be any disallowance on account of interest paid for making investment in such securities. Similar view has been canvassed in assessee s own case. As regards the operating expenses, the Tribunal in earlier years has directed to sustain disallowance at the rate of 2% of exempt income. In the absence of any distinguishing facts for the current year having been brought to notice, 2% of the exempt income should be disallowed u/s 14A towards operating expenses. This ground is partly allowed. Claim for loss on account of valuation of investments disallowed - Held that - CIT(A) has decided this issue against the assessee and resultantly there was no occasion for the Revenue to challenge the same as it is simple and plain that when deduction has been allowed on account of loss arising on revaluation of investments in earlier years, the subsequent write back of the same amount cannot escape taxation. Therefore, hold that the amount is chargeable to tax. However, the A.O. is directed to ensure that the same amount is not taxed twice in the assessment for the current year. Benefit on account of unmatured forex contracts as on 31.03.2000 credited to the Profit and loss account for the year under appeal is chargeable to tax. Deduction on account of mobilization of India Millennium Deposit issued by the State Bank of India - whether be treated as fees for technical services? - A.O. held that the provisions of section 40(a)(i) read with section 195 were applicable - Held that - It was SBI who came out with IMD issue with SBI Capital Markets Ltd. as Advisor and Lead arranger. The services rendered by the arrangers or sub-arrangers were only a small part of the management of the IMD issue. It is further significant to note that the assessee was only one of the several banks soliciting subscribers to SBI s IMD. Even within the same territory, there were several banks competing with each other to find out customers. To be more precise, in India alone there were several banks including the assessee, contesting with each other to reach the potential subscribers. Another factor which is of prime importance is that SBI reserved right to reject any application forwarded by the assessee without assigning any reason, as is evident from the brochure of IMD scheme, thus it is clear that the sub- arrangers were no where near the management of IMD issue. What to talk of managing, even the fate of the applicants sent by them was not certain as to acceptability. Under such circumstances, it cannot be said that by doing their activities, the sub-arrangers were rendering any managerial services to the assessee in connection with IMD issue of SBI. They were simply acting as commission agents or brokers for which they were entitled to a particular rate of commission. The AO seems to have been swayed by the designation of fees given to sub-arrangers in adopting a view that it was a fees for technical services. It goes without saying that the nomenclature of a transaction does not change its true character. It is the real essence and character of a transaction which needs to be looked into. Thus no hesitation in concluding that it was simply a commission or brokerage paid by the assessee to its sub-arrangers. The fact that it was characterized as fees , is of no consequence. If this payment is not fees for technical services but only commission, the provisions of section 195 requiring the assessee to make deduction of tax at source before remitting or crediting the amount to the accounts of sub-arrangers, cannot apply. If no deduction of tax at source is required, obviously the provisions of section 40(a)(i) do not come into play. In favour of assessee. Unamortized part of the net expenditure - whether be ought to have been held as deductible - Held that - The expenses in question incurred by the assessee are of the nature of the first category of the expenses incurred for issuing debentures eligible for deduction in full in the year of incurring as per the ratio decidendi of India Cements (1965 (12) TMI 22 - SUPREME Court). The authorities below have wrongly matched it with the second category by relying on the ratio decidendi of Madras Industrial (1997 (4) TMI 5 - SUPREME Court) thereby by allowing amortization over the period of deposit. The expenditure has no relation whatsoever with the life of long term deposits received by the assessee bank from SBI. As this expenditure is revenue in nature and not a deferred revenue expenditure, the same has to be allowed as deduction in entirety in the year of incurring itself without spreading it over the term of deposit. Thus the deduction should be allowed in the year under consideration. The AO is directed to ensure that no allowance of the unamoritzed expenditure is allowed in subsequent years. The ground raised by the assessee in this regard is accordingly allowed.

Issues Involved:

1. Taxation rate on business income for foreign companies.
2. Taxability of interest received on Nostro Account and overseas placements.
3. Deduction of interest paid to Head Office/overseas branches.
4. Levy of interest under section 234D of the Income-tax Act.
5. Exemption of interest income under section 10(15)(iv)(h) of the Income-tax Act.
6. Taxability of write back of provision for revaluation of investments.
7. Taxability of benefit on account of unmatured forex contracts.
8. Deduction of expenses for mobilization of India Millennium Deposit (IMD).

Detailed Analysis:

1. Taxation Rate on Business Income for Foreign Companies:
The assessee's appeal against the direction to charge business income at the rate of 48%, applicable to foreign companies, was dismissed. This decision was based on consistent Tribunal rulings against the assessee in earlier years.

2. Taxability of Interest Received on Nostro Account and Overseas Placements:
The assessee did not press the ground regarding the taxability of interest received on Nostro Account and overseas placements, leading to the dismissal of this ground. Consequently, the interest paid to Head Office/overseas branches was allowed as a deduction.

3. Deduction of Interest Paid to Head Office/Overseas Branches:
Since the interest received was accepted as taxable, the interest paid to Head Office/overseas branches was allowed as a deduction.

4. Levy of Interest Under Section 234D:
The interest levied under section 234D was upheld based on the judgment of the Hon'ble Bombay High Court in the case of CIT v. Indian Oil Corporation Limited. As the assessment was completed after the stipulated cut-off date, the interest had to be charged.

5. Exemption of Interest Income Under Section 10(15)(iv)(h):
The Tribunal upheld the exemption under section 10(15) on the gross amount of interest but also applied section 14A, disallowing 2% of the exempt income towards operating expenses. This ground was partly allowed.

6. Taxability of Write Back of Provision for Revaluation of Investments:
The write back of provision for revaluation of investments was held to be taxable. The Tribunal directed the AO to ensure that the same amount is not taxed twice.

7. Taxability of Benefit on Account of Unmatured Forex Contracts:
The Tribunal held that the benefit of Rs. 1.38 crore on account of unmatured forex contracts credited to the Profit and Loss account was chargeable to tax, following precedents from earlier years.

8. Deduction of Expenses for Mobilization of India Millennium Deposit (IMD):
The Tribunal examined the nature of payments to sub-arrangers and held that these payments were in the nature of commission/brokerage and not fees for technical services. Consequently, no tax was required to be deducted at source, and the provisions of section 40(a)(i) did not apply. The Tribunal also directed that the entire amount of Rs. 14.87 crore incurred on securing IMDs should be allowed as a deduction in the year it was incurred, overturning the decision to amortize it over the life of the deposit.

Conclusion:
The cross appeals were partly allowed, and the cross objection was dismissed. The Tribunal provided detailed reasoning for each issue, ensuring that the decisions were consistent with previous rulings and relevant legal principles.

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