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2015 (7) TMI 39 - AT - Income TaxRestricting the deduction for Head Office Expenses (HOE) - DTAA with U.A.E. - AO denied the treaty benefit to the assessee for the reason that it had not paid tax in UAE - Held that - Firstly,in the assessment year involved, limitation clause of applicability of incometax Act will not apply in Article 7(3) and consequently provisions of sections 44C will not be applicable; secondly, the amendment brought by way of Protocol by which article 7(3) has been amended and limitation clause has been brought in, will apply from 1st April, 2008 and will not have any retrospective effect. It is held that computation of income and disallowance of expenses relating to head office cannot be made by invoking the provisions of Section 44C of IT Act. Thus, in view of the above conclusions, we hold that income of the PE of the assessee should be computed as business income after allowing all the expenses attributable to its business in India including the head office expenses. We have gone through the amendment to the treaty but same is applicable w.e.f. 01.04.2008. Therefore,considering the facts of the case and the decisions delivered in Sumitomo Mitsui Banking Corporation 2012 (4) TMI 80 - ITAT MUMBAI , Abu Dhabi Commercial Bank 2012 (7) TMI 703 - ITAT MUMBAI and Dalma Energy LLC (2012 (5) TMI 10 - ITAT, Ahmedabad ) we are deciding ground no.1 in favour of the assessee. Disallowance of loss on foreign exchange contract which were un-matured on the last date of the previous year - Held that - When the market price of stock is lower than the purchase price, the market price is taken into account, and, accordingly, anticipated loss is taken into account. These dual standards in recognizing anticipated losses and anticipated profits are accepted accounting norms. In the case of Chainrup Sampatram Vs CIT (1953 (10) TMI 2 - SUPREME Court), Hon ble Supreme Court took note of this position and observed that while anticipated loss is taken into account, anticipated profit is not brought into account as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is lower, and it is now generally accepted as an established rule of commercial practice and accountancy . No doubt these observations were made in the context of valuation of stock but what is material is the theory underlying the principle of valuing closing stock at cost or market price whichever is lower and the fact that such a theory has tile acceptance of the Hon ble Supreme Court. Just because anticipated profits are not assessed to tax, it would not follow, as a corollary thereto, that anticipated losses cannot be allowed as deduction in computation of business income. In the light of these discussions, we are of the considered view that the very basis of the action of the Assessing Officer was vitiated in law and on facts. We, therefore, deem it fit and proper to direct the Assessing to delete the impugned disallowance. The assessee gets the relief accordingly. - Decided in favour of assessee. Restricting the exemption in respect of interest on tax free bonds - Held that - The gross amount of interest payable to the assessee would qualify for exemption under subsections (c) (f) and (h) of section 10(15)(iv). The facts beingsame,respectfully following the predecessor we decide this ground in favour of the assessee. Arrangers fees with regard to mobilizing the deposits under IMD Programme - applicability of the provisions of section 40(a)(i) and 195 - Held that - The amount paid by the assessee to the nonresidents sub-arrangers is 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 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. Once it is held that the said commission/brokerage is 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. In that view of the matter, we are of the considered opinion that the learned CIT(A) was justified in reversing the AO s order insofar as the applicability of section 40(a)(i) is concerned. Consequently, the ground raised by the Revenue fails - Decided against revenue.
Issues Involved:
1. Deduction for Head Office Expenses (HOE) under Section 44C vs. Article 7(3) of the DTAA. 2. Applicable tax rate on business income under Article 26 of the DTAA. 3. Disallowance of loss on Forward Foreign Exchange Contracts. 4. Restriction of exemption on interest from tax-free bonds. 5. Deduction for broken period interest. 6. Taxability of commission income from mobilizing deposits under the Indian Millennium Deposit Scheme (IMDS). Detailed Analysis: 1. Deduction for Head Office Expenses (HOE): Issue: The CIT(A) upheld the AO's decision to restrict the deduction for HOE by applying Section 44C of the Income-tax Act, instead of allowing the full deduction as per Article 7(3) of the DTAA between India and UAE. Judgment: The Tribunal referred to the Special Bench decision in the case of M/s Sumitomo Mitsui Banking Corp, which held that the limitations under domestic tax laws should not be applied to the DTAA provisions before the amendment effective from 01.04.2008. Therefore, the Tribunal decided in favor of the assessee, allowing the full deduction of HOE as per the DTAA. 2. Applicable Tax Rate on Business Income: Issue: The CIT(A) erred in upholding the AO's action of applying a 48% tax rate on the business income of the assessee, instead of 35% as per Article 26 (non-discrimination clause) of the DTAA read with Section 90(2) of the Act. Judgment: The Tribunal did not specifically address this issue in detail in the provided judgment. However, the general principle is that the DTAA provisions will override domestic law if they are more beneficial to the assessee. 3. Disallowance of Loss on Forward Foreign Exchange Contracts: Issue: The AO disallowed the loss on Forward Foreign Exchange Contracts, considering it contingent and not allowable under Section 37 of the Act. Judgment: The Tribunal referred to its earlier decision for AY 1997-98, where it allowed such losses, considering them as business losses in accordance with consistent accounting practices and RBI guidelines. The Tribunal again decided in favor of the assessee, allowing the loss on Forward Foreign Exchange Contracts. 4. Restriction of Exemption on Interest from Tax-Free Bonds: Issue: The AO restricted the exemption on interest from tax-free bonds to Rs. 3,17,117, against the assessee's claim of Rs. 27,81,617 under Section 10(15)(iv)(h). Judgment: The Tribunal referred to its earlier decision for AY 1997-98, where it allowed the full exemption on gross interest. Following the same reasoning, the Tribunal decided in favor of the assessee, allowing the full exemption on interest from tax-free bonds. 5. Deduction for Broken Period Interest: Issue: The assessee claimed that if the broken period interest is not allowed in the year of purchase, it should be allowed in the year of sale of securities. Judgment: The Tribunal dismissed this ground as infructuous based on the statement made by the assessee's representative. 6. Taxability of Commission Income from Mobilizing Deposits under IMDS: Issue: The AO taxed the commission income earned by overseas branches for mobilizing deposits under the IMDS in India, while the assessee claimed it should not be taxed in India. Judgment: The Tribunal referred to its decisions in similar cases (Abu Dhabi Commercial Bank and Credit Lyonnais) and held that the commission income should be computed under Article 7(1) of the DTAA, allowing the deduction of related expenses. The Tribunal decided in favor of the assessee, holding that the commission income was not taxable in India after allowing the expenses incurred. Conclusion: The Tribunal's judgment largely favored the assessee on all major issues, allowing deductions and exemptions as per the DTAA provisions and consistent accounting practices. The appeals were partly allowed for the assessee and dismissed for the AO.
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