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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
1 ITA No.2619/Kol/2018 The Royal Bank of Sctoland N.V. India Branches, AY 2014-15 आयकर अपील�य अधीकरण, �यायपीठ – “C” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH: KOLKATA (सम�)Before �ी जे. सुधाकर रे�डी, लेखा सद�य एवं/and �ी ऐ. ट�. वक�, �यायीक सद�य) [Before Shri J. Sudhakar Reddy, AM & Shri A. T. Varkey, JM] I.T.A. No. 2619/Kol/2018 Assessment Year: 2014-15
The Royal Bank of Scotland N.V. India Vs. Deputy Commissioner of Income-tax Branches (PAN: AACCA6818K) (International Taxation)-2(1), Kolkata Appellant Respondent
Date of Hearing 15.01.2020 Date of Pronouncement 19.02.2020 For the Appellant Shri R. N. Bajoria, Senior Advocate For the Respondent Shri Imokaba Jamir, CIT, DR
ORDER Per Shri A.T.Varkey, JM
This is an appeal filed by the assessee against the order of DCIT (International Taxation), Circle-2(1), Kolkata (in short ‘AO’) u/s. 143(3) read with sec. 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) dated 30.10.2018 pursuant to the direction issued by the Ld. Dispute Resolution Panel (in short “DRP”) vide its direction u/s. 144C(5) of the Act dated 04.09.2018 for AY 2014-15. 2. At the outset, the Ld. Sr. Counsel Shri R. N. Bajoria appearing for the assessee in his usual manner fairly conceded that out of the two grounds of appeal preferred by the assessee against the impugned order, one of the issue i.e. rate of tax applicable to the assessee has been decided by the Tribunal in earlier years against the assessee. The said ground of appeal of the assessee is ground no. 2(a) to (d), which is as under:
a) On the facts and in the circumstances of the case and in law, the learned Assessing Officer ('AO') has erred in proposing and the Hon'ble Dispute Resolution Panel ('DRP') further erred in confirming the action of the learned AO in charging tax at the higher rate (43.26% including surcharge and education cess) applicable to foreign companies
2 ITA No.2619/Kol/2018 The Royal Bank of Sctoland N.V. India Branches, AY 2014-15 instead of the tax rate applicable to domestic companies (33.99% including surcharge and education cess) as claimed by the Appellant, in violation of the provisions of Article 24 of the Double Taxation Avoidance Agreement ('DTAA') entered between India and Netherlands. b) In this matter, the learned AO and Hon'ble DRP have completely disregarded the findings of the Hon'ble Income-tax Appellate Tribunal ('ITAT') in the Appellant's own case for AY 1996-97. The Hon'ble ITAT had allowed the application of the tax rate applicable to domestic companies in its order for AY 1996-97. c) The learned AO erred in proposing and the Hon'ble DRP further erred in confirming the action of the learned AO in disregarding the Appellant's contention that the Explanation to section 90 which was introduced by Finance Act, 2001 with retrospective effect from 1 April 1962 is in conflict with the main section. d) The Appellant prays before the Hon'ble ITA T to direct the learned AO to apply the rate of tax applicable to domestic companies or any other favourable rate while computing the tax payable by the Appellant.”
We note that this issue has been decided against the assessee in assessee’s own case in ITA No. 503 & 505/Kol/2016 for AY 2011-12 vide order dated 05.09.2018 wherein the Tribunal has held as under: “The brief facts of this issue are that the assessee is a non-resident foreign company and therefore the prescribed rate of tax applicable to it as per the relevant Finance Act would be 40% along with surcharge and education cess as applicable. The assessee pleaded that it is liable to tax only at the rate of 30% along with surcharge and education cess as applicable. We find that this issue is decided against the assessee by the order of this tribunal in assessee's own case for the Asst Years 2005-06 to 2008-09 vide order dated 13.4.2016 . Accordingly, the Ground Nos. 1 (a) to l(d) raised by the assessee are dismissed.”
Respectfully following the order of the Tribunal, we dismiss the ground of appeal no. 2(a) to 2(d) raised by the assessee in this respect.
Ground No. 1(a) to (d) is as under: “a) On the facts and in the circumstances of the case, the learned AO has legally erred in proposing and the Hon'ble DRP has further erred in confirming the disallowance of unfunded pension (akin to salary) amounting to Rs. 4,22,00,000 under section 36(1)(iv) of the Act, without appreciating the fact that section 36(1 )(iv) deals only with contribution to an approved superannuation fund and not to payment to pensioners in nature of ex- gratia (akin to salary) to compensate for the increased cost of living. b) On the facts and in the circumstances of the case, the learned AO and the Hon'ble DRP erred in not appreciating the fact that the unfunded pension paid by the Bank is an actual payment to the pensioners by the Bank after deduction of applicable taxes, as
3 ITA No.2619/Kol/2018 The Royal Bank of Sctoland N.V. India Branches, AY 2014-15 against contribution made to an approved superannuation fund and thus should be allowed under section 37(1) of the Act. c) The Hon'ble DRP grossly erred in presuming that the impugned payment is made to few employees and not to all the employees. The Hon'ble DRP failed to appreciate the facts that the said additional payments is payable to all the employees who joined the bank prior to 31.12.2004 and completed 10 years of service with the bank, irrespective of their grade and designation as is evident from details of salary slips and TDS certificates filed before the AO and the DRP. d) The Hon'ble DRP grossly erred in holding that the payment of unfunded pension made by the Appellant is related to pension paid to pensioners and hence disallowed under section 36(1 )(iv) whereas the section 36(1)(iv) deals only with contribution to approved superannuation fund and not to payment to pensioners in nature of ex-gratia/salary for increased cost of livings.”
The Ld. Sr. Counsel Shri Bajoria also pointed out that this issue is covered in favour of the assessee by the Tribunal in assessee’s own case for AY 2011-12 wherein the Tribunal has held as under: “5. DISALLOWANCE OF PAYMENT MADE TO EMPLOYEES IN RELATION TO UNFUNDED PENSION Ground No. 4(a) to 4(c ) of Assessee Appeal The brief facts of this issue are that the ld AO observed that the assessee during the year had claimed the payment made to its employees against the provision made for unfunded pension amounting to Rs 4.09 crores. In this regard, the assessee filed the submissions on 20.3.2015 and 25.3.2015 stating as under:- • “The Bank has established a superannuation fund for the purpose of providing pension to its eligible employees. The fund has been approved by the Commissioner of Income-tax under rule 2(1) of the part B of the Fourth Schedule. The bank has been regularly contributing to the fund for the base pension, based on actuarial valuation and have been claiming a deduction of the same on payment basis under Section 36(1)(iv) read with Section 43B(b) of the Act. • Apart from the approved superannuation fund, to compensate for the increased cost of living of the employees, the Bank also provides annual increment on the Base pension which is .towards unfunded pension liability and directly paid to the employees. Such provision in relation to the unfunded pension liability is disallowed in the tax computation and is claimed as deduction on actual payment the employees (which is done after deduction of the applicable TDS thereon). • During the year under consideration, the Bank has made payments to the employees amounting to Rs 4.09 crore towards such unfunded pension liability. the payment has been incurred wholly and exclusively for the purposes of the business of the Bank, the same has been claimed as deduction by the Bank under Section 37(1) of the Act. • In the course of the assessment proceedings, your good self has asked the Bank as to why the said amount should be allowed as deduction in view of the provisions of section 36(1) of the Act. In this regard, we submit as under: • In this regard the assessee mentioned the provisions of section 37(1) of the Act, whereby any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid
4 ITA No.2619/Kol/2018 The Royal Bank of Sctoland N.V. India Branches, AY 2014-15 out or expended wholly and exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". In this regard, the asseessee relied on the following decisions: • CIT v. High Land Produce Co. Ltd. [1986] 158ITR 419 (SC) • Liberty Cinema V. Commissioner of Income-tax [1964] 52 ITR 153, 161 / (Cal.), • Decom Marketing (P.) Ltd. v. CIT (164 CTR 230). • RDB Industries Ltd vs DCIT 120 ITJ 107 (Kol). • CIT v. Punjab FinanciaL Corpomtion Ltd.. [2007] 295 ITR 510 (Punj. & Har.) • Khimji Visram & Sons (Gujrat) (P.) Ltd. v. CIT [1995] 79 Taxman 112 (Guj) • CIT v. Akkem Labomtories (P.) Ltd.. [2009] 314 ITR 329 (Pat) • CIT vs Hindustan Motors Ltd 175 ITR 411 (Cal); • CIT vs. Karamchand Premchand Pvt. Ltd. 200 ITR 281 (Gui), • CIT v Punjab Financial Corporation Ltd., 295 ITR 510 (P&H); • Decom Marketing Pvt. Ltd vs CIT 251 ITR 398 (Guj); • CIT vs Chhotabhai Jethabhai Patel Tobacco Products Co. Ltd. 128 ITR 70 (Guj), and • Mylan Laboratories Ltd. vs ACIT (ITA No. 1616/Hyd/2010 dated 16 January, 2015). • Further, we understand that your goodself wishes to place reliance on the decision of the Calcutta High Court in the case of Brooke Bond India Limited vs. Joint Commissioner of Income-tax [2011] 337 ITR 482, while seeking to disallow the payment of Rs. 4.09 crore to employees towards unfunded pension. In this regard, we submit that the aforesaid decision is not applicable to the Bank's case for the following reasons: • In the case of the Bank the deduction for pension has been made in respect of amounts which have been actually paid to the employees of the Bank and which has been gone out irretrievably and on which the Bank has no control. However, in the case of Brooke Bond, the deduction for pension was claimed merely on basis of a provision created based on a Board Resolution which could have reversed at a later date. • The Brooke Bond judgment only covers disallowance of provision made in respect of such liability based on actuarial valuation and the Hon’ble Court have not looked into the question of deduction of such pension payment made directly to employees. The Bank’s relies on jurisdiction High Court ruling in the case of CIT vs. Hindustan Motors Ltd 175 ITR 411 (Cal) wherein it was held that payment of pension to employee is a deductible expenditure under Section 37(1) on ground of commercial expediency. • The intention of Section 36(1)(iv) read with Section 40A(9) of the Act is to restrict the tax avoidance by the employer by creating trust wherein the utilization of contribution made to trust is left to the discretion of the trustee and wherein the amounts flows back to the employer in the form of the deposits or investment. Thus, the Bank submits that the provisions which are introduced to curb a particular mischief should be construed in a manner that they do not create jeopardy beyond the mischief which is sought to be remedied. As per the intent, the above restriction should apply to contribution to superannuation trust/funds which are not approved by CIT. As mentioned above, in the Banks' case, the deduction for unfunded pension has been made in respect of amounts which have been actually paid to the employees of the Bank (and not as contribution to a fund/trust) and on which the Bank has not control. • In rendering the decision in the case of Brooke Bonde, the Hon’ble Kolkata High Court has not taken into consideration the decision of the Supreme Court in the case of High
5 ITA No.2619/Kol/2018 The Royal Bank of Sctoland N.V. India Branches, AY 2014-15 Land Produce and the decision of the jurisdictional High Court in the case of Liberty Cinema. In light of the above, we submit that the decision in the case of Brooke Bonde is not applicable to the Bank case and the Bank has righty claimed the deduction of the unfunded pension under section 37 of the Act.
Given the above, the Bank submits that the payment of Rs. 4.09 crores towards unfunded pension should be allowed in full.”
5.1. The ld AO in the draft assessment order placed reliance on the decision of the Hon’ble Jurisdictional High Court in the case of Brooke Bond India Ltd vs JCIT & Anr. reported in 337 ITR 482 (Cal) and observed that the said decision would be applicable to the facts of the instant case. Moreover, the assessee in the instant case had not provided the details in respect of the classes of employees eligible to avail it. When certain details were furnished by the assessee before the ld DRP, the matter was remanded to the ld AO. The ld AO in his remand report commented as under:- “The list does not indicate the class of employees, their place in the hierarchy, whether these were terminal benefits or short term benefits, etc. The submission is devoid of the Boards resolution, terms and conditions of payment of benefits and business expediency of such payments inter alia.
It is therefore could not be perceived from the additional evidence filed, as to how it negates the proposal of the AO to disallow payment of unfunded pension to the employees. On the basis of the facts and circumstances of the case, the additional evidence filed does not hold merit to overturn the AO’s proposal.”
5.2. The ld DRP observed that this remand report was sent to assessee for its rebuttal and no submissions were made later on. Accordingly , the ld DRP upheld the action of the ld AO in disallowing the said expenditure in the sum of Rs 4.09 crores. Accordingly, the same was sought to be disallowed in the final assessment order by the ld AO. Aggrieved, the assessee is in appeal before us.
5.3. We have heard the rival submissions. The ld AR submitted that the very basis on which the claim of expenditure was disallowed by the ld AO as well as by the ld DRP was stated to be non-furnishing of details of employees by the assessee to whom the payments were made. In this regard, he drew the attention of the Bench to pages 247 to 250 of the paper book containing the list of employees, their designation, employee code details and the amounts paid to 276 employees in total. He also drew our attention to page 416 of the paper book wherein these payments were duly approved by the competent authority in the assessee company including the Head of Human Resources in charge of Indian operations of the assessee bank. We find that though the assessee had nomenclatured the subject mentioned payments of Rs 4.09 crores as ‘unfunded pension’, it is effectively paid to employees of the assessee bank and no contribution was made whatsoever to any fund with respect to the said pension payments. It is more of a exgratia or extra payment of salary made to the employees of the bank based on some criterion, which has been duly subjected to deduction of tax at source and the same has been duly included in their respective Form No. 16. This fact is not in dispute before us. In other words, the payments made by the assessee bank to the various employees had been treated effectively as salary and other allowances including perquisites and the employees in turn had paid taxes for the same by offering it to tax in their returns,
6 ITA No.2619/Kol/2018 The Royal Bank of Sctoland N.V. India Branches, AY 2014-15 wherever applicable. Hence it is effectively a payment made as a welfare measure for the benefit of the employees of the assessee bank, which is squarely allowable as deduction u/s 37 of the Act. It is well settled that nomenclature or the form of a transaction should have to be ignored for the purpose of allowability of the same as deduction for income tax purposes and substance of the transaction is to be looked into. The real substance is that payment has been made as a welfare measure to employees of the assessee bank which makes it eligible for deduction u/s 37 of the Act. The payments were made to employees pursuant to Employer – Employee Relationship. Even the TDS obligations associated with the said payments have been duly complied with by the assessee, which is not disputed by the revenue before us. Even the sample Form No. 16 were duly submitted by the assessee before the ld AO which are enclosed in page 246 of the paper book. It was specifically submitted before the ld AO that the payment made under this particular scheme covered all eligible employees ranking from clerical staff, assistant manager, manager, vice president etc. We find that the genuinity of the said payments are not disputed by the revenue before us. We find that the case law relied upon by the ld AO in his assessment order and by the ld DR i.e Brooke Bond India Ltd supra, refers to payments made to fund . In the instant case, there was no contribution made by the assessee bank to any of the funds. The payments were directly made to the employees of the bank and subjected to deduction of tax at source. The moment the payments are made to those employees, the assessee had lost complete control over those funds and it had not come back to the assessee in any manner whatsoever either by creation of any fund managed by it or otherwise. From the approval letter of the competent authority of the assessee bank, we find that these payments were made only to meet the increased cost of living of the employees and hence it is effectively a payment made as a welfare measure . Hence the provisions of section 40A(9) of the Act as heavily relied upon by the ld DR is not at all applicable to the facts of the instant case. In view of these observations, we have no hesitation in directing the ld AO to grant deduction of the sum of Rs 4.09 crores in the instant case to the assessee. Accordingly, the Ground Nos. 4(a) to 4(c ) raised by the assessee are allowed.”
Since the issue raised by the assessee has also been decided by this Tribunal in the earlier years and the Ld. DR could not point out any change in facts or law, we respectfully following the order of the Tribunal allow this ground of appeal of the assessee and direct the AO to grant deduction of the sum of Rs.4,22,00,000/- in the instant case. This ground of appeal of assessee is allowed. 8. In the result, the appeal of assessee is partly allowed. Order is pronounced in the open court on 19th February, 2020
Sd/- Sd/- (J. Sudhakar Reddy) (Aby. T. Varkey) Accountant Member Judicial Member
Dated : 19th February, 2020
Jd.(Sr.P.S.)
7 ITA No.2619/Kol/2018 The Royal Bank of Sctoland N.V. India Branches, AY 2014-15
Copy of the order forwarded to: Appellant – The Royal Bank of Sctoland N. V- India Branches, 907, 1. Regus, 9th floor, PS Arcadia, 4A, Abanindra Nath Thakur Sarani, Kolkata-700 016. Respondent – DCIT (International Taxation)-2(1), Kolkata. 2 The CIT(A)-, Kolkata 3. 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order, Asstt. Registrar.