STANDARD CHARTERED BANK,MUMBAI vs. DDIT (IT) 2(1), MUMBAI

PER GAGAN GOYAL, A.M: These cross appeals by Assessee and Revenue are directed against the order of Ld. CIT (A)-58, Mumbai, dated 28/04/2017 passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2001-02. The assessee has raised the following grounds of appeal:-

1.2 The learned CIT(A) ought to have appreciated that the taxes have been paid by Master Card in view of which the provisions of section 40(a)(i) of the Income tax Act, 1961 (Act) cannot be invoked and accordingly, disallowance should be deleted.

1.3 The learned CIT(A) ought to have appreciated that the provisions of section 40(a)(i) of the Act cannot be invoked in view of Article 26(3) of Double Tax Avoidance Agreement (DTAA) entered into by India with USA and accordingly, disallowance should be deleted. 2. 2.1 The learned CIT (A) erred in law and on facts to confirm the disallowance towards part of the expenses directly attributable to operations in India. 2.2The learned CIT(A) erred on facts that the Advisory and Business support costs in connection with the acquisition of Indian branches of ANZ Grindlays Bank Ltd are not in nature of revenue expenditure with respect to the business activity carried out by the Appellant.

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2.3The learned CIT (A) erred on facts that the Singapore IT Hubbing costs are in the nature of Fees for Technical Services liable to deduction of tax at source by the Appellant. Further, the learned CIT (A) erred in law and on facts to direct the Assessing Officer to obtain break- up of total amount of reimbursement from the Appellant.

3.2 The learned CIT(A) ought to have considered that a combined reading of Articles 7(2) and 7(5) of DTAA entered into by India with UK provides that interest paid by the Permanent Establishment (PE) on moneys lent to it by the Head Office / overseas branches of any banking enterprise would be taken into consideration in determining the profits attributable to that PE.

3.3 The learned CIT (A) ought to have allowed deduction for interest payment by the Appellant to its Head Office / overseas branches and accordingly, disallowance should be deleted.

5.2 The learned CIT(A) ought to have considered the Appellant's submission that the expression 'in relation to' under section 14A of the Act means dominant and immediate connection which is not applicable in the case of the Appellant as no expenditure has been incurred by the Appellant in relation to earning the exempt income.

5.3 The learned CIT (A) erred in law and on facts in disallowing the expenditure under section 14A of the Act and accordingly, the disallowance should be deleted. 6. 6.1 The learned CIT(A) erred in confirming the action of the Assessing Officer of making additions of recovery of securities losses of Rs. 1,21,69,75,125/- without appreciating the fact that the losses incurred by the Appellant pertaining to the earlier years is subject matter of litigation.

6.2 The learned CIT(A) erred in confirming the action of the Assessing Officer to tax recovery of Rs. 15,59,20,000/- with respect to Cantriple Units.

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6.3 Without prejudice to the above, the learned CIT(A) erred in disallowing loss of Rs. 40,80,000/- being the difference between the total loss of Rs.16,00,00,000/- incurred by the Appellant and the corresponding recovery of Rs.15,59,20,000/-.

6.4 The learned CIT(A) erred in confirming the action of the Assessing Officer to tax proceeds of Rs. 3,15,00,000/- received by the Appellant with respect to 13% NPCL bonds.

6.5 The learned CIT(A) erred in confirming the action making additions on account of proceeds of Rs. 102,95,55,120/- received with securities pledged by the broker.

6.7 The CIT (A) ought to have considered the submissions of the Appellant that losses allowed in earlier years are subjudice and accordingly, the recovery of the amounts should not be taxed. 7. 7.1 The learned CIT(A) erred in law in confirming the action of the Assessing Officer in applying the provisions of section 115JB which are not attracted to the facts of the case. 7.2 The learned CIT(A) failed to appreciate that: a. Section 90(2) and Circular No. 333 dated April 12, 1982, issued by the Central Board of Direct Taxes (CBDT) provides that the provisions of the Act shall apply to the assessee, who is otherwise eligible for double tax treaty relief only to the extent that they are more beneficial to him. b. The DTAA entered into by India with UK specifically lays down the method of determination of profits of the PE and therefore, it overrides the provisions of Section 115JB of the Act. c. Section 115JB (5) of the Act provides that, save as otherwise provided in Section 115JB of the Act, all other provisions of the Act shall apply to every company mentioned in the said section. It, therefore, appears that there is no intention of the Legislature to specifically override the provisions of Section 90 of the Act and therefore, by implication, the provisions of applicable tax treaties by the introduction of Section 115JB of the Act. 7.3 Without prejudice to the above and notwithstanding that the provisions of section 115JB of the Act are not applicable to DTAA entered into by India with UK, the CIT (A) erred in disregarding the submission of the Appellant that modified provisions of section 115JB of the Act (as amended by the Finance Act 2012) are applicable to the banking companies only from Assessment Year 2013-14 on prospective basis. 7.4 Without prejudice to the above the learned CIT(A) erred in confirming the action of the Assessing Officer of making an addition to the Book Profit of Rs. 1,26,28,068/- being expenses related to exempt income under section 14A of the Act and not reducing the exempt income of Rs. 3,41,29,914/-.

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7.5 The learned CIT (A) ought to have not applied the provisions of section 115JB of the Act as they are not attracted to the facts of the case. 8. 8.1 The learned CIT(A) erred in disallowing the claim of the appellant towards Head Office Expenditure of Rs. 77,08,83,765/- in entirety on the ground that no revised return of Income was filed for such claim and thus, restricted the claim under section 44C of the Act.

8.2 The CIT (A) failed to appreciate that: a) The decision of the Supreme Court in the case of Goetz (India) Ltd. v CIT (2006) 284 ITR 323 (SC) can be applied only when the claim for deduction was made first time during the course of assessment. In the present case, the Appellant had already claimed deduction for Head Office Expenditure in the Return of Income, but the same was restricted under section 44C of the Act. Further, the said decision of Supreme Court deals with the power of the Assessing officer and not that of Appellant Authority. b) The said claim was revised during the course of appeal proceeding in view of the decision of the Mumbai Tribunal in the case of Metchem Canada Inc. v/s. DCIT [284 ITR (A.T.) 196], wherein after referring to Article on non-discrimination, it has been held that provisions of section 44C of the Act will have no application.

8.3 Without prejudice to the above, the learned CIT(A) also erred in holding that Article 26 of the DTAA entered into by India with UK is not applicable to the provisions of section 44C of the Act and the provisions of section 44C of the Act does not create a situation of discrimination vis-a-vis an Indian resident taxpayer.

8.4 The learned CIT (A) ought not to have restricted the claim of head-office expenses to 5% under section 44C of the Act and accordingly, should have allowed the head-office expenses in entirety. 9. 9.1The learned CIT(A) erred in not adjudicating the ground of taxability of interest on tax received by the Appellant on the basis that this is an issue of fact which cannot be raised before the CIT(A).

9.2 The learned CIT(A) ought to have appreciated that the issue raised in additional ground involves question of law which goes to the root of the matter not involving investigation of fresh facts and therefore, the same ought to have been adjudicated in favour of the Appellant. 2. The revenue has raised the following grounds: - 1. On the facts of the case and in law, the Ld CIT(A) erred in allowing the expenditure of Rs. 64,04,42,048/- incurred by its HO outside India, based on certificate given by the auditors, without appreciating that these expenses being not recorded in books of assessee(PE) in India, were neither actually paid nor shown payable in books of Indian PE

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and as the assessee did receive the services of such value through its HO, simultaneously there was equivalent income also accruing to assessee u/s. 28(iv) of the Act and once the AO having not made any separate addition u/s 28(iv) of the Act, the disallowance of expenses claimed directly in computation of income was merely to bring tax neutrality. 2. Without prejudice to ground above, on the facts of the case and in law, the Ld. CIT(A) erred in allowing additional claim of direct expenses incurred outside India amounting to Rs. 24,79,25,160/- which were not recorded in accounts maintained in India, thereby ignoring the ratio of the decision of the Hon'ble Supreme Court in its judgment in the case of Goetze (India) Ltd Vs CIT(2006) 284 ITR 323(SC) wherein it is held that the Assessing Officer has no power to entertain a claim made otherwise than by filing a revised return of income.

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During the year under consideration, the Appellant has raised various grounds of appeals before the Hon’ble ITAT against the order of Hon’ble CIT(A) dated 28 April 2017 passed under section 250 of The Income-tax Act, 1961 (‘the Act’). The Appeal was also filed by the Department before the Hon’ble ITAT against the above Ld. CIT (A) order.

The Appellant has filed the legal and factual paperbook with respect to both the appeals (i.e., the Appellant’s as well as the department’s appeal) on 23 January 2023.

The Appellant submits the brief synopsis of facts and submission on the grounds of appeal raised by the Appellant / Department before the Hon’ble ITAT for A.Y. 2001-02 as under:

Bank’s appeal no. 4867/Mum/2017

Ground No. 1: Payment to Master card International Incorporated, USA (‘Master Card’)

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1.1 Ground 1.1 The learned Commissioner of Income Tax (Appeals)-58, Mumbai [CIT (A)] erred in law and on facts to confirm the disallowance of payments made to Master Card International Inc, USA [Master Card].

1.2 The learned CIT(A) ought to have appreciated that the taxes have been paid by Master Card in view of which the provisions of section 40(a)(i) of the Income tax Act, 1961 (Act) cannot be invoked and accordingly, disallowance should be deleted.

1.3 The learned CIT(A) ought to have appreciated that the provisions of section 40(a)(i) of the Act cannot be invoked in view of Article 26(3) of Double Tax Avoidance Agreement (DTAA) entered into by India with USA and accordingly, disallowance should be deleted

1.2 Brief facts: During the year consideration, the Appellant has made payment to Master Card on which tax was not deducted by the Appellant on the contention that the income of Master Card is not taxable in India due to following:

 Master Card does not have a PE in India. As per Article 5 of the India-US tax treaty, the term ‘PE’ shall not include the maintenance of fixed place of business solely for the purpose of collating / supplying information.

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 Even otherwise, Master Card is not profit making body. It is a membership corporation organized and existing under the laws of the state of Delaware, USA. It is acting on the principle of mutuality.  The payment made to MasterCard is in the nature of service charges and not for the use of trademark and therefore it is not in nature of royalty as defined in article 12 of the DTAA between India-UK.  The payment received by Master Card cannot be categorized as ‘fees for technical services’ since no technical information was made available to the Appellant.  Under section 195(1) of the Act, the person responsible for paying is required to deduct tax only if the sum is chargeable under the provision of the Act.  Further, it was claimed by the Appellant before the Ld. CIT (A) that in view of the Mumbai ITAT decisions in the case of Central Bank of India (42 SOT 450) and Citibank N.A., (ITA No. 5275/Mum/2001), even if income of Master Card was taxable in India, no tax was required to be deducted in view of Article 26(3) of India US tax treaty, which protects non-resident against any discrimination vis-à-vis residents. Article 26(3) provides that payment made to a non-resident will be deductible under the same condition as if payment were made to a resident. As per provisions of section 40(a) (i) applicable for the relevant year, no disallowance could be made in respect of payments to residents on the ground of non-deduction of tax.

1.3 AO’s contention (Page5)  The AO relied on the Appellant’s own case Assessment order passed u/s. 143(3) for the A.Y. 1996-97 and held that the services rendered by

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MasterCard to the Appellant are technical services in nature and hence the Appellant was liable to deduct tax on the same. Since the Appellant failed to deduct tax u/s. 195, the payment made to Master Card is disallowed under section 40(a) (i) of the Act.

 Also, the AO mentioned that in case of the Appellant, the issue of TDS on payments to MasterCard has been examined in detail by DCIT in detail in his order u/s. 201(1) of the Act and has held that income of MasterCard is taxable in India. Therefore, in absence of TDS, the sum is disallowed under section 40(a) (i) of the Act.

1.4 CIT’s decision (Page 5, para 4.3) Master Card have gone before competent authority under Mutual Agreement Procedure (‘MAP’), wherein it was ruled that they are liable to pay tax, hence, the Appellant was required to deduct tax at source on payments made to Master Card.

The Hon’ble CIT(A) followed the Appellant’s own case CIT(A)’s order for AY 2000- 01 and held that amount is liable to be disallowed under section 40(a)(i) of the Act.

Further, CIT(A) rejected the Appellant’s contention that disallowance under section 40(a)(i) is covered by Article 26 of India-UK Tax Treaty and held that provision of section 40(a)(i) does not differentiate between foreign Company and a domestic company. The treatment in respect of person whose income is being computed remains the same irrespective of their residential status.

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1.5 Appellant’s submissions  The Appellant submitted the copy of the order under section 254 of the Act, dated 23 September 2008, in case of MasterCard for AY 2001-02 (copy enclosed at page 7 of the Bank’s appeal Factual paperbook) confirming the details of taxes paid by MasterCard.

 Further, the Appellant submitted that this issue is covered in favor of the Appellant by the decision of the Co-ordinate bench of the Tribunal in the Appellant’s own case for the assessment year 1999-2000, wherein the Tribunal followed the decision of Hon’ble Mumbai ITAT in the case of Celltick Mobile Media (India) (P.) Ltd., vs. DCIT[2021] (188 ITD 883) (Copy of the decision is enclosed in the Bank’s appeal legal paperbook at page no.80), wherein it was held that the amendment in the provision of section 40(a)(i) of the Act, which states that no disallowance u/s. 40(a)(i) is warranted in the hands of payer of income where payee has already discharged the tax liability on the said income, is retrospective in nature (copy of A.Y. 1999-00 ITAT order dated 17 October 2022 is enclosed in the Bank’s appeal legal paper book - refer page 27, para 37) which read as under:

“37. from the above decision of the Coordinate Bench it is clear that the amendment in provision u/s. 40(a) (i) is retrospective in nature. Therefore, the provisions of section 40(a) (ia) are equally applicable u/s. 40 (a) (i) of the Act, with that above discussion we are inclined to accept the first proposition made by the assessee and accordingly, Ground No.3 raised by the assessee is allowed

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and we do not wish to consider the proposition No. 2 raised by the assessee at this point of time.”

In view of the above, the Appellant submits before us to follow its own case vide ITAT order for A.Y. 1999-00, dated 17 October 2022, and delete the disallowance of INR 2,41,51,287/- made under section 40(a)(i) of the Act. Respectfully following the decision of coordinate bench in the case of assessee on similar issue, we don’t see any force in the orders of authorities below and find that amendment in section 40(a) (i) is retrospective in nature. Therefore, the provisions of section 40(a) (ia) are equally applicable u/s. 40 (a) (i) of the Act. In view of this, ground raised by the assessee is allowed.

Ground No. 2 Direct expenses incurred outside India 2.1 Grounds 2.1 The learned CIT (A) erred in law and on facts to confirm the disallowance towards part of the expenses directly attributable to operations in India.

2.2 The learned CIT(A) erred on facts that the Advisory and Business support costs in connection with the acquisition of Indian branches of ANZ Grindlays Bank Ltd are not in nature of revenue expenditure with respect to the business activity carried out by the Appellant.

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2.3 The learned CIT (A) erred on facts that the Singapore IT Hubbing costs are in the nature of Fees for Technical Services liable to deduction of tax at source by the Appellant. Further, the learned CIT (A) erred in law and on facts to direct the Assessing Officer to obtain break-up of total amount of reimbursement from the Appellant.

2.2 Brief facts  During the F.Y. under consideration, the Appellant had claimed the deduction of INR 64, 04, 42,048/- on account of expenses incurred outside India, directly related to the Indian operations based on audit certificates.

 The broad nature of direct expenses attributable to the Appellant is as under: o GTS, IT cable & wireless and corporate &institutional banking o Advisory and business support costs o Singapore IT Hubbing/IT Cable & wireless

2.3 AO’s contention (page 7) The Ld. AO held that the Appellant failed to produce any details or explanation for the direct expenses, hence, disallowed the entire expenses by relying on the decision of Mumbai ITAT in case of Micoperi, Italian Company (82 ITD 369).

2.4 CIT(A)’s decision (page 19)  The Ld. CIT(A) allowed the direct expenses attributable to Appellant’s business of INR 21,50,15,149/- which relates to GTS, IT cable and wireless Page 13 of 90

and corporate and institutional banking as it represents payment made to self and the amounts are held to be not liable to TDS [refer para 6.13, page 19 of the CIT(A) order]

 The Hon’ble CIT(A) disallowed the direct expenses of INR 42,54,26,899/- attributable to the Appellant’s business which relates to advisory and business support costs and Singapore IT Hubbing costs due to the following:

o With respect to advisory and business support costs incurred in connection with the acquisition of Indian branches of ANZ Grindlays Bank, the Ld. CIT (A) held that these advices are not with respect to business activity carried on by the PE but are services rendered to the HO. The amount is not in the nature of revenue expenditure of the PE and hence, cannot be allowed [refer para 6.14, page 19 of the Ld. CIT (A) order]. o With respect to expenses relating to Singapore IT Hubbing costs, the Ld. CIT (A) held that the said expenditure falls within the ambit of FTS on which the Appellant was liable to deduct tax at source. In absence of TDS, the amount is not allowed as deduction [refer para 6.17, page 20 of the Ld. CIT (A) order].

2.5 Appellant’s submissions Advisory and Business support costs:

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 The Appellant submits that this issue is covered in favor of the Appellant, in the case of CIT vs. Bombay Dyeing & Mfg. Co. Ltd [1996] 85 Taxman 396 (SC) [Handed over during the hearing on 5 October 2023- refer page 3], wherein it was held that professional fees incurred for effecting amalgamation of a company was necessary for smooth and efficient conduct of assessee’s business and held as allowable under section 37(1) of the Act (relevant part extracted as under):

“The facts concerning the first question are the following: a company named Nawrosjee Wadia Ginning & Pressing Company was amalgamated with the assessee-company. In that connection an expenditure of Rs. 10,350/- was incurred by the assessee-company towards the professional charge paid to the firm of Solicitors. In the assessment proceedings the said amount was claimed as revenue expenditure. The assessee's case was that Nawrosjee Wadia Ginning &Pressing Company was engaged in the same business as the assessee. In other words, the businesses of both the companies were 'complimentary'. The directors of both the companies thought that it would be advantageous if both the companies are amalgamated. Accordingly, a scheme of amalgamation was evolved. It was submitted that the legal expenses incurred in connection with the said amalgamation are in the nature of revenue expenditure. The ITO did not agree nor did the AAC. On further appeal, the Tribunal upheld the assessee's contention. It disagreed with the revenue's contention that inasmuch as the said amalgamation resulted in acquisition of the other company by the assessee, which acquisition was in the nature of acquisition of a capital

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asset, the legal expenses incurred in that behalf partake the nature of capital expenditure. The Tribunal was of the opinion that "as both the companies were carrying on complimentary business and their amalgamation was necessary for the smooth and efficient conduct of the business", it is an expenditure laid out wholly and exclusively for the purpose of the business of the assessee. In view of the, said finding and also in view of the, decision of this Court in Bombay Steam Navigation Co. [1953] (P.) Ltd. v. CIT [1965] 56 ITR 52, we are of the opinion that the Tribunal was right in its conclusion. The decision in Bombay Steam Navigation Co. (1953) (P.) Ltd.'s case (supra) also pertains to amalgamation of two shipping companies. The assessee company took over the assets of the other company and part of the price was treated as a loan secured by a promissory note and hypothecation of all movable properties of the assessee company. The loan was to carry simple interest at 6 per cent. The question that arose in the said case was whether the interest paid upon the said loan was deductible as revenue expenditure. It was held by this Court that it was an expenditure deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. It was held that transaction of acquisition of the asset was closely related to the commencement and carrying on of the assessee's business and, therefore, interest paid on the unpaid balance of the consideration for the assets acquired had, in the normal course, to be regarded as expenditure for the purpose of the business which was carried on in the accounting periods. In the course of the judgment this Court referred to the earlier decision of this Court in State of Madras v. G.J. Coelho [1964] 53 ITR 186 wherein it was held that the interest on the amount

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borrowed for acquiring a capital asset is deductible as revenue expenditure. It is true, that in the said decision this Court re-affirmed the well established principle that any expenditure laid out for acquiring an asset of a permanent character would be capital expenditure, held at the same time that inasmuch as the acquisition of the other company was in the course of carrying on of the assessee's business, the interest paid thereon was deductible under section 10(2)(xv) of the Act. In this case too, the Tribunal has recorded a finding that the acquisition of Nawrosjee Wadia Ginning & Pressing Company was necessary for the smooth and efficient conduct of the assessee's business. Following the ratio of the aforementioned decisions of the Court, we hold that the expenditure incurred towards professional charges of the Solicitors' firm for the services rendered in connection with the said amalgamation was in the course of carrying on of the assessee's business and, therefore, deductible as a revenue expenditure. In this view of the matter, it is not necessary for us to deal with the other decisions cited before us on this question.”

Singapore IT Hubbing/ IT Cable & Wireless costs:

At the outset, the Appellant submit that this ground is covered in the Appellant’s own case in A.Y. 1999-00, wherein with respect to the similar nature of services, the Hon’ble ITAT held that the said expenditure is allowable under section 37(1) and should not be restricted under section 44C of the Act. However, in the current year (i.e., AY 2001-02), the Ld.

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CIT(A) has raised an additional contention that Singapore IT Hubbing/ IT Cable & Wireless costs are in nature of “Fees for Technical Services”.

With regards to additional contention of Ld. CIT (A), the Appellant submit that the same is not sustainable due to following reasons:

o The Appellant has undertaken a Hubbing project as result of which its operations were networked to hub in Singapore allowing it to have access to centralized transaction processing operations and operation of bank accounts from anywhere in India.

o The expenditure mainly relates to salaries and other related costs, travel, communication for staff working on the project, payment to external vendors such as Cable and Wireless for system maintenance and similar expenditure.

o The examples provided in India US DTAA which is relied by the Ld. CIT (A) (refer para 6.16, page 19) are not applicable in the instant case, as the Appellant has incurred the expenses only for the use of technology solely for the purpose of business in India.

o Further, the services of IT Hubbing costs does not make available any technical design or technical plan to the Appellant. In this regard, the Appellant rely on the following judicial decisions (as enclosed in the Appellant’s legal paper book) wherein it is held that payments towards

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use of technology do not result in make available. Therefore, the same will not fall with the definition of FTS under Article 13 of India-UK tax treaty:

In view of the above, the Appellant submits before us to allow the deduction towards Advisory services expenses and Singapore IT Hubbing cost of INR 42, 54, 26,899/- under section 37(1) of the Act. We agreed with the logics put forward by the assessee and not in favour of additional contentions raised by the Ld. CIT (A). Moreover, similar issue is covered in the Appellant’s own case in A.Y. 1999-00, wherein with respect to the similar nature of services, the Hon’ble ITAT held that the said expenditure is allowable under section 37(1) and should not be restricted under section 44C of the Act. Respectfully following the decision of coordinate bench and judicial pronouncements relied upon by the assessee, we are in agreement with the contentions of assessee and ground raised by the assessee is allowed.

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Ground No. 3: Interest paid to Head office / Overseas Branches 3.1 Ground 3.1 The learned CIT(A) erred in law and on facts to disallow interest payable to head office/ overseas branches on the ground that the Act does not allow deduction of interest paid by Branch to Head office.

3.2The learned CIT(A) ought to have considered that a combined reading of Articles 7(2) and 7(5) of DTAA entered into by India with UK provides that interest paid by the Permanent Establishment (PE) on moneys lent to it by the Head Office / overseas branches of any banking enterprise would be taken into consideration in determining the profits attributable to that PE.

3.3 The learned CIT (A) ought to have allowed deduction for interest payment by the Appellant to its Head Office / overseas branches and accordingly, disallowance should be deleted.

3.2 Brief Facts  During the year under consideration, the Appellant paid interest of INR 32, 44,183/- to Head Office (HO)/ Overseas Branch (OB) on overdrawn Nostro accounts.

 As the interest paid by the Appellant to HO / OB is not taxable in India, the Appellant had not deducted tax at source while crediting/paying the interest to HO / OB.

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3.3 AO’s contention (Page 14) The AO disallowed the interest payment on the ground that interest payable to HO/ OB is taxable in India on which the Appellant was required to deduct tax under section 195 of the Act. Since the Appellant had not deducted tax under section 195 of the Act, the same is disallowed under section 40(a) (i) of the Act.

3.4 CIT(A)’s Decision (Page 27, para 8.9) The Hon’ble CIT(A) held that the Special Bench decision in the case of Sumitomo Mitsui Banking Corporation vs. DDIT (2012) (136 ITD 66) (SB- Mumbai ITAT) is not applicable on the current facts of the Appellant.

3.5 Appellant’s submissions At the outset, the Appellant wish to highlight that this issue of disallowance of interest paid to HO was first time raised in AY 2000-01. The Appellant submits that this issue is covered in favor of the Appellant by the decision of the Mumbai Special Bench of the Tribunal in case of Sumitomo Mitsui Banking Corporation vs. DDIT (2012) (136 ITD 66) (SB-Mumbai ITAT), wherein the Special Bench of the Tribunal has inter alia held that since the interest payment by branch to HO is in the nature of payment to self, (the HO and branch being one legal entity), the same should not be chargeable to tax in the hands of the HO under the provisions of the Act. It was also held that this interest cannot be taxed in the hands of the HO / overseas branch of the Bank even under the provisions of the tax treaty and hence the same should not be subject to TDS / consequent disallowance under section 40(a) (i) of the Act

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(copy enclosed at page247 of the Bank’s Appeal legal paperbook), which read as under:

“88. Keeping in view all the facts of the case and the legal position emanating from the interpretation of the relevant provisions of domestic law as well as that of the treaty as discussed above, we are of the view that although interest paid to the head office of the assessee bank by its Indian branch which constitutes its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the PE which is taxable in India as per the provisions of article 7(2) & 7(3) of the Indo-Japanese treaty read with paragraph 8 of the protocol which are more beneficial to the assessee. The said interest, however, cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per 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 of the

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Act 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) of the Act does not arise. Accordingly we answer question No.1 referred to this Special Bench in the negative i.e. in favour of the assessee and question No.2 in affirmative i.e. again in favour of the assessee.

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In view of the above, the Appellant submits before us to allow the deduction of interest paid of INR 32, 44,183/- to HO/OB in line with the decision of the Mumbai Special Bench in case of in case of Sumitomo Mitsui Banking Corporation (supra). Further, the Appellant submit that Special Bench decision in case of Sumitomo (supra) is not only dealing with India-Japan Tax Treaty but also dealt with India- Netherland Tax Treaty. Your Honour will appreciate that the language of India-UK Tax Treaty (applicable in case of the Appellant) is in line with India-Netherland Tax Treaty. Revenue is not able to produce any argument to controvert the facts of the ground raised by the assessee and also not able to controvert the stand taken

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by the special bench in the case of Sumitomo Mitsui Banking Corporation vs. DDIT (2012) (136 ITD 66) (SB-Mumbai ITAT). Hence, in the given situation respectfully following the decision of special bench (supra), ground raised by the assessee is allowed.

Ground No. 4: Expenditure on refurbishment of premises

4.1 Ground 4.1 The learned CIT (A) erred in law and on facts to disallow 25% of the expenditure incurred on refurbishment of leasehold premises as capital in nature.

4.2 The learned CIT (A) ought to have allowed the said expenditure as revenue in nature and accordingly disallowance should be deleted.

4.2 Brief Facts  During the F.Y. under consideration, the Appellant has incurred expenditure on renovation of its various leasehold premises. The expenses incurred are mainly on account of interior works, electrical works, cabling and wiring etc.

 These expenses have been accounted as deferred revenue expenditure and amortized over a period in the books of account. However, in the computation of income, the entire expenses were claimed as deduction as the same are revenue expenditure.

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4.3 AO’s contention (Page 17) The AO disallowed the entire expenses holding that the expenditure is incurred for creating assets of enduring benefits and the same cannot be allowed as revenue expense. Also, by amortising these expenses in the books, the Appellant itself is admitting the fact that these expenses are creating assets of enduring benefit and not revenue in nature.

4.4 CIT(A)’s decision(Page 30, para 10.5) The CIT(A) followed its decision in the Appellant’s own case for the earlier years, wherein 25% of the expenditure incurred were held to be capital nature and held that 25% of expenditure is capital in nature and balance 75% expenses are allowed as revenue deduction. Also, depreciation was allowed by the Ld. CIT (A) on 25% expenses characterized as capital in nature.

4.5 Appellant’s submissions  The Appellant submits that this issue is covered in favor of the Appellant by the decision of the Co-ordinate bench of the Tribunal in the Appellant’s own case for the assessment year 1999-2000, wherein the Tribunal following the decision of Hon’ble Supreme Court in the case of Madras Auto Service Pvt. Ltd. [233 ITR 468] (Copy of decision is enclosed in the Bank’s legal paper book at page 336) allowed the deduction for the entire refurbishment expenses (Copy of A.Y. 1999-00 ITAT order is enclosed in the Bank’s legal paper book -refer page 157, para 13 and 14) which reads as under:

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“13. Considered the rival submissions and material placed on record, we observed that Hon'ble Supreme Court in the case of Madras Auto Services Pvt. Ltd., (supra) on similar issue adjudicated in favour of the assessee. While holding so Hon'ble Supreme Court held as under: -

“The assessee is a limited company carrying on the business of sale of motor parts. Its head-office is at Madras. It has a branch at Bangalore. Under an agreement of lease dated 1st of February, 1966, the assessee obtained from M/s. Hajira Comer and Mrs. Rabia Bai Razack a lease of premises Nos. 64 and 64/1 situated at Sri Narasimharaja Road, Bangalore for a period of 39 years commencing from 1st of January, 1966. Under the terms and conditions of the lease, the lessee (that is to say the assessee), had the right to demolish at its own expense the existing premises and appropriate to itself all the material thereof without paying to the lessors any compensation and construct a new building thereon to suit the purpose of their business as per the plan approved by the lessors. Under Clause 2 of the lease deed, the lessee was required to pay a rent of Rs. 1000/- per month for the first fifteen years, Rs. 1500/- per month for the next ten years, Rs. 1650/- per month for the next ten years and Rs. 2000/- per month for the remaining years. The lease deed further provided that the new construction shall, right from the commencement of the work, be the property of the lessors; and upon completion of the work of construction the lessee will have only the right to be a tenant for a period of 39 years under the existing lease subject to the payment of rent and observation of other terms and conditions of the lease. The lessee shall not be entitled under any

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circumstances for any compensation whatsoever on account of its putting up the new construction in the place of the old.

Acting under the lease agreement the assessee invested a sum of Rs. 1, 62, 835/- in the previous year relevant to the assessment year 1968/69 and Rs. 50, 937/- during the succeeding year in constructing a new building on the said land. The assessee claimed before the Income-tax Officer the expenditure of the said sums of Rs. 1, 62,835/- and Rs. 50, 937/- in the relevant assessment years as capital loss. In the alternative, the assessee claimed depreciation on capital investment; in the alternative, the assessee claimed deduction of the payments as business expenditure or as extra rent for the lease. Ultimately, the Income-tax Tribunal has held that the expenditure of the said two amounts for the construction of a new building is in the nature of business expenditure for proper carrying on of the business of the assessee. The Tribunal has, therefore, treated these amounts as revenue expenditure and allowed a deduction in that regard to the assessee. The claim of the department that the expenditure was capital expenditure and was, therefore, not deductible was negatived by the Tribunal.

On the application of the department the Tribunal referred the following question to the High Court for its determination under Section 256(1) of the Income-tax Act, 1961:

"Whether on the fact and in the circumstances of the case the Appellate Tribunal was right in holding that the building expenses of Rs. 1,62,835/-

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are not liable to be taken into account as deductible expenditure in arriving at the real income of the assessee for the assessment year 1968-69?"

For the next assessment year, a similar question was raised in regard to the second sum of Rs. 50,937/-The High Court has, by the impugned judgment, upheld the view of the Tribunal and has held that the two amounts constitute revenue expenditure for the concerned assessment years and are deductible in order to arrive at the income of the assessee for the said assessment years. The present appeals are filed by the department from the impugned judgment of the High Court.

The assessee in the present case has spent the amounts in question in order to construct a new building after demolishing the old building. The new building, however, from inception was to belong to the lessor and not to the assessee. The assessee, however, had the benefit of the existing lease in respect of the new building at the agreed rent for a period of 39 years. The Tribunal has found, as a fact, that the rent as stipulated in the lease was extremely low. It rental rate for the area in which the building was situated was much higher and would be not less than Rs. 12,000/- as against which the maximum rent the assessee would be paying was only Rs. 2,000/-. This concessional rent was on account of the fact that the new building was constructed by the assessee at its own cost.

In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of

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view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction? The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was saving in revenue expenditure in the form of rent. Whatever, substitutes for revenue expenditure, should normally be considered as revenue expenditure. Moreover, assessee in the present case did not get any capital asset by spending the said amounts. The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, expenditure appears to be revenue expenditure.

The test for distinguishing between capital expenditure and revenue expenditure in our country was laid down by this Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, West Bengal (27 ITR 34). In that case, the appellant-company had acquired from the Government of Assam lease of certain lime-stone quarries for a period of 20 years for the purpose of manufacture of cement. The lessee had, inter alia, agreed to pay an annual sum during the whole period of the lease as a protection fee and in consideration of that payment, the lessor undertook not to grant to any person any lease, permit or prospecting license for lime-stone. This Court examined tests laid down in various cases for distinguishing between capital expenditure

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and revenue expenditure. One of the standard tests now in use was laid down in the case of Atherton v. British Insulated and Helsby Cables Ltd. ([1925] 10 Tax Cases 155). It said: "When an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capita." Whether by spending the money any advantage of an enduring nature has been obtained or not will depend upon the facts of each case. Moreover, as the above passage itself provides, this test would not apply if there are special circumstances pointing to the contrary. This Court in the above case summarised the tests as follows :( p. 44): 1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment. 2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade...........If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. 3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen

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whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. (Underlining ours)

Relying upon the second test enumerated above, learned counsel for the appellant has submitted that the assessee got enduring benefit of a capital nature by spending the amount because the assessee obtained a new building for a period of 39 years. The difficulty, however, in the present case, arises from the fact that this building was never to belong to the assessee. Right from inception, the building was of the ownership of the lessor. Therefore, by spending this money, the assessee did not acquire any capital asset. The only advantage which the assessee derived by spending the money was that it got the lease of a new building at a low rent. From the business point of view, therefore, the assessee got the benefit of reduced rent. The High Court has, therefore, rightly considered this as obtaining a business advantage. The expenditure is, therefore, to be treated as revenue expenditure.

Although there are a number of cases dealing with this question, we will limit ourselves to examining a few cases where the assessee, by expending money, created and asset of an enduring nature. However, the asset so created did not belong to the assessee. In such a situation the courts have held that the expenditure was for better carrying on of the business of the assessee and could be allowed as revenue expenditure, looking to the circumstances of each of those cases. Thus in Lakshmiji Sugar Mills Co. P. Ltd. v. Commissioner of Income-tax, New Delhi (82 ITR 376) the assessee company was carrying on the business of manufacture and sale of sugar. It paid to the Cane Development

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Council certain amounts by way of contribution for the construction and development of roads between various sugarcane-producing centers and the sugar factories of the assessee. The roads remained the property of the Government. This Court held that the expenditure was not of a capital nature and had to be allowed as an admissible deduction in computing the profits of the assessee's business. The expenditure was incurred for the purpose of facilitating the running of the assessee's motor vehicles and other means employed for transportation of sugarcane to its factories.

In the case of L.H. Sugar Factory and Oils Mills (P) Ltd. v. Commissioner of Income-tax, U.P. (125 ITR 293), the assessee was carrying on the business of manufacture and sale of sugar. It has its factory in U.P. The assessee paid a contribution towards meeting the cost of construction of roads in the area around its factory under a sugarcane development scheme. The question was whether this amount was deductible in computing the assessee's profits. The Court held that it was. Because although the advantage secured was of long duration, it was not an advantage in the capital field because no tangible or intangible asset was acquired by the assessee; nor was there any addition to or expansion of the profit making apparatus of the assessee. The amount was contributed for the purpose of facilitating the business of the assessee and making it more efficient and profitable. It was, therefore, revenue expenditure.

In the case of Commissioner of Income-tax, Bombay City- I v. Associated Cement Companies Ltd. (172ITR 257) the respondent-company entered into an agreement to supply water to the municipality and provide water pipelines as

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also to supply electricity for street lighting and put up a transmission line for that purpose. The assessee also agreed to concrete the main road from the factory to the railway station. The amounts expended for these purposes were held to be revenue expenditure since the installations and accessories were the assets of the municipality and not of the assessee. The expenditure, therefore, did not result in creating any capital asset for the company. The advantage secured by the respondent was immunity from liability to pay municipal rates and taxes for a period of 15 years. This Court said that had these liabilities been paid, the payments would have been on revenue account. Therefore, the advantage secured was in the field of revenue and not capital.

In the case of Commissioner of Income-tax v. Bombay Dyeing and Manufacturing Co. Ltd. (219 ITF 521) the company contributed to the State Housing Board certain amounts for construction of tenements for its workers. The tenements remained the property of the Housing Board. It was held that the expenditure was incurred wholly and exclusively on the welfare of the employees and, therefore, constituted legitimate business expenditure. As the assessee company acquired no ownership rights in the tenements, this Court said that the expenditure was incurred merely with a view to carry on the business of the company more efficiently by having a contented labour force.

All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived

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an enduring business advantage by expending the amount. In all these cases, the expense has been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure. In the premises, the appeals are dismissed with costs.”

In view of the above, the Appellant submits before us to follow its own case vide ITAT order for A.Y. 1999-00 dated 27 September 2022 and allow deduction for the entire amount incurred on refurbishment of premises. Revenue is not able to produce any argument to controvert the facts of the ground raised by the assessee and also not able to controvert the stand taken by the coordinate bench in assessee’s own case. Hence, in the given situation respectfully following the decision of coordinate bench in assessee’s own case for A.Y. 1999-00, dated 17 October 2022, ground raised by the assessee is allowed.

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Ground No. 5: Expenses attributable to exempt income

5.1 Ground 5.1 The learned CIT (A) erred in law and on facts that Rule 8D is to be applied for arriving at the disallowance of expenditure attributable to earning taxable income.

5.2 The learned CIT(A) ought to have considered the Appellant's submission that the expression 'in relation to' under section 14A means dominant and immediate connection which is not applicable in the case of the Appellant as no expenditure has been incurred by the Appellant in relation to earning the exempt income.

5.3 The learned CIT (A) erred in law and on facts in disallowing the expenditure under section 14A of the Act and accordingly, the disallowance should be deleted.

5.2 Brief facts:  During the year under consideration, the Appellant had claimed the total interest received on tax free securities of INR 3,41,16,164/- as exempt u/s. 10(15)(iv) of the Act and divided received of INR 13,750/- as exempt under section 10(34) of the Act.  The Appellant has not incurred any expenses that could be directly attributable to earning tax free income.

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5.3 AO’s contention (page 18, para 8)  The Appellant cannot take exemption of gross receipts as well as claim deduction of the expenditure incurred;  The Appellant is involved in various business activities which are separately identifiable;  What is exempt u/s. 10 of the Act is the income and not the gross receipt; and  Unintended benefit of double deduction cannot be allowed to the Appellant on the plea that separate accounts for various ventures are not prepared and the business is interlinked.  The AO disallowed the INR 1,26,28,068/- as being expenditure attributable to earning the tax free income on the basis of ratio of the total interest expended and indirect expenditure to total interest earnings of the Appellant for the year.

5.4 CIT(A)’s decision (Page 33, para 11.5) The Ld. CIT(A) relied on the Appellant’s own case CIT(A)’s order for A.Y. 2000- 01 and the other decisions and held that disallowance of expenditure is liable to be computed under Rule 8D of the Income-tax Rules, 1962.

5.5 Appellant’s submissions  The Appellant submits that this issue is covered in favor of the Appellant by a decision of the Co-ordinate bench of the Tribunal in the Appellant’s own case for the AY 1999-2000, wherein the Tribunal followed the Appellant’s own case Tribunal order of AY 1997-98 and dismissed the ground raised by Page 37 of 90

Revenue (Copy of AY 1999-00 ITAT order dated 27September 2022 is enclosed in the Bank’s appeal legal paper book -refer page 156, para 10) which reads as under:

“10. Since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 1997-98, we allow ground raised by the assessee”

 Further, the Appellant submits that the Hon'ble Supreme Court in the case of South Indian Bank Ltd [2021] (130 taxmann.com 178) held that disallowance u/s. 14A of the Act is not warranted for investments made in tax-free bonds/ securities which yield tax-free dividend and interest in those situation wherein interest free own funds available to the assessee exceeded their investments (Copy of decision is enclosed in the Bank’s Appeal legal paperbook - refer para 27, page 414), which reads as under:

“27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A of Income Tax Act for investments made in tax-free bonds/securities which yield tax-free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favoring the assesses”

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In view of the above, the Appellant submits before us to follow its own case vide ITAT order for A.Y. 1999-00, dated 27 September 2022, and delete the disallowance of INR 1,26,28,068/- made by the Ld. CIT(A). Without prejudice to the above, if the Hon’ble ITAT do not agree with the above plea of the Appellant, it is submitted that the disallowance be restricted to 1% of the exempt income. We have gone through the entire material and case laws relied upon. Assessee’s own case pertains to A.Y. 1997-98 and A.Y. 1999-00, as there is no change in the facts of the case and law laid down by the Hon’ble Apex court in the case of South Indian Bank Ltd [2021] (130 taxmann.com 178) is squarely applicable to the assessee, we agreed with the plea taken by the assessee and to be just and fair in the matter, disallowance is restricted upto 1% of the exempted income. Ground raised by the assessee is partly allowed.

Ground No. 6 Recoveries made against securities losses 6.1 Ground 6.1 The learned CIT(A) erred in confirming the action of the Assessing Officer of making additions of recovery of securities losses of Rs. 1,21,69,75,125/- without appreciating the fact that the losses incurred by the Appellant pertaining to the earlier years is subject matter of litigation.

6.2 The learned CIT (A) erred in confirming the action of the Assessing Officer to tax recovery of Rs. 15, 59, 20,000/- with respect to Cantriple Units.

6.3 Without prejudice to the above, the learned CIT(A) erred in disallowing loss

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of Rs. 40,80,000/- being the difference between the total loss of Rs. 16,00,00,000/- incurred by the Appellant and the corresponding recovery of Rs. 15,59,20,000/-.

6.4 The learned CIT(A) erred in confirming the action of the Assessing Officer to tax proceeds of Rs. 3,15,00,000/- received by the Appellant with respect to 13% NPCL bonds.

6.5 The learned CIT(A) erred in confirming the action making additions on account of proceeds of Rs. 102,95,55,120/- received with securities pledged by the broker.

6.7 The CIT (A) ought to have considered the submissions of the Appellant that losses allowed in earlier years are subjudice and accordingly, the recovery of the amounts should not be taxed.

6.2 Brief facts  During the year under consideration, the Appellant has claimed a deduction of INR 121, 69, 75,125/- towards recoveries of securities losses. Originally, the said securities losses were claimed by the Appellant in the ROI for A.Y. 1993-94 and the same were disallowed by AO/ Ld. CIT (A).

 Since the securities losses were not allowed in A.Y. 1993-94, the recovery against the same were not offered to tax by the Appellant in AY 2001-02.

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 The ITAT has allowed the entire securities losses in AY 1993-94 vide its order dated 18 February 2008 and 27 July 2023 respectively.

6.3 Appellant’s Submissions The Appellant seeks a direction that in case, the Department succeed in its appeal before the Hon’ble High Court / Supreme Court in assessment year 1993-94, that loss is not allowable in the said year as the loss is not crystallized in the said year, then the Assessing Officer be directed to not to tax recoveries against the said securities losses in A.Y. 2001-02.

We have gone through the submissions of assessee and order of coordinate bench for A.Y. 1993-94, wherein the loss claimed by the assessee has been allowed on its own facts, but as the department is in further appeal before the Hon’ble jurisdictional High Court, We agree with the contentions raised by the assessee, that in case Hon’ble High Court reversed the decision of coordinate bench on the ground of crystallization of loss in A.Y. 1998-99, same will be allowed in current A.Y. under consideration as the same has been settled with the parties and final figure of loss has been crystallized in this year. In view of this, this ground of appeal is allowed for statistical purposes and AO is directed to allow the same in A.Y. 2001-02, if Hon’ble High Court reversed the decision of coordinate bench for A.Y. 1993-94, then only on the basis of crystallization, same will be allowed in current assessment year.

Ground No. 7Taxability under section 115JB 7.1 Ground

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7.1 The learned CIT(A) erred in law in confirming the action of the Assessing Officer in applying the provisions of section 115JB which are not attracted to the facts of the case.

7.2 The learned CIT (A) failed to appreciate that: a. Section 90(2) and Circular No. 333 dated April 12, 1982, issued by the Central Board of Direct Taxes (CBDT) provides that the provisions of the Act shall apply to the assessee, who is otherwise eligible for double tax treaty relief only to the extent that they are more beneficial to him. b. The DTAA entered into by India with UK specifically lays down the method of determination of profits of the PE and therefore, it overrides the provisions of Section 115JB of the Act. c. Section 115JB (5) of the Act provides that, save as otherwise provided in Section 115JB, all other provisions of the Act shall apply to every company mentioned in the said section. It, therefore, appears that there is no intention of the Legislature to specifically override the provisions of Section 90 of the Act and therefore, by implication, the provisions of applicable tax treaties by the introduction of Section 115JB of the Act.

7.3 Without prejudice to the above and notwithstanding that the provisions of section 115JB of the Act are not applicable to DTAA entered into by India with UK, the Ld. CIT (A) erred in disregarding the submission of the Appellant that modified provisions of section 115JB of the Act (as amended by the Finance Act 2012) are applicable to the banking companies only from Assessment Year 2013-14 on prospective basis.

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7.4 Without prejudice to the above the learned CIT(A) erred in confirming the action of the Assessing Officer of making an addition to the Book Profit of Rs. 1,26,28,068/- being expenses related to exempt income under section 14A of the Act and not reducing the exempt income of Rs. 3,41,29,914/-.

7.5The learned CIT (A) ought to have not applied the provisions of section 115JB of the Act as they are not attracted to the facts of the case.

7.2 Brief facts During the year under consideration, the Appellant claimed before the Ld. AO that its income is taxable basis the tax treaty between India and UK. Article 7 of the tax treaty provides mechanism for computation of profit of the PE and therefore, the provisions of section 115JB are not applicable to the Appellant.

Further, it was claimed by the Appellant before the Ld. CIT (A) that provision of section 115JB of the Act are not applicable in the present case since the Appellant is not required to maintain books of accounts as per the Companies Act.

7.3 AO’s contention (Page 35, para 14)  The AO held that Article 7 of the DTAA between India and UK clearly provides that the profit of the PE is to be computed subject to limitation of the domestic law.  Section 115JA of the Act is part of domestic law and hence applicable to PE also.

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7.4 CIT(A)’ decision (Page 54, para 16.8)  Article 7 mandates that the computation of the income has to be in accordance with the provisions of the domestic law. Hence, when the DTAA itself mandates that the computation of income of the PE will be in accordance with the domestic law, treating the PE as an independent standalone entity, the Appellant cannot rely on section 90(2) of the Act to claim that such provisions will not be applicable to a PE.

 While deciding this issue in A.Y. 2000-01, the Ld. CIT (A) had taken a view that the provisions of section 115JB of the Act are indeed applicable to a PE.

 Contention of the Appellant that Companies not preparing their accounts in accordance with Companies Act are not covered by section 115JB of the Act is misplaced.

7.5 Appellant’s submissions  The appellant relies on the following decisions, wherein it was held that provisions of section 115JA of the Act are not applicable to the Banking companies which are not required to prepare its books of accounts under the Companies Act:

o The Appellant’s own case ITAT order dated 12 April 2019 for the AY 1997-98 [2019] (104 taxmann.com 236) – (Mumbai ITAT) [refer para 8, page 144 of the Bank’s Appeal legal paper book] which reads as under:

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“8.We have considered rival submissions and perused material on record. The main plank of assessee' argument against applicability of section 115JA of the Act is, assessee being a banking company maintaining its accounts under the Banking Regulations Act, 1949, the provision contained under section 115JA of the Act will not apply. Undisputedly, the assessee is a banking company and has opened its branches in India after obtaining permission of the RBI. Therefore, the assessee is governed under the Banking Regulations Act, 1949. Section 115JA of the Act provides for computation of total income chargeable to tax to be an amount equal to 30% of the book profit in case such income is less than 30% of the book profit. However, subsection (2) of section 115JA of the Act mandates that the company for the purpose of section 115JA of the Act has to prepare its Profit & Loss Account in accordance with the provisions of Part-II & III of Schedule- VI of the Companies Act, 1956. Undisputedly, the assessee being governed under the Banking Regulations Act, 1949, is not required to prepare its Profit & Loss Account under the provisions of Part-II & III of Schedule-VI of the Companies Act, 1956. That being the case, the provisions of section 115JA of the Act are not applicable to the assessee. The Tribunal, Mumbai Bench, in Krung Thai Bank (supra) has held that the provisions of section 115JB of the Act, which is more or less pari-materia to section 115JA of the Act, can only come into play when the assessee is required to prepare its Profit & Loss Account in accordance with the provisions of Part-II & III of Schedule-VI of the Companies Act, 1956. It was observed

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by the Bench that the starting point of computation of minimum alternate tax (MAT) is the result shown by such Profit & Loss Account. Since, in case of Banking company, the provisions of Schedule-VI of the Companies Act, 1956 are not applicable, as, they are required to prepare their accounts under the provisions of Banking Regulations Act, the provision of section 115JB will not be applicable. The other decisions cited by the learned Sr. Counsel for the assessee also support this view. Further, the Tribunal, Mumbai Bench, in MSEB (supra), has held that since the assessee is not constituted as a company under the Companies Act, 1956, the provisions of section 115JA of the Act cannot be applied. While doing so, the Bench further observed that since the assessee Corporation is not required to distribute any dividend, it cannot be considered to be a company under the Companies Act, 1956. The facts involved in assessee's case are more or less identical to the facts of MSEB (supra). In view of the aforesaid, we hold that the provisions of section 115JA of the Act are not applicable to the assessee. This ground is allowed.”

o Appellant’s own case ITAT order dated 27 September 2022 for the A.Y. 1999-00 [2022] (ITA No. 803/ Mum/ 2009) – (Mumbai ITAT) [para 18, page 167 of the Bank’s Appeal legal paper book] which reads as under:

“18. Since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 1997-98, we allow the ground raised by the assessee”.

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o CIT vs. Union Bank of India [2019] (105 taxmann.com 253) (Bombay HC) [para 21, page 436 of the Bank’s Appeal legal paper book].

4.1 Accordingly, the Appellant submits that the provisions of section 115JB of the Act are not applicable in the Appellant’s case. We have thoroughly considered the decision rendered by coordinate bench in assessee’s own case for A.Y. 1997-98, 1998-99 & 1999-2000 alongwith the principle laid down by the Hon’ble High Courts as discussed (supra) and as the submissions by assessee not controverted by the Revenue, we also agree that provisions of section 115JA of the Act is not applicable in the case of assessee being banking company duly regularized by the provisions of Banking Regulations Act, 1949 and is not required to prepare its Profit & Loss Account under the provisions of Part-II & III of Schedule-VI of the Companies Act, 1956. In view of the above, ground raised by the assessee is allowed.

Ground No. 8: Head Office Expenditure 8.1 Ground 8.1 The learned CIT(A) erred in disallowing the claim of the appellant towards Head Office Expenditure of Rs. 77,08,83,765/- in entirety on the ground that no revised return of Income was filed for such claim and thus, restricted the claim under section 44C of the Act.

8.2 The Ld. CIT (A) failed to appreciate that:

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a) The decision of the Supreme Court in the case of Goetz (India) Ltd. v CIT (2006) 284 ITR 323 (SC) can be applied only when the claim for deduction was made first time during the course of assessment. In the present case, the Appellant had already claimed deduction for Head Office Expenditure in the Return of Income, but the same was restricted under section 44C of the Act. Further, the said decision of Supreme Court deals with the power of the Assessing officer and not that of Appellant Authority. b) The said claim was revised during the course of appeal proceeding in view of the decision of the Mumbai Tribunal in the case of Metchem Canada Inc. v/s. DCIT [284 ITR (A.T.) 196], wherein after referring to Article on non-discrimination, it has been held that provisions of section 44C of the Act will have no application.

8.3 Without prejudice to the above, the learned CIT(A) also erred in holding that Article 26 of the DTAA entered into by India with UK is not applicable to the provisions of section 44C of the Act and the provisions of section 44C of the Act does not create a situation of discrimination vis-a-vis an Indian resident taxpayer.

8.4 The learned CIT (A) ought not to have restricted the claim of head-office expenses to 5% under section 44C of the Act and accordingly, should have allowed the head-office expenses in entirety.

8.2 Brief facts

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 For the F.Y. under consideration, the Head Office (‘HO’) allocated Head Office Expenditure (‘HOE’) of INR 77, 08, 83,765/- to the Appellant on the basis of the Auditor’s certificate.

 The Appellant, in its return of income, had claimed a deduction of HOE under section 44C of the Act (being 5% of Adjusted Total Income)

 The Appellant had raised the additional ground before the Ld. CIT (A) that in view of express provisions of Article 26 of DTAA, section 44C of the Act will have no application since the provisions of section 44C of the Act are discriminatory in the favour of an Indian enterprise vis-à-vis the Permanent Establishment of a UK enterprise.

8.3 CIT(A)’s decision (page 59)  The Ld. CIT(A) held that facts are the same as A.Y. 2000-01, wherein the Ld. CIT(A) denied the admission of the claim of the Appellant on the basis that the claim was not made in ROI nor during the course of assessment proceedings.

 Further, even on merits the Ld. CIT (A) held that Article 26 of the India UK DTAA is not applicable to the provisions of section 44C of the Act in light of the provisions of Article 7(5) and the fact that section 44C of the Act does not create a situation of discrimination vis-a-vis an Indian resident taxpayer. It is held that the profits of the PE are liable to be computed in accordance

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with the Indian Income Tax Act, including section 44C of the Act as contemplated by Article 7 of the India UK DTAA.

8.4 Appellant’s submissions The Appellant submits that this issue is covered in favor of the Appellant by the decision of the Co-ordinate bench of the Tribunal in the Appellant’s own case for the A.Y. 1999-2000 wherein the Tribunal, following the decision of the Mumbai ITAT in the case of Metchem Canada Inc. v DCIT 284 ITR (AT) 196 (copy of decision enclosed in the Appellant’s legal paper book at page 444), has held that in view of Article 26 of the India-UK DTAA, provisions of section 44C of the Act will not be applicable to the Appellant (copy of A.Y. 1999-00 ITAT order is enclosed in the Appellant’s legal paper book - refer page 168, para 21), which reads as under:

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State through a PE situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to: (a) That PE, and (b) Sales of goods and merchandise of the same or similar kind as those sold, or from other business activities of the same or similar kind as those effected, through that PE. 2. Subject to the provisions of para 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a PE situated therein, there shall in each Contracting State be attributed to that PE, the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. In any case, where the correct amount of profits attributable to a PE is incapable of determination or the ascertainment thereof presents exceptional difficulties, the profits attributable to the PE may be estimated on a reasonable basis provided that the result shall be in accordance with the principles laid down in this Article.

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any paid (otherwise than as a reimbursement of actual expenses) by the PE to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the PE. Likewise, no account shall be taken in the determination of the profits of a PE, for amounts charged (otherwise than towards reimbursement of actual expenses), by the PE to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices.

Article 24 - Non-discrimination 2. The taxation on a PE which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. 5. The core issue, as we have noted earlier as well, is whether or not the limitation on deduction of head office expenditure, as set out in Section 44C of the Indian IT Act, will apply in the case of non-resident companies governed by the India Canada DTAA, particularly in the light of non-discrimination clause in the said DTAA. As a corollary to this question, we must decide whether

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restriction on admissibility of deduction on account of head office expenditure, as contemplated by Section 44C of the Act, constitutes "taxation on a PE which an enterprise of a Contracting State has in the other Contracting State" as "less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities". Another aspect which requires to be considered by us is whether the provisions of computation of business profits in Article 7 are to viewed as subject to the application of non- discrimination clause in Article 24(2), or is it the other way round i.e., non- discrimination clause to be read as subject to the clause regarding computation of business profits. There are other peripheral or subsidiary issues raised before us, such as, whether the provisions of Section 44C of the Act can be viewed as a restriction on admissibility of deduction of head office expenditure at, and, whether the provisions of Section 44C of the Act, only provide for a fair method of estimation of deductible head office expenses and are enabling provisions in nature. 6. Article 24(2) of the Indo-Canadian DTAA is worded on the lines of Article 24(3) of the OECD Model Convention. In fact, it is verbatim extract from the Model Convention. While elaborating upon the scope of the said clause the OECD Model Convention Commentary, inter alia, states as follows: 24. Effect of tax bases With regard to the basis of assessment of tax, the principle of equal treatment normally has the following implications: (a) PE must be accorded the same right as resident enterprises to deduct the trading expenses that are, in general, authorized by the taxation law to be deducted from taxable profits in addition to the right to attribute to the PE a proportion of overheads of the head office of the enterprise. Such deductions

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should be allowed without any restriction other than those imposed on the resident enterprise. (b)... It is thus clear that according to the scope of this clause as explained by the OECD Commentary, includes the deduction on account of head office expenditure. In addition to the deduction of normal business expenditure of a PE as permissible under the domestic taxation laws, the deduction is also required to be allowed for a proportion of overheads of the head office and such a deduction is to be allowed without any restriction other than those imposed on the resident enterprise. This makes two things clear-(a) that the restriction on admissibility of expenditure in accordance with the domestic law is, according to the OECD Commentary, is in respect of the normal business expenditure incurred by the PE; and (b) that the deduction on account of overheads of the head office is to be allowed without placing any restriction on such deduction save and except such restrictions as may also be placed on the resident enterprises. As the provisions of Article 24(2) of Indo-Canadian DTAA and of the provisions of Article 24(3) of the OECD Model Convention are in pari materia, the OECD Model Convention Commentary has a key role in determining the scope and connotations of art 24(2) of the Indo- Canadian DTAA. Hon'ble Andhra Pradesh High Court in the case of CIT v. Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP), referred to the OECD Commentary on the technical expressions and the clauses in the model conventions, and referred to, with approval, Lord Redcliff’s observation in Ostime v. Australian Mutual Provident Society (1960) 39 ITR 210, 219 (HL) which have described the language employed in those documents as the 'international tax language'. These

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documents are thus in the nature of contemporanea expositioin as much as the meaning indicated in these documents to the clauses and expressions in the tax treaties can be inferred as the meaning normally understood in, to use the words of Lord Redcliff, 'international tax language' developed by the organizations like OECD. This is so held in the case of Graphite India Ltd. v. Dy. CIT (2003) 78 TTJ (Cal) 418 : (2003) 86 ITD 384 (Cal).

When an expression or a clause is picked up from the OECD Model Convention, the normal presumption is that the persons using the said clause or expression are also aware about the meanings assigned to the said clause or expression by the OECD and have used it in the same sense and for the same purpose. Unless a contrary intention is specifically expressed, say by a protocol attached to the DTAA, it is only axiomatic that the clause or the expression will have the same meaning as normally assigned in the tax literature by the OECD. Therefore, when an expression or a clause from the OECD Model Convention is used even in a bilateral tax treaty involving a non OECD country, one has to proceed on the basis that it is used in the same meaning and with the same connotations as assigned to it by the OECD Model Convention Commentary. As per the OECD Commentary, placing a restriction on the deduction, on account of overheads of the head office, except when the same restriction is also placed on the resident enterprises, does constitute discrimination under Article 24. The taxation on a PE of a Canadian company, by the reason of placing a restriction on deduction of head office expenditure which is not applicable in the case of resident companies, does, therefore, constitute less favorable tax treatment in India than the taxation levied on Indian enterprise carrying on the same activities in India.

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Viewed in this perspective, it is clear that the limitation on deduction of head office expenditure, as stipulated by Section 44C of the Act, will be hit by the non- discrimination clause in the Indo-Canadian DTAA. In any event, on a plain reading of the provisions of the Article 24(2), we are of the considered view that a restriction on admissibility of head office overheads of PE of a Canadian company constitutes discrimination against such a PE vis-a-vis a domestic Indian entity because no such restriction is applicable for deduction of head office or controlling office overheads of an Indian entity. It puts PE of a Canadian company to an unfair disadvantage inasmuch as even legitimate business expenses attributable to the PE and deductible under Section 37(1) of the Act cannot be allowed as a deduction in the light of restriction placed under Section 44C of the Act, whereas all the legitimate business expenses of the Indian entity operating in India will be allowed as a deduction. The scope of deduction under Section 37(1) of the Act thus stands curtailed for PE of a Canadian company.

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over the special provision or vice versa, the law is fairly well settled. As aptly conveyed by the legal maxim generalia specialibus non derogant', i.e., special things derogate from general things. As observed by a co-ordinate Bench, in the case of ITO v. Titagarh Steels Ltd. (2001) 73 TTJ (Cal) 297 : (2001) 79 ITD 532 (Cal) and relying upon Hon'ble Supreme Court judgment in the case of South India Corporation (P) Ltd. v. Secretary, Board of Revenue AIR 1964 SC 207, 'a special provision normally excludes the operations of general provision'. The provisions of Article 7 being general in nature are therefore, required to be read as subject to the provisions of Article 24. Revenue's argument that since the business profits are to be computed "in accordance with the provisions of and subject to the limitations of the taxation laws of that State" under Article 7(3) and, therefore, limitation placed under Section 44C of the Indian IT Act cannot be ignored, cannot, therefore, be accepted. What Article 24(2) seeks to remove is the discrimination to the permanent residents of Indian and Canadian residents in the other States visa-vis the domestic business entities of that other State. When domestic tax laws permit such discrimination, such legal provisions have to be treated as overridden by the provisions of the Indo-Canadian DTAA. There is no dispute about the fact that when the provisions of the IT Act and the DTAA are in conflict, the provisions of the Act will be applicable only to the extent the same are more beneficial to the assessee. In other words, the provisions of the treaty prevail over the provisions of the Act. Therefore, the restriction placed on the allowability of the head office expenditure by Section 44C of the Act is to be ignored in the light of the provision of Article 24(2) of the Indo-Canadian DTAA.

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restriction placed under Section 44C of the Act. In our considered view, this direction of the Ld. CIT (A) is justified and calls for no interference.

In view of the above, the Appellant submits before Hon’ble ITAT to follow the own case above ITAT order for AY 1999-00 and allow the head office expenditure in entirety under the provisions of Article 26 of the tax treaty without applying the restriction under section 44C of the Act.

 Further, the Appellant submits that Article 26 of the India-UK Treaty is pari- materia to Article 24 of India-Canada Treaty. Relevant extracts from ‘Non- discrimination’ Article from India-UK and India-Canada Tax treaty are produced below for easy reference:

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Provision India – UK Treaty India – Canada Treaty Article 26(2) Article 24(2) Non- discrimination “The taxation on a permanent “The taxation on a establishment which an permanent establishment enterprise of a Contracting State which an enterprise of a has in the other Contracting State Contracting State has in the shall not be less favourably levied other Contracting State in that other State than the shall not be less favourably taxation levied on enterprises of levied in that other State that other State carrying on the than the taxation levied on same activities in the same enterprises of that other circumstances or under the same State carrying on the same conditions.” activities.”

In view of the above, we observe that the above additional ground involves question of law liable to be admitted. Further, on the basis of the above submissions by assessee, we agree that as decided by the coordinate bench, in the case of assessee that the Head office expenditure is allowed in entirety under the provisions of Article 26 of the tax treaty without the applicability of restriction under section 44C of the Act, and as the submissions by assessee not controverted by the Revenue, In view of this, ground of appeal of the assessee is allowed following the precedent discussed (supra). Page 60 of 90

Ground No. 9- Taxability of interest income received on tax refund

9.1 Ground 9.1 The learned CIT(A) erred in not adjudicating the ground of taxability of interest on tax received by the Appellant on the basis that this is an issue of fact which cannot be raised before the CIT(A).

9.2 The learned CIT(A) ought to have appreciated that the issue raised in additional ground involves question of law which goes to the root of the matter not involving investigation of fresh facts and therefore, the same ought to have been adjudicated in favour of the Appellant.

9.2 Brief facts  During the year under consideration, the Appellant has received interest on income tax refund of INR 2, 13, 28,700/- for A.Y. 1995-96 and A.Y. 1996-97 and INR 1,17,85,085/- for A.Y. 1992-93.

 The Appellant had raised the additional ground before the Ld. CIT(A) that interest on income tax refund ought to be excluded from taxable income and should be taxed, if necessary, only when the issue of income-tax refund reaches finality. Without prejudice, interest should be taxable at the rate of 10% under Article 12 of the tax treaty.

9.3 CIT(A)’s decision (page 68, Para 22.2) The Ld. CIT (A) did not admit the additional ground on account of following: Page 61 of 90

 The ground relating to taxability of interest paid to the Appellant is a factual ground based on the amount received by the Appellant during the year as interest on refunds granted  Such income is connected with the PE and is liable to be included in the income of the Appellant in the year of receipt  This is an issue of fact and cannot be raised by the Appellant at this stage.  The factum of various issues to which such income pertains being subjudice has no relevance with taxation of such amount in the hands of the Appellant.

9.4 Appellant’s submissions In this connection, the Appellant submit as under:

Interest is taxable in the year of finality / final output of the appellant proceedings

The Appellant submit that the amount of interest to be taxed in the assessment year under consideration should be the amount of interest on income-tax refund basis the final outcome of the appellate proceedings. In other words, the Appellant submit that the learned AO be directed to tax interest on income-tax refund which is based on the finality / final outcome of the appellate proceedings this is because of the fact that the said interest may get reduced depending upon the final outcome.

Rectification of taxability of interest income due to subsequent development

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In this regard, the Appellant relies on the decision of Mumbai ITAT in the case of Avada Trading vs. ACIT (284 ITR (A.T.) 73 (refer page 478 of the Bank’s Appeal legal paperbook), wherein it was held that if interest granted under section 244A (1) is varied under sub-section (3) of such section, then interest originally granted would be substituted by the reduced/ increased amount as the case may be. Thus, income on account of interest if assessed can be rectified under section 154.

Interest is taxable at the rate of 10% if taxable in AY 2001-02

 Further, the Appellant submits that the interest on income-tax refund received by the Appellant is taxable at the rate of 10% in accordance with provisions of Article 12(3) of the Treaty as the said interest on income-tax refund cannot be said to be effectively connected to a PE / India Branch.

 This issue is covered by the decision of the Jurisdictional High Court/ ITAT in the following cases:

o DIT vs. Credit Agricole Indosuez [2015] [377 ITR 102] [Bom-HC](refer page 390 of the Bank’s Appeal legal paper book) wherein the Hon’ble Bombay HC upheld the decision/ruling of Hon’ble Delhi ITAT in the case of ACIT vs. Clough Engineering Ltd [2011] [11 taxmann.com 70] [Delhi Special Bench](refer page 454 of the Bank’s Appeal legal paper book).

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o Covered in Appellant’s own case

The Appellant submits that in the A.Y. 1999-00, the Hon’ble Mumbai ITAT vide its order dated 27 September 2022 (ITA No. 803/Mum/2009) admitted the similar additional ground relying on the decision of Hon’ble SC in the case of National Thermal Power Co., Limited Vs. CIT 229 ITR 383 as the additional ground is legal and no fresh investigation of facts are required [Page 155, para 6] which read as under:

“6. Considered the rival submissions and material placed on record, we observe that as the said additional grounds are legal grounds, wherein, the facts are on record and facts do not require fresh investigation, following the decision of Hon’ble Supreme Court in the case of National Thermal Power Co., Limited v. CIT 229 ITR 383 (SC), we admit the said additional grounds of appeal.”

Further, the Hon’ble ITAT in AY 1999-00, by following the Mumbai ITAT decision in the case of Avada Trading Vs. ACIT 284 ITR (A.T) 73 has held that the interest on IT refund would be assessable in the year in which it is granted [Page 184, para 26], which read as under:

“26.Respectfully following the above said decision, additional ground no. (i) is allowed as per the stated direction in the above decision of the Coordinate Bench.”

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With regard to the applicable rate, the Hon’ble ITAT followed the Bombay HC decision in the case of DIT vs. Credit Agricole Indosuez [377 ITR 102] and held that interest should be taxable as per the DTAA at the rate of 10%. The observation of the Tribunal at page 184, para 27 are as under:

“27. With regard to Additional ground (ii) which is in respect of “interest on tax refund be taxed at 10% as per India-UK Treaty”, we observe that the Hon'ble Bombay High Court in the case of Director of Income-tax (IT) v. Credit Agricole Indosuez [377 ITR 102] held as under: - “2. at the hearing Mr. Tejveer Singh, learned counsel for the Revenue urges the following questions of law for consideration. “(1) …….. (2) Whether, on the facts and in the circumstances of the case and in law, the Hon'ble ITAT was right in holding that the income chargeable at special rate u/s. 10(15) of the Act would be on gross basis and not on net basis? (3) …… (4) Whether, on the facts and in the circumstances of the case and in law, the ITAT has erred in directing the A.O. to tax the interest received u/s. 244A of the Act at the rate prescribed in Article 12 of DTAA between India and France?

(5) ……..” …………

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“4 Regarding Question 2 – The Tribunal records in the impugned order that the Revenue has before it accepted the position that the exemption under Section 10(15) (iv) (h) of the Act is to be allowed on gross basis and not on net basis. In spite of having accepted that exemption under Section 10(15)(iv)(h) of the Act is to be allowed on gross interest before the Tribunal, the Revenue has proposed to above question for consideration without pointing out in any manner the basis for withdrawing the concession made before the Tribunal. In any case in terms of Section 10(15)(iv)(h) of the Act, it is a self evident position that interest payable by any public sector company is not to form part of the total income. Further the Tribunal in the impugned order has relied upon its own decision in other cases to hold in favour of the Respondent- assessee and decisions in those cases have not been shown to be inapplicable to the present facts and/or disturbed in appeal. Accordingly, Question 2 does not raise any substantial question of law to be entertained. ….. 6. Regarding Question 4 – (a) The Tribunal by the impugned order restored the issue of the rate at which interest is to be charged to tax on income-tax refund received under Section 244A of the Act to the Assessing Officer to be decided in the light of Indo-France DTAA and the decision of the Special Bench of the Tribunal in the matter of Assistant Commissioner of Income Tax vs. Clough Engineering Ltd. [130 ITD 137].

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(b) The grievance of the Revenue is with the impugned order following the decision of the Special bench in Clough Engineering Ltd. (supra). (c) 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 on examination of the DTAA in the above case concluded that interest on income tax refund is not effectively connected with the PE (Permanent Establishment) either on asset test or activity test. Therefore, taxable under the Article 11(2) of Indo-Netherlands tax treaty. The Revenue carried the aforesaid decision of M/s. DHL Operations B.V. (supra) in appeal to this Court, being Income Tax Appeal No.431 of 2012. This Court by order dated 17 July 2014 refused to entertain the appeal. In the circumstances no fault can be found with the impugned order of the Tribunal in restoring the issue to the Assessing officer to determine / adopt the rate of tax on refund in the light of the relevant clauses of Indo-France DTAA and the decision of Special Bench in Clough Engineering (supra) Accordingly, question 4 does not raise any substantial question of law so as to be entertained.” 28. Respectfully following the above decision of the Hon'ble Bombay High Court, we allow the additional ground (ii) raised by the assessee.”

In view of above, the Appellant submits before us that the learned AO be directed to tax the interest on income tax refund once it reaches finality

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and not in A.Y. 2001-02 i.e., A.Y. under consideration. Without prejudice, if the interest is taxed in A.Y. 2001-02 then the Appellant wishes to submit that the aforesaid interest should be taxed at the rate of 10% in accordance with provisions of Article 12 of the Tax Treaty (mentioned supra).

6.1 Further, basis the above submissions, we agreed with the contentions of the assessee that the interest on income tax refund is taxable, once it reaches finality and not in A.Y. 2001-02 i.e., A.Y. under consideration and as the submissions by assessee are not controverted by the Revenue in principle, in view of this, AO is directed to delete the addition made on this count till finality on this issue been attained. In the result, this ground of appeal no. 9.1 is allowed.

6.2 As additional ground no. 9.1 is already allowed in assessee’s favour, Ground no. 9.2 became academic now, hence not detracted.

Department’s Appeal (ITA No. 4934/Mum/2017)

Ground 1 to 4: Direct expenses incurred outside India

1.1 Grounds On the facts of the case and in law, the Ld CIT(A) erred in allowing the expenditure of Rs. 64,04.42,048/- incurred by its HO outside India, based on certificate given by the auditors, without appreciating that these expenses being not recorded in books of assessee(PE) in India, were neither actually paid

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nor shown payable in books of Indian PE and as the assessee did receive the services of such value through its HO, simultaneously there was equivalent income also accruing to assessee u/s. 28(iv). And once the AO having not made any separate addition u/s. 28(iv) of the Act, the disallowance of expenses claimed directly in computation of income was merely to bring tax neutrality.

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the head GTS, IT Cable and wireless and corporate and institutional banking represent payments made to self without appreciating the fact that these transactions between the PE and HO would not be treated as payment to self as per the principle of mutuality, as under International taxation principles the income of the PE has to be computed as independent entity.

1.2 Brief facts  During the F.Y. under consideration, the Appellant had claimed the deduction of INR 64, 04, 42,048/- on account of direct expenses attributable to the Indian Branches basis the auditor’s certificates.

 In the Return of Income (‘ROI’), the Appellant had claimed expenses of INR 39,25,16,888 (pertaining to 1 April 2000 to 31 December 2000) incurred by the HO as directly related to the business carried out in India.

 Further, during the course of assessment proceedings, the Appellant claimed the expenses of INR 24, 79, 25,160 (pertaining to 1 January 2001 to 31 March 2001).

 The expenses mainly relates to data processing at Singapore for the Appellant’s operations in India, leased line cost. etc.

 The broad nature of direct expenses attributable to the Appellant is as under:

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o GTS, IT cable & wireless and corporate & institutional banking o Advisory and business support costs o Singapore IT Hubbing /IT Cable & wireless

1.3 AO’s contention (page 7) The AO held that the Appellant failed to produce any details or explanation for the direct expenses, hence, disallowed the entire expenses.

1.4 CIT(A)’s decision (page 19)  The Hon’ble CIT(A) allowed the direct expenses attributable to Appellant’s business of INR 21,50,15,149/- which relates to GTS, IT cable and wireless and corporate and institutional banking as it represents payment made to self and the amounts are held to be not liable to TDS [refer para 6.13, page 19 of the CIT(A) order]

 The Ld. CIT(A) disallowed the direct expenses of INR 42,54,26,899/- attributable to the Appellant’s business which relates to advisory and business support costs and Singapore IT Hubbing costs due to the following:

o With respect to advisory and business support costs incurred in connection with the acquisition of Indian branches of ANZ Grindlays Bank, the Ld. CIT (A) held that these advices are not with respect to business activity carried on by the PE but are services rendered to the HO. The amount is not in the nature of revenue expenditure of the PE

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and hence, cannot be allowed [refer para 6.14, page 19 of the CIT (A) order].

o With respect to expenses relating to Singapore IT Hubbing costs, the Ld. CIT (A) held that the said expenditure falls within the ambit of FTS on which the Appellant was liable to deduct tax at source. In absence of TDS, the amount is not allowed as deduction [refer para 6.17, page 20 of the Ld. CIT (A) order].

1.5 Appellant’s submissions  With respect to the contention raised by the department for the very first time directly before the ITAT in the Ground No. 1 that simultaneously there was equivalent income also accruing to the Appellant under section 28(iv) of the Act and once the AO having not made any separate addition u/s. 28(iv) of the Act, the disallowance of expenses claimed directly in the computation of income was merely to bring tax neutrality, the Appellant submit as under:

o This issue is covered in favor of the Appellant by the decision of the Mumbai Tribunal in case of Shinhan Bank vs. DCIT [2022] 144 taxmann.com 182 (Mumbai ITAT) (Copy of the decision is enclosed in the Department’s appeal legal paper book at page no. 1), wherein the Hon’ble Tribunal has inter alia held that non-reimbursement of expenses incurred by HO for salary of employees of Indian PE did not result in

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taxable income in the hands of PE/HO under section 28(iv) of the Act. Relevant para is reproduced as under:

also referred to as the 'general enterprise') and other PEs outside the source jurisdiction, but then such a visualization of the state of things is only to compute the profits which the source jurisdiction PE might have made if such hypothetical independence was to exist. This fiction, however, is confined to the computation of profits attributable to the permanent establishment, and, in our considered view, it does not go beyond that. There is no dispute that the assessee company has a PE in India and therefore, the assessee is taxable in India in respect of the profits attributable to the PE. While the taxability is of the foreign company and as such tax subject is the foreign company, the taxation is only in respect of the profits attributable to the Indian PE, and the tax object, as such, is the profits that the PE might be expected to make it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. The entire profit computation is thus based on this fiction. We must also remember that the taxable unit is the foreign company itself, and not the Indian PE. As observed by the Hon'ble Supreme Court in the case of CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 161 Taxman 191/291 ITR 482, "it is clear that under the Act, a taxable unit is a foreign company and not its branch or PE in India". It is in this light that one has to analyze the fact situation that we are dealing with. The assessee has eleven Korean expatriates working in India and running the entire show with respect to its Indian banking operations. These persons are employees of the assessee company, but they work

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exclusively for the Indian PE. As employees of the Assessee Company and working for its head office, these employees get salaries in Korea and, in addition to that salary, when they come to India, they get a certain additional amount as compensation for working in India. While the Indian salaries of these eleven expatriates are paid in India, and shown in the books of accounts in India, and, as such duly reflected in the profit and loss account of the PE in India, so far as the salaries paid to these expatriates in Korea are concerned, admittedly these expenses are incurred by the head office, but these expenses are incurred for the benefit of the Indian PE as the related employees are working exclusively for the Indian PE. To put a question to ourselves, would it have been possible in a hypothetically independent situation that the expenses benefiting the Indian PE would have been borne by the Korean head office? The answer, in our humble understanding, is emphatically in negative. Therefore, under fiction envisaged in article 7(2), which requires Indian PE to be treated as wholly independent for the purpose of profit computation of the PE, the expenses incurred by the HO, which are exclusively for the benefit of the PE, are required to be treated as expenses relatable to the PE and, as such, taken into account in the computation of the profits attributable to the Indian PE. It is for this reason that the expenses incurred by the HO, though relatable to the PE, are allowed as a deduction in the computation of income attributable to the PE. The next question is as to what is the impact of the Indian PE not reimbursing the costs so incurred, for the benefit of the Indian PE, by the Korean HO. In our considered view it has no impact on income

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computation so far as PE profits are concerned, as a taxable unit is only the HO or the Korean company. Its importance, if at all, is only from the point of view of cash flow, but then a cash flow, or absence thereof, is not a critical factor from the taxation point of view since an intra- company cash flow simpliciter is tax neutral- unless it can be seen as a standalone transaction of funding. Quite contrary to the stand of the Assessing Officer, by treating non-reimbursement of expenses by the PE as a cause of action for independent income in the hands of the HO, the hypothetical fiction envisaged in article 7(2) is de facto negated. That is incongruous. There cannot be any purpose of expenses incurred by the HO, which are relatable to the Indian PE, being allowed as a deduction in the computation of income of the PE when non-reimbursement of that expenditure by the PE is treated as a source of income of the foreign company itself- particularly when, from the income tax perspective, the taxable unit is the foreign company and not the PE. It is also important to bear in mind the fact that, in the light of the five-member bench decision of this Tribunal, in the case of Sumitomo Mitsui Banking Corpn. V. Dy. CIT (IT) [2012] 19 taxmann.com 364/136 ITD 66 (Mum.), the intra- organization transactions, as non-reimbursement of employee costs by the PE to HO, is, are tax neutral. In any case, there cannot be a benefit accruing to the Korean company when the Indian PE of the assessee company does not reimburse its Korean company, because the assessee itself is the Korean company and the transaction in question is a wholly non-business and internal transaction of the Korean company.

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 With respect to the Ground 2 to 4, the Appellant submits that this issue is covered in favor of the Appellant by a decision of the Co-ordinate bench of the Tribunal in the Appellant’s own case for the assessment year 1999- 2000, wherein the Tribunal followed the Appellant’s own case Tribunal order of A.Y. 1997-98 and dismissed the ground raised by the Revenue (Copy of A.Y. 1999-00 ITAT order is enclosed in the Bank’s legal paper book - refer Page 191, para 34) which reads as under:

“34. since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 1997-98 and also following rule of consistency, we dismiss the grounds raised by the revenue.”

In view of the above, the Appellant submits before us to follow the own case ITAT order for A.Y. 1999-00 dated 27 September 2022 and decision of Mumbai Tribunal in case of Shinhan Bank (supra) allow the deduction of INR 64,04,42,048/- and dismissed the ground raised by the Revenue.

We have gone through the relevant orders of Ld. CIT (A) and coordinate bench for A.Y.’s 1994-95 to 1997-98 and 1999-00 respectively. Continuously this issue is being raised by the revenue, but the same is decided in favour of assessee by the Ld. CIT (A) and coordinate bench as mentioned (supra) and Revenue is not in a position to controvert the same with any decision in their favour by any higher judicial forum. Hence, following the legal precedent continuously uptill in favour of assessee, Ground raised by the Revenue is dismissed.

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Ground No. 5: Salary paid to expatriate employees

5.1 Ground 5.On the facts of the case and in law, the Ld CIT(A), while allowing the expenditure the expenditure incurred by the HO for salary paid to the expatriate employees for rendering services to PE, erred in not considering at the same time that these expenses being not recorded in books of assessee(PE) in India, were neither actually paid nor shown payable in books of Indian PE and as the assessee did receive the services of such value through its HO, simultaneously there was equivalent income also accruing to assessee u/s 28(iv)of the Act and once the AO having not made any separate addition u/s 28(iv) of the Act, the disallowance of expenses claimed directly in computation of income was merely to bring tax neutrality. 5.2 Brief Facts  During the FY under consideration, the Appellant had claimed a deduction of INR 3, 25, 01,633/- in respect of salaries paid outside India to expatriate employees who were seconded to India and work exclusively for the Appellant’s business in India.

 Expatriate employees are seconded by Head Office to the Appellant. As the expatriate employees are seconded to India, they work exclusively for the Appellant. The employees are seconded to India Branch normally for a period of two to three years during which they work exclusively for India. Most of the expatriate employees are head of various functions in India and responsible for India business. Page 78 of 90

5.3 AO’s contention (page 7, para 4) The AO disallowed the entire expenditure under section 37(1) of the Act as expense is not laid-out/ incurred wholly and exclusively for purpose of SCB India and not debited in books. However, the AO treated the expenses as Head Office expenditure and allowed the deduction for this expenditure under section 44C of the Act (restricted the claim to 5% of adjusted total income).

5.4 CIT(A)’s decision (page 22, para 7.6) The Ld. CIT (A) following earlier year's decisions in the Appellant’s case and decision of Bombay High Court in case of CIT vs. Emirates Commercial Bank Ltd. (262 ITR 55) (Bombay HC), held that the expenses incurred are exclusively for the purpose of business of the Appellant in India and not in nature of Head Office expenses and allowed the deduction of the expenses under section 37(1) of the Act.

5.5 Assessee’s submission The Assessee submits that this issue is covered in favor of the Assessee by a decision of the Co-ordinate bench of the Tribunal in the Assessee’s own case for the assessment year 1999-2000, wherein the Tribunal followed the Assessee’s own case Tribunal order of A.Y. 1997-98 and dismissed the ground raised by the Revenue (Copy of A.Y. 1999-00 ITAT order is enclosed in the Bank’s legal paper book - refer Page 191, para 34) which reads as under:

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“34. since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 1997-98 and also following rule of consistency, we dismiss the grounds raised by the revenue.”

Further, with respect to the contention of the department that equivalent income accruing to the Appellant under section 28(iv) of the Act (being raised for the very first time directly before the Hon’ble ITAT), the Appellant submit that this issue is covered in favor of the Appellant by the decision of the Mumbai Tribunal in case of Shinhan Bank vs. DCIT [2022] 144 taxmann.com 182(Mumbai ITAT) (Copy of the decision is enclosed in the Department’s appeal legal paper book at page no. 1), wherein the Hon’ble Tribunal has inter alia held that non-reimbursement of expenses incurred by HO for salary of employees of Indian PE did not result in taxable income in the hands of PE/HO under section 28(iv) of the Act. Relevant para is reproduced as under:

“9.We find that Article 7(1) of India Korea Double Taxation Avoidance Agreement [(1987) 165 ITR Stat 191; the then Indo-Korea tax treaty, in short], provides that "The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment" and article 7(2) further makes it clear that "Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other

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Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment" As Shri Agarwal, learned counsel for the assessee, rightly points out, the fiction of the hypothetical independence of a PE, as inherent in the scheme of Article 7(2), is confined to the computation of PE profits under Article 7(2). Under the scheme of Article 7(2), one has to visualize a situation of hypothetical independence of the source jurisdiction's PE vis-a-vis it's GE (i.e. the foreign company, which is also referred to a the 'general enterprise') and other PEs outside the source jurisdiction, but then such a visualization of the state of things is only to compute the profits which the source jurisdiction PE might have made if such hypothetical independence was to exist. This fiction, however, is confined to the computation of profits attributable to the permanent establishment, and, in our considered view, it does not go beyond that. There is no dispute that the assessee company has a PE in India and therefore, the assessee is taxable in India in respect of the profits attributable to the PE. While the taxability is of the foreign company and as such tax subject is the foreign company, the taxation is only in respect of the profits attributable to the Indian PE, and the tax object, as such, is the profits that the PE might be expected to make it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. The entire profit computation is thus based on this fiction. We must also remember that the taxable unit is the

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foreign company itself, and not the Indian PE. As observed by the Hon'ble Supreme Court in the case of CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 161 Taxman 191/291 ITR 482, "it is clear that under the Act, a taxable unit is a foreign company and not its branch or PE in India". It is in this light that one has to analyze the fact situation that we are dealing with. The assessee has eleven Korean expatriates working in India and running the entire show with respect to its Indian banking operations. These persons are employees of the assessee company, but they work exclusively for the Indian PE. As employees of the Assessee Company and working for its head office, these employees get salaries in Korea and, in addition to that salary, when they come to India, they get a certain additional amount as compensation for working in India. While the Indian salaries of these eleven expatriates are paid in India, and shown in the books of accounts in India, and, as such duly reflected in the profit and loss account of the PE in India, so far as the salaries paid to these expatriates in Korea are concerned, admittedly these expenses are incurred by the head office, but these expenses are incurred for the benefit of the Indian PE as the related employees are working exclusively for the Indian PE. To put a question to ourselves, would it have been possible in a hypothetically independent situation that the expenses benefiting the Indian PE would have been borne by the Korean head office? The answer, in our humble understanding, is emphatically in negative. Therefore, under fiction envisaged in article 7(2), which requires Indian PE to be treated as wholly independent for the purpose of profit computation of the PE, the expenses incurred by the HO, which are exclusively for the benefit of the PE, are required to be treated as expenses relatable to the PE and, as such, taken into account in the computation of the profits attributable to the Indian PE. It is for this reason that

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the expenses incurred by the HO, though relatable to the PE, are allowed as a deduction in the computation of income attributable to the PE. The next question is as to what is the impact of the Indian PE not reimbursing the costs so incurred, for the benefit of the Indian PE, by the Korean HO. In our considered view it has no impact on income computation so far as PE profits are concerned, as a taxable unit is only the HO or the Korean company. Its importance, if at all, is only from the point of view of cash flow, but then a cash flow, or absence thereof, is not a critical factor from the taxation point of view since an intra-company cash flow simpliciter is tax neutral- unless it can be seen as a standalone transaction of funding. Quite contrary to the stand of the Assessing Officer, by treating non- reimbursement of expenses by the PE as a cause of action for independent income in the hands of the HO, the hypothetical fiction envisaged in article 7(2) is de facto negated. That is incongruous. There cannot be any purpose of expenses incurred by the HO, which are relatable to the Indian PE, being allowed as a deduction in the computation of income of the PE when non-reimbursement of that expenditure by the PE is treated as a source of income of the foreign company itself- particularly when, from the income tax perspective, the taxable unit is the foreign company and not the PE. It is also important to bear in mind the fact that, in the light of the five-member bench decision of this Tribunal, in the case of Sumitomo Mitsui Banking Corpn. v. Dy. CIT (IT) [2012] 19 taxmann.com 364/136 ITD 66 (Mum.), the intra-organization transactions, as non-reimbursement of employee costs by the PE to HO, is, are tax neutral. In any case, there cannot be a benefit accruing to the Korean company when the Indian PE of the assessee company does not reimburse its Korean company, because the assessee itself is

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the Korean company and the transaction in question is a wholly non-business and internal transaction of the Korean company.”

In view of the above, the Appellant submits before us to follow the own case ITAT order for A.Y. 1999-00 dated 27 September 2022 and decision of Mumbai Tribunal in case of Shinhan Bank(supra) and allowed the deduction of INR 3,25,01,633/- by dismissing the ground raised by the Revenue.

Since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 1997- 98 and 1999-00 and also following rule of consistency, we dismiss the grounds raised by the revenue.

Ground No. 6: Interest income of Head Office 6.1 Ground: On the facts of the case and in law, the Ld CIT(A) erred in holding that the interest paid to the HO represent payments made to self on principles of mutuality, without appreciating the fact that under International taxation principles the income of the PE has to be computed as independent entity by attributing appropriate portion of income arising from transaction between the PE and its HO. 6.2 Brief Facts  During the year under consideration, the Assessee had paid interest of INR 32, 44,183/- to Head Office (HO)/ Overseas Branch (OB) on overdrawn Nostro accounts.

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 As the interest paid by the Assessee to HO / OB is not taxable in India, the Assessee had not deducted tax at source while crediting/paying the interest to HO / OB.

6.3 AO’s contention (Page 14, para 6(a)): The Ld. AO relied on the circular No. 740 dated 17 April 1996 and the commentary of Klaus Vogel and order of CIT(A) in case of Sumitomo Bank and taxed the interest paid by the Assessee to HO/OB and held that the said income is taxable as per Article 12 of the tax treaty between India and UK.

6.4 CIT(A)’s Decision (Page 28, para 9.3) The Ld. CIT (A) relied on the decision of special Bench of Mumbai ITAT in case of Sumitomo Bank vs. DDIT (2012) (136 ITD 66) (SB-Mumbai ITAT) and Decision of Calcutta High Court in case of ABN AMRO Bank vs. CIT (343 ITR 181) and held that amount paid by the Assessee to HO as interest cannot be treated as income of the HO.

6.5 Assessee’s submissions The Assessee submits that this issue is covered in favor of the Assessee by the decision of the Special bench of the Mumbai Tribunal in case of Sumitomo Mitsui Banking Corporation vs. DDIT (2012) (136 ITD 66).The Hon’ble Tribunal has inter alia held that since the interest payment by branch to HO is in the nature of payment to self, (the HO and branch being one legal entity), the same should not be chargeable to tax in the hands of the HO under the provisions of the Act. It

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was also held that this interest cannot be taxed in the hands of the HO / overseas branch of the Bank even under the provisions of the tax treaty. (The relevant portion of Mumbai Special Bench order is already reproduced at para 3.5 of Ground 3 above.)

Further, the Assessee submits that the amendment under the provisions of section 9(1) (v) of the Act, is applicable prospectively with effect from 1 April 2016 (i.e., AY 2016-17 onwards). Hence, the interest paid by Branch to the Head office is not taxable under the domestic laws for the year under consideration.

In view of the above, the Assessee submits before the Hon’ble ITAT to dismiss the ground raised by the Revenue. In view of the above, the Assessee/respondent submits before us to follow its own case for A.Y. 1999-00 dated 27 September 2022 and upholds the decision of the Ld. CIT (A) by dismissing the ground raised by the Revenue. We have gone through the relevant orders of Ld. CIT (A) and coordinate bench for A.Y.’s 1994-95 to 1997-98 and 1999-00 respectively. Continuously this issue is being raised by the revenue, but the same is decided in favour of assessee by the Ld. CIT (A) and coordinate bench as mentioned (supra) and Revenue is not in a position to controvert the same with any decision in their favour by any higher judicial forum. Hence, following the legal precedent continuously uptill in favour of assessee, Ground raised by the Revenue is dismissed.

Ground No. 7: Expenditure on refurbishment of premises 7.1 Ground

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On the facts of the case and in law, the Ld CIT(A) erred in directing that 75% of the expenses of Rs 1,70,04,962/- ( incurred on refurbishment of leasehold premises) be treated as revenue expenses and 25% of the expenditure be considered as capital expenses, without considering the fact that there is no provision under the Act to estimate certain percentage of the total expenditure related to a particular asset as revenue expenditure or capital expenditure and that the expenditure incurred in relation to any particular asset is either entirely on capital or on revenue account.

7.2 Assessee’s submissions

The Assessee submits before us to refer the submission made against the Ground 4 of the Appellant’s Appeal. As this issue has already been discussed in detail and already allowed in assessee’s own appeal (supra), no further discussion/adjudication is required on the same. Hence ground raised by the revenue is dismissed.

Ground No. 8: Indirect Income 8.1 Ground On the facts of the case and in law, the Ld. CIT(A) erred in directing deletion of Rs 2,45,60,214/-treated as indirect income earned by the Head Office by relying on submission admitted in contravention to Rule 46A of the Income-tax Rules, 1962.

8.2 Brief facts  The Assessee submits that the indirect income falling within the scope of Article 7 of the India UK tax treaty has been offered for tax.

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 The Assessing Officer considered INR 2,45,60,214/- as indirect income arising to the Assessee on the similar activities as that of Indian Permanent Establishment undertaking by the Head Office directly with the Indian customer as taxable under Article 7 of India-UK tax treaty under the “force of attraction “rule.

 The said income was already forming part of profit and loss account and offered to tax in the computation of income.

8.3 AO’s contention (Page 22, para 9) Relying on International Taxation Commentaries, Klaus Vogel, and AO held that the income of the head office would be taxable in India even when the head office is engaged in the same or similar activities even though it might not be attributable to the PE and taxable under Article 7 of the tax treaty. Accordingly taxed, the said income in the hands of the Assessee.

8.4 CIT(A)’s Decision (Page 34, para 12.4)

The Ld. CIT(A) deleted the additions made by the AO as the said income of INR 2,45,60,214/- was already offered by the Assessee and addition made by the AO amounts to double taxation of the same income.

8.5 Assessee’s submissions

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The Assessee rely on the submission filed before the Assessing officer vide letter dated 22 December 2003 and the submissions made before the Ld. CIT (A) (refer page 1 and 2 of the Department’s Appeal factual paper book) and submits that since the indirect income of the Head Office already forms part of profit and loss account of the Assessee and offered to tax in the computation of income, the same should not be taxed again

In view of the above, the Assessee submits before the Hon’ble ITAT to dismiss the ground raised by the Revenue. We don’t see any infirmity in the order of Ld. CIT (A) and confirm the same. Hence ground raised by the revenue is dismissed.

In the result, the appeal filed by the assessee is partly allowed and appeal filed by the Revenue is dismissed.

Order pronounced in the open court on 13th day of November, 2023. Sd/- Sd/- (VIKAS AWASTHY) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, दिन ांक/Dated: 13/11/2023 Dhananjay, Sr. PS

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Copy of the Order forwarded to: अपील र्थी/The Appellant , 1. प्रदिव िी/ The Respondent. 2. आयकर आयुक्त CIT 3. दवभ गीय प्रदिदनदि, आय.अपी.अदि., मुबांई/DR, ITAT, Mumbai 4. ग र्ड फ इल/Guard file. 5.

BY ORDER, //True Copy// (Asstt. Registrar) ITAT, Mumbai

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