9911796707
TMI Blog2023 (4) TMI 1284X X X X Extracts X X X X X X X X Extracts X X X X ..... s which yielded tax free dividend and interest to assessee bank in those situation where, the interest free own funds available with the assessee, exceeded their investment. Revenue has not disputed the fund position as highlighted by the CIT(A) in the impugned order. Decided in favour of assessee. Allocation of interest towards earning of income on foreign exchange loans - AO held that net interest income is taxable at concessional rate of 20% u/s. 115A - HELD THAT:- As decided in assessee own case the legislature has intended to tax the interest only on gross basis. Further in support of his arguments ld. A.R has also cited Article 10 11 of DTAA with Canada - Notification No.10503(F No.505/2/87-FTD) - Further it has also been mentioned that section 90(2) of IT Act also provides that the provisions of this Act shall apply to the extent they are more beneficial to that assessee. The order of the first appellate authority is quite elaborate on this subject and needs no interference - Decided in favour of assessee. TDS u/s 195 - Disallowance u/s. 40(a)(ia) - not deducting TDS on interest paid to Head Office - branch office of the assessee in India paid interest to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to admit the appeal of Revenue observing that the Circular, issued by the Board in exercise of its statutory powers u/s. 119(2) of the Act may have the effect of relaxing the rigors of statutory provision. Thus, in the light of aforesaid decisions and CBDT Instructions we find no merit in ground No.5 of the appeal, hence, the same is dismissed. Salary paid to expatriate employees - HELD THAT:- Undisputedly, the salary expenditure of expatriate employees was for rendering services wholly and exclusively for assessee in India. The quantum of expenditure and payment of salary to employees expatriated to India by head office has not been doubted by the AO. The solitary objection of Assessing Officer for disallowing expenditure is that no debit note was raised by head office. CIT(A) has negated the objection raised by the AO by placing reliance on the decision in the case of Kedarnath Jute Manufacturing Co [ 1971 (8) TMI 10 - SUPREME COURT] Regarding applicability of section 44C of the Act, the CIT(A) placed reliance on the decision of Hon'ble Jurisdictional High Court in the case of Emirates Commercial Bank [ 2003 (4) TMI 2 - BOMBAY HIGH COURT] to conclude that payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L MEMBER AND SHRI AMARJIT SINGH , ACCOUNTANT MEMBER Assessee : Shri Nishant Thakkar with Ms. Jasmin Amasadvala Revenue : Shri Soumendu Kumar Dash ORDER PER VIKAS AWASTHY, JM: These cross appeals by the assessee and Revenue are directed against the order of Commissioner of Income Tax(Appeals)-XXXI, Mumbai [in short the CIT(A) ] dated 18/09/2006 for the assessment year 2002-03. 2. The Revenue in appeal has assailed the order CIT(A) by raising seven effective grounds. The same reads as under: 1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs. 91,46,886/- made by the Assessing Officer as interest expenses incurred for earning interest on tax free bonds. 2. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in holding that the Assessing Officer was not justified in allocating interest of Rs. 82,46,164/- as costs incurred towards earning the income and accordingly deleting the disallowance made. 3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in- deleting the addition of Rs. 77,78.945/- made as interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings, the Assessing Officer made following disallowances/additions: (i) Disallowance u/s. 14A of the Income Tax Act, 1961 [in short the Act ]; (ii) Disallowance u/s. 40(a)(i ) of the Act for non-deduction of TDS on interest paid to Head Office. (iii) Disallowance of Broken Period Interest; (iv) Disallowance of expenditure relatable to earning of Interest on Foreign Currency Loans; (v) Disallowance of deduction of bad debts written off u/s. 36(1)(vii) of the Act . (vi) Addition on account of interest received by Head Office. (vii) Transfer Pricing adjustment on account of services rendered to Foreign AEs. (viii) Disallowance of Salary paid to expatriate employees. 5. Aggrieved by the assessment order dated 14/03/2005, the assessee filed appeal before CIT(A). The First Appellate Authority vide impugned order granted part relief to the assessee. The Revenue is in appeal on the issues where the CIT(A) has granted relief to the assessee. Since, the grounds raised by the Revenue are substantial and ground No.1 in appeal of the assessee is corresponding to ground No.3 in appeal of the Revenue, appeal of the Revenue is take up first for adjudication. IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4/03/2006 (supra) deleted the disallowance. The Hon ble Apex Court in the case of South Indian Bank Ltd. vs. CIT (supra) has reiterated the legal position, that the proportionate disallowance of interest is not warranted u/s.14A of the Income Tax Act for investment made in tax free bonds/ securities which yielded tax free dividend and interest to assessee bank in those situation where, the interest free own funds available with the assessee, exceeded their investment. . The Revenue has not disputed the fund position as highlighted by the CIT(A) in the impugned order. Thus, taking into consideration entire facts of the case and the law expounded by Hon ble Apex Court in this regard, we find no merit in ground No.1 of the appeal, hence, the same is dismissed. 7. Allocation of interest Rs. 82,46,164/- towards earning of income on foreign exchange loans: During the period relevant to assessment year under appeal, the assessee has earned interest income amounting to Rs. 2,13,66,918/- from foreign currency loans. The assessee claimed that interest income is liable to be taxed @20% on gross basis u/s. 115A of the Act. The Assessing Officer held that net interest income is taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue, we have no hesitation in dismissing ground No.2 of the Department s appeal. 8. Disallowance u/s. 40(a)(ia) of the Act for not deducting TDS on interest paid to Head Office Rs. 77,78,947/-: The branch office of the assessee in India paid interest to the Head Office/ overseas branches . The Indian branch is the Permanent Establishment (PE) of the assessee. The Assessing Officer held that Indian branch of the assessee was liable to deduct withholding tax on the interest payment. In first appellate proceedings, the CIT(A) following the decision of Special Bench in the case of ABN AMRO Bank NV vs. ADIT, 97 ITD 89 (Kol)(SB) held that interest payment made by the Indian PE to Head Office is not allowable as deduction. Thus, the CIT(A) upheld the disallowance but for the different reason. The Revenue in ground No.3 of appeal has assailed the findings of the CIT(A) in rejecting the reason given by Assessing Officer for making disallowance u/s. 40(a)(ia) of the Act . The assessee in ground No.1 of the appeal has raised a ground assailing the findings of CIT(A) in holding that payment of interest by branch to head office is not allowable. 8.1 The ld. Authorized Represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the domestic law. Even otherwise, there is no express provision contained in the relevant tax treaty which is contrary to the domestic law in India on this issue. This position applicable in the case of interest paid by Indian branch of a foreign bank to its Head Office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the Head Office. At the time of hearing before us, the learned representatives of both the sides have also not made any separate submissions on this aspect of the matter specifically. Having held that the interest paid by the Indian branch of the assessee Bank to its head office and other branches outside India is not chargeable to tax in India, it follows that the provisions of section 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the PE, the question of disallowance of the said interest by invoking the provisions of section 40(a)(i) does not arise. Thus, in the light of the decision of Special Bench, ground No.3 raised in appeal by the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-. The CIT(A) placing reliance on the decision in the case of Oman International Ltd. vs. DCIT, 96 ITD 76 (Mum) and the decision of Bangalore Bench in the case of Vijaya Bank vs. CIT, in ITA No. 3/Bang/1998 for Assessment Year 1994-95 decided on 24/04/2003 held that current years allowance u/s. 36(1)(viia) cannot be taken into account while computing deduction for bad debt u/s. 36(1)(vii) of the Act. 10.1 The ld. Authorized Representative for the assessee vehemently supported the findings of CIT(A) on this issue and also placed reliance on CBDT Instruction No.17/2008 dated 26/11/2008. 10.2 Per contra the ld. Departmental Representative placed reliance on the findings of the Assessing Officer. 10.3 Both sides heard. We find that the CIT(A) has allowed assessee s claim of deduction of bad debt u/s. 36(1)(vii) of the Act by following the order of Tribunal in the case of Oman International (supra) and Vijaya Bank (supra). The ld. Authorized Representative for the assessee has further placed reliance on the Instructions No.17/2008 (supra). The relevant part of said Instructions is extracted herein below: (i) Under section 36(1)(vii) of the Act, deduction on account of bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5(Del) (ii) CIT vs. Emirates Commercial Bank, 262 ITR 55 (Bom) (iii) ADIT vs. Hongkong Shanghai Banking Corporation, 113 taxamann.com 245 (Bom) (iv)British Bank of Middle East vs. JCIT, 4 SOT 122 (Mum) 11.2 On the other hand, the ld. Departmental Representative strongly defended the assessment order. The ld. Departmental Representative submits that undoubtedly the head office paid salary expenses of expatriate employees and no debit note was raised on the assessee for the settlement of account. The ld. Departmental Representative thus, prayed for reversing the findings of CIT(A) on this issue. 11.3 Both sides heard . Undisputedly, the salary expenditure of expatriate employees was for rendering services wholly and exclusively for assessee in India. The quantum of expenditure and payment of salary to employees expatriated to India by head office has not been doubted by the Assessing Officer. The solitary objection of Assessing Officer for disallowing expenditure is that no debit note was raised by head office . The CIT(A) has negated the objection raised by the Assessing Officer by placing reliance on the decision in the case of Kedarnath Jute Manufacturing Co. 82 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the adjustment made by the CIT(A). The Revenue has assailed the findings of CIT(A) in rejecting T.P adjustment made by the TPO. Transfer Pricing concept was in nascent stage in assessment year 2002-03. The jurisprudence on Transfer Pricing was in infancy stage. Having rejected comparables the CIT(A) ought to have selected fresh set of comparables to benchmark the transaction. The CIT(A) rightly rejected the comparables selected by the TPO as none of the comparables selected by the TPO were functionally comparable to the activities carried out by the assessee. We are of the considered view that transfer pricing adjustment made by the TPO has been rightly rejected by the CIT(A). Thus, the ground No.7 raised in appeal by Revenue fails. 13. Ground No.8 and 9 in appeal by the Revenue are general in nature, hence, require no adjudication. 14. In the result, appeal of the Revenue is dismissed. ITA No.6818/Mum/2006 A.Y.2002-03: 15. The ground No.1 in assessee s appeal is corresponding to ground No.3 in Department s appeal. The ground No.1 has already been adjudicated (in favour of assessee ) while adjudicating ground No.3 of Department s appeal. 16. The ld. Authoriz ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
