2013 (9) TMI 603 - AT - Income Tax

TDS on Arrangers Fees - whether fee for technical services (FTS) or commission - u/s 195 r.w.s. 40(a)(i) - Held that - Following M/s. Credit Lyonnais (through their successors Calyon Bank) and Others Versus The Asstt. Director of Income-tax (International Taxation) - 1(2) And Others 2013 (5) TMI 639 - ITAT MUMBAI - The amount paid by the assessee to the non-residents sub-arrangers was not a fees for managerial or technical or consultancy services - Hence, the same cannot be brought within the ambit of fees for technical services as per section 9(1)(vii) of the Act - If this payment was 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 was required, obviously the provisions of section 40(a)(i) do not come into play - Once it was held that the said commission/brokerage was not chargeable to tax in the hands of non-resident sub-arrangers under the provisions of the Act, there remains no need to examine the taxability or otherwise of this amount in their hands under the respective Double taxation avoidance agreements - CIT(A) was justified in reversing the AO s order insofar as the applicability of section 40(a)(i) was concerned Decided against Revenue. Exemptions u/s 10(15) and 10(33) - Interest from tax free bonds - UTI dividend - Whether the CIT(A) erred in holding that since there was no nexus proved between tax free income and interest bearing funds, no disallowance can be made from the gross income claimed as exempt u/s. 10 of the I.T. Act Held that - No nexus had been proved between tax-free-income and interest bearing funds by the AO, that there were sufficient funds the findings shares/tax free securities that the action of the AO in disallowing exemption u/s 10 of the part of dividend/interest on tax free securities could not be sustained - AO had not given any details as how the alleged borrowed funds were used for earning tax free income, whereas the FAA had given a categorical finding; after considering the submissions made by the assessee bank during the appellate proceedings before him; that the interest free funds available to the assessee were far more than the investment made during the year The order of the FAA does not suffer from any legal or factual infirmity Decided against Revenue. Head office expenditure - section 44C - AO held that expenses incurred by the H.O. which were not debited to the books of account of the assessee were not allowable, that expenditure which was executive and administrative in nature had to be treated as office expenses in respect of which deduction was allowable only as per the provisions of section 44C of the Act. - Held that - following the decision in assessee s own case 2012 (7) TMI 703 - ITAT MUMBAI decided in favor of assessee.

Summary

Issues Involved:
1. Deletion of addition on account of Arrangers' Fees.
2. Exemption claimed under section 10 of the Income Tax Act.
3. Disallowance of interest expenditure.
4. Disallowance of wealth tax payment while computing book profit under section 115JB.
5. Disallowance of provision for bad debts while computing book profit under section 115JB.
6. Disallowance of Head Office expenses while computing book profit under section 115JB.
7. Restriction of deduction for Head Office expenses by applying section 44C.
8. Applicability of tax rate for business income.

Detailed Analysis:

1. Deletion of Addition on Account of Arrangers' Fees:
The AO disallowed Rs. 31.72 Crores paid as Arrangers' Fees to the Head Office/Overseas branches without deducting tax at source under section 195 r.w.s. 40(a)(i). The CIT(A) deleted this addition, holding that there was no income chargeable to tax in India. The Tribunal upheld the CIT(A)'s decision, referencing the case of M/s Credit Lyonnais, where it was concluded that the amount paid to non-resident sub-arrangers was not fees for managerial or technical services and thus not subject to tax deduction at source under section 195. Consequently, the provisions of section 40(a)(i) did not apply.

2. Exemption Claimed Under Section 10:
The AO restricted the exemption under section 10(33) and 10(15) to Rs. 48.43 lacs, arguing that the net income, not the gross receipts, should be exempt. The CIT(A) reversed this decision, stating that no nexus was proved between tax-free income and interest-bearing funds. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not provide details on how borrowed funds were used to earn tax-free income.

3. Disallowance of Interest Expenditure:
For AY 2002-03, the AO disallowed a portion of the interest expenditure, asserting that the assessee used borrowed funds to earn tax-free income. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, referencing its earlier ruling for AY 2001-02, where it was held that no nexus was established between borrowed funds and tax-free investments.

4. Disallowance of Wealth Tax Payment While Computing Book Profit Under Section 115JB:
The AO added the wealth tax payment to the book profit under section 115JB. The CIT(A) deleted this addition, citing the Bombay High Court's judgment in the case of CIT v. Echjay Forgings (P.) Ltd. The Tribunal upheld the CIT(A)'s decision, noting that wealth tax cannot be added back while computing book profit.

5. Disallowance of Provision for Bad Debts While Computing Book Profit Under Section 115JB:
The AO added the provision for bad debts to the book profit. The CIT(A) deleted this addition, referencing case laws that supported the exclusion of such provisions from book profit computation. The Tribunal upheld the CIT(A)'s decision.

6. Disallowance of Head Office Expenses While Computing Book Profit Under Section 115JB:
The AO added Rs. 20 lacs of Head Office expenses to the book profit. The CIT(A) deleted this addition, following the precedent set in the case of Apollo Tyres. The Tribunal upheld the CIT(A)'s decision.

7. Restriction of Deduction for Head Office Expenses by Applying Section 44C:
The AO restricted the deduction for Head Office expenses to the limits prescribed by section 44C. The CIT(A) upheld this restriction. The Tribunal reversed this decision, referencing its earlier ruling for AYs 1995-96 to 2000-01, where it was held that the entire amount of Head Office expenses should be allowed as per Article 7(3) of the India-UAE DTAA.

8. Applicability of Tax Rate for Business Income:
The AO applied a higher tax rate of 48% to the assessee's business income, which the CIT(A) upheld. The Tribunal confirmed this decision, referencing its earlier rulings where it was held that the higher tax rate for foreign companies was applicable.

Conclusion:
The Tribunal dismissed the appeals filed by the AO and allowed the cross-objections and appeals filed by the assessee for statistical purposes. The Tribunal's decisions were based on precedents and detailed analysis of the applicable legal provisions and facts of the case.