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TMI Blog2013 (12) TMI 718X X X X Extracts X X X X X X X X Extracts X X X X ..... interest in the Act is not as compensation for use of the money belonging to the creditor which a debtor has, but the payment is for an entirely different consideration - There was a default in complying with the statutory obligation to make advance payment of tax - The interest cannot be strictly called a penalty, it was in the nature of penalty because it was for a default - On this basis also the rule of netting was not accepted – Decided against assessee. Expenses incurred – Held that:- Indian law limits certain deductions of a permanent establishment with respect to head office expenditures. The deduction of amounts characterized as executive and general administration expenditures (not interest) is capped at five percent of the adjusted total income of the permanent establishment - The restrictions for allowing expenses incurred by the PE being head office expenses which are covered by Sec.44C of the Act (domestic law) as well as other expenses incurred in India are within the fold of Article 7(3) of the DTAA - As far as expenses incurred in India attributable to the business carried on in India are concerned, they have to be allowed subject to the limitations provided in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture incurred for earning exempt income but expenditure incurred for the composite/indivisible activities in which taxable and non-taxable income is received, then the principle of apportionment will apply - The AO has not brought out any direct expenditure incurred for earning the exempt income in question and disallowed the proportionate expenses by considering total expenditure incurred by the assessee and booked to the P&L Account - When there is no direct expenditure incurred for earning the exempt income then the apportionment of the expenditure is only for such expenditure which has been incurred for composite/indivisible activities resulting in taxable and non taxable income - The expenditure which is common for the activities for taxable and non-taxable income, the disallowance has to be considered - Section 14A was not in existence when the assessment in the said case was completed by the AO – As per the provision inserted by the Finance Act, 2001 retrospectively w.e.f 01/04/1962 - The disallowance of the proportionate expenditure incurred for composite or indivisible activity in which taxable and non-taxable income is received has to be examined in the light of the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessee has raised the following grounds:- "Ground No.1 The learned Commissioner of Income-tax (Appeals) VII, Mumbai [hereinafter referred to as "the CIT (Appeals)"] erred in confirming the decision of the learned Assessing Officer in not allowing a deduction in respect of expenditure of Rs.85,053,699 incurred by your Appellants' overseas branches, on the ground that such expenses come within the ambit of the provisions of Section 44C of the Income-tax Act, 1961 (hereinafter referred to as "the Act") pertaining to Head Office expenses, having failed to appreciate that the expenses incurred overseas which are directly attributable to the Indian operations of your Appellants do not attract the restrictive provisions of Section 44C of the Act. Ground No.2 The learned CIT (Appeals) erred in confirming the decision of the learned Assessing Officer in not allowing interest of Rs.18,147,135 paid to the Income-tax Authorities to be set off against interest of Rs.110,469,871 received from the Income-tax Authorities during Assessment Year 1997-98. Ground No.3 The learned CIT (Appeals) erred in confirming the decision of the learned Assessing Officer in disallowing certain expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round No.10 The learned CIT (Appeals) erred in holding that the interest paid by the Appellant's Indian branches to its Singapore branch was chargeable to tax in India, having failed to appreciate that, having regard to the provisions of the Act and the India-US Tax Treaty such sum was not income chargeable to tax in your Appellant's hands in India." 2. Ground No.1 regarding disallowance of expenditure incurred by the over-seas branches of the Assessee by applying the provisions of section 44C of the Income tax Act, 1961 (the Act). We have heard the ld. Senior Counsel as well as the ld. DR and considered the relevant material on record. The ld. Sr. Counsel has pointed out that AO has disallowed the expenses incurred by the overseas branches by considering the fact that a similar issue came up in the assessment year 1996-97. The ld. Sr. Counsel has referred the assessment order and submitted that the Assessee explained before AO that the expenditure incurred by the overseas branches of the bank is actually expenditure incurred by assessee. In fact the expenditure has been duly audited by local accounting firms at these locations and certified that the expenditure is incurred by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rations of the bank of the Indian branches. Expenses were incurred by those branches abroad to earn income by Indian Branches in India. These expenses were debited under the head of 'staff related expenses' and pertained to staff manning the NRI Desk at various branches outside India such as Singapore, Hong Kong, Jakarta and London. It was further stated that the expenses are directly for Indian operations and they were not considered or accounted by such overseas branches as deductible under their respective tax laws. Since these are expenses incurred exclusively for Indian branches, the provisions of section 44C and limitations provided therein are in applicable. However AO was of the opinion that provisions of section 44C apply to the assessee for the reason that relevant books of accounts, details of expenditure, as maintained by the overseas branches are not available for him for verify if the said expenditure is exclusively related to the business of the Indian branches of the assessee bank. After considering the above facts as well as legal position, the CIT(A) upheld the action of the AO. 14. Aggrieved with the above, the assessee is before the Tribunal. The ld. Counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the affairs of any office outside India; Travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and Such other matters connected with executive and general administration as may be prescribed." From the above provisions, it is evident from the use of the words and phrases in the above section i.e. 'in respect of so much of the expenditure in the nature of head office expenditure as is in excess of the amount' that these provisions are inapplicable to the cases, where the alleged expenses are exclusively incurred and accounted in the books. In the instant case, the expenses of Rs. 273.29 lakhs are undoubtedly falling within the definition of 'head office expenses' within the meaning of the clause (iv) of the Explanation to section 44C of the Act. There is no dispute in this regard. Nevertheless, the case of the assessee is that the said expenses are incurred wholly and exclusively for the business purposes of Indian Business of the Bank. However, the case of the revenue is that the said expenses are incurred also for other Bank branches in Asian Regions. But the Special Counsel for revenue did not have any evidence to suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT in assessee's own case for A.Y 1991-92, we direct the AO to allow the claim for deduction as made by the assessee." 2.2 Following the earlier order of this Tribunal in Assessee's own case, we decide ground No.1 of Assessee's appeal in favour of the Assessee and against the Revenue. 3. Ground No.2 regarding disallowance of interest paid to the Income tax authorities to set off against interest received from Income tax authorities. 3.1 We have heard the ld. Sr. Counsel as well as the ld. DR and considered the relevant material on record. The assessee claimed deduction of interest paid to the Income tax authorities. The AO asked the assessee to explain why the said claim of interest of Rs.1,81,47,135/- paid to the Government may not be disallowed in view of the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills Ltd. vs. CIT (31 ITR 153) as well as the decision of Ferro Alloys Corporation Ltd. vs. CIT (196 ITR 406) and also decision of Hon'ble Supreme Court in the case of CIT vs. Parmeshwari Devi Sultania (230 ITR 745). In reply, the assessee made an alternative plea that the interest paid should be set off against interest received and only net amount sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee's case did not rest upon the provisions of section 57(iii) of the Act, which provided for a deduction of the interest paid by the assessee for earning the interest income. In other words, it was not the contention of the assessee that he was paying interest to the bank to facilitate the earning of interest from the bank. This aspect of the matter was noticed by the Supreme Court at page 450 of the report. Thereafter the Supreme Court noticed that the argument before them on behalf of the assessee was that the real income of the assessee was only Rs. 27,034/-. This argument was rejected by the Supreme Court in the following words: - "It was not disputed, as it could not be, that if the assessee had taken a loan from another bank and paid interest thereon his real income would not diminish to the extent thereof. The only question then is : does it make any difference that he took the loan from the same bank in which he had placed the Fixed deposit. There is no difference in the eye of the law. The interest that the assessee received from the bank was income in his hands. It could stand diminished only if there was a provision in law which permits such diminution. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is between the advance tax paid by the assessee by his discharging the statutory obligation and receiving the interest, and the failure of the assessee to make that statutory advance. It was held that in the first case the assessee was being paid interest for making the advance payment and in the second case he is made to pay interest for failure to pay the advance payment. According to the Hon'ble High Court, there was no connection between the two positions and that it is impossible to accept the claim that the two situations are so connected as to constitute one transaction. The result of each of these facts, according to the Hon'ble High Court, have separate and independent legal consequences and that the receipt undoubtedly constituted income of the assessee and the claim to deduct or reduce the interest paid from the interest received should be examined independently. Thereafter the High Court went on to examine the contention based on the principle of netting and eventually rejected the same. Another argument based on the contention that both commercially and technically the payment of interest by the Government and the payment of interest by the assessee stand on the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint out that the judgment of the Hon'ble Bombay High Court in Aruna Mills Ltd.'s case (supra) should not be read or understood as deciding the matter against the assessee since the law at that time was that the assessee could make advance payments of the income tax and earn interest. I do not see how this could make any difference to the result. 18. In the result, I hold that the assessee is assessable in respect of the gross interest of Rs. 45,90,876/- received from the income tax department and not merely on the net interest of Rs. 44,53,655/ remaining after set off of the interest of Rs. 1,37,225/- paid to the income tax department. The interest payment cannot also be allowed as a deduction from the interest received. I thus agree with the decision of the learned Judicial Member in respect of Ground No. 4 taken by the department." 3.3 It is clear that in the case of DCIT vs. Sandvik Asia, the issue has been decided against the assessee by following the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills (supra), whereas for the assessment year 1990-91 the Tribunal has followed the decision in the case of Delhi Bench of this Tribunal in the case of K.N. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal has held that there is nothing in the Article 7(3) as well as technical explanation of Indo US Treaty and protocol to show that restrictions in the local law for allowing certain expenses will not apply while determining profit attributable to PE. Therefore, the Tribunal held that the expenses incurred by the PE in India have to be allowed subject to limitation in domestic law i.e., Act. The ld. Sr. Counsel has submitted that while deciding this issue the Tribunal has relied upon the decision in the case of Mashreqbank PSC vs. DDIT (108 TTJ (Mum) 554) as well as in the case of Dresdner Bank AG vs. ACIT (105 TTJ (Mum.) 149). Whereas the decision in case of Mashreqbank PSC is no longer a good law in view of the decision of Special Bench of the Tribunal in the case of Sumitomo Mitsui Banking Corporation Ors. vs. DDIT (136 ITD 66) . The ld. Sr. Counsel has also referred to Article 7(3) of Indo US-DTAA as well as the technical explanation of Indo US Treaty and protocol and submitted that as general rule the expenses which are incurred for the purpose of business of PE shall be allowed as deduction and the restriction provided under second part of Article 7(3) is only in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the laws in force in either of the contracting states will continue to govern the taxation of income in the respective contracting state except where specific provisions to the contrary is made in the treaty. We are in the present case concerned with Indo-USA treaty. We have perused the Indo-USA treaty. As contended by the learned counsel for the Assessee, that there is no clause in the said treaty which provides that the laws in force in either of the contracting states will continue to govern the taxation of income in the respective contracting state except where specific provisions to the contrary is made in the treaty. The decision in the case of Mashrreqbank PSC (supra) proceeded to hold that even in the absence of such a provision in the treaty, the restrictions contained in the domestic law would apply, as otherwise, the non-resident having PE in India would get a preferential treatment compared to a resident carrying on same business in India. 34. The technical explanation of the Indo-US treaty and protocol which serves as an office guide and reflects the policies behind particular convention provisions with respect of the application and interpretation of the trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , wherever incurred, that are incurred for the purposes of the permanent establishment" Page: 31.099-10: "In computing taxable business profits, deductions generally are allowed for expenses, wherever incurred, that are incurred for the purposes of the permanent establishment" The technical explanation of the treaty and protocol (underlined for emphasis above), makes it clear that the restrictions for allowing expenses incurred by the PE being head office expenses which are covered by Sec.44C of the Act (domestic law) as well as other expenses incurred in India are sought to be brought within the fold of Article 7(3) of the DTAA. There is nothing in the technical explanation to show that the restrictions in the local law for allowing certain expenses will not apply while determining profits attributable to the PE. As stated in the technical explanation, under the US Model all expenses are to be allowed without any limitation whether incurred in the source country or head office. There is a departure from the US model by virtue of Article 7(3) of the Indo-US treaty. There is nothing to show that this departure is only with reference to the head office expenses. The fact that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure on this account at Rs.2.00 lacs. The estimation made by AO has been confirmed by the CIT(A). The ld. Sr. Counsel submitted that a reasonable estimate may be considered by the Tribunal in allowing the claim of the assessee. On the other hand the ld. DR has relied upon the orders of AO and the CIT(A). 5.2 Having considered the facts and circumstances of the case we note that the AO has not ruled out some part of the entertainment expenses attributable to the staff members entertaining the clients. Therefore, to bring an end to the controversy we estimate 10% of the entertainment expenses to be attributed to the staff members entertaining the clients and accordingly allowable to that extent. 6. Ground No.6 is regarding disallowance in respect of expenditure on rent, repairs and depreciation for the use of Guest House under section 37(iv) of the Income tax Act. 6.1 We have heard the ld. Sr. Counsel for the assessee as well as the ld. DR and have considered the relevant material on record. Though this issue has been decided by the Tribunal in assessee's own case for the assessment years 1992-93 to 1996-97 however, the ld. Sr. Counsel has fairly conceded that now this issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the RBI was not penalty and accordingly the interest expenditure is allowable. SLP filed by the revenue against similar decision of the Tribunal in the case of Dhanalakshmi Bank Ltd. (supra) has been dismissed by the Apex Court as reported in [2005] 277 ITR (ST) 3. In this view of the matter, we find no merit in the appeal and the same is dismissed with no order as to costs." 7.3 Following the decision of the Hon'ble High Court we decide this issue in favour of the Assessee and against the Revenue. 8. Ground No.9 10 of the assessee's appeal will be considered alongwith Ground No.2 of the revenue appeal for the assessment year 1997-98. Cross Appeal by Revenue Assessment Year 1997-98 : 8.1 The revenue for the assessment year 1997-98 raised the following grounds:- "1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting addition of Rs.9,63,803/- made on account of membership fee paid to club. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting addition of Rs.9,18,78,860/- made on account of interest paid to its Singapore Branch. 3. On the facts and in the circumstances of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Tribunal referred to above, in assessee's own case, uphold the order of the Commissioner of Income-tax (Appeals) VII, Mumbai and dismiss the appeal of the revenue." In view of the above we find no merits in Ground No.8, consequently the same is dismissed. In the result, the appeal by the revenue is dismissed". 8.4 In view of the earlier orders of this Tribunal as well as the decision of the Hon'ble Jurisdictional High Court in case of Otis Elevator Co. India Ltd. supra, we decide this issue against the revenue and in favour of the assessee. 9. Ground No.2 of the revenue appeal and ground No.9 and 10 of assessee's appeal are regarding allowability of claim being interest paid to Singapore branch as well as taxability of the said interest income of the assessee. 9.1 The India branch of assessee's bank has borrowed funds from Head office/overseas branches on which the assessee paid interest to the tune of Rs.9,18,78,860/- to its Singapore branch and claimed the same as deduction in computation of income. The AO has disallowed the claim of interest on the ground that interest payment to Singapore branch constitutes payment to self. The assessee challenged the disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a tax liability where the liability is not imposed by the Act. It was held that if a tax liability is imposed by the Act, the agreement may be resorted to for negativing or reducing it. 56. In so far as the taxability of interest payable by PE in India in the hands of GE under the domestic law is concerned, it is relevant to note that the PE in India and the GE abroad of which the said PE is part are not independent persons under the domestic law i.e. Indian Income-tax Act and they are not assessed to tax separately in India. The taxable entity is only one i.e. the overseas GE which is the assessee bank in the present case who is a non resident in India and the PE in India is part of that entity which is a taxable entity in India even in respect of income attributable to the PE in India. There is thus only one person assessable to tax i.e. GE and PE is not an independent person who is assessed to tax separately in India. It is a part of the GE and its income is chargeable to tax in the hands of GE which alone is the person assessable to tax in India. 57. In the case of Sir Kikabhai Premchand (supra) it was held by the Hon'ble Supreme Court that under the Income-tax Act, all t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of its business connection through the assessee in India and by not paying commission, this earning accrued or arose to the assessee because of its business connection in India. The Tribunal accordingly set aside the order of the AAC on this issue and restored the addition made by the AO as profit in respect of purchase operation carried on in India on behalf of the London office. On reference, the question raised before the Hon'ble Calcutta High Court was whether on the facts and circumstances of the case, the Tribunal was right in holding that the amount in question was includible in the computation of assessee's income as profit in respect of sales made to its head office in London within the meaning of section 9(1) of the Income-tax Act, 1961. Their lordships answered the said question in the negative and in favour of the assessee holding that when the transaction between the London head office of the assessee and its unit in India was a transaction as between principal and principal, it cannot be held that any income arose in favour of the assessee either directly or indirectly since the gain in London office was offset by the loss incurred in the Indian branch. It was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the AO has also relied upon decisions of Hon'ble Supreme Court in the case of Distributors (Baroda) Ltd. vs. Union of India (155 ITR 120) as well as in case of CIT vs. United General Trust (200 ITR 488) . Thus, it is settled proposition that proportionate expenses has to be deducted from the gross exempt income. On the other hand the ld. Sr. Counsel has submitted that the AO has disallowed the proportionate expenses from the total expenditure booked by the assessee in the P L Account without considering the fact that the tax free bonds were purchased by the assessee in the earlier years by using its own funds and the AO did not disallow any sum in the earlier years. He has further submitted that when no expenditure has been incurred by the assessee then the question of disallowance does not arise even under section 14A. The ld. Counsel has further contented that the issue is also covered by the decision of this Tribunal in case of British Bank of Middle East Vs JCIT (4 SOT 122)(Mum.) He has further submitted that section 14A is not applicable in case of the assessee because bonds in question are held as stock in trade and this fact has been recorded by CIT(A). He has relied u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has utilized borrowed fund for purchase of the tax free bonds in question. Therefore, when the assessee is having sufficient own funds then no disallowance can be made in respect of interest expenditure. As regards the expenditure which is common for the activities for taxable and non taxable income, the disallowance has to be considered in the light of provisions of Section 14A. It is pertinent to note that Section 14A was not in existence when the assessment in the said case was completed by the AO. However, the provision has been inserted by the Finance Act, 2001 retrospectively w.e.f 01/04/1962. Therefore, the disallowance of the proportionate expenditure incurred for composite or indivisible activity in which taxable and non-taxable income is received has to be examined in the light of the provisions of Section 14A. Though the ld. Sr. Counsel has relied upon the decision of Hon'ble Karnataka High Court in the case of CCI Ltd. vs. JCIT (250 CTR 291) as well as the decision dated 07/12/2012 of the Tribunal in the case of State Bank of Mauritius for assessment year 2008-09 in ITA No.5778/Mum/2011. However, AO has not examined the issue by considering the expenditure which is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporated by or under the laws of a country outside India, an amount not exceeding five per cent. of the total income (computed before making any deduction under this clause and Chapter VI-A) " 11.3 Similarly the deduction in respect of the head office expenditure allocable to the business or profession of the non resident Assessee in India is restricted to 5% of the adjusted total income or expenditure incurred by the head office as attributable to the business generally whichever is less as per provisions of section 44C. The definition of adjusted income has been given in clause-(i) of the Explanation to section 44C as under :- "Section 44C ....... Explanation.--For the purposes of this section,-- (i) "adjusted total income " means the total income computed in accordance with the provisions of this Act, without giving effect to the allowance referred to in this section or in sub- section (2) of section 32 or the deduction referred to in section 32A or section 33 or section 33A or the first proviso to clause (ix) of sub-section (1) of section 36 or any loss carried forward under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) or sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the head office expenditure to that actually incurred. 14.1 Before us, the ld. Sr. Counsel has submitted that the assessee has filed certificate of chartered Accountant to show actual expenditure incurred by the head office and, therefore, the expenditure debited in the books of account is not relevant while allowing expenditure under section 44C of the Income tax Act. He has contended that as per the provisions of section 44C of the Income tax Act, allowable expenditure is 5% of the adjusted total income or actual expenditure whichever is least. When the assessee has produced certificate of chartered accountant in respect of actual expenditure incurred, then the issue has to be decided by considering actual expenditure or 5% of adjusted total income. The ld. Sr. Counsel has relied upon the decision of this Tribunal in the case of British Bank of Middle East vs. JCIT (4 SOT 122)(Mum). On the other hand the ld. DR has relied upon the orders of authorities below. 14.2 We have considered the rival submissions as well as relevant material on record. The assessee has claimed to have filed a certificate from the head office auditors confirming head office administrative expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 Ground No.1 is regarding expenses incurred by overseas branch attributable to India Branch. 15.2 We have heard the ld.DR and the ld. Sr. Counsel for the Assessee. We note that Ground No.1 is common to Ground No.1 of Assessee's appeal for the assessment year 1997-98. In view of out finding in Assessee's appeal for the assessment year 1997-98 this issue is decided against the revenue and in favour of the assessee. 16. Ground No.2 regarding club membership fee. We have heard the ld. DR and the ld. Sr. Counsel for the assessee. This ground is common to the ground No.1 of the revenue's appeal for the assessment year 1997-98. In view of our finding for the assessment year 1997-98 this issue is decided against the revenue and in favour of the assessee. 17. Ground No.3 regarding interest paid to the assessee's Singapore Branch. This ground is common to the Ground No.2 of the Revenue's appeal for the assessment year 1997-98. In view of our finding for the assessment year 1997-98 this issue is decided against the Revenue and in favour of the Assessee. 18. In the result appeals of the Assessee are partly allowed and appeal by the Revenue for the assessment year 1997-98 is partly al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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