9911796707
Advanced Search 
TMI Blog2012 (7) TMI 703X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed as a deduction as per the provision of Article 7(3) of the convention between the Govt of UAE and the Government of India (hereinafter referred to as the Tax Treaty). The appellants submit that in computing the taxable business income in India, the treaty allows a deduction for all expenses wherever incurred and reasonably allocable to the permanent establishment, including its share of executive and general administrative expenses. As the treaty overrides the domestic law, the amount allocated by the Head Office should be allowed as a deduction in full." 3. Briefly stated the relevant facts of the case for adjudication of the solitary issue involved is that the assessee is a Banking Company incorporated in UAE and is having two branches in India i.e. in Mumbai and Bangalore. The income from banking operations in India is offered for tax in India. The Government of UAE and Government of India have entered into DTAA, which is applicable from this year i.e., from assessment year 1995-1996. The business profit of the bank related to its Indian operations required to be computed in accordance with the provisions of Article 7 of the convention. In computing the total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered at the time of introduction of Section 44C by the Finance Act, 1976. Lastly, he extensively referred and relied upon the decision of CIT(A) rendered in the case of the assessee for the assessment year 1997-1998 vide order dated 18-1-2001. Following the said decision, he held that 'head office expenses' will be allowed only as per the limit prescribed under section 44C. 5. Before the CIT(A), the assessee made elaborate submissions, contending, inter alia, that the total income of the PE should be computed as per the provisions of Article 7(3), where there is no restriction clause for applying the tax laws of the Contracting State. It was further submitted that such a restriction in Article 7(3) has come by way of the amendment brought through Protocol dated 3-10-2007 with effect from 1st April, 2008. Thus, prior to the amendment such a restriction clause cannot be read into. The assessee also relied upon the decision of ITAT Mumbai Bench in the case of Bank International Indonesia, Mumbai ITA No. 303/M/2001 (vide order dated 14.1.2004) and Metchem Canada Inc. 100 ITD 251 (Mum.), wherein the Tribunal came to a view in the light of non-discrimination clause in DTAA, that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. He cited example of Indo-German DTAA and Indo-Japan DTAA, wherein article 23(3) and 23(1), which is similar to Article 25(3) of Indo-UAE Treaty have been interpreted to be not providing any clause of limitation in Article 7(3). In support of his contention that view taken by ITAT in Mitsui Bank PSC (supra) has been impliedly observed by recent decision of ITAT Mumbai Special Bench in the case of M/s Sumitomo Mitsui Banking Corporation v. DDIT (IT), passed in ITA No. 5402/M/2006, vide order dated 30-3-2012 and drew our attention, specifically to paras 60 to 63. Lastly, he submitted that in a latest decision by the ITAT Ahmedabad Bench in the case of ADIT(IT) v. M/s Dalma Energy LLC, passed in ITA No. 1664/Ahd/2008, vide order dated 23-4-2012, have discussed this issue of Article 7(3), 25(1) of Indo-UAE Treaty with specific reference to amendment brought by way of Protocol w.e.f. 1-4-2008 and submitted that in this case it has been held that the amendment would be applicable prospectively and not retrospectively. 8. Per Contra, learned CIT DR submitted that this issue is squarely covered by the decision of ITAT Mumbai Bench in the case of Mashreqbank Psc. v. DDIT(IT), passed in 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be assigned in the article 7(3) and it can never be held that it has a retrospective effect. He cited examples of various protocol wherein chargeability of a tax from a particular date, cannot be said to be retrospective. Regarding order of the Tribunal in miscellaneous application, he submitted that when the miscellaneous application has been dismissed, it is dismissed in toto, which inter alia, means original order stands as it is and it does not amend the original order. Lastly, he submitted that the case of M/s Dalma Energy LLC (supra), which has considered that the protocol should be applied. 10. We have heard the rival submissions and perused the material placed on record. Here in this case, the entire controversy is whether in determining the profits of PE in India, the expenses incurred for the purpose of PE is to be computed by applying the provisions of section 44C of the Act (i.e., under the domestic law in which PE is situated) on an interpretation of Article 7(3) r/w Article 25(1) of the India-UAE DTAA as was prevalent in the relevant assessment year. The other corollary to this issue are:- (i) Whether on a true and correct interpretation of Article 7( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in such a manner that the limitation clause of applicability of domestic law should be read into. The protocol amending Article 7(3) has been brought w.e.f. 1-4-2008 which cannot have a retrospective effect. Before us, both the parties have given decision of ITAT in their favour on this point. The Department has heavily relied upon the judgment of Mashreqbank Psc (supra), and the assessee has relied upon the case of M/s Dalma Energy Ltd. (supra). 11. The relevant provisions contained in Article 7(3) of Indo-UAE DTAA prior to 1-4-2008 which was based on OECD model, reads as under :- "3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere." From the above, it is apparent that in determining the profits of PE, (i) all expenses incurred for the purposes of the business of the PE shall be allowed as a deduction in determining profits of PE; (ii) such expenses include executive and general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d any such interpretation giving retrospective effect not only impairs the vested right but attracts the new disability in respect of transactions already entered in the past. 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. The retrospective operation cannot be taken to be intended unless by necessary implication it has been made to have the retrospective effect. Thus, the amendment brought in Article 7(3) w.e.f. 1-4-2008, will not apply retrospectively, prior to such date as it would impose a new obligation or a liability to tax which was not made by the two Contracting States. 12. A lot of stress has been given by the department and the learned DR that such an exception already existed by virtue of Article 25(1) which provides that : "The laws in force in either of the Contracting States shall continue to govern the taxation of income and capital in the respective Contracting States except where express provisions to the contrary are made in this Agreement." Article 25 which is similar to Article 23 of other treaties, deals with the Elimination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the relevant provisions of the Indo-Japanese treaty. He has, inter alia, relied on article 23 of Indo-Japanese treaty which provides that the laws in force in either of the contracting State shall continue to govern the taxation of income in respective contracting state except where express provisions to the contrary are made in the convention. According to him, article 11 read with article 7 of the treaty contains such express provision and make the interest payable by the PE in India to the GE abroad the income of the GE chargeable to tax in India. Before we consider this argument of Shri Girish Dave in the light of the relevant provisions of the article 7 and 11 of the Indo-Japanese treaty, it is pertinent to discuss certain basic aspects of the matter which are relevant in this context. 61. Section 90(2) of the Income-tax Act, 1961 provides that where the Central Government has entered into an agreement with the Government of any country outside India or specific territory outside India, as the case may be, section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude the legal aspect of this issue, we have already reproduced Article 7 (in para 12.1 above) and on careful perusal, we have noted that in determining the profits of a PE the expenses which are incurred for the purposes of the business of the said PE, including general administrative expenses is to be allowed. At this stage of argument, we have categorically raised a question that if executive and general administrative expenses of a PE is to be allowed having been incurred for the purposes of the business of a PE, then what is the utility of the introduction of section 44C of the IT Act. Ld. AR Mr. Milin Mehta has answered that keeping in mind the controversy an amendment took place in the Articles and vide a protocol amending the agreement between the Government of the Republic of India and the Government of United Arab Emirates vide Notification No.282/2007, dated 28/11/2007 which is effective from 1st day of April, 2008, paragraph 3 of Article 7 (Business Profits) has been replaced by the following :- "3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds taken by the assessee is allowed. ITA NO.3857/M/2010 (AY:1996-97) (By Assessee): 16. This appeal has been filed against the order dated 5.3.2010 passed by CIT (A)-10, Mumbai. 17. In ground no.1 assessee has challenged the restriction of deduction for head office expenses by applying the provisions of sec. 44C of the Act as against the assessee's claim that the entire amount of Rs. 39,47,623/-allocated to the Indian branches should be allowed as deduction as per provision of Article 7(3) of India-UAE DTAA. 18. This issue has already been decided in favour of the assessee in the aforesaid appeal for the Assessment Year 1995-96 in ITA No.3462/M/2010. The finding given in the above appeal applies mutadis-mutandis in this ground also. Thus, ground no.1 as raised by the assessee stands allowed. 19. In ground no.2, the assessee has challenged calculation of interest u/s 244A in the following manner: "2(a) The CIT(A) ought to have directed the AO to recomputed interest under section 244A at Rs. 1,17,83,506/- (per computation enclosed) as against Rs. 85,50,458/- (incorrectly mentioned as Rs. 8,55,05,458/- by the CIT(A) in the order dated 5th March, 2010 for the assessment year 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und of tax as well as interest granted u/s 244A from the refund due to the assessees. In order to compute the interest u/s 244A, the amount balance refund due to the assessee has to be determined after deducting the amount of that tax already refunded and not amount of interest already granted u/s 244A. Thus the interest component in the refund already granted should be excluded while the same is to be reduced from the refund due to the assessee for the purposes of section 244A for future interest on the balance refund due amount. Accordingly, we are of the view that the method adopted by the AO suffered from grave error as the same has resulted the reduction of interest payable to the assessee because the principal amount is reduced by interest component already granted and then future interest is computed. The interest already granted up to a date is relevant only for exclusion of period for which it is granted and the future interest has to be granted from the subsequent period. Therefore, the interest already granted cannot reduce the principle refund due to the assessee but the amount which represents the tax already refunded has to be reduced from the total refund due to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43/- (b) Entertainment Rs. 2,41,664/- (c) 43 B Rs. 1,15,472/- 27. The Ld CIT (A) has held that issue of disallowance of these expenses are not borne out from the ITAT's order dated 14.2.2007and neither any details have been filed nor examined by the AO as to how these expenses are not part of section 44C of the Act. On this reasoning, he dismissed the assessee's ground. 28. After perusing the records it is seen neither the AO nor the CIT (A) have properly examined this issue. Therefore, in the interest of justice, this matter is restored back to the file of AO, who will examine these expenses afresh after calling for the necessary records and evidence from the assessee in support of its claim. In the result, this ground is allowed for statistical purposes. 29. In ground no.3, the assessee has challenged the computation of interest u/s 244A on the refund granted by the AO. Similar matter has been decided in assessee's appeal for the assessment year 1996-1997 in ITA No.3857/M/2010 wherein after relying upon the Tribunal's order for the assessment year 1990-1991, matter has been sent back to the Assessing Officer as per directions given therein. In view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is the foreign company vis-à-vis the domestic company other than Indian company. It is noteworthy that the domestic company is defined under the Finance Act. For the sake of reference we may quote the definition of the domestic company as per the finance (No.2) Act, 1996. "Domestic Company" means and Indian company, or any other company which in respect of its income liable to income tax under the IT Act for the assessment year commencing on the 1st April, 1996, has made the prescribed arrangements for the declaration and payment within India of the dividends (including dividends on preference shares) payable out of such income in accordance with the provisions of section 194 of the Act." Thus even under the Finance Act the domestic company is recognized as Indian company and any other company having made arrangement for declaration of dividends payable on such income. We, therefore, do not find the language of Explanation to section 90 as inappropriate. Moreover, insofar as there is no doubt the category of the foreign company vis-à-vis Indian company having been specified in the Explanation, one need to ascertain as to whether in any case the second category of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench. After gone through the order of the Tribunal for the assessment year 1997-1998, we find that this issue stands allowed in favour of the assessee after observing and holding as under: "We have considered the rival submissions and perused the materials on record. We find that in the case of State Bank of India (supra), this issue has been decided by the Tribunal in favour of the assessee by holding that for exemption u/s 10(15), gross interest has to be considered. While holding so, the Tribunal has followed the judgment of Hon'ble Bombay high Court rendered in the case of CIT v. New Great Insurance Co. Ltd., 90 ITR 348 and also on the judgment of Hon'ble Apex Court rendered in the case of Rajasthan Warehousing Corporation, 242 ITR 450. In the case of JCIT v. Mashrequ Bank PSC (supra), the Tribunal has decided the issue in favour of the assessee by following the Tribunal judgment rendered in the case of State Bank of India (surpa). In the case of British Bank of Middle East (supra) also, the issue has been decided by following the Tribunal judgment in the case of State Bank of India (supra) and it held that provisions of section 10(15)(iv) are very clear and unambiguous and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... word "accrue" is "to fall as a natural worth or increment; to come as an accession or advantage". The word "arse" is defined as "to spring up, to come into existence". The words "accrue" and "arise" do not mean actual receipt of profits or gains. Both these words are used in contradistinction to the word "receive" and indicate a right to receive. Thus, it is manifest that if any assessee acquires a right to receive income, the income can be said to accrue to him though it may be received later on. Unless and until there is created in favour of an assessee a debut due by somebody, it cannot be said that income has accrued to him. A mere claim to income without an enforceable right thereto cannot be regarded as accrued income for the purpose of income-tax Act. When the bank gives a guarantee, its obligation extends to the entire period for which guaranty is given. In exchange of this obligation, the bank receives a commission. It is wrong to say that such commission accrues to the full extent the moment when the bank stands as a guarantor. Since the obligation is spread over a period of time, so should be the guarantee commission. One can perhaps draw a parallel on this issue with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, in view of the above, this ground of appeal is allowed and the Assessing officer is directed to delete the addition of Rs. 75,07,484/- made in respect of guarantee commission. In view of my above decision the alternative submission made by the appellants does not survive for consideration." 45. Ld CIT-DR relied upon the findings of the AO and on the other hand learned Sr. Counsel relied on the findings of the CIT(A). 46. After carefully considering the submissions made by the parties and the findings given by the AO as well as CIT(A), we find that in view of the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation (supra) and the Bombay High Court decision in the case of Taparia Tools Ltd. (supra), the finding and the reasoning given by the CIT(A) is legally correct and we do not find any reason to deviate from such reasoning. Thus, the finding of the CIT(A) is upheld. In the result, the ground taken by the Department is dismissed. 47. In ground no.3, the Department has challenged the deletion of addition of Rs. 1,37,75,000/- made in the computation of total income of the assessee on account of difference between cost and book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt decision in the case of Bank of Baroda (262 ITR 334). Accordingly, the AO is directed to delete the addition of Rs. 1,37,75,000/- made by him in computing the total income of the appellant on this issue." 49. After carefully considering the issue involved and the finding of the AO as well as CIT(A), it is an undisputed fact that the method of valuation followed by the assessee to value its investment was cost or market value whichever was lower. The assessee had shown a higher value and paid the tax at a higher rate in the assessment year 1996-1997. Such valuation was reversed as per its method of accounting and the differential amount has been claimed as loss. Thus, such a claim is duly allowable in view of the decision of Hon'ble Bombay High Court in the case of Bank of Baroda (supra) and the decision of Hon'ble Supreme Court in the case of United Commercial Bank Ltd. v. CIT reported in 1999 (240 ITR 355). Thus, the findings given by the Ld CIT(A) is perfectly correct and we do not find any reason to deviate from the same. In the result, ground no.3 is dismissed. C.O. No.115/M/2004 (AY:1998-199) (By the Assessee): 50. This Cross Objection arising out of ITA No.2205/M/2004. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2004. In view of the finding given therein, this ground is dismissed. 57. Ground no. 1(ii) is similar to the ground no. 2 of the Departmental appeal for the assessment year 1998-1999. In view of the finding given therein, this issue stands decided against the assessee. As a result, this ground is dismissed. 58. Ground no. 1(iii) is similar to ground no.3 of the Departmental appeal for the assessment year 1998-1999. Thus, in view of the findings given therein, this ground is too decided against the Department and accordingly this ground is dismissed. 59. In ground no. 1(iv), Department has challenged allowability of bad debts of Rs. 2,53,64,316/- without setting of the provision for bad debts of Rs. 75,73,458/- made during the year. The assessee has claimed deduction for bad debts of Rs. 2,53,64,316/- after setting off opening provision of Rs. 2,11,60,709/-. The Assessing Officer while computing the total income has allowed deduction of Rs. 1,77,90,858/- after setting off the closing provision of Rs. 75,73,458/-. 60. Before the CIT(A) it was submitted that closing provision of Rs. 75,73,458/- made u/s 36(1)(viia) ought not to have been set off against the amount of Rs. 2,53,64, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment 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. 66. 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.5017/M/2004 (AY:2000-2001) ( By the Department): 67. In this appeal, the revenue has taken the following two grounds : "1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that, exemption of section 10(15) of the IT Act, 1961, was to be allowed in respect of the 'gross receipts' and not in respect of the 'net income' arising to the assessee. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to delete the addition of Rs. 16,54,257/- made in respect of guarantee commission." 68. Ground no.1 is similar to ground no.1 of Department's appeal in ITA No.2205/M/2004. Therefore, respectfully following the decision given therein, this ground is dismissed. 69. Ground no.2 is similar to ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
