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Income Tax Appellate Tribunal, “K” Bench, Mumbai
Before: Shri M. Balaganesh & Shri Ravish Sood
The present cross appeals filed by the assessee and the revenue for AY. 2003-04 are directed against the order passed by the CIT(A)-XXXI, Mumbai, dated 10.10.2006, which in turn arises from the order passed by the A.O under Sec.143(3) of the Income Tax Act,1961 (for short „Act‟), dated 28.02.2006. Also, the assessee had filed an appeal against the order passed by the CIT(A)-10, Mumbai, dated 31.10.2013 for A.Y. 2008-09 which in turn arises from the order passed by the A.O under Sec. 144C(3) r.w.s 143(3) of the Act, dated 02.02.2017. As common issues are involved in the said appeals, therefore, the same are being taken up and disposed off together by way of a consolidated order. We shall first take up the appeal of the assessee for A.Y. 2003-04. The assessee has assailed the order of the CIT(A) by raising before us the following grounds of appeal:
“1. The Commissioner of Income-tax (Appeals) [hereinafter referred to as the CIT(A)] erred in restricting the allowance of Deduction u/s 44C of the Income Tax Act, 1961 ('Act') to Rs.44,70,936/- only, in connection with the disallowance of Head Office Overhead Expenses allocated to the Indian Branch of Rs.70,95,000/- by the appellant.
2. The CIT(A) erred in not appreciating the fact that the allocation of Head Office expenses to the Indian branch was based on a certificate and computation prepared by the recognized International Accounting firm Ernst & Young, Bahrain.
3. The CIT(A) ought to have allowed the Deduction u/s 44C of Rs.70,95,000/- on the basis of the above certificate.
4. The appellant craves leave to add, alter, amend, modify or delete any of the grounds taken in appeal.”
The ld. Authorized Representative (for short „A.R‟) for the assessee at the time of hearing did not press the grounds raised in the P a g e | 3 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) appeal. Accordingly, the Grounds of Appeal No. 1 to 4 are dismissed as not pressed.
3. The appeal filed by the assessee is dismissed in terms of our aforesaid observations. A.Y. 2003-04 4. We shall now advert to the appeal filed by the revenue against the order passed by the CIT(A)-XXXI, Mumbai for A.Y. 2003-04. The revenue has assailed the order of the CIT(A) by raising before us the following grounds of appeal :
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made by the Assessing Officer of Rs.1,98,59,913/- on the basis of entries in the books of account, interest on securities, Bonds, Debentures and Zero Coupon Bonds, which had accrued but were not due on 31st March, 2003.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made by the AO of Rs.61,21,073/- on account of interest payable in respect of broken period expenses.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the deduction u/s 44C in respect of Head Office Expenses/General Administrative expenses and NRI Desk Expenses amounting to Rs.44,70,936/- and Rs.2,13,71,243/- respectively relying upon the case laws which are entirely different from the facts of the present case.
The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the AO restored.
5. The appellant craves leave to amend or alter any ground or add new ground which may be necessary.”
Briefly stated, the assessee which is a commercial bank having its Head office at Bahrain is involved in normal banking activities including financing of foreign trade and foreign exchange transactions. The assessee has its presence in India by way of two branches at Mumbai and Hyderabad. The assessee had filed its return of income for A.Y. 2003-04 on 01.12.2003, declaring its total income of Rs.5,42,78,327/-. The return of income filed by the assessee was P a g e | 4 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2).
The A.O while framing the assessment inter alia made the following additions/disallowances :
Sr. No. Particulars Amount 1. Addition of interest in respect of Government Rs.1,98,59,913/-. securities which had accrued but was not due. 2. Disallowance of interest expenditure Rs. 61,21,073/-. incurred for earning of exempt income. 3. Disallowance of deduction under Sec.44C in Rs. 44,70,936/- respect of Head Office expenses/General Administrative Expenses. 4. Disallowance of deduction under Sec.44C in Rs.2,13,71,243/- respect of NRI Desks Expenses.
On appeal, the aforesaid additions/disallowances were deleted by the CIT(A).
The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. A.R submitted that the issue pertaining to the addition of Rs.1,98,59,913/- that was made by the A.O in respect of the interest on securities, bonds debentures and zero coupon bonds on the basis of entries in the book of account, which had though accrued but was not due on 31st March, 2003, was squarely covered in favour of the assessee by the order passed by the Tribunal in its own case for A.Y. 2002-03 viz. ADIT(IT)-3(2), Mumbai Vs. Bank of Bahrain & Kuwait, dated 28.01.2011.(copy placed on record). Apart there from, it was submitted by the ld. A.R that the said issue was also covered in favour
P a g e | 5 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) of the assessee by the order of the Hon‟ble High Court of Bombay in the case of DIT Vs. Credit Suisse First Boston (Cyprus) Ltd. (2013) 351 ITR 323 (Bom). As regards the deletion of an addition of Rs.61,21,073/- by the CIT(A), it was submitted by the ld. A.R that the „Ground of appeal
No. 2‟ on the basis of which the said deletion had been assailed by the revenue was found to be misconceived. In order to fortify his aforesaid contention the ld. A.R took us through the observations of the CIT(A) in context of the disallowance of interest expenditure of Rs. 61,21,073/-. It was submitted by the ld. A.R that the CIT(A) observing that as the assessee had sufficient interest free funds available with it for making investment in the exempt income yielding assets, had thus for the said reason vacated the disallowance of interest expenditure of Rs. 61,21,073/- made by the A.O under Sec. Sec. 14A of the Act. As regards the allowing of deduction by the CIT(A) under Sec. 44C in respect of Head Office Expenses/General Administrative Expenses and NRI Desk Expenses amounting to Rs.44,70,936/- and Rs.2,13,71,243/-, respectively, it was submitted by the ld. A.R that the first appellate authority correctly following the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. Emirates Commercial Bank Ltd. (2003) 262 ITR
55. (Bom), had rightly deleted the same. It was submitted by the ld. A.R that a similar issue as regards the entitlement of the assessee towards claim of deduction under Sec. 44C had came up before the Tribunal i.e ITAT „L‟ Bench, Mumbai in the assesses own case for A.Y. 2002-03 in ADIT (IT) -3(2), Mumbai Vs. Bank of Bahrain & Kuwait (ITA No. 6731/Mum/2006, dated 28.01.2011). The ld. A.R submitted, that the Tribunal in its aforesaid order had observed that direct and exclusive NRI Desk Expenses which were incurred by the head office were not hit by Sec. 44C and were to be allowed in full as per the general provisions of the Act. It was further submitted by him that the Tribunal had observed
P a g e | 6 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) that insofar the allocated/shared/apportioned staff costs incurred by the Overseas Business Division (for short „OBD‟) and the various other head office support centres to NRI Desk, and also other common head office expenses were concerned, the same were to be considered as per the parameters envisaged in Sec. 44C.
Per contra, the ld. Departmental Representative (for short „D.R‟) fairly admitted that the issue pertaining to the addition of Rs. 1,98,59,913/- towards interest on securities, bonds, debentures and zero coupon bonds, which had accrued but was not due on 31st March, 2003, was squarely covered in favour of the assessee by the order of the Tribunal in the assesses own case for A.Y. 2002-03. Also, it was submitted by him that the issue as regards the allowing of the deduction under Sec.44C in respect of Head Office expenses/General Administrative expenses and NRI Desk expenses amounting to Rs.44,70,936/- and Rs.2,13,71,243/-, respectively, was also covered by the order passed by the aforesaid order of the Tribunal in the case of the assessee for A.Y. 2002-03. As regards the deletion by the CIT(A) of an addition of Rs. 61,21,073/- the ld. D.R relied on the assessment order.
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record and also the judicial pronouncements relied upon by them. As is discernible from the assessment order, it was observed by the A.O that though the assessee was recognising its income from interest on securities on day-to-day accrual basis, however, in its return of income it had claimed that interest which had not became “due” for payment during the relevant preceding year could not be included in its total income. On being queried, it was submitted by the P a g e | 7 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) assessee that day-to-day accrual of interest on government securities, debentures and bonds were to be taxed only when such interest/dividend became due and payable. As observed by us hereinabove, the A.O not finding favour with the aforesaid explanation of the assessee made an addition of the interest not being due amounting to Rs.1,98,59,913/-.
As concurred by the authorized representatives for both the parties, we find that the issue pertaining to chargeability to tax on interest on securities, bonds, debentures and zero coupon bonds, which had accrued but was not due, is covered by the judgment of the Hon’ble High Court of Bombay in the case of DIT Vs. Credit Suisse First Boston (Cyprus) Ltd. (2013) 351 ITR 323 (Bom). In the said case, it was observed by the Hon‟ble High Court that when an instrument or an agreement stipulates interest to be payable at a specified date, interest does not accrue to the holder thereof on any date prior thereto, and the same would accrue or arise only on the date specified in the instrument. Apart there from, we find that as observed by the CIT(A), the aforesaid issue is also covered by the order passed by the Tribunal in the assessee own case for A.Y. 1996-97 in ITA No. 198/Mum/2000. We find that the CIT(A) following the view taken by the Tribunal in the assesses own case for A.Y. 1996-97, had observed as under: “3.2 I have considered the arguments of the A.R and also seen the facts. The Hon'ble I.T.A.T. have considered the issue for A.Y.1996-97 in the appellant's own case in their order dt. 27.02,2004 in ITA.No.198/M/2000. The Hon'ble I.T.A.T. has held that interest in respect of government securities accrues only on the specified coupon date and not on day-to- day basis. The Hon'ble I.T.A.T. has observed as under in para 4 of the order. “4. The Revenue is in appeal before us to contend that the decision of the CIT(Appeals) is erroneous. The Id. Counsel for the assessee on the other hand has filed copies of the order of the Mumbai "C" Bench of the Tribunal dated 23.12.2003 in for the A, Y. 1989-90 in the case of Union Bank of India vs. DCIT and submitted the identical issue has been P a g e | 8 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) decided in the case of a Bank and the should be followed by us. We have carefully perused the order of the Tribunal cited above in that case also, the issue was identical namely, whether in the case of government Securities, interest accrues only on the coupon dates and not on day to day basis in coming to this conclusion, the Tribunal placed reliance on the judgment of the Lahore High Court in Ha veil Shah Sardarilal v. CIT, Punjab (4 ITR 297) the Full Bench judgment of the Patna High Court in Ranjit Prasad Singh v. CIT Bihar & Orissa ( 4 ITC 264) and the Karnataka High Court judgment in Addl.CIT / Mysore v. The Vijaya Bank Ltd. Mangalore (1976) Tax LR 524. It was also noticed by the Tribunal that the contention advanced on behalf of the Revenue before the Tribunal in that case was totally contradictory to the contention advanced by the Revenue before the Karnataka High Court in the case of Vijaya Bank (Supra). Before the Tribunal the department had placed reliance on the judgment of the Hon'ble Bombay High Court in the case of American Express International Banking Corporation v CIT (258 ITR 602) and Taparia Tools Ltd. v. ]CIT ( 260 ITR 102). These two judgments have been considered by the Tribunal in paragraphs 14 to 17 of the order cited above and it was held that these judgments are not applicable to the facts of Union Bank's case. In paragraphs 20 & 21 to the Tribunal has also considered the objection of the department that the assessee cannot credit the interest on Govt. securities in the profit and loss account on day to day basis but contend that for purposes of income-tax only the interest that accrued on the coupon dates can be assessed. The Tribunal noticed the judgment of the Supreme Court in the case of another Bank, namely, United Commercial Bank (240 ITR 355). In this case the Supreme Court reversed the judgment of the Calcutta High Court which held that the assessee cannot prepare the computation of its income for income-tax purposes in a manner different from the method under which it keeps accounts. Applying the judgment of the Supreme Court, the Tribunal held that Union Bank of India cannot be prevented from urging in the return that the interest on Govt. securities accrued only on the specified coupon dates, notwithstanding that credit has been taken in the profit and loss account for the interest on day to day basis. Thus, the issue has been decided in favour of the view that the interest accrues only on the specified coupon dates and not on day to day basis. Since the facts of the present case are identical, following the order of the Tribunal in the case of Union Bank of India (supra) we uphold the vie taken by the CIT(Appeals) and dismiss the appeal.” Following the above order, ground of appeal No. 1 is allowed and addition of Rs.1,98,59,913/- is deleted.” On the basis of our aforesaid observations, we are of the considered view that the CIT(A) had rightly vacated the addition of interest income of Rs.1,98,59,913/- made by the A.O. Accordingly, finding no infirmity on the order of the CIT(A) in context of the aforesaid issue under consideration , we uphold the same. The Ground of appeal No. 1 raised by the revenue is dismissed.
P a g e | 9 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) 11. We shall now advert to the disallowance of interest expenditure of Rs.61,21,073/- made by the A.O for the reason that the same was incurred by the assessee for earning of exempt income. On a perusal of the orders of the lower authorities, we find that the CIT(A) taking cognizance of the fact that the assessee had sufficient interest free funds available with it which would justify the investments made in exempt income yielding assets, had thus concluded that no disallowance of the interest expenditure was called for in the hands of the assessee. We have given a thoughtful consideration to the observation of the CIT(A) in context of the issue under consideration and do not find any infirmity in the same. In our considered view, in the case the self-owned funds of the assessee are found higher than the investments made in the exempt income yielding assets, then no disallowance under Sec.14A would be called for in the hands of the assessee. Our aforesaid observation is fortified by the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). At this stage, it would be relevant to point out that the ld. D.R had not pointed out any perversity in the observation of the CIT(A) that the assessee possessed interest free funds much higher than the amount of the investments which were made by it in the tax free investments. Accordingly, we uphold the deletion of the disallowance of interest expenditure of Rs.61,21,073/- by the CIT(A). The Ground of appeal No.2 raised by the revenue is dismissed.
12. We shall now advert to the claim of the revenue that the CIT(A) had erred in allowing the deduction under Sec.44C in respect of Head Office expenses/General Administrative expenses and NRI Desk expenses amounting to Rs. 44,70,936/- and Rs.2,13,71,243/-, respectively. As is discernible from the orders of the lower authorities,
P a g e | 10 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) the assessee had claimed deduction under Sec. 44C in respect of Head Office expenses/General Administrative expenses of Rs.44,70,936/- and expenses of NRI Desk amounting to Rs.2,13,71,243/-. It was stated by the assessee that though the actual H.O expenses amounted to Rs.70,95,000/-, however, the deduction claimed was only Rs.44,70,936/- as allowable under Sec. 44C. On a reference made by the A.O to the TPO u/s 92CA(1) of the Act, the latter vide his order passed under Sec.92CA(3), dated 20.02.2006 concluded that the share of head office expenses attributable to the operations of the Indian Branch were only to the extent of Rs. 47,31,496/- [Baharaini Dinars : 37,575] as against claimed by the assessee at Rs.44,70,936/- (Baharaini Dinars : 35,497]. Further, it was observed by the TPO that the NRI Desk expenses relating to the Indian Branch were to the extent of Rs.1,85,36,680/- (Baharaini Dinars: 1,26,070) as against its claim of Rs. 2,13,71,243/-. Observing, that the H.O had not raised any invoices/debit note on the Indian branch as regards the H.O expenses and NRI Desks expenses, therefore, the TPO disallowed the entire claim of deduction of the assessee. The A.O while framing the assessment under Sec.143(3) restricted the assesses claim for deduction under Sec.44C to the amount of actual provision made in the books of accounts of Rs. 44,70,936/-.
On appeal, it was observed by the CIT(A) that as the claim of deduction under Sec.44C in respect of the H.O expenses was claimed by the assessee at Rs.44,70,936/-, therefore, the reduction of the allocated expenses of Rs.70,95,000/- as claimed by the assessee to be pertaining to the Indian Branch to an amount of Rs.47,31,406/-by the TPO would not be of any relevance at all. Accordingly, the CIT(A) observed that deduction as regards the H.O expenses of Rs.44,70,936/- claimed by the assessee was in order.
P a g e | 11 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2)
As regards the NRI Desk expenses, the CIT(A) observed that the allocation of the said expenses as claimed by the assessee as against that held by the TPO was as under:
Sr. No. Nature of Expenses Allocated by Allocated appellant by TPO 1. Direct Staff costs 79,789 79,789 2. Travel and communication 21,102 21,102 3. Allocated staff costs a) Office of the head of OBD 12,867 Nil incurred by OBD and b) Financial control 5,742 5,742 various other Head c) Information technology 5,180 5,180 Office support centers d) Human Resources 4,764 4,764 e) Operations 4,545 4,545 f) Internal Audit 1,937 1,937 4. Allocated General a) rent and maintenance 14,309 14,309 and administration b) Depreciation 9,804 9,804 costs c) advertising 3,395 Nil d) Other 6,243 Nil Total 1,69,677 1,47,172 It was observed by the CIT(A) that insofar the issue pertaining to the allowability of the expenses which were incurred overseas exclusively for the business of the Indian branches of the assessee were concerned, the same was considered by his predecessor in the assesses own case for A.Y. 2000-01 and A.Y. 2001-02, vide his respective orders dated 18.03.2004 and 19.07.2004. It was noticed by him that in the aforementioned years it was concluded that the expenses of the NRI Desk which were incurred specifically for the Indian branch, even if incurred outside India, were fully allowable and were not to be subjected to any restriction under Sec.44C. Accordingly, following the decision of his predecessor that the expenses specifically incurred for the Indian Branch by the NRI Desk were fully allowable without being restricted by Sec.44C, the CIT(A) allowed the entire claim of the NRI Desk Expenses of Rs.2,13,71,243/-.
Aggrieved, the revenue has carried the matter in appeal before us. As concurred by authorized representatives for both parties, the P a g e | 12 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2)
issues involved in the present appeal are squarely covered by the order passed by the Tribunal in the assesses own case for A.Y. 2002-03 i.e ADIT(IT)-3(2), Mumbai Vs. Bank of Bahrain & Kuwait (ITA No. 6731/Mum/2006, dated 28.01.2011). The Tribunal in its aforesaid order had observed that the assessee in the year before them had claimed three categories of head office expenses viz. (i) direct and exclusive NRI Desk Expenses (hereinafter called „A‟); (ii) allocated staff costs incurred by Overseas Business Division (OBD) and various other head office support centres (hereinafter called „B‟); and (iii) common Head Office expenses (hereinafter called „C‟). The details of the aforesaid expenses during the year were as under:
Sr. No. Particulars Nature of expenses (II) Allocated by Allocated by TPO appellant (III) (IV) 1. Direct Staff Costs 81,192 81,192 2. Travel and communication 17,866 17,866 3. Allocated staff a) Office of the Head of OBD 13,307 Nil costs incurred by b) Financial control 5,320 OBD and various c) Information technology 5,320 5,213 other Head office d) Human Resource 5,213 4,782 Head office e) Operations 4,762 support centers f) Internal Audit 4,782 2,226 4,762 2,226 4. Allocated General a) Rent and maintenance 14,767 14,767 and b) Depreciation 9,719 9,719 administration c) Advertising 3,390 Nil costs d) Other 6,641 Nil Total 1,69,185 1,45,848 As regards the expenses covered under category „C‟, it was observed by the Tribunal that the said allocated head office expenses were covered under Sec.44C of the Act. As regards the expenses covered under Category-„A‟ representing “direct staff costs” and “travel and communication expenses”, it was observed by the Tribunal that as the said expenses were exclusively incurred for the Indian branch, therefore, the same were to be allowed in full. As regards the expenses covered under Category-„C‟ i.e allocated staff costs incurred by OBD and various other head office support centre, it was observed by the P a g e | 13 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) Tribunal that the said expenses were to be considered only under Sec. 44C and there was no scope in granting separate deduction as rgards the same under the general provisions of the Act. However, at the time of adjudicating as hereinabove, it was observed by the Tribunal that as regards the expenses mentioned in the above table at Sr. No. 3(A) i.e allocated staff costs incurred by the OBD and various other H.O support centres, as there was no evidence as regards incurring of the expenditure by the assessee, therefore, the deduction could not be allowed simply on the basis of a claim which had no legs to stand upon. Accordingly, the Tribunal had „set aside‟ the impugned order, and had directed the A.O to verify as to whether the allocated staff costs claimed by the assessee to have been incurred by the OBD and various other HO support centres was remitted by the assessee to the head office or not. On a similar footing, as regards the “advertising expenses” mentioned in the table at Sr. No. 4(c) and “other expenses” mentioned in the table at Sr. No. 4(d), it was observed by the Tribunal that the fact that the said expenses were incurred by the head office in relation to the NRI Desk had not been controverted by the TPO. Accordingly, it was observed by the Tribunal that the aforesaid two items of allocated head office expenses were liable to be included in the overall limit of Sec. 44C.
We find that the facts and the issue involved in the appeal for the year under consideration before us remains the same as was there in the case of the assessee for A.Y. 2002-03. In fact, the said factual position had duly been admitted by the authorised representatives for both the parties. Accordingly, we herein proceed with and adjudicate the issue as regards the allowability of the expenses in the hands of the assessee by following the view taken by the Tribunal in the case of the assessee for A.Y. 2002-03. As is discernible from the CIT(A) order,
P a g e | 14 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) the allocation of expenses under various the heads as claimed by the assessee and thereafter examined by the TPO during the year under consideration i.e A.Y. 2003-04 is as under:
Sr. No. Particulars Nature of Expenses Allocated by Allocated appellant. by TPO. (Bahraini (Bahraini Dinars) Dinars) 1. Direct Staff costs 79,789 79,789 2. Travel and communication 21,102 21,102 3 Allocated staff costs incurred a) Office of the head of OBD 12,867 Nil by OBD and various other b) Financial control 5,742 5,742 Head Office support centres. c) Information technology 5,180 5,180 d) Human Resources 4,764 4,764 e) Operations 4,545 4,545 f) Internal Audit 1,937 1,937 4. Allocated General and a) rent and maintenance 14,309 14,309 administration costs b) Depreciation 9,804 9,804 c) advertising 3,395 Nil d) Other 6,243 Nil Total 1,69,677 1,47,172 In conformity with the view taken by the Tribunal in the case of the assessee for A.Y 2002-03, the expenses pertaining to the year towards “direct staff costs” and “travel and communication expenses” of Bahraini Dinars :79,789 and Bahraini Dinars : 21,102, respectively, had exclusively been incurred by the head office for the Indian branch, therefore, the same are allowed in full as per the general provisions of the Act. Accordingly, respectfully following the view taken by the Tribunal in the assesses own case for A.Y 2002-03 in context of the issue under consideration, we uphold the order of the CIT(A) to the said extent.
Next are the allocated staff costs incurred by the OBD and various other head office support centres given at Serial No. 3(a) to (f) of the table aggregating to Bahraini Dinars: 35,035 and allocated General and Administration costs mentioned at Serial No. 4(a) to (d) of the table at Bahraini Dinar: 33,751. We find that in respect of the aforesaid expenses there is a two fold controversy viz. (i) the basis of P a g e | 15 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) allocation of such expenses; and (ii) the inclusion or otherwise of such expenses under Sec.44C. As is discernible from the aforesaid table, the TPO had accepted the allocation of the aforesaid expenses at Serial No. 3 & 4 of the said table except for three items viz. Serial No. 3(a) - allocated expenses of the office of the head of OBD Bahraini Dinar 12,867; Serial No. 4(c) – allocated advertising expenses: Bahraini Dinar 3,395; and Serial No. 4(d) other allocated expenses : Bahraini Dinar 6,243. Accordingly, we find that the allocation of the other expenses as claimed by the assessee had been accepted by the TPO. As regards the allowability of the expenses at Serial No. 3 and Serial No. 4, we find that the Tribunal while disposing off the appeal in the assesses own case for A.Y 2002-03, had observed, that the items of head office expenses mentioned hereinabove viz. under Serial No.3 (a) to (f) and Serial No. 4 (a) to (d) can be considered only under Sec.44C and there is no scope for granting separate deduction as regards the same under the general provisions of the Act. Accordingly, finding ourselves to be in agreement with the view taken by the Tribunal, we respectfully follow the same and herein direct that the items of head office expenses mentioned in the above table under Serial No. 3 (a) to (f) and Serial No.4 (a) to (d) be considered only under Sec.44C. In terms of our aforesaid observations, we set aside the order of the CIT(A).
We shall now advert to the aspect as to whether the items of head office expenses mentioned in the above table under Serial No.3(a) to (f) and Serial No. 4 have been actually incurred by the head office for the Indian branch. In our considered view the acceptance of allocation by TPO in respect of items, other than those at Serial No. 3 (a), 4(c) and 4 (d), meant that the said expenses were incurred for the Indian branches. We find that the controversy as regards the P a g e | 16 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) allocation of expenses between the assessee and the TPO had arisen only in respect of three items viz. Serial No. 3(a) - Office of the head of Overseas Business Division (OBD) amounting to Bahraini Dinar 12,867, Serial No. 4(c): advertising amounting to Bahraini Dinar 3,395; and Serial No. 4 (d) other expenses amounting to Bahraini Dinar 6,243. A perusal of the orders of the lower authorities reveals, that as the assessee could not produce any evidence to support allocation of the expenses which were claimed to have been incurred by OBD towards staff costs, therefore, the same for the said reason were disallowed. It was the claim of the assessee before the CIT(A) that the expenses incurred by the OBD towards staff cost was allocated on the basis of management experience after considering the time devoted to NRI Desks and other divisions. The CIT(A) finding favour with the aforesaid claim of the assessee had concluded that the staff expenses of OBD were also required to be allocated to the NRI Desks. Accordingly, the CIT(A) observed that the TPO had incorrectly disallowed the claim of allocation of expenses of Bahraini Dinar 12,867 pertaining to the staff costs incurred by the office of the head of OBD. As regards the advertisement expenses of Bahraini Dinar 3,395 and other general administration costs of the H.O of Bahraini Dinar 6,243, the TPO observed that as the assessee had not submitted any justification as regards allocation of the same, therefore, they were not required to be allocated. Accordingly, the CIT(A) was not persuaded to subscribe to the aforesaid view of the TPO and observed, that advertisement which was brought out by the H.O also included expenses on the advertising resulting to generation of NRI deposits and NRI business. Further, it was observed by him that as the other general and administration costs of Bahraini Dinar 6,243 were required to be incurred for the purpose of NRI Desks, therefore, the said expenses were also required to be allocated. On the basis of his
P a g e | 17 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) aforesaid observations, it was observed by the CIT(A) that the TPO was not justified in declining to allocate the aforesaid expenses as claimed by the assessee viz. (i) allocated staff costs incurred by the office of the head of OBD: Bahraini Dinar 12,867; (ii) allocated advertising expenses : Bahraini Dinar 3,395; and (iii) other expenses: Bahraini Dinar 6,243. After observing as hereinabove, the CIT(A) concluded that the aforesaid expenses were also to be allowed as a deduction in the hands of the assessee.
We have given a thoughtful consideration to the aforesaid observation of the CIT(A) and are unable to persuade ourselves to accept the same. Admittedly, the assessee could not produce any evidence to justify the allocation of the expenses of Bahraini Dinar 12,867 claimed by the assessee to have been incurred by the OBD towards staff costs for the NRI desks, therefore, the same were disallowed by the A.O/TPO. In our considered view, if there is no evidence for incurring expenditure by the assessee, the deduction as regards the same cannot be allowed. In order to verify the veracity of the aforesaid allocation of expenses pertaining to the allocation of staff costs as regards the office of the head of OBD amounting to Bahraini Dinar 12,867 as claimed by the assessee, we set aside the issue to the file of the A.O, with a direction to verify as to whether the aforesaid amount of Bahraini Dinar 12,867 was remitted by the assessee to the head office or not. In case the assessee is able to demonstrate that the remittance of the said amounts was made either during the year itself or in the succeeding year, then the inclusion of such amount in the overall limit for Sec. 44C will be justified. Further, if the assessee fails to conclusively prove that the amount of Bahraini Dinar 12,867 was paid or adjusted in any manner with the head office, then the said
P a g e | 18 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) amount shall not be considered while working out the assesses claim for deduction under Sec. 44C.
We shall now advert to the remaining two items of expenses the allocation of which have not been allowed by the TPO, viz. (i). advertising expenses : Bahraini Dinar 3,395; and (ii). other expenses: Bahraini Dinar 6,243. As the assessee had failed to furnish any justification for allocation of the advertising expenses of Bahraini Dinar 3,395 and other general administration costs of Bahraini Dinar 6,243 towards the Indian branch of the assessee, therefore, the same were disallowed by the A.O/TPO. The fact that such expenses were incurred by the head office in relation to NRI Desks had however not been controverted by the TPO. In our considered view once it is established that expenses were actually incurred for the business purposes of the assessee, then there would be no need to justify the allocation of such cost. Accordingly, we are of the considered view that the aforesaid two items of allocated head office expenses are liable to be included in the overall limit of Sec.44C. The order of the CIT(A) is upheld to the said extent.
To sum up, the direct and exclusive NRI Desk expenses incurred by the head office („A‟), being items at Serial No. 1 & 2 of the table extracted hereinabove, are to be allowed in full as per the general provisions of the Act and would not be fettered by Sec.44C; allocated/shared/apportioned staff costs incurred by OBD and various other head office support centres to NRI Desks („B‟) being the items at Serial No. 3 & 4 of the aforesaid table, subject to verification of item at Serial No. 3(a) in terms of our aforesaid directions, and also the other head office expenses are to be considered within the purview
P a g e | 19 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) of Sec.44C only. Accordingly, the matter is restored to the file of the A.O for allowing deduction in terms of our aforesaid observations.
Resultantly, the appeal of the revenue is partly allowed in terms of our aforesaid observations.
We shall now advert to the appeal of the assessee for A.Y 2008- 09. The present appeal filed by the assessee is directed against the order passed by the CIT(A)-10, Mumbai, dated 31.10.2013, which in turn arises from the order passed by the A.O under Sec.144C(3) r.w.s 143(3) of Income Tax Act, 1961 dated 02.02.2012 for A.Y. 2008-09. The assessee has assailed the order of the CIT(A) by raising before us the following grounds of appeal :
“1. Against adjustment of Rs.13,142,578/- to Arm's Length Price (ALP) of international transactions. a. The Commissioner of Income tax (Appeals) - 10 [CIT(A)] erred in holding that the amounts, other than the amounts spent on “direct staff costs” and “travel and communication” of the NRI Desk (hereinafter referred to as “Other Costs”) were governed by the provision of section 44C of the Income Tax Act, 1961 (Act) is bad in law and deserves to be quashed. b. The CIT(A) failed to appreciate that the Other Costs were directly attributable to and connected with the business of the Indian Branch and were wholly and exclusively incurred for the Indian branches and, therefore section 44C of the Act was not applicable thereto. c. The CIT(A) failed to appreciate and overlooked that the entire costs, including the Other Costs, were certified by an independent firm of Chartered Accountants as having been incurred by the Head Office for and on behalf of the Indian branches of the appellant. d. The appellant, therefore, prays that the unwarranted adjustment of Rs.13,142,578/- to the ALP in respect of the allocated NRI Desk Expenses by treating them as "overheads" be deleted. e.
P a g e | 20 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) 2. Against adjustment of Rs.5,266,515/- to ALP in respect of Head Office Overheads a. The CIT(A) erred in not deleting the addition of Rs.52,66,515/- as determined by the Transfer Pricing Officer (TPO), to the total income of the appellant in respect of Head Office overheads ignoring the fact that the appellant has neither debited the Head Office overheads in its books of account nor claimed the same as expense in the return of income. b. The appellant, therefore, prays that the unwarranted adjustment of Rs.5,266,515/- to the ALP in respect of the Head Office overheads be deleted.
Leave to add, alter and/or supplement grounds of appeal.
The appellant craves leaves to add, alter and/or supplement any ground or grounds, if necessary, during the appellate proceedings.”
Briefly stated, the assessee had filed its return of income for A.Y. 2008-09 on 29.09.2008, declaring a total loss of Rs.4,86,82,039/- and „book profit‟ under Sec.115JB of Rs.13,31,88,214/-. Subsequently, the assessee filed a revised return of income declaring a total loss of Rs.4,86,82,039/- and a „book loss‟ under Sec.115JB of Rs.2,88,15,468/-. Thereafter, the case of the assessee was selected for scrutiny assessment under Sec. 143(2).
In the course of the assessment proceedings the A.O made a reference to the Transfer Pricing Officer (for short „TPO‟) for computation of the „Arms Length Price‟ (for short „ALP‟) of the International Transactions carried out by the assessee with its Associate Enterprise (for short „AE‟) during the year under consideration. The TPO in his order passed under Sec.92CA(3), dated 29.07.2011 made a total adjustment of Rs.2,69,73,078/- viz. (i) adjustments on account of NRI Desk expenses: Rs.2,16,96,895/-; (ii) adjustment on account of interest amount received at below the benchmark rates on the funds placed with the Head Office: Rs.9,668;
P a g e | 21 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) and (iii) adjustment on account of determination of ALP of head office overheads: Rs.52,66,515/-.
The A.O while framing the assessment restricted the claim of the assessee in respect of expenses incurred towards NRI/Other expenses at the head office which were in the nature of general administrative expenses as per the limits prescribed under Sec.44C of the Act. Thereafter, the A.O after making the TP adjustments of Rs.2,69,73,078/- as suggested by the TPO assessed the loss in the hands of the assessee at Rs.2,17,08,961/-.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after necessary deliberations partly allowed the appeal of the assessee.
The assessee being aggrieved with the order passed by the CIT(A) has carried the matter in appeal before us. It was submitted by the ld. Authorized Representative (for short „A.R‟) for the assessee, that though the assessee had neither debited the head office overheads in its „books of accounts‟ nor claimed the same as an expense in its return of income, however, the lower authorities had erroneously added/sustained the addition of Rs.52,66,515/- as regards the ALP of the H.O overheads as determined by the TPO.
Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities.
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. As regards the multiple contentions raised by the assessee before us, viz. (i) that, the CIT(A) was in error in holding that the amounts, other than the amounts spent on „direct staff costs‟ and P a g e | 22 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) „transfer and communication‟ of the NRI Desks were governed by the provisions of Sec.44C of the Act; (ii) that, the CIT(A) had failed to appreciate that the other costs were directly attributable to and connected with the business of the Indian branch and were wholly and exclusively incurred for the Indian branch, therefore, Sec.44C was not applicable; and (iii) that, the CIT(A) failed to appreciate that the entire cost including other costs, as certified by an independent firm of chartered accountants as having been incurred by the head office for and on behalf of the Indian branches of the assessee, we find that the said contentions of the assessee are squarely covered by the order passed by the Tribunal in the assesses own case for A.Y. 2002-03 i.e ADIT (IT)-3(2), Mumbai, Vs. Bank of Bahrain & Kuwait (ITA No. 6731/Mum/2006, dated 28.01.2011). As had been observed by us at length hereinabove, the Tribunal in the aforesaid case had observed that the expenses representing to “Direct Staff Costs” & “Transfer and Communication Expenses” having been incurred exclusively by the head office for the Indian branch, were thus to be allowed in full under the general provisions of the Act. However, as regards the allocated staff costs incurred by the OBD and various other head office support centres, and also the allocated General and Administration Costs, it was observed by the Tribunal that the said items of head office expenses were to be considered only under Sec.44C and there was no scope for granting separate deduction under the general provisions of the Act. Finding ourselves to be in agreement with the aforesaid view taken by the Tribunal, we respectfully follow the same. Accordingly, finding no infirmity in the view taken by the CIT(A) in context of the aforesaid issue under consideration, we uphold the same. The Ground of appeal No. 1 raised by the assessee is dismissed.
P a g e | 23 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) 31. We shall now advert to the claim of the assessee that the CIT(A) had erred in not deleting the addition of Rs.52,66,515/- as determined by the TPO, in respect of the head office overheads, ignoring the fact that the said expenses had neither been debited by the assessee in its „books of account‟ nor claimed as an expense in its return of income. As per the facts discernible from the records, the assessee as per the auditors certificate had allocated head office overheads of Rs.52,66,515/- to the Indian branch of the assessee. However, the TPO in his order passed under Sec. 92CA(3) of the Act suggested an adjustment to the arms length price of the aforesaid head office overheads allocated to the Indian branches of the assessee, and determined the same at Nil. On the basis of the aforesaid adjustment suggested the TPO, the A.O while framing the assessment made an addition of Rs. 52,66,515/- in the hands of the assessee. It is the claim of the ld. A.R that as the aforesaid share of H.O overheads of Rs,52,66,515/- was neither debited by the assessee in its „books of account‟ nor claimed as an expense in the return of income, therefore, no addition of the same could have been made on the basis of the transfer pricing adjustment made by the TPO. As is discernible from the order passed by the TPO under Sec. 92CA(3), the following indirect staff/general and administration costs as per the auditors certificate were allocated to its Indian branches by the assessee:
Allocated staff costs incurred by OBD and various other head office BD 39,504 support centers. Allocated general and administration costs incurred by Head Office BD 9,919 It is the claim of the assessee that only the actual cost as certified by the head office auditors was shared. The cost allocated was without any mark up. Observing, that the direct expenses of the overseas business division were not required to be allocated to the assessee, the P a g e | 24 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) TPO determined the arms length value of the head office overheads at Rs. nil. Accordingly, the TPO as per the order passed under Sec. 92CA(3) suggested a TP adjustment of Rs.52,66,515/-.
We have given a thoughtful consideration to the issue before us and find substantial force in the claim of the assessee that as it had neither debited the H.O overheads in its „books of account‟ nor claimed the said sum as an expense in its return of income, therefore, there was no occasion for making an addition of Rs.52,66,515/- on the basis of the transfer pricing adjustment determined by the TPO. The aforesaid factual position had not been controverted by the ld. D.R. Accordingly, we are of the considered view that in the absence of the aforesaid claim of expense of share of H.O overheads of Rs.52,66,515/- by the assessee either in its books of accounts or in its return of income, no addition of the same could have been made on the basis of the TP adjustment of the said expenses whose ALP was determined at nil by the TPO. Accordingly, the A.O/TPO is directed to delete the addition of Rs.52,66,515/- made in the hands of the assessee. The Ground of appeal No. 2 raised by the assessee before us is allowed.
The Ground of appeal No. 3 being general in nature is dismissed as not pressed.
The appeal of the assessee is partly allowed in terms of our aforesaid observations.
The appeal of the assessee for A.Y 2003-04 i.e is dismissed, and that for A.Y 2008-09 i.e is partly allowed. As for the appeal of the revenue