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TMI Blog2017 (6) TMI 1345X X X X Extracts X X X X X X X X Extracts X X X X ..... ans/working capital loans paid to banks/others treating them to be capital in nature on the assumption that all these loans were utilized for investment in its wholly owned foreign subsidiary i.e. Aban Holdings Pte Limited. 4. After hearing both the parties, we are of the opinion that the similar issue was considered by the Tribunal in assesse's own case in ITA Nos.585/Mds/2015 & 267/Mds/2016 for the assessment years 2010-11 and 2011-12 dated 14.9.2016 wherein Tribunal held that:- "31. We find that the reliance placed on by the ld. DR on the judgment of Madras High Court in the case of Trishul Investments (supra) is misplaced. The main contention of the ld. DR is that the interest expenditure on borrowings used for investment in wholly owned subsidiary cannot be allowed as deduction u/s.36(1)(iii) of the Act instead it should be added to the cost of investment, in view of the above judgment of the Madras High Court. In our opinion, when activity is undertaken as an investment activity and interest incurred upto the acquisition of the shares of subsidiary company could be considered as part of investment. Once it is acquired, then it will be a revenue expenditure. In the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness assets are acquired out of borrowed funds. At this stage, it may be pertinent to note that depreciation is also allowable as deduction under section 32 in respect of business assets on the cost of acquisition. In determining the cost of acquisition, the interest component after bringing the asset into existence is not taken into consideration as Explanation 8 to section 43 of the Act. If the interest is to be added to cost of acquisition, then the assessee would be entitled to double deduction once under section 36(1)(iii) and the other under section 32 of Act, which is not permissible in view of the decision of the Supreme Court in the case of Escorts Ltd. v. UOI[1993] 199 ITR 43. 31.6 Similarly, when the shares are purchased by way of investment, and the dividend is received in respect of such shares, the interest paid on borrowed funds has been held to be allowable as deduction against dividend income. The Supreme Court has gone a step further in the case of CIT vs. Rajendra Prasad Moody [1978] 115 ITR 519, wherein it has been held that deduction on account of interest paid on borrowed funds is allowable as deduction in computing the income under the head 'Income from ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e asset brought into existence, i.e., after the acquisition of the asset would form part of the actual cost. The Supreme Court laid down the proposition that interest paid on monies borrowed for acquisition of capital asset and to meet expenses connected with its installation etc. and capitalized, has to be added to the cost of asset for the purpose of deprecation. 31.8 Thus in our opinion if the money was borrowed for purchase of shares of subsidiary company for the purpose of acquiring controlling interest and acquisition of such controlling interest was of the business of the assessee and it resulted in promote the business of the assessee as well as helpful to the assessee for having management control over said such subsidiary company, then the interest expenditure should be allowed u/s.36(1)(iii) of the Act. Further if the Assessing Officer found that investment in shares of subsidiary company not for maintaining controlling interest, then the Assessing Officer should see that there cannot be any disallowance in respect of investment of assessee's own fund. This is so because the borrowed funds and own funds are admittedly mixed up in such cases, the disallowance of interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, dayto-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares/units of mutual funds at the most appropriate time. They require huge investment in shares/mutual funds and consequential blocking of funds. It is well-known that capital has cost and that element of cost is represented interest. Besides, investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. iii) It is logical to conclude that a portion of the routine expenditure to maintain its establishment and administration can be attributable towards the activity of making investments to earn dividend. Further, it is a fact that the managerial staff and the Directors are involved in making decisions on investments. Hence, a portion of this managerial remuneration and Directors remuneration definitely be attributable towards earning such exempt income. iv) For the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on borrowings used for the specific purpose, it is to be noted that this issue came for consideration before this Tribunal in the case of ACIT v. M/s. Farida Shoes Pvt. Ltd. In ITA Nos.2102 & 2103/Mds/2015 dated 8.1.2016, wherein it was held as under : "5.1 Coming to the merits of the issue regarding disallowance u/s.14A r.w. Rule 8D of the I.T.Rules, in our opinion, similar issue was considered by this Tribunal in the case of ACIT v. M/s. Best & Crompton Engineering Ltd. in ITA No.1603/Mds/2012 dated 16.7.2013, wherein it was observed that interest on borrowings used for the business purpose cannot be considered for the purpose of computing disallowance u/s.14A r.w. Rule 8D(2)(ii) of the IT Rules and the relevant portion is reproduced as below: "10. Heard both sides. Perused the orders of lower authorities and the decision of Calcutta Bench of this Tribunal relied on by the assessee's counsel. This issue has been considered elaborately by the Commissioner of Income Tax(Appeals) and deleted the interest on bank loan and term loans which were not utilized for making any investments having tax free income. While holding so, the Commissioner of Income Tax (Appeals) held as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, directed to take into account only the remaining interest on other accounts amounting to Rs.1,29,43,000/- for computing the proportionate disallowance under rule 8D(2)(ii)." 11. On going through the order of the Commissioner of Income Tax (Appeals), we find that the Commissioner of Income Tax (Appeals) excluded the interest on bank loan and term loans from the calculation of disallowance under Rule 8D(2)(ii) as the assessee has utilized the bank loan and term loan for the purpose of purchase of machineries and for expansion of projects and these loans were specifically sanctioned for specific project and such loans were also used for the purpose for which they were sanctioned. In the circumstances, we find that the Commissioner of Income Tax (Appeals) has rightly excluded such interest from the purview of computation of disallowance under Rule 8D(2)(ii). 12. The decision of Calcutta Bench of this Tribunal in the case of Champion Commercial Co. Ltd. (supra) also supports the view of the Commissioner of Income Tax (Appeals). The Tribunal had considered a situation when the loans were utilized for the purchase of machineries, interest arising out of such loans, whether s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learly relates to the taxable income. The interest expenditure which is "not directly attributable to any particular receipt or income" is thus only Rs. 10,000. However, in terms of the formula in rule 8D (2)(ii), allocation of interest which is not directly attributable to any particular income or receipt will be for Rs. 90,000 because, as per formula the value of A (i.e. such interest expenses to be allocated between tax exempt and taxable income) will be " A = amount of expenditure by way of interest other than the amount of interest included in clause (i) [ i.e. direct interest expenses for tax exempt income] incurred during the previous year". Let us say the assets relating to taxable income and tax exempt income are in the ratio of 4:1. In such a case, the interest disallowable under rule 8 D(2)(ii) will be Rs.18,000 whereas entire common interest expenditure will only be Rs. 10,000/-. 13. The incongruity arises because, as the wordings of rule 8D(2)(ii) exist, out of total interest expenses, interest expenses directly relatable to tax exempt income are excluded, interest expenses directly relatable to taxable income, even if any, are not excluded. 14. The question then a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in the method'. 16. Once the revenue authorities have taken a particular stand about the applicability of formula set out in rule 8 D(2)(ii), and based on such a stand constitutional validity is upheld by Hon'ble High Court, it cannot be open to revenue authorities to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Viewed thus, the correct application of the formula set out in rule 8D(2)(ii) is that, as has been noted by Hon'ble Bombay High Court in the case of Godrej and Boyce (supra), "amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)". Accordingly, even by revenue's own admission, interest expenses directly attributable to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material available on record. The main contention of the assessee is that the available share capital including reserves and surplus was Rs.2385.7 Crores as on 31.03.2010. The available share capital is Rs.1970.4 Crores and Reserves and surplus is Rs. 21,886.7 Crores. The investments made in mutual funds including subsidiary companies are only Rs. 541.11 Crores. Therefore, it cannot be said that the assessee has diverted the borrowed funds for making any investment either in the sister concerns or in the mutual funds. When the assessee has sufficient share capital, reserves and surplus, this Tribunal is of the considered opinion that there cannot be any disallowance towards the interest paid on the borrowed funds under Section 14A of the Act. For the purpose of disallowing interest income under Section 14A read with Rule 8D, there should be nexus between the borrowed funds and investment made by the assessee in the share capital and mutual funds. In the absence of any nexus, the presumption is that the assessee has invested the available interest-free funds in share capital and mutual funds. Furthermore, making investment in sister concerns is for commercial expediency in view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above order of Co-ordinate Bench. With this observation, we remit the issue relating to disallowance u/s.14A r.w.r.8D to the file of AO for fresh consideration. Hence, this ground is allowed for statistical purposes." 7.1 Accordingly, following the aforesaid order of the Tribunal, we remit this issue to the file of the AO for fresh consideration on similar direction and this ground of appeal is allowed for statistical purposes. 8. The next ground in this appeal is with regard to disallowance of Rs. 13,32,01,184/- u/s.40(a)(i) of the Act. 9. The facts of the issue are that during the course of assessment proceedings it is seen that the assessee company has offered entire income to tax in India. Therefore, any expenses corresponding to the income offered in India is deemed to accrue or arise in India to the third party. Hence, the assessee company is not covered by the exclusion clause provided in sec.9(1)(vii)(b) of the Act. Since the income is offered in the books of the Indian company, the source rule as provided in the section would not be applicable to the assessee. The assessee was caused to explain, as to why disallowance u/s.40(a)(i) of the Act should not be made in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no dispute with the factual position that the GMPL did not have any permanent establishment in India, and with the legal principle laid down in the applicable tax treaty that, in the absence of the PE of GMPL, its business profits could not be taxed in India. The taxability under the source state under Article 7 of the applicable tax treaty, therefore, clearly fails. We further find that so far as taxability under Article 12, i.e. with respect to 'Royalties and fees for technical services' is concerned, we find that Article 12(4) provides that, "The term "fees for technical services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein ; or (c) c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingapore tax treaty. Learned Departmental Representative, however, proceeds to give a new twist to the case of the revenue. Learned Departmental Representative has now come up with the argument that even if the income embedded in payments to GMPL were not taxable in India under Article 7 (i.e. business profits) or under Article 12, these amounts were taxable under article 23 of the applicable tax treaty. He invites our attention to Article 23 which provides that " (i)tems of income which are not expressly mentioned in the foregoing Articles of this Agreement may be taxed in accordance with the taxation laws of the respective Contracting States." His interpretation of the scope of this provision is that when taxability fails under all articles of the applicable tax treaty, the taxability automatically arises under this provision. In other words, for example, when a business profit is not taxable under Article 7, this non taxability is not the end of the road so far as taxability in the source state is concerned, because, according to the learned Departmental Representative, the taxability of business profit in such a situation, though not taxable under article 7, automatically shift ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 'interest' appearing in Section 40(a)(i) but that is hardly material in the present context. What is material is that the expression 'other income' was used in the context of mandate of Section 40(a)(i) and not in the context of treaty classification of income. Learned Departmental Representative has clearly missed out this vital fact. Let us now turn to the provisions of Article 23 of the applicable tax treaty. As we have noted earlier, this treaty provision provides that "items of income which are not expressly mentioned in the foregoing Articles of this Agreement may be taxed in accordance with the taxation laws of the respective Contracting States". Learned Departmental Representative's argument is that "consultancy charges, brokerage, commission, and incomes of like nature which are payments which are covered by the expression "other sums" as stated in Section 40(a)(i) and chargeable to tax in India as per the Income Tax Act, and also liable to tax as per taxation laws of Singapore" are squarely covered by Article 23 of the India Singapore tax treaty. This argument proceeds on the fallacious assumption that 'other sums' under section 40(a)(i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... article 23. There could be many such items of income which are not covered by these specific treaty provisions, such as alimony, lottery income, gambling income, rent paid by resident of a contracting state for the use of an immoveable property in a third state, and damages (other than for loss of income covered by articles 6-22) etc. In our humble understanding, therefore, article 23 does not apply to items of income which can be classified under sections 6-22 whether or not taxable under these articles, and the income from consultancy charges on is covered by Article 7, Article 12 or Article 14 when conditions laid down therein are satisfied. Learned Departmental Representative's argument, emphatic and enthusiastic as it was, lacks legally sustainable merits and is contrary to the scheme of the tax treaty. While dealing with the scope of residuary article of income under the tax treaties, and in support of the above conclusions, we may also refer to certain observation, with which we are in most respectful agreement, made by the Hon'ble Justice P V Reddi, articulating the views of the Authority for Advance Ruling in the case of Gearbulk AG (318 ITR 66), and in his felici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake or have as a subject; discuss." .......................... 9.1 The applicant's counsel submitted that an item of income can be said to have been dealt with in an article of the Treaty only if it defines its scope as well as allocates the right to tax such income between the two Contracting States. Mere exclusion of shipping business profits from article 7 does not amount to dealing with that item of income. We find it difficult to accept this contention. Allocation of taxing right to the source State can well be done by such a process of exclusion. There is no particular manner or methodology of achieving that result. The expression 'dealt with' does not necessarily mean that there should be a detailed or elaborate treatment of the subject. 10. Clearly, therefore, the income from consultancy services, which cannot be taxed under article 7, 12 or 14 because conditions laid down therein are not satisfied, cannot be taxed under article 23 either. It is also only elementary that when recipient of an income does not have the primary tax liability in respect of an income, the independent of the payer having moved an application under section 195 or not, or on the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axmann. 83) (Bang.), & in the case of Bharti Airtel Limited (67 Taxmann.com 223)(Delhi) and in the case of TUF Bayren (India) Ltd. (23 taxmann.com 127)(Mum.). 11. The ld. DR submitted that in earlier year for the assessment year 2007-08, this issue came for consideration in ITA No.90/Mds./2012 and 1159/Mds./2012 vide order dated remitted the issue to the file of Assessing Officer to examine the issue in the light of judgment of Bombay High Court in the cast of DIT Vs. Ishikawjima Harima Heavy Inds. Co. Ltd., in 212 Taxman 273(Bom.). However, he submitted that the said decision was delivered before the amendment of Sec.9(1) of the Act. According to ld. D.R, in the present assessment year the DRP considered the amendment to Sec.9(1) and observed that tax must be deducted which has not been done and thus the action of the Assessing Officer is correct in invoking the provisions of Sec.40(a)(i) of the Act. 12. We have heard both the parties and perused the material on record. The Explanation incorporated in section 9 declares that "where the income is deemed to accrue or arise in India under clause (v),(vi) and (vii) of sub-sec.(1), such income shall be included in the total income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the head "Profits and gains of business or profession", (ia) any interest, commission or brokerage,[rent, royalty]fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work(including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII- Band such tax has been deducted or, after deduction,[has not been paid on or before the due date specified in sub-section(1) of section 139:]" A perusal of the above provisions show that it is only when a deduction is claimed in computing the income chargeable under the head 'profit and gains of business or profession' that the above provision are attracted. The deduction claimed should be of interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services. The claim for depreciation made by the assessee does not fall within any of the categories mentioned in the aforesaid provision. Therefore, it is not possible to make the impugned disallowance by resorting to the provisions of section 40(ia) of the Act. The learned D.R. however sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the assessee has taken a plea before the DRP to consider this issue, but refused to entertain it on the reason that it was not before the TPO/AO. In our opinion, all the facts are available on record and assessee made a claim, it is appropriate to remit the issue to the file of AO for his consideration. In view of the judgement of Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (229 ITR 283), wherein it was held that a legal ground can be raised at any stage of appeal. Further, the Co-ordiante Bench in the case of M/s.Abhiniha Foundation Pvt Ltd., in ITA No.281/Mds./2016 for the A.Y 2011-12 the Tribunal vide order dated 29.04.2016 wherein admitting the additional ground, though it was not raised before the Assessing Officer and observed that the assessee is entitled to raise not merely by additional legal submissions before the appellate authorities, but is also entitled to raise additional claims before them. The appellate authorities have the discretion whether or not to permit such additional claims to be raised. It cannot, however, be said that they have no jurisdiction to consider the same. That they may choose not to exercise their jurisdiction in a giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment years 2010-11 and 2011-12 dated 14.9.2016 wherein Tribunal held that:- "23. We have heard both the parties and perused the material on record. This issue came for consideration in assessee's own case in I.T.A.No.1159/Mds/2012 challenging the action of the CIT(A) in restricting the assessee's claim of relief u/s 90 of the Act of Rs. 224,67,411/- to the extent of tax payable in India on net income of Rs. 516,93,732/- i.e difference between interest earned from M/s AHPL and interest paid on borrowings made for advancing the loans to M/s AHPL. The Tribunal while adjudicating the grounds, placed reliance on the order of the Tribunal in the case of Bank of Baroda vs CIT in I.T.A.No.2927/Mds/2011 dated 25.7.2014 wherein the Tribunal has given a direction that the income of the branches of the assessee shall also taxable in India i.e it would be included in the return of income filed by the assessee in India and whatever taxes have been paid by the branches in the other contracting states i.e the source country, credit of such taxes shall be given. Thereafter, the Tribunal in this case remitted the issue to the file of the Assessing Officer to decide afresh in the light of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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