9911796707
TMI Blog2012 (7) TMI 703X X X X Extracts X X X X X X X X Extracts X X X X ..... eign nations entered into an agreement. When a particular provisions in the agreement has been brought from a particular date, it has to be, prima facie, taken to be prospective in operation, unless it is expressly or by necessary implication provided or made to have retrospective operation - Here in this case, if any such interpretation is given for retrospective operation of this Article, it creates new obligation and disturbs the assessability of the profit of the PE. Thus, the amendment brought in Article 7(3) w.e.f. 1-4-2008, will not apply retrospectively - 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 - in favour of assessee. Calculation of interest u/s 244A - Held that:- CIT (A) has not gone into the question of correctness of method adopted by the AO who has calculated the interest by reducing the refund of tax already granted to the assessee but decided the issue on the ground that the method adopted by the AO is being consistently followed in respect of all assessee. Therefore, the impugned order of the CIT (A) qua this issue is not su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction allowable under clause (viia) in respect of bad debts will have to be taxed against the opening credit balance in the provision of account to arrive at the quantum of deduction allowable while computing the total income - no infirmity in the reasoning given by the CIT(A) for allowing the assessee's claim - in favour of assessee. - IT APPEAL NOS. 1996, 2205, 2851, 3925, 4304 & 5017 (MUM.) OF 2004 AND 3462, 3857 & 4022 (MUM.) OF 2010 - - - Dated:- 20-7-2012 - P.M. JAGTAP, AMIT SHUKLA, JJ. ORDER Per Bench These are bunch of cross appeals and cross objections filed by the assessee for the assessment years 1995-1996 to 2000-2001. Since the issues in all the appeals are common, therefore, for the sake of convenience, all these appeals are being disposed of by this consolidated order. ITA No.3462/M/2010 (AY: 1995-1996) (By Assessee) :- 2. In this appeal the assessee is aggrieved by the order dated 8-2-2010, passed by the CIT(A)-10, Mumbai on the following grounds :- "1. The Commissioner of Income-tax (Appeals)-10, Mumbai [hereinafter referred to as the CIT(A)] erred in confirming the action of Assessing Officer (AO) of restricting the deduction for h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered in assessee's own case for the assessment years 1984-1985 to 1992-1993. Against the said order, the revenue came in appeal before the ITAT. The Tribunal vide order dated 14-2-2007, restored the matter back to the file of the Assessing Officer for fresh adjudication on the ground that the amendment in section 44C has come in the statute w.e.f. 1-4-1993 and all the judgments rendered were prior to the assessment years in question and, therefore, will not be applicable. Thus, the matter was restored back to decide this issue afresh as per the amended provisions of Section 44C and in accordance with the provisions of law. 4. Before the Assessing Officer in the set aside proceedings, the assessee claimed that the deduction for head office expenses, which was attributable to Indian branches should be allowed in full, in view of the Article 7(3) of the Treaty between India and UAE. The Assessing Officer observed that there is no dispute that this deduction for head office expenses should be allowed to the permanent establishment, albeit within the limits specified under the Income Tax Act i.e. under Section 44C. The Assessing Officer while arriving to this conclusion, referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter that expenses pertaining to executive and administrative are to be allowed in accordance with the provisions of domestic law only. Thus, the provision contained in Article 25(1) has been ratified by this amendment. Following the CIT(A)'s order for the assessment years 1998-1999 to 2003-2004, he thus, upheld the finding of the Assessing Officer and dismissed the assessee's ground on this score. 7. Learned Senior Counsel appearing on behalf of the assessee submitted before us that in absence of limitation clause in Article 7(3), the provision of section 44C cannot be applied in the assessee's case. The amendment brought by way of protocol in the Indo-UAE Treaty w.e.f. 1-4-2008 only strengthens the assessee's case that earlier such a limitation clause cannot be read into in Article 7(3). On the issue that the limitation clause can be said to be imported by virtue of Article 25(1), he submitted that it is a general article dealing with elimination of double taxation and credit of taxes and does not provide any restriction to article 7(3). He referred to similar provisions in various treaties and their interpretation as per OECD convention, UN Model etc. He submitted that where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as decided against the assessee. He also tried to distinguish the decision of the ITAT Ahmedabad Bench in the case of M/s Dalma Energy LLC ( supra ), on the ground that impact of Article 25(1) has not been considered at all. On the issue that amendment was only clarificatory, he relied upon the decision of ITAT which has been reported in 13 SOT 95, wherein it was held that amendment in Article 4, was clarificatory, and therefore, the same logic should be imported to Article 7(3) vis- -vis protocol brought with effect from 1st of April, 2008. Lastly, he extensively referred to findings and the reasoning given by the CIT(A) and the Assessing Officer. 9. In rejoinder, learned Senior Counsel submitted that purpose of Article 25(1) of Indo-UAE Treaty, which is similar to Article 23(3) of Indo-Japan Treaty has been specifically interpreted by the Special Bench in the case of M/s Sumitomo Mitsui Banking Corporation ( supra ). He referred to various paragraphs in the said judgment wherein this issue has been clarified. Regarding the case of Mashreqbank Psc. ( supra ) as relied upon by the learned CIT DR he submitted that in view of the Special Bench decision, Mashreqbank Psc. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive contracting State except for expressly provided in the agreement. The ld. CIT(A) has observed that most of the Treaties entered into by India with various countries, it has been specifically provided that computation of profit of PE in Article 7(3) would be as per domestic laws of that State in which PE is situated and wherever there is no such specific provision, Article 25(1) enables the applicability of the domestic law. He has referred to commentary by 'Klaus Vogel', wherein he mentions that "while explaining the provision of Article 7(1) of the OECD/UN Model Convention that the meaning of term profit of a permanent establishment and how the profits are determined is always governed by the domestic laws of the contracting state concerned, though it may happen sometimes that certain provisions of domestic law do not apply to the foreign permanent establishment." He also relied upon the CBDT Circular No. 202, which lays down intention behind interpretation of Section 44C. The protocol dated 3-10-2007, which has amended the Article 7(3) w.e.f. 1-4-2008 only clarifies the department's stand that the expenses pertaining to executive and administrative nature are to be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Now, with the insertion of phrase, "in accordance with the provisions of and subject to the limitations of the tax laws of that State", the mandate of applicability of the domestic law has been provided, in allowing the deduction of expenses of the PE and determination of profit under the Income Tax Act. Consequently section 44C becomes applicable. The issue before us is, whether such a limitation clause can be said to have retrospective effect. It is a cardinal principle, when two sovereign nations enter into an agreement and have come to an understanding regarding the terms, views expressed in the agreement, such terms cannot be unilaterally changed. Once the Government of India and Government of UAE had not used the limitation clause of applicability of domestic law in determining the profits and deduction of expenses of PE under Article 7(3), the same cannot be read into even impliedly, that such a provision existed. One has to see the merits of the word and its meaning understood when the two high contracting parties, herein in this case, two sovereign nations entered into an agreement. When a particular provisions in the agreement has been brought from a particular date, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mported therein by virtue of Article 25. 13. The case of Mashreqbank Psc ( supra ), which has been relied upon heavily by the department, first of all, was rendered prior to the amendment brought by the Protocol. However in this case it has been interpreted that Article 25(1) of Indo-UAE Treaty should be read in Article 7(3) for applicability of domestic law. After detail analysis and discussion, the relevant observations given in the said decision are as under :- "21. In view of the above discussions, and particularly bearing in mind the provisions of Article 25(1) of the India UAE tax treaty, we are of the considered view that the limitations under the domestic tax laws are to be taken into account for the purposes of computing profits of a PE under Article 7(3) of the India UAE tax treaty. The plea of the assessee is incompatible with overall scheme of the tax treaties, particularly India UAE tax treaty. Accordingly, the conclusion arrived at by the CIT(A) meets our approval. We confirm the same and decline to interfere in the matter." This view of Mashreqbank psc ( supra ), stands impliedly overruled by the latest decision of ITAT Special Bench in the case of M/s S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld to be taxable relying on the provisions of the treaty, the same will run contrary to the provisions of section 90(2). Such interpretation, therefore, cannot be assigned to article 23 and the only interpretation which, in our opinion, can be assigned to the said article so as to make the provisions thereof in consonance with section 90(2) of the domestic law is that if there is an express provision made in the convention giving benefit to the assessee which is contrary to the domestic law, then the provisions of treaty can be relied upon which shall override and prevail over the provisions of the domestic law to give any benefit expressly given to the assessee under the treaty. The decision of Hon'ble Supreme Court in the case of Azadi Bachao Andolan ( supra ) fully supports this view." 13.1 The view taken by the Special Bench in a way negates the view of Mashreq Banks case. If such an interpretation of Article 25(1) is to be given in Article 7(3), then there was no need of bringing the amendment by way of protocol from a particular date. The amendment itself shows there was no such intention by the two Contracting States at the time when they entered into the agreement. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed deduction of expenses incurred for the purposes of the business of the permanent establishment including general administrative expenses but in accordance with the provisions and also subject to the limitations of the tax laws of that State. Therefore, by this amendment in the Article the applicability of provision of section 44C has been enforced, nevertheless with effect from 1st day of April, 2008." 14. Thus, in view of our above finding, we hold that, firstly, in the assessment year involved, limitation clause of applicability of income-tax 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; thirdly, the judgment of Mashreqbank psc ( supra ), is no longer relevant in view of the decision of the Special Bench in the case of M/s Sumitomo Mitsui Banking Corp .( supra ).and Lastly, from the above conclusions, it is held that computation of income and disallowance of expenses relating to head office cannot be made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s covered by the decision of ITAT in assessee's own case for the assessment year 1990-91 passed in ITA No.5136/M/2009 vide order dated 2.7.2010. He also referred to calculation of interest which has been given in the paper book from pages 98 to 102. On the other hand, Ld CIT-DR submitted that the issue of interest u/s 244A is arising out of the order u/s 154 passed by the AO and, therefore, the same cannot be adjudicated upon. 22. After carefully considering the rival submissions and perusing the material on record, we find that the issue of interest u/s 244A is a part of working of demand determined by the AO in pursuance of the assessment order. Therefore, same can very well be challenged in the present appellate proceedings. As stated by the learned Counsel, this issue has come up for consideration before this Tribunal in assessment year 1990-1991 wherein this issues was decided in favour of the assessee after observing and holding as under: "We have considered the rival contentions and relevant record. It is evident from the orders of the lower authorities that the AO has calculated the interest u/s 244A by reducing the refund of tax already granted to the assessee. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s being consistently followed in respect of all assessees. Therefore, the impugned order of the CIT (A) qua this issue is not sustainable in law and liable to be set aside. We accordingly decide this issue in favour of the assessee and direct the AO to calculate the interest on the refund due to the assessee without reducing the interest under section 244A which is part of the refund earlier granted from the refund due." 23. Thus, respectfully following the aforesaid decision, we direct the AO to calculate the interest on the refund due to the assessee without reducing the interest u/s 244A which is a part of the refund earlier granted from the refund due. The AO is also required to examine the calculation of interest as submitted by the assessee. 24. Thus, this ground is restored back to the AO to give consequential relief in calculation of interest u/s 244A. In the result, this ground is treated as allowed, but for statistical purposes. ITA NO.4022/M/2010 (AY: 1997-98) (By Assessee): 25. In this appeal, ground no.1 is similar to ground no.1 in ITA No.3462/M/2010 dealing with applicability of sec.44C vis.a.vis Article 7(3). The issue raised in this ground has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's business income instead of 35%. The CIT (A) too has confirmed the action of the AO after giving detailed reasoning in para nos. 6.4 to 6.7 of the order. 33. At the outset, learned Counsel submitted that this issue stands covered against the assessee by the order of ITAT in assessee's own case for the assessment years 1995-1996, 1996-1997 and 1997-1998. 34. After gone through the aforesaid decisions of the ITAT passed in ITAT Nos.4316 4317/M/2000, we find that this issue has been decided against the assessee after observing and holding as under: "We have considered the rival submissions, perused the materials on record and have gone through the orders of authorities below and the judgments cited by both sides. We find that this issue is covered against the assessee by the judgment of the Tribunal rendered in the case of ABN Amro Bank NV v. JCIT reported in TTJ (Cal) (TM)1041. In that case also, contention was advanced on behalf of the assessee that this Explanation to section 90 is un-implementable because of inappropriate language. But, it was held by the Tribunal that this contention of the assessee cannot be accepted. Relevant para of this Tribunal judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17/M/2000 and ITA No.2116/M/2001 wherein the Tribunal after following the earlier years orders and various other decisions has observed and hold as under: "We have considered the rival submissions, perused the materials on record and have gone through the Tribunal judgments relied upon by learned Counsel of the assessee. We find that this issue has been decided by the Tribunal in favour of the assessee by the following the judgment of Hon'ble Calcutta High Court rendered in the case of Eastern Investments India reported in 213 ITR 334 and Tribunal judgment in the cases of Canara Bank Ltd reported in 84 ITD 310. It is also noted by the Tribunal that the department's SLP is since been rejected by Hon'ble Apex Court in the case of Canara Bank Ltd. as per 201 ITR (Statute) 51. Learned DR of the revenue could not point out any difference in facts; and hence, respectfully following the precedent, this issue is decided in favour of the assessee. These grounds of the revenue stand rejected." 39. Thus, respectfully following the aforesaid decision, this ground stands allowed in favour of the assessee. ITA NO.2205/M/2004 (AY:1998-99) ( By Department): 40. In ground no.1 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been following mercantile system of accounting for accounting the guarantee commission. If the guarantee commission is for the guarantee given for a period of 5 years, then the commission received and taken to the profit is only 1/5th in a year. Since, the assessee has been following mercantile system and have been offering the tax on guarantee commission, during the currency of the period of guarantee, there is no justification to tax the same on receipt basis. Such a system of accounting had been followed consistently and the same has been accepted by the Department in the past. Reliance was place on the decision of Supreme Court in Madras Industrial Investment Corporation (225 ITR 802) and Bombay High Court judgment in Taparia Tools Ltd. (260 ITR 102). On the other hand, the Assessing Officer's case is that the transaction involving bank guarantee is only in the year in which guarantee is given. The assessee bank receives no right in subsequent year for any guarantee commission. That is an advance commission received, therefore, there is no question of deferring the same to future years. Ld CIT(A) agreed with the contention of the assessee and allowed the assessee's groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er taxed the entire guarantee commission in the year of receipt. On appeal, the CIT(A) deleted the addition and the Tribunal also upheld the CIT(A)'s order. On further appeal to the High Court, the Hon'ble Calcutta High Court upheld the Tribunal's order. The High Court held as under: "The Revenue contends that the right to receive the commission being a one-time right, its accrual shall coincide with the commencement of the service rendered by way of guaranteeing the debt repayment; it is immaterial that the repayment covers more than one previous year. Therefore, the entirety of the commission accrues at a time. The assessee-bank, on the other hand, submits that the service having a spread of years, the accrual should be year by year. The Revenue's contention that the accrual of the entire commission is a point of time accrual is not tenable. The contesting submissions boil down to one question. Whether accrual is co-eval with the playability, the same may be payable but may not be apportionable until the happening of an event; In the present case the expiry of the period of guarantee comprised in the previous year. The right to receive for unexpired period, for, the guarantee b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claimed as deduction at the rate of tax being 48% in the assessment year 1998-1999 and, therefore, the Department has gained more tax. Similarly, HUDCO Bonds were purchased by the Bank for Rs. 4,59,77,000/-, which too was wrongly valued by the Bank in the accounting year ended 31.3.1996 at market value of Rs. 5,50,00,000/- resulting in offering to tax erroneously at Rs. 90,23,000/- in the assessment year 1996-1997 @ 55%. This error was realised and was corrected after reversing the amounts for year ending 31.3.1997 and 31.3.1998. In the assessment year 1997-1998, the AO allowed the assessee's claim with respect to the amount reversed in the assessment year 1997-1998. In this year the assessee has only claimed balance amount. Ld CIT(A) allowed the assessee's claim after following the decision of Hon'ble Bombay High Court in the case of Bank of Baroda reported in 2003 (262 ITR 334) after observing and holding as under: "I have considered the facts of the case and the material on record and I am of the view that the claim of the appellant in this regard is fair and does not result in any disadvantage to the department. On the other hand, the acceptance of the claim results in a ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in ITA No.3462/M/2010. The issue raised in this ground has been discussed in detail in the assessment year 1995-1996 in ITA No.3462/M/2010 and the finding given therein squarely applies in this year also. Thus, ground no.1 as raised by the assessee is allowed. 54. Ground no.2 is similar to ground no.2 in ITA No.1996/M/2004 for the assessment year 1998-1999. In view of the finding given therein, this issue is decided against the assessee. In the result, ground no.2 is dismissed. ITA NO.3925/M/2004 (AY:1999-2000) (By the Department): 55. In this appeal the revenue has raised the following grounds : "1( i ) On the facts and circumstances of the case in law, the CIT(A) erred in holding that, exemption of sec. 10(15) of the IT Act, 1961 was to be allowed in respect of the "gross receipt" and not in respect of the net income arising to the assessee. ( ii ) On the facts and circumstances of the case and in law, the CIT(A) erred in directing the AO to delete the addition of Rs. 28,97,893/-made in respect of guarantee commission. ( iii ) On the facts and circumstances of the case and in law, the CIT(A) erred in directing the AO to delete the addition of Rs. 3,53,000/-made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT-DR relied upon the findings of the AO. 62. We have carefully, considered the rival submissions and also gone through the decisions relied upon by the learned Counsel and the findings of the CIT(A). The total income of the assessee can be computed at the end of the previous year and in computation of such income deduction u/s 36(1)(viia) has to be allowed. If bad debts are written off in the books of account during the course of the previous year, such bad debts must be deducted as admissible u/s 36(1)(viia). Apparently, the deduction allowable under clause (viia) in respect of bad debts will have to be taxed against the opening credit balance in the provision of account to arrive at the quantum of deduction allowable while computing the total income. The decision of Oman International Bank v. DCIT (92 ITD 76) is also in support of the case of the assessee. We thus find no infirmity in the reasoning given by the CIT(A) for allowing the assessee's claim. 63. In the result, this issue is decided in favour of the assessee and accordingly this ground is decided against the Department. C.O.NO.414/M/2004 (AY: 1999-2000) (By the Assessee): 64. The assessee has made a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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