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TMI Blog2018 (6) TMI 1659X X X X Extracts X X X X X X X X Extracts X X X X ..... h the HO/other overseas branches - HELD THAT:- As decided in own case authorities below we are not justified in taxing the interest received by the Indian PE / branches of the assessee from its head office / other overseas branches as no person can make profit out of its self. The Assessing Officer is, therefore, directed to delete the addition in question. Decided in favour of the assessee. Addition on account of interest received on External Commercial Borrowings given to the Indian Borrowers - HELD THAT:- As decided in own case In the present case, the Assessing Officer himself had admitted by grossing up the ECB interest by the amount of tax borne by the borrowers that tax at source has been deducted. We are thus of the view that no interest under section 234B of the Act can be levied for the tax demand on account of ECB interest and interest under section 234B is also not chargeable sicne ECB interest received by the assessee from the borrowers was subject to tax deduction at source under section 195 of the Act. The Assessing Officer is thus directed to delete the addition made on account of interest received from ECB given to Indian borrowers. Taxability of intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : Sh. Nishant Thakkar, Adv. And Sh. Hiten Chande, Adv. Revenue by : Ms. Meeta Sinha, CIT DR ORDER N. K. Saini, This is an appeal by the assessee against the order dated 31.10.2017 passed by the AO u/s 144C(13) r.w.s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act). 2. Following grounds have been raised in this appeal: 1. Disallowance of salary paid overseas to expatriates of the Appellant working in India by the Head Office (HO) and the Indian taxes paid thereon by the HO: INK 37,12,44,563. 1.1 That on the facts and in the circumstances of the case and in la\v, the Hon'ble Dispute Resolution Panel ('DRP') erred in confirming the addition, as proposed in the draft assessment order, for an amount of INR 37,12,44,563 paid as salaries by the HO overseas, in foreign currency (including Indian taxes thereon), without appreciating that such salary paid by the HO to the expatriate employees working in India exclusively for the permanent establishment ('PE') of the Appellant, is fully allowed as deduction under section 37(1) of the Act. 1.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax refund amounting to INR 8,00,57,085 at tax rate of 40% (excluding surcharge and education cess) instead of beneficial tax rate of 10% as provided under Article 11 of India - Japan DTAA. 5.Short grant of credit for TDS That on the facts and circumstances of the case and in law, the ld. AO erred in not granting the complete TDS credit in the impugned assessment order, which was claimed by the Appellant in its return of income filed for AY 2013-14. 6.Levy of interest under section 234B of the Act That on the facts and circumstances of the case and in law, the ld. AO erred in levying interest under section 234B of the Act. 7.Excess withdrawal of interest under section 244A of the Act That on the facts and circumstances of the case and in law, the ld. AO erred in withdrawing the interest under section 244A(3) of the Act. 8.Excess levy of interest under .section 2340 of the Act That on the facts and circumstances of the case and in law, the ld. AO erred in levying excess interest under section 234D of the Act. 9.Transfer Pricing adjustment 9.1That on facts and in law, the Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 40% (plus surcharge and education cess) on the income of the Appellant. 10.2 Under the provisions of Article 24 of the DTAA, the applicable rate of tax on the income of the Appellant attributable to its PE in India cannot exceed the applicable rate of tax (as per the Finance Act for the subject AY) in the case of Domestic Companies and consequential directions may kindly be issued in this regard. 11That on the facts and in the circumstances of the case and in law, the Id. AO has erred in initiating penalty proceedings, being against the provisions of the Act. 12General a)Each of the above ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant. b)The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable your Honour to decide this appeal according to law. 3.The first issue vide ground nos. 1 to 1.3 relates to the disallowance of salary paid to overseas expatriates of the assessee working in India by the Head Office amounting to ₹ 37,12,44,563/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f tax component of salary of expatriate employees, relating to asst. y₹ 1990-91 and 1991-92, in the asst. yr. 1995-96, i.e., the year in which the tax has been paid by the assessee. (b)Whether or not, on the facts and in the circumstances of the case, the assessee was entitled to deduction of interest levied u/s 201(1A). (c)Whether or not, on the particular facts and in the particular circumstances of this case, the assessee was entitled to deduction on account of operational loss of ₹ 9,57,58,904/-. 11.1 Thus, Id. DRP has not correctly appreciated the facts of the case. 12. Respectfully following the decisions of Hon ble Bombay High Court in the case of Emirates Commercial Bank Ltd. (supra), this ground is allowed. 7.The said order has been affirmed by the Hon ble Jurisdictional High Court in ITA No. 604 605/2015 vide order dated 08.04.2016 and the relevant findings have been given in paras 9 10 which read as under: 9. The first question urged concerns the payment of salaries to the expatriates. In deciding this issue in favour of the Assessee, the ITAT has in the impugned common order referred to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no dispute amongst the members in regard to non applicability of provisions u/s 44C. The issue before third member was not at all in regard to allowability of deduction u/s 44C and only following points of differences were before him for adjudication: (a) Whether or not, on the facts and in the circumstances of the case, the assessee is entitled to deduction of tax component of salary of expatriate employees, relating to asstt. y₹ 199091 and 1991-92, in ITA Nos. 5364/D/2010 5104/D/2011 the asst. yr. 1995-96, i.e., the year in which the tax has been paid by the assessee. (b)Whether or not, on the particular facts and in the circumstances of the case, the assessee was entitled to deduction of interest levied u/s 201(1A). (c)Whether or not, on the particular circumstances of this case, the assessee was entitled to deduction on account of operational loss of ₹ 9,57,58,904/-. 11.1 Thus, Id. DRP has not correctly appreciated the facts of the case. 12. Respectfully following the decisions of Hon'ble Bombay High Court in the case of Emirates Commercial Bank Ltd. (supra), this ground is allowed. 8.1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see from its head office / other overseas branches amounting to ₹ 14,10,452/-. During the year the Indian PE / branches of the assessee received interest for the accounts maintained with its head office / other overseas branches. The said amount received by the Indian PE / branches from its head office other overseas branches although credited to the profits and loss account of the Indian branches of the assessee was claimed to be not taxable being payment of self. The authorities below have held that TDS should have been deducted under section 195 from the interest paid by the Indian branches to head office and other branches. 13.1 In support of the above ground, the ld. AR has made following submissions:- The coordinate bench in the assessee s own case for the order dated September 19, 2014 passed for AYs 2007-08 and 2008-09 has decided this ground against the assessee and held that interest received by the Indian branches of the assessee from its HO/other overseas branches is taxable under the Act under section 9(1)(v) of the Act. At the outset, it is submitted that the issue stands covered in favour of the assessee by the recent jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(c) of the Act (refer para 74 of the decision of Special Bench). (ii)Reference can be made to the decision of Mumbai Tribunal in the case of Oman International Bank S.A.O.G (ITA No 2518/Mum/2004 4492/Mum/2005) wherein the ratio of mutuality laid down by the Special Bench inter-alia in the case of Sumitomo Mitsui Banking Corporation has been applied to interest received by the Indian branches from its HO/other overseas branches. On the basis of mutuality, it was held by the Mumbai Tribunal that there can be neither any income in respect of interest earned from its overseas branches, nor there can be deduction for interest expenditure paid by the Indian branch to HO/other overseas branches. With respect to interest paid to HO/other overseas branches, no treaty provision was examined in the case of Oman International Bank and therefore, no deduction was allowed for interest paid by the Indian branches to HO/other overseas branches. IndoJapanese treaty specifically provides for deduction to Indian branches for interest paid to HO/overseas branches as held by the Special (Larger) Bench in the case of Sumitomo Mitsui Banking Corporation. (iii)Severa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or of Income-tax Vs. M/s. Credit Agricole Indoseuz in ITA. No. 1430 of 2013 vide its order dated 17.06.2015 has been pleased to hold that it is a settled position that no person can make profit out of its self and accordingly, interest received by the Indian PE from its head office is not taxable in India. The relevant para No. 7 of the said order of the Hon ble Bombay High Court is being reproduced hereunder for a ready reference:- 7 Regarding question 5 (a)Mr. Tejveer Singh, the learned counsel for the Revenue submitted that this question ought to be admitted as a similar issue has been admitted by this Court. In support Mr. Singh tenders the order dated 14 February 2013 of this Court in Income Tax Appeal (L) No.2078 of 2012, in Director of Income Tax (IT)1 Vs. M/s Antwerp Diamond Bank N.V. The question on which the above appeal was admitted reads as under: a) Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that interest payable by the Indian Permanent Establishment of the foreign bank to its HO and other overseas branches, is deductible in computing the total income? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representatives of the assessees during the course of hearing before us. They, however, have relied on the relevant tax treaties in support of the assessee's claim for deduction on account of interest payable to GE while computing the profits attributable to PE in India as per article 7(2) and 7(3) read with paragraph No.8 of the protocol. 51. .................... 52.A combined reading of article 7(2) and 7(3) of the treaty and paragraph No.8 of the protocol thus makes it clear that for the purpose of computing the profits attributable to the PE in India, the said PE is to be treated as a distinct and separate entity which is dealing wholly independently with the general enterprise of which it is a part and deduction has to be allowed for all the expenses which are incurred for the purpose of PE whether in India or elsewhere barring the amount paid by a permanent establishment to the head office of GE or any other offices thereof, inter alia, by way of interest on moneys lent to the permanent establishment except where the enterprise is a banking institution. (Emphasis supplied) It would thus be noticed from the order of this Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year under appeal, India branches of the assessee has received a sum of ₹ 15,79,194/- from its overseas branches / HO. The assessee submitted that such interest is not income in the hands of the branch as the same has been received from the head office and thus, being a receipt for self, in view of the principles laid down by the Supreme Court in the case of Sir Kikabhai Premchand vs. CIT 24 ITR 506. The DRP however noted that ITAT Delhi Bench in assessee s own case for assessment year 2007-08 and 2008-09 has decided the matter against the assessee. The DRP following the order of the Tribunal rejected the objections of the assessee. Learned counsel for the assessee submitted that identical issue was considered by ITAT Delhi Bench C in assessee s own case for assessment year 2010-2011 in ITA No. 1174/2015 dated 25th January, 2017 in para 15 of the order and identical addition has been deleted. The order of the Tribunal is reproduced as under: Considering the above submission, we find that during the year the Indian PE / branches of the assessee had received interest for the accounts maintained with its head office / other overseas branches. The said amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. It is pointed out that the Indian PE and the head office are one and the same person. It is settled position that one cannot make a profit out of oneself as held by the Apex Court in Sir Kikabhai Premchand v.Commissioner of Income tax (Central) Bombay 24 ITR page 506. The impugned order of the Tribunal also places reliance upon the Special Bench decision in the case of Sumitomo Mitsui Banking Corpn. Vs Deputy Director of Income tax (IT), Range2(1), Mumbai [(2012) 19 Taxmann.com 364 (Mum.) (SB)] to hold that man cannot make profit out of himself and therefore the interest received by the Assessee from its own Head Office is not chargeable to tax. (c)So far as the reliance by the Revenue on order dated 14 April 2013 of this Court admitting the appeal in M/s Antwerp Diamond Bank N.V.(supra), is concerned, deduction on account of interest paid by the Indian PE to its Head office was in the specific context of Articles 7(2) and 7(3) of the Indo Belgium DTAA. The case of M/s Antwerp Diamond Bank N.\/. (supra) before the Tribunal was a part of the Special Bench decision in Sumitomo Mitsui Banking Corpn. (supra) wherein at para 50, it is held as under: 50. As rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the impugned order has recorded the fact that the Respondent Assesses has admitted before it that to bring about parity, it is not claiming any deduction of interest paid by it to its Head Office while computing the taxable income. (d)Accordingly, in view of the above settled position that no person can make profit out of itself, the proposed question of law not being substantial, is not entertained. It is a settled position of law that in absence of the decision of Hon ble jurisdictional High Court on an issue, the order of the non-jurisdictional High Court should be followed by the Tribunal. Besides, the Tribunal while passing its order on the issue in the appeals for the assessment years on 19.09.2014 was having no benefit of the decision of Hon ble Bombay High Court in the case of DIT Vs. M/s. Credit Agricole Indoseuz (supra) dated17.06.2015. In view of this position we are bound to follow the decision of Hon ble Bombay High Court in the case of DIT Vs. M/s. Credit Agricole Indoseuz (supra) on the issue. We thus respectfully following the ratio laid down in the decision, hold that the authorities below we are not justified in taxing the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign currency except for providing export credit to its customers as per the extant Reserve Bank of India Regulations. Indian branches of the assessee, based on the request of the customers pass on the lead to the overseas branches along with the credit evaluation report, terms and conditions of approval and details of security documents to be entered into. Indian branches evaluate the customer on an on-going basis and passes on the lead information to its overseas branches on activities related to credit rating, monitoring of covenants etc. On receipt of the information from the Indian branches of the assessee, the overseas branches of the bank do the booking of the loan based on the terms and conditions of the approval. The agreement and security documentations are entered between overseas branches and the borrowers. Indian branches receive syndication fees from its head office / other overseas branches for the services rendered by it in relation to ECB. 22.The case of authorities below is that interest income accrues and arises as under: (i)Interest income accrues and arises in India under section 9(1)(v) of the Act. Since the ECB do not form pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with respect to ECB syndication fee in the return of income. Therefore, the assessee has already offered to tax an amount of ₹ 16,73,70,200 (₹ 14,58,92,297 + ₹ 2,14,77,903) as fee received by the Indian PE of the assessee from its HO/other overseas branches for the services performed in relation to ECBs, which has been accepted to be an arms length price by the Revenue. (iv)The Mumbai Tribunal in the case of Credit Lyonnais (ITA No. 1935/Mum/2007) has held that ECB interest is not attributable to the Indian branches of the assessee and only the fee is taxable in the hands of the Indian branches of the assessee for the role played by it in arranging the ECBs. (v)Without prejudice to the claim of non-taxability of ECB interest income, the AO has erred in not allowing the credit for tax deducted at source on ECB interest. Sample copies of TDS certificates were also furnished to the AO. Further, that the taxes have been deducted is an admitted position since the AO has himself grossed up the entire amount of ECB interest by the amount of tax borne by the borrowers. Once this is so, in view of section 205 of the Act, the necessary credit has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal in the case of Credit Lyonnais (supra) has held that ECB interest is not attributable to the Indian branches of the assessee and only the fee is taxable in the hands of the Indian branches of the assessee for the role played by it in arranging the ECB. The Hon ble High Court of Delhi in the case of GE Package Powerink (supra) has been pleased to hold that no interest under section 234B of the Act can be levied where the payment to non-resident payee is subject to tax deduction at source. In the present case, the Assessing Officer himself had admitted by grossing up the ECB interest by the amount of tax borne by the borrowers that tax at source has been deducted. We are thus of the view that no interest under section 234B of the Act can be levied for the tax demand on account of ECB interest and interest under section 234B is also not chargeable since ECB interest received by the assessee from the borrowers was subject to tax deduction at source under section 195 of the Act. The Assessing Officer is thus directed to delete the addition made on account of interest received from ECB given to Indian borrowers. The ground No. 7 is accordingly allowed. 18. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy been discharged by way of TDS by payer. 10.The learned DRP however held that contention of the assessee that such interest is taxable under Article 7 because of provisions contained in Article 11(6) of DTAA is not correct because debt claim in respect of which interest is arisen is not effectively connected with PE of the assessee in India. Indian PE of the assessee is just providing processing services to the assessee for ECB loans being availed by Indian residents and is being remunerated by services fees also. The objection was accordingly rejected. 11.Learned counsel for the assessee reiterated submissions made before authorities below and referred to PB 124 i.e. objection filed before DRP in which the assessee has also explained that bank has offered to tax an amount of ₹ 2.29 Crores as transfer pricing adjustment with respect to ECB syndication fees in its return of income in addition to amount of ₹ 23.56 Crore. Therefore, the bank has already offered to tax an amount of ₹ 25.85 Crores as income which is attributable to the PE in India in respect of interest received / earned by the assesse s branches from Indian borrowers. He has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this issue. Following the order of the Tribunal dated 25th January, 2017 (supra), we set aside the impugned orders and direct the AO to delete the addition made on account of interest received on ECB given to Indian borrowers. This ground of appeal of assessee is allowed. 19.So, respectfully following the aforesaid referred to order in assessee s own case, this issue is decided in favour of the assessee. 20.Vide ground no. 4 4.1, the grievance of the assessee relates to the taxability of interest u/s 244A of the Act on the income tax refund amounting to ₹ 8,00,57,085/-. 21.The ld. Counsel for the assessee submitted that the AO did not charge any interest u/s 244A of the Act in the draft assessment order but the interest had been charged in the final assessment order. It was also stated that this issue has been decided by the ITAT Delhi Bench B (Special Bench) in the case ACIT, Range-I, Dehradun Vs Clough Engineering Ltd. reported at (2011) 11 Taxmann.com 70 and that the said order was followed by the ITAT Bombay Bench in the case of M/s DHL Operations B.V., The Netherlands Vs DCIT has been confirmed by the Hon ble Bombay High Court in IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the residuary head and yet be effectively connected with the PE. The bank interest in this case is an example of effective connection between the PE and the income as the indebtedness is closely connected with the funds of the PE. However, the same cannot be said in respect of interest on income-tax refund. Such interest is not effectively connected with PE either on the basis of asset-test or activity-test. Accordingly, it is held that this part of interest is taxable under paragraph No. 2 of Article XI. Thus, the ground referred to the Special Bench is partly allowed. The Division Bench shall dispose off the appeal in conformity with this order. 23.On a similar issue, the Hon ble Bombay High Court in the case of DIT(IT), Mumbai Vs M/s Credit Agricole Indosuez held as under: However we find that the decision in Clough Engineering (supra) of the Special Bench had been followed by the Tribunal in ITA No. 183/Mum/2010 - [M/s DHL Operations B. V., The Netherlands Vs. Dy. Director of Income Tax] . The issue before the Tribunal was the rate of tax on which Income tax refund is to be taxed i.e. on the basis of the Articles of DTAA or under the Act. The Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct but without providing any opportunity to the assessee, while determining the arm s length price of the international transaction. 30.The ld. Counsel for the assessee submitted that the ld. DRP decided, the similar issue in the assessment years 2010-11 and 2011-12 in favour of the assessee and the department had not preferred any appeal against the directions of the ld. DRP. Therefore, by keeping in view the principles of consistency, this issue is required to be decided in favour of the assessee and no addition could have been made on account of receipt of Counter Guarantee Commission. The reliance was placed on the judgment of the Hon ble Supreme court in the case of Bharat Sanchar Nigam Ltd. and Another Vs Union of India and Others reported at (2006) 2 SCC 1. 31.In her rival submissions, the ld. CIT DR supported the orders of the AP/TPO. 32.We have considered the submissions of both the parties and perused the material available on the record. In the present case, it appears that the AO/TPO collected comparable uncontrolled price (CUP) data by issuing the notices u/s 133(6) of the Act and used the said data for the purpose of determining the ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h C in the case of the same assessee in preceding assessment year vide order dated 25th January, 2017 (Supra) decided this issue against the assesse. Para 35 of the order is reproduced as under: It is regarding applicability of rate of tax. Having gone through the order dated 19.09.2014 of the Tribunal in the case of assessee itself for the assessment years 2007-08 and 2008-09 (supra), we find that the issue raised is covered against the assessee. The Tribunal has dealt with this issue in the appeal for the assessment year 2007-08 vide para numbers 87 and 87.1 of the order, which has been followed on the issue in the assessment year 2008-09. The Tribunal while referring Explanation (1) to section 90(2) has rejected the contention of the assessee that the applicable rate of tax on the income of the assessee attributable to its PE in India cannot exceed the applicable rate of tax in the case of domestic companies. In the said Explanation (1) to section 90(2) it has been declared that the charge of tax in respect of foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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