DOHA BANK QSC INDIA BRANCHES,MUMBAI vs. DCIT (IT) 2(2)(2), MUMBAI

The assessee has raised the following grounds of appeal:-

The brief facts of the case are that the assessee is an Indian branch of M/s. HSBC Bank Oman S.A.O.G (earlier known as Oman International Bank S.A.O.G) registered in Oman. It is engaged in banking activities. The assesee is operating in India through its PE (Permanent Establishment) and thus, the Head Office (HO) becomes the AE of the branch offices in India. In this case, a draft assessment order u/s 144C(1) r.w.s 143(3) of the Act, 1961 was passed on 25/03/2015. In the draft assessment order, the Ld. AO has proposed adjustment of Rs.26,65,783/- towards Arm’s Length Price (ALP) of interest on borrowing from head office. It is seen from the records that the assessee has neither, filed any objections before the Ld. DRP, nor has intimated the Ld. AO about the 3 IT(TP)A No.3210/Mum/2017 Doha Bank QSC acceptance of variation in draft assessment order, within the period specified in sub-section (2) of section 144C of the I.T.Act, 1961. Therefore, the Ld. AO has passed final assessment order on 29/05/2015 u/s 143(3) r.w.s. 144C(3) of the I.T.Act, 1961 and determined total income at Rs. ‘Nil’ after making additions towards TP adjustment as suggested by the Ld.TPO and additions towards disallowances u/s 14A r.w.Rule 8D of I.T.Rules, 1962 amounting to Rs.88,551/-.

Being aggrieved by the assessment order, the assesee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assesee has challenged additions made by the Ld. AO towards TP Adjustment of Rs.26,65,783/- made on interest paid by the Indian branch to its head office and disallowance of expenditure u/s 14A of the I.T.Act, 1961. The Ld.CIT(A) for the reasons recorded in its appellate order dated 31/01/2017, upheld additions made by the Ld. AO towards TP Adjustment on interest payment to head office and also, disallowances u/s 14A r.w.Rule 8D of I.T.Rules, 1962. Aggrieved by the Ld.CIT (A) order, the assessee is in appeal before us.

At the time of hearing, the Ld. AR for the assessee submitted that ground No.1 taken by the assesee challenging applicability of provisions of section 14A of the I.T.Act, 1961 towards interest received by the branch office from its head office is not exempt income, consequently, provisions of section 14A has no application is decided against the assessee by the ITAT for earlier years and hence, he do not want to press the ground. Therefore, the ground taken by the assessee challenging applicability of provisions of 4 IT(TP)A No.3210/Mum/2017 Doha Bank QSC section 14A on interest received from head office is decided against the assessee by following the order of the ITAT in assesee own case for AY 2004-05 & 2005-06. Further, the Ld. AR for the assessee, at the time of hearing submitted that he do not wish to press ground No.4 & 5 challenging upward adjustment made by the TPO, an interest paid by the Indian branch to its head office and therefore, ground NO.4 and 5 of the assessee are dismissed as not pressed.

The next and final issue that came up for our consideration from ground No.2 & 3 of assessee appeal is disallowances u/s 14A of the Act, r.w.Rule 8D(2) of I.T. Rules, 1962. The Ld. AO has disallowed an amount of Rs.88,551/- towards interest expenditure under Rule 8D(2)(ii) and other expenses @0.5% of average value of investments under Rule 8D(2)(iii) of I.T.Rules, 1962.

The Ld. AR for the assessee submitted that the Ld.CIT(A) has erred in not appreciating that since, the bank had not incurred any expenditure for the purpose of earning interest amount, provisions of section 14A are not applicable. The Ld. AR, further submitted that if at all provisions of section 14A is applicable, even otherwise, there could not be any disallowances under Rule 8D(2)(ii) towards interest expenditure, because the assessee has sufficient own funds, which is in excess of investments considered by the Ld. AO for disallowance of interest expenditure. The Ld. AR, further submitted that as regards disallowances of other expenses under Rule 8D(2)(iii) of I.T.Rules, 1962, a reasonable amount of 1% to 2% of total exempt income may be disallowed. He, further, submitted that in any case total disallowances worked out by the Ld. AO shall not exceed exempt income earned by the assessee and in this 5 IT(TP)A No.3210/Mum/2017 Doha Bank QSC regard, he relied upon various judicial precedents. The Ld. AR for the assessee has also challenged the disallowances worked out by the Ld. AO, on the ground that the Ld. AO has invoked provisions of section 14A without recording any satisfaction as required under section 14A(2) and hence, in absence of any satisfaction, the disallowances worked out by the Ld. AO cannot survive in the eyes of law.

The Ld. DR, on the other hand strongly supporting order of the Ld.CIT(A) submitted that from AY 2008-09 onwards, application of provisions of section 14A is mandatory, in the case, where the assessee earned exempt income and hence, there is no merit in arguments of the assessee that adhoc disallowances of 1% to 2% of total exempt income may be disallowed and is opposed to the settled position of law.

We have heard both the parties, perused the material available on record and gone through orders of the authorities below. As regards, satisfaction issue, we find that the question of recording satisfaction comes into play only, when the assessee has made suo-moto disallowance u/s 14A, but such disallowances has not been accepted by the Ld. AO. In such eventuality, the Ld. AO has to record clear satisfaction as required u/s 14A(2) of the Act, having regard to books of accounts of the assessee that suo-moto disallowances computed by the assessee is incorrect. In case, there is no suo-moto disallowances from the assessee, then the requirement of recording satisfaction as required under law does not arise and the Ld. AO can invoke provisions of section 14A of the Act, with reference to Rule 8D of I.T. Rules, 1962 to compute

Coming back to disallowances quantified by the Ld. AO u/s 14A of the I.T.Act, 1961. As regards interest disallowances, it is a settled position of law that only net interest expenditure needs to be considered for computing disallowances u/s 14A. This principle is supported by the decision of Hon’ble Bombay High court, in the case of CIT vs Jubiliant Enterprises Pvt.Ltd in ITA No.1512/2014. Therefore, we direct the Ld. AO to consider net interest expenditure for the purpose of working out disallowances of interest under Rule 8D(2)(ii) of I.T.Rules, 1962. As regards other expenditure, although the assesee has requested for disallowances of 1% to 2% of exempt income, but from AY 2008-09 onwards disallowances contemplated

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