2016 (5) TMI 283 - AT - Income Tax

Computation of income of the PE - Held that - On going through the orders of the Co-ordinate Bench of this Tribunal in assessee s own case for the A.Yrs 1995-96 to 2000- 01 2012 (7) TMI 703 - ITAT MUMBAI , we find that the issue is decided in favour of the assessee holding 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. Respectfully following the said decision, we allow the ground raised by the assessee. We do not find much substance in the alternative contention raised by the Revenue in so far as the applicability of provisions of Sec. 41(1) of the Act - Decided in favour of assessee Disallowance of claim of the assessee on tax rate applicable to its business income is 35% and not 40% - Held that - This ground is decided against the assessee in assesee s own case for assessment years 2001-02 and 2004-05 reported in (2013 (9) TMI 603 - ITAT MUMBAI). - Decided against assessee Disallowance u/s 14A - Held that - In view of the decision of Godrej & Boyce Co. Ltd., (2010 (8) TMI 77 - BOMBAY HIGH COURT ) Rule 8D has no application for the assessment year 2004-05. However, reasonable disallowance should be made towards expenditure attributable for earning exempt income. It is the submission of the Ld. Counsel that in the case of DDIT Vs Development Bank of Singapore (2013 (8) TMI 175 - ITAT MUMBAI), 2% of dividend income is held to be reasonable for earning exempt income. Respectfully following the above decision, we hold that 2% of dividend income will be reasonable expenditure for earning exempt income - Decided in favour of assessee partly TDS u/s 195 - Disallowance u/s 40(a)(i) - Non deduction of tds on interest paid by the assessee to its Head Office/overseas branch - Held that - The said interest, however, cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domestic law. Even otherwise, there is no express provision contained in the relevant tax treaty which is contrary to the domestic law in India on this issue. This position applicable in the case of interest paid by Indian branch of a foreign bank to its Head Office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the Head Office. At the time of hearing before us, the learned representatives of both the sides have also not made any separate submissions on this aspect of the matter specifically. Having held that the interest paid by the Indian branch of the assessee Bank to its head office and other branches outside India is not chargeable to tax in India, it follows that the provisions of section 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the PE, the question of disallowance of the said interest by invoking the provisions of section 40(a)(i) does not arise.- Decided in favour of assessee Penalty levied u/s. 271(1)(c) - assessee has claimed head office expenses and also the claim made by the assessee that interest paid to head office is not taxable - Held that - Assessee has made claim in the return of income and it is a full disclosure of the assessee in respect of the expenses as well as the claim towards interest paid to head office. We do not see concealment of income or furnishing of inaccurate particulars in respect of these two disallowances/additions made by the Assessing Officer. It is only a difference of opinion as to whether these claims can be allowable or not and the issues are debatable.Alongwith the computation of income, assessee has referred to the relevant article of the treaty with UAE and the complete details of expenses are given in the annexure. In the circumstances, we are of the considered view that there is neither concealment of income nor furnishing of inaccurate particulars of income by the assessee so as to levy penalty u/s. 271(1)(c) - Decided in favour of assessee

Issues Involved:
1. Deduction for head office expenses under Sec. 44C vs. Article 7(3) of the UAE-India tax treaty.
2. Applicable tax rate on business income (35% vs. 40%).
3. Applicability of Sec. 14A r.w. Rule 8D for disallowing expenses related to exempt income.
4. Application of Sec. 40(a)(i) for interest paid to head office/overseas branches.
5. Deletion of penalty levied under Sec. 271(1)(c).

Detailed Analysis:

1. Deduction for Head Office Expenses:
The assessee contended that the entire head office expenses allocated to Indian branches should be allowed as a deduction under Article 7(3) of the UAE-India tax treaty, as opposed to the restriction under Sec. 44C of the Income Tax Act. The Tribunal noted that this issue had been previously decided in favor of the assessee for the assessment years 1995-96 to 2004-05, where it was held that the income of the Permanent Establishment (PE) should be computed as business income after allowing all attributable expenses, including head office expenses. Therefore, following these precedents, the Tribunal allowed the assessee's claim for the assessment year 2004-05 but dismissed similar grounds for the assessment years 2005-06 and 2006-07 due to quantum differences.

2. Applicable Tax Rate on Business Income:
The assessee argued that the applicable tax rate for its business income should be 35% instead of 40%. The Tribunal referred to its earlier decisions for the assessment years 2001-02 and 2004-05, which had ruled against the assessee on this matter. Consequently, the Tribunal dismissed the assessee's appeal on this ground for all relevant assessment years.

3. Applicability of Sec. 14A r.w. Rule 8D:
The assessee challenged the disallowance of interest and other expenses related to exempt income under Sec. 14A r.w. Rule 8D. For the assessment year 2004-05, the Tribunal noted the Jurisdictional High Court's decision in Godrej & Boyce Co. Ltd. vs. CIT, which held that Rule 8D was not applicable for that year. Instead, the Tribunal deemed a reasonable disallowance of 2% of the dividend income as appropriate, partly allowing the assessee's appeal. For the assessment years 2005-06 and 2006-07, the Tribunal followed a similar reasoning and partly allowed the appeals by estimating the disallowance at 2% of the exempt income.

4. Application of Sec. 40(a)(i) for Interest Paid to Head Office/Overseas Branches:
The assessee contended that the interest paid to its head office and overseas branches should not be disallowed under Sec. 40(a)(i). The Tribunal cited the Special Bench decision in Sumitomo Mitsui Banking Corporation vs. DDIT, which held that such interest payments are not chargeable to tax in India and therefore, the provisions of Sec. 195 and Sec. 40(a)(i) are not applicable. Following this precedent, the Tribunal allowed the assessee's appeal on this ground for the assessment years 2005-06 and 2006-07.

5. Deletion of Penalty under Sec. 271(1)(c):
The Revenue appealed against the deletion of penalty levied under Sec. 271(1)(c) for the assessment year 2006-07. The Tribunal found that the assessee had made full disclosures regarding head office expenses and interest payments to the head office, and the disallowances were due to differences in interpretation rather than concealment or furnishing of inaccurate particulars. Citing the Supreme Court's decision in Reliance Petroproducts Pvt. Ltd., the Tribunal affirmed the CIT(A)'s order deleting the penalty, stating that mere making of unsustainable claims does not amount to furnishing inaccurate particulars. Consequently, the Revenue's appeal was dismissed.

Conclusion:
The appeals filed by the assessee for the assessment years 2004-05 to 2006-07 were partly allowed, while the Revenue's appeal was dismissed. The cross-objection filed by the assessee was also dismissed as infructuous. The Tribunal's decisions were pronounced in the open court on 29th April 2016.

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