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TMI Blog2020 (10) TMI 1189X X X X Extracts X X X X X X X X Extracts X X X X ..... of these are head office expenses. 2. The Ld. CIT(A) was not justified in law in ignoring the order of a superior judicial forum in the appellant's own case for earlier years wherein it was held that the NRI expenses are fully allowable and no part of them are in the nature of Head office expenses. 3. The learned Ld. CIT(A) has erred in law and on facts in upholding an excessively high pitched estimate of as much as 94% of the gross receipts amounting to Rs. 3,04,60,516/- as expenses attributable to earning income on foreign currency syndicated term loans under Sec. 115A(3) of the Income Tax Act, 1961. 4. (i) The learned Ld. CIT(A) has erred in law and on facts in making an ad hoc addition of Rs. 15,00,000/- on account of expenses incurred on earning foreign currency syndicated term loans. (ii) On page 14, para 6.1 of the CIT(A)'s Order, when dealing with the expenses on foreign currency syndicated terms loans, the CIT(A) has erroneously quoted an extract of the AO's order with respect to deduction under sec.36(1)(viia), which is not relevant to the ground of appeal being discussed. Hence this AO's quotation in this para should be expunged as it is quoted out of contex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the face of the records on the following ground: * The CIT(A) has allowed us the tax deductibility of CBS costs, and Operations & Technology costs for the following periods: 1.4.1999 to 31.3.2000 & 1.4.2000 to 31.7.2000. This was in accordance with the provisions of sec. 40(a)(i) as withholding tax was paid on such payments in May 2000. * However when granting relief in figures, the CIT(A) has correctly taken the CBS costs & Ops /Tech costs for the period 1.4.1999 to 31.3.2000. * But for the period 1.4.2000 to 31.7.2000 he has erroneously bunched up the costs of CBS.+ Operations Technology + Credit Cards Support Costs and treated the entire amount as Credit Cards Support Costs costs. This would be exfacie evident from CIT(A)'s order itself as well as the records. * Therefore although the relief is computed by him of Rs. 379,366,666/- actually there is a further relief available per his order of: CBS costs for 1.4.2000 to 31.7.2000-Rs. 91,601,740 + Operations / Technology costs for 1.4.2000 to 31.7.2000 of Rs. 1,94,31,463. This totals to Rs. 111,033,203. * Therefore the total relief on tax deductibility of access and user of CBS & Operations Technology fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been adjudicated by the ITAT Delhi Bench in the case of the assessee for the assessment years 1993-94 to 1998-99 in ITA No. 4988/Del/2003 dated 24.10.2008 and ITA No. 1106/Del/2017 dated 30.11.2017. The relevant portion of the order of the ITAT is as under: "6. We have considered the rival submissions. The Tribunal while considering similar claim in earlier year held as under (ITA Nos.1850/Del/1997, 2376, 2818 & 2819/Del/99, order dated 18th August, 2006). We have carefully considered the rival submissions: The xxxxxx abroad were brought to India in foreign currency xxxx and kept in India for the Indian business of the assessee bank. The benefits reaped by the India branch or Permanent Establishment in India have been accounted for as Indian income. We, therefore, see no reason as to why the deduction of expenditure* should not allowed. These expenses incurred for procurement of business cannot be understood as Head Office expenses and the learned Assessing Officer, therefore, erred in treating them as Head Office expenses within the meaning of section 44C of the Act. We, therefore, direct "the learned Assessing Officer to allow the assessee deduction of actual expenditure ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 115A(3), no deduction is permissible for the income covered under the said provision and the corresponding expenditure is to be disallowed. Based on the gross receipts and expenditure shown in the P&L account for the year of Rs. 14,82,24,25,000/- and Rs. 13,94,24,89,000/- respectively, the AO held that the assessee had incurred expenses in the ratio of 94% of the gross receipts. Therefore, the AO estimated the expenditure relatable to income of Rs. 3,24,04,804/- at Rs. 3,04,60,516/-. 9. The ld. CIT (A) confirmed the addition on the grounds that in absence of any details, the AO is correct in estimating the disallowance. 10. Before us, it was submitted that the bank earned interest of Rs. 3.24 crores on FCNR - B Rules and this interest duly offered at the rate of 20% in accordance with the provisions of Section 115A(1) of the Income Tax Act, 1961. 11. This issue has been adjudicated by the ITAT Delhi in the case of the assessee for the assessment years 1993-94 to 199596 and 1996-97 to 1998-99. The relevant portion of the order of the ITAT is as under: "42. The issue for our adjudication relates to the disallowances to be worked out for indirect expenses incurred by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of 17.34% on the exempt income. 14. With regard to dividend, the AO disallowed an amount of Rs. 16,60,280/- out of the dividend income earned of Rs. 17,66,255/-. The ld. CIT (A) confirmed the addition to the extent of Rs. 2,50,000/- on estimate basis. 15. Before us, the ld. AR relied on the order of the Hon'ble Supreme Court in the case of Walfort Shares & Stock Brokers Pvt. Ltd. 326 ITR 1. The ld. DR relied on the order of the ld. CIT (A). 16. The relevant portion of the judgment of the Hon'ble Supreme court is as under: "Section 14A of the Income-tax Act, 1961, clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to exempt income and partly to taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear : it desires to curb the practice of claiming deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exempt income witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was confirmed the addition to the tune of Rs. 30,15,52,101/- and granted the relief of Rs. 37,94,66,666/-. The revenue is in appeal against the relief granted and the assessee's in appeal against the addition confirmed by the ld. CIT (A). 21. For the sake of ready reference and for detailed facts, the order of the ld. CIT (A) is reproduced as under: "10.3.2 The AR stated that the appellant had made payments totaling to Rs. 68,10,18,767/- to Australia and New Zealand and Banking Group (in short ANZ) through HO of appellant in Melbourne Australia, after deduction of withholding tax in the year under consideration in lieu of technical services rendered by ANZ to PE of appellant in India under three agreements. It was argued that copies of original challan evidencing payments of withholding tax alongwith interest u/s 201(1 A) were attached to the return of income for the year and details of payments were disclosed in tax audit report for A.Y. 2000-01 and A.Y. 2001-02. It was contended by the AR that the expenditure was incurred wholly and exclusively for the purpose of the business of Indian PE of appellant and was claimed as allowable deduction by way of notes attached and forming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of withholding taxes are attached. (ii) Report of External Auditors - KPMG certifying the payments made for availing of technical services are attached. (ii) For the period 1.4.2000 to 31.7.2000 the Bank continued to avail of the technical services from ANZ Banking Group Ltd. Of: (a) Commercial Banking system (CBS) for its Indian operations (b) Operations and Technology services for its Indian operations (c) Cards Technology services for its Indian operations For which payment of Rs. 16,48,46,668/- was made during the year. The Bank has duly paid withholding taxes to the Indian Govt., in accordance with Article 11 of the Indo-Australian Double Tax Treaty within prescribed time. Since the taxes were paid in this financial year the above sum is deductible as business expenditure from Profits and Gains of business in accordance with the Proviso to sec. 40(a)(i). The details are as follows - (i) Withholding tax paid in the month of April 2000 is Rs. 68,38,000/- alongwith interest u/s 201(1A) of Rs. 103,000/- - Annexure IV. (ii) Withholding tax paid on June 6, 2000 is Rs. 67,98,000/- Annexure V. (iii) Withholding tax paid on July 6, 2000 is Rs. 70,81 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TO THE 2nd PARTY FOR ITS BANKING OPERATIONS IN INDIA: The 1st Party provided the following operations and technology support services including software licences to the 2nd Party, for its business in India during the extended period of 4 months. Maintenance Based Systems: The lsl Party has developed and maintained various Mainframe based Computer systems at Melbourne such as: - IT Service Delivery - IT Software Solutions (other than CBS Fail & Fix) - Payment Services - Telecommunications - Operations & Technology International Costs - BTS (ANZLINK, Chequeout) - MIDANZ Support and Enhancements - ANZIT Recon Support - Projects : Y2K - Projects : Business Planning & Reorganizing - Projects : TEP - Projects : Telephone Banking - Projects : MARS The 1st Party granted the 2nd Party the operations and technology support services comprising of access to and use of the Mainframe based systems. This included access to Global Server and Desktop support, Cards mainframe, Swift mainframe, CDM/CTA (Credit Cards Assessment and collections modules), AS400 Support, Unix Support, and for Y2K and other projects." (extracted from "operation and techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Rs. 30,43,53,333/- for CBS technical services in India were incurred wholly and exclusively for the purpose of the business of the PE of appellant in India and were allowable deduction u/s 37(1) of the Act and balance amount of payment of Rs. 30,15,52,101/- was not proved to be incurred for the purpose of the business of appellant in India and the same cannot be claimed as allowable deduction u/s 37(1) of the Act. It is pertinent to mention here that appellant had filed evidence of payments of Rs. 7,51,13,333/- and Rs. 30,43,53,333/- in form of invoice challans of withholding taxes and external auditor report accordingly, genuineness of expenditure totalling to Rs. 37,94,66,666/- (Rs. 7,51,13,3.33/- + Rs. 30,43,53,333/-) was also proved. 10.3.5 The AR had contended that above referred to payments were in the technical fee and the same did not fall under the head 'head office' expenditure as stipulated u/s 44C of the Act. In support of the claim appellant placed re lance on Board's Circular no. 649 as reported in (1993 200 ITR (Stat) 0230B). I have examined the claim of the appellant with the nature of services and have reached to following conclusion: (a) It is eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at appellant had not discharged its onus to prove that balance expenditure of Rs. 30,15,52,101/- incurred for the purpose of the business of the appellant in India. Accordingly, disallowance of Rs. 68,10,18,767/- made by the AO is restricted to Rs. 30,15,52,101/- and appellant gets relief Rs. 37,94,66,666/- (Rs. 30,43,53,333 + Rs. 7,51,13,333/-). This ground of appeal is partially allowed." 22. We find that the ld. CIT (A) has disallowed an amount of Rs. 30.15 lakhs as the expenses not incurred for the business of the assessee and was not deductible u/s 37(1) on the ground that the credit cards support services memorandum has not stipulate that ANZ would provide credit cards support services to PE of the assessee in India. 23. Before us during the arguments, the ld. AR relied on, 1. Tax Audit Report - To prove the expenses were incurred for the assessee's business in India 2. Payment of taxes pertaining to these expenses 3. Certificate by the Auditors regarding the expenditure 4. Memorandum of agreement - showing tax deducted at source 5. Agreement between the assessee and ANZ Grindlays. 24. On the other hand, the ld. DR relied on the order of the ld. CIT (A) and argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviding of consultancy for delivery of card operation services, support to resolve operational issues, consistency of processes, cost reduction, coordination of projects, the proposed centralized processing of charge-backs and voucher processing. 1.3 International Cards Marketing:- The international cards marketing services comprised of product development and marketing initiatives, analysis & planning, promotion and operational support, study and feasibility of new markets, strategic management and business development. 1.4 Management Analysis:- Management analysis services included strategic and financial analysis, management of the production of monthly performance reports, analysis of key Management Information System, preparation of business plan, operating plan and forecast, providing assistance with accounting advice, budgeting and forecasting support, assistance with service transfer pricing information requirements and Global Software Support Management. 1.5 Partnership 'Business System Management': Partnership Business System management services comprised of providing operations and technological support for the Credit Cards business which included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hholding tax of Rs. 4,56,53,000 along with interest under section 201(1A) of Rs. 44,99,000 is attached as Annexure A-1. (b) Operation and Technology services for its Indian OperationsRs. 75,113,333 Original challans evidencing payment of withholding tax of Rs. 1,12,67,000 along with interest under section 201(1A) of Rs. 11,36,000 is attached as Annexure A-2. (c) Cards technology services for its Indian operations- Rs. 134,033,333 Original challans evidencing payment of withholding tax of Rs. 2,01,05,000 along with interest under section 201 (1A) of Rs. 14,88,000 is attached as Annexure A-3. The Bank had duly deducted taxes at source on the payments in accordance with Article 11 of Indo-Australian Double Tax Treaty and paid interest under sec. 201(1A) and made payment to the Government on 31st May 2000. Since such taxes have been paid in the current accounting period, the above expenses are deductible as business expenditure from the Profits and Gains of Business in accordance with Proviso to Section 40(a)(i). (i) Original challans evidencing payment of withholding taxes are attached. (ii) Report of External Auditors - KPMG certifying the payments made for availing of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to NHPC. While the bonds with FV of Rs. 4.5 crore and Rs. 2.58 crore were registered in the Bank's name, the bonds of FV Rs. 9.06 crore were not registered due to suspected involvement of a Notified Party under the Special Court (TORTS) Act, 1992. (iii) Having exhausted all avenues, the Bank filed three civil suits in Delhi High Court for recovery of interest warrants on all bonds and in Company Law Board for registration of bonds of FV Rs. 9.06 crore. The suit filed with CLB was later transferred to Special Court in Mumbai. (iv) In September 1992, LRG en cashed interest warrants of Rs. 0.73 crore in relation to interest on bonds of FV Rs. 16.16 crores. The Bank, therefore, brought a Court injunction to prevent further encashment of interest. 28. The audit report to management of Australia and New Zealand Banking Group Limited reported as under: Scope We have audited the schedule charges of Operations and Technology Support Services (Operation and Technology), Credit Cards Support Services (Credit Cards) and Access and Use of the Commercial Banking System (CBS) for the Indian Branch of ANZ Grindlays Bank Limited (the Schedule) in respect of the services provided by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year ended 31 March 2000 Charges for A$ - providing Operation and Technology support and access to and use of 'IT Service Delivery: Mainframes' 77,000 -providing Operation and Technology support and access to and use of 'IT Service Delivery: AS400, Unix, etc' 976,000 - support services in the nature of 'IT Software Solutions (other than CBS Fail & Fix)' 102,000 - providing access to and use of 'Payment Services' 90,000 - providing 'Telecommunications and International' communication services 864,000 - providing the services of the central operation technology & information technology planning team 62,000 -providing access to and use of 'BTS: ANZLINK' 135,000 -providing the use of' ANZIB: MIDANZ Support & Maintenance' 31,000 - providing support to various ANZ software 'ANZIT Recon Support' 2,000 - Projects: Y2K 75,000 -providing Operation and Technology support and access to and use of 'IT Service Delivery: Mainframes-Project TEP' 21,000 - providing Operation and Technology support and access to and use of 'IT Service Delivery: Mainframes-Project Telephone Banking (excluding Capex)' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elate to production support, recovery from system failures, troubleshooting, problem investigation, user assistance and right to use the system, and have been incurred on behalf of the Indian branch of ANZ Grindlays Bank Limited. The audit opinion expressed in this report has been formed on the above basis. Audit opinion In our opinion, the attached Schedule presents fairly, in accordance with the generally accepted accounting principles, charges which relate to production support, recovery from system failures, troubleshooting, problem investigation, user assistance, right to use the system software and services provided in respect of Credit Cards, CBS and other Operation and Technology support, and have been incurred on behalf of the Indian branch of ANZ Grindlays Bank Limited for the period from 1 April 2000 to 31 July 2000. Michelle Somerville Partner Place: Melbourne Date: Schedule of Charges for the Access and Use of the Commercial Banking System Allocated to the ANZ Grind lays Bank Limited -India Branch For the four months ended 31 July 2000 Charges for A$ - providing the access to and use of the CBS system for Indian 1,962,000 banking operations for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocal currency allocation amount to INR54,825,415. 29. On going through the above, we find that the expenses have been incurred for Indian Banking business. 30. Thus, on going through the Memorandum of agreement, tax report, notes to account and the details of the tax payment under Article 12 of the Indo-Australian Treaty and on going through the challans enclosed at 77 to 84 of the paper book, we hereby hold that the fees for access and user technology related to services for Credit Cards Services is meant for the business of the assessee's in India and such expenses are allowable to be claimed by the assessee u/s 37(1). 31. The appeal of the assessee on this ground is allowed. 32. The similar issue is also involved in the appeal of the revenue. With regard to the appeal of the revenue for the similar expenses which have been deleted by the ld. CIT (A), we concur with the reasoning given by the ld. CIT (A) which has been duly mentioned above. Hence, the appeal of the revenue on this ground [Ground No. 1(d)] is hereby dismissed. 33. Ground No. 10 of the assessee deals with rectification of the computational errors for which we direct the revenue to dispose off the rectificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar also, the said income is estimated at Rs. 10 crores and the same is added to the returned income, for the reasons cited in detail in A.Y. 1998-99." 38. The ld. CIT (A) deleted the addition holding that the question of attributing income to the PE, under the DTAA, it has to be said that as per Article 7, only such income can be brought to tax as can be attributed to its assets and activities in India. In India its income has been earned as commission received by it for honoring the transaction in India on behalf of the foreign branch. This commission is earned from its activity as an Acquiring bank and has to be taxed in the country where the PE is situated. The income earned by the foreign bank from its client outside India on the credit given by it there and recovered there, cannot be said to have arisen in India. But the commission received from the merchant in India can be said to have arisen in India, as mentioned by the Assessing Officer, and this has been retained by the Acquiring bank, while making the acquiring bank would have been received by the foreign bank, But since the Indian branch, being a PE played a role, this income will be taxed in India in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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