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Income Tax Appellate Tribunal, “I ”, BENCH MUMBAI
Before: SHRI MAHAVIR SINGH, JM & SHRI G. MANJUNATHA, AM
आदेश / O R D E R PER G. MANJUNATHA (A.M):
These two appeals filed by the revenue are directed against separate, but identical orders of the CIT(A)-55, Mumbai dated 07/11/2017 and they pertain to A.Yrs. 2013-14 & 2014-15. Since facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed off by this consolidated order.
The assessee is more or less filed common grounds of appeal for both the assessment years. For the sake of brevity, grounds of appeal filed for A.Y.2013-14 are reproduced hereunder:-
“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the 'Data Processing Cost' paid by the assessee - Branch to its Head Office does not amount to "Royalty", when such payment is based and determined on the usage of space / capacity and other key determinants towards usage of ICT infrastructure? 2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the usage of the ICT infrastructure of the Bank by the Branch did not amount to "use" or "right to use" as per the provisions of Article 12(3) of the India - Belgium DTAA? 3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that Indian branch of the assessee - Bank was not obliged to deduct tax at source while making payment for 'Data Processing Cost' of Rs.1,15,51,228/- to the Head Office and that Section 40(a)(ia) of the Act is not applicable to this payment? 4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the definition u/s 9(l)(vi) of the Act read with Explanation 4 & 5, would not be applicable in case where 'Royalty' has been defined under the India - Belgium DTAA? 5. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the claim of interest paid by the Branch Office (BO) of the assessee bank in India to its Head Office (HO) in the computation of business income of the assessee attributable to the BO (PE) in India? 6. Without prejudice to Ground 5 above, on the facts and in the circumstances of the case and in law, whether the learned CIT(A) erred in allowing the deduction for interest paid by the BO to the Head Office and at the same time not holding that the interest received by the Head Office was taxable in India by virtue of section 9(i)(v) of the Act read conjointly with paragraphs 4 and 5 of Article 11 of the India-Belgium DTAA? 7. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in relying on the decision of the Hon'ble Calcutta High Court in the case of ABN Amro Bank in which it was held that the interest earned by the HO from the BO is not chargeable to tax in view of Article 11(7) of the DTAA between India and Netherlands when in fact the Hon'ble Calcutta High Court did not have the occasion to consider the provisions of Article 11(8) of the India - Netherlands DTAA which is similar to Article 11(5) of the India -Belgium DTAA and which allows for interest income to arise in the Contracting State in which the PE is situated (i.e., India) if it is borne by the PE and in spite of the payer not being resident in that Contracting State (India)? 8. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not considering that the Hon'ble Supreme Court in the case of ABN Amro Bank in Civil Appeal No. 8764/2012 had dismissed the Special - Leave Petition filed by the Department without assigning reasons and in light of the Hon'ble Supreme Court's own decision in the case of Shanmugavel Nadar V. State of Tamil Nadu & Another (263 ITR 658) such decision is applicable to that particular case only and does not have any precedence value in a case dealing with India - Belgium DTAA? 9. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) while considering the interest income in the hands of the HO erred in ignoring the provisions of section 9(l)(v)(c) of the Act which is a charging section as held by the Hon'ble Supreme Court in the case of A. Sanyasi Rao 1996 SCC (3) 465and again reiterated by the Hon'ble Supreme Court in the case of Sedco Forex International Inc in Civil Appeal No. 4906 of 2010? 10. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in not making the disallowance u/s 14A read with Rule 8D for earning of exempt income on the basis of the Principle of Mutuality by the HO by following the order of the Special Bench of the ITAT, Mumbai in the case of Sumitomo Mitsui Banking Corporation, when the HO and the BO are fungible entities.
11. The Appellant prays that the order of the CIT(A) be set aside on the above ground and that of the Assessing Officer be restored.
12. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.
The brief facts of the case are that the assessee is a banking company incorporated in Belgium with limited liability, was granted license to carry on banking business in India by the Reserve Bank of India. The assessee has filed return of income for the A.Y.2013-14 on 29/11/2013 declaring total income of Rs.1,79,30,700/-. The assessment was completed u/s.143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 determining the total income at Rs.15,00,44,453/-, interalia, by making additions towards disallowance of data processing cost u/s.40(a)(i) of the Income Tax Act, 1961 for failure to deduct tax at source u/s.194J of the Income Tax Act, 1961 on the ground that data processing cost is in the nature of royalty as per Clause-3, Explanation 1 of Section 9(i)(vi) of the Act. The AO also made additions towards disallowance of interest paid to head office and taxability of the same in the hands of the head office. Similarly, the AO also made additions towards disallowance of expenditure incurred in relation to exempt income u/s.14A of the Income Tax Act, 1961.
Aggrieved by the assessment order, the assessee preferred the appeal before the CIT(A). 5. The CIT(A) for the detailed reasons recorded in the appellate order deleted the additions made by the AO towards data processing cost u/s.40(a)(i) of the IT Act, 1961, disallowance of interest paid to head office and taxability of the same in the hands of the head office and also disallowance of expenditure incurred in relation to exempt income u/s.14A of the Income Tax Act, 1961. 6. Aggrieved by the CIT(A) order, revenue is in appeal before us. 5. The first issue that came up for consideration from ground No.1 to 4 of revenue appeal is disallowance of data processing cost u/s.40(a)(ia) of the IT Act, 1961. The ld. AR for the assessee, at the time of hearing submitted that the issue is squarely covered in favour of the assessee by the decision of ITAT, Mumbai ‘I’ Bench in assessee’s own case for the A.Y.2012-13 in where under identical set of facts, the Tribunal has deleted additions made by the AO towards data processing cost paid to its head office u/s.40(a)(i) of the Act for failure to deduct tax at source u/s.194J of the Income Tax Act, 1961.
The ld. DR, on the other hand fairly accepted that the issue is covered in favour of the assessee by the decision of ITAT for earlier years.
We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The issue involved in this ground of appeal i.e., data processing cost paid to head office is in the nature of royalty as per Clause-3, Explanation 1 to Section 9(1)(vi) of the Income Tax Act, 1961 which is liable for withholding tax u/s.194J of the Income Tax Act, 1961 has been the subject matter of discussions by the Co-ordinate Benches of ITAT in assessee’s own case for the A.Y.2012-13. The Co-ordinate Bench, after considering relevant provisions of the Act, and also scope of Article 12(3)(a) of DTAA between India and Netherlands held that data processing cost did not constitute royalty and is merely reimbursement of expenses not liable for withholding tax and therefore, no disallowance could be made u/s.40(a)(i) of the Income Tax Act, 1961. Relevant paragraphs of the Tribunal order are as under:-
“2.1. The facts in brief are that - assessee paid Data Processing Cost of Rs. 88,26,181/- to its HO, which according to the AO is a copy right protected intellectual property, known as ICT Infrastructure, which is IT Hardware imbedded with software and accordingly, the AO came to the conclusion that the it is a Royalty as per Clause-(iii), Explanation-2 to Section 9(1)(vi) of the Act. Since the assessee has not deducted any tax at source, the AO disallowed the same under the provisions of Section 40(a)(ia) of the Act and added to the income of the assessee. 2.2. At the outset, Ld. Counsel for the assessee pointed out that the issue is squarely covered in favour of assessee in assessee's own case by the decision of the Co-ordinate Bench in earlier years i.e., AYs. 2004-05, 2006-07 & 2007-08, wherein the Co-ordinate Bench has held that 'Royalty' cannot be held to be covered under the scope of Article 12(3)(a) of DTAA (Double Taxation Avoidance Agreement) between India and Netherlands. Ld. CIT(A) following the order of ITAT in these years held that Data Processing Cost did not constitute 'Royalty' and is merely a reimbursement of expenses not liable for TDS and therefore, the deduction has to be allowed for reimbursement of cost of data processing charges. 2.2. The ld DR on the other hand relied on the grounds of appeal and order of AO. 2.3. Since the facts in the instant year are identical to ones as in the earlier years and accordingly we respectfully following the decision of the Co- ordinate Benches hold that assessee is entitled for deduction of data processing cost of Rs. 88,26,181/- as the same is not royalty but reimbursement of Data Processing Charges and therefore there is no requirement of deduction of tax at source from the said reimbursement. This ground of Revenue is dismissed.”
8. In this view of the matter and consistent with view taken by the Co- ordinate Bench, we are of the considered view that there is no error in the order of the ld. CIT(A) in deleting additions made by the AO towards disallowance of data processing cost, hence, we are inclined to uphold the findings of ld. CIT(A) and reject the ground taken by the revenue.
9. The next issue that came up for consideration from ground No.5 to 9 is disallowance of interest paid to head office and taxability of the same in the hands of the head office.
10. The ld. AR for the assessee submitted that this issue is also covered in favour of the assessee by the decision of ITAT Mumbai in assessee’s own case for the A.Y.2012-13, wherein the Tribunal under identical set of facts, held that interest paid by the PE to GE is not liable to tax in the hand of head office, since branch is separate and distinguishable from head office for the purpose of assessment under the Income Tax Act and also held that interest earned by the head office from branch office is not chargeable to tax in view of the specific provisions of Article 11 of DTAA between India and Netherlands.
The ld. DR, on the other hand fairly accepted that issue is covered in favour of the assessee by the decision of ITAT Mumbai ‘I’ Bench in assessee’s own case for the A.Y.2012-13.
We have heard both the parties and perused the materials available on record. The issue of deductibility of interest paid to head office is a subject matter of consideration by the Co-ordinate Bench in assessee’s own case for earlier years. The Tribunal after considering relevant facts in the light of the provisions of Article 11 of DTAA between India and Netherlands hold that interest paid by the branch office to head office is not chargeable to tax in view of the specific provisions of Article 11 of DTAA between India and Netherlands. The relevant findings of the Tribunal are as under:- “3. As far as the Ground No. 2 is concerned, the facts in brief are that assessee-branch in India during the year has paid interest of Rs. 11,94,79,875/- to its HO which is not taxable in the hand of H.O. under the Income Tax Act and therefore not offered to tax as income of the H.O. The AO disallowed the same on the ground that the decision of the ITAT in the case of Mitsui Bank [35 TTJ 426] and ITAT, Calcutta in the case of ABN AMRO Bank [97 ITD 89] and also that the DRP has disallowed the same in AYs. 2006-07 & 2007-08 though the credit of TDS deducted of Rs. 1,21,04,206/- u/s. 195 of the Act was allowed which was deducted in terms of Circular No. 740, dt. 17-04-1996 @ 10% under Article 11(2) of Tax Treaty between India and Belgium. 3.1. At the outset, Ld. Counsel for the assessee submitted that the issue is squarely covered in favour of assessee in assessee's own case in AYs.
2002-03 to 2011-12 and Ld. AR submitted that CIT(A) while deciding the issue, has also followed the decision of the Co-ordinate Bench in assessee's own case for the AYs. 2003-04 to 2007-08. Therefore, the CIT(A) has passed well reasoned and speaking order which is in accordance with the ratio as laid by the tribunal in the earlier year and should be followed in the instant year also. 3.2. After hearing both the sides and perusing the material on record, including the decisions relied upon, we find that the issue has been decided by the Co-ordinate Benches in the earlier years from AYs. 2002- 03 to 2011-12, wherein the Co-ordinate Benches have allowed the claim for deduction of interest paid by the branch office to its HO considering the fact that the assessee a banking company. The Calcutta High Court has held in the case of ABN Amro Bank 198 taxman 376 where an assessee is an branch (PE) of non resident entity i.e its Head Office(G.E.) and the interest paid by the P.E. to G.E. allowable since branch (P.E.) is separate and distinct from head office(G.E.)for the purpose of assessment under the I.T.Act and also held that interest earned by the head office (G.E.) from branch office(P.E.) is not chargeable to tax in view of the specific provisions of Article 11 of DTAA between India and Netherland. Therefore, respectfully following the decisions of the Co-ordinate Benches, we dismiss the ground raised by Revenue.”
In this view of the matter and consistent with view taken by the Co- ordinate Bench, we are of the considered view that the CIT(A) was right in deleting the addition made by the AO towards disallowance of interest paid to head office. Hence, we are inclined to uphold the findings of the ld. CIT(A) and reject the ground taken by the revenue.
The next issue that came up for consideration from ground No.10 is disallowance u/s.14A of the Income Tax Act, 1961. The ld. AR for the assessee submitted that this issue is also covered in favour of the assessee by the decision of ITAT, Mumbai in assessee’s own case for the A.Y.2012-13 in ITA No.6423/Mum/2016.
Ld. DR, on the other hand fairly accepted that the issue is covered in favour of the assessee.
We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The issue involved in the present appeal i.e., disallowance of expenditure incurred in relation to exempt income u/s.14A r.w.r. 8D is no longer res integra. The Co-ordinate Bench of ITAT, Mumbai ‘I’ Bench, in assessee own case considered similar issue in light of provisions of Section 14A r.w.r. 8D and by following the decision of ITAT Delhi Bench in the case of Sumitomo Corporation vs. DCIT 114 ITD 61 held that when the assessee has not claimed reduction towards interest paid to head office as its expenditure, the question of apportionment interest for exempt income and taxable income does not arise, consequently no disallowance could be made u/s.14A of the Income Tax Act, 1961. The relevant findings of the Tribunal are as under:-
“4.1. The facts in brief are that the assessee during the course of assessment proceedings made disallowance u/s. 14A r.w. Rule 8D to the tune of Rs. 2,15,61,865/-, comprising proportionate disallowance of interest of Rs. 1,34,59,230/- under rule 8D(2)(ii) and Rs. 81,02,635/- under Rule 8D(2)(iii). The said disallowance was made by the AO on the ground that the assessment of both HO and branch in India are done together. According to the AO, the branch has borrowed money from the HO, utilized and had paid back the interest on such debt and thus, the branch has claimed expenses in connection with payment of interest to the HO and the HO is claiming the said interest income as exempt. Therefore, the disallowance u/s. 14A r.w. Rule 8D has to be made on the basis of Principles of Mutuality following the Special Bench decision in the case of Sumitomo Corpn. Vs. Dy.CIT [114 ITD 61]/[17 SOT 197] (Delhi) when the HO and branch office are fungible entities.
4.2. Ld. CIT(A) deleted the disallowance on the ground that if there is any exempt income earned by the branch which is exempt under the Income Tax Act, only then the provisions of Section 14A could be applied. According to the CIT(A) the assessee has not claimed any exempt income under theIncome Tax Act as is clear from the computation of total income and as regards the interest of Rs. 11,94,79,875/-, interest earned by the HO from the branch, the HO has not incurred any expenditure in India to earn it even though the interest earned by it is held to be not chargeable to tax under DTAA and therefore, the provisions of Section 14A of the Act would not apply. 4.3. Ld. AR at the outset pointed out that the issue involved in this case has been decided by the Co-ordinate Bench in assessee's own case in & 7482/Mum/2014, dt. 28-02-2017 for the AYs. 2010-11 & 2011-12 decided the issue in favour of assessee by observing and holding as under: "6. Next issue relates to disallowance u/s. 14A for earning exempt income. We have considered rival contentions and found from record that the issue has been decided in assessee's favour by the Mumbai ITAT, in assessee's own case for Assessment Years 2004-05, 2005- 06, 2007-08 and 2009-10. The Indian Branch has not received/earned any interest income from its Head Office or other foreign branches and hence there can be no question of the interest expense in question being incurred to earn any exempt income and hence the same cannot be disallowed u/s. 14A. The proposition that no disallowance can be made u/s.14Aof the Income-tax Act, 1961 in case there is no exempt income is now well settled and one can refer to the following cases wherein the said proposition has been upheld: • ClT v/s. Delile Enterprises (ITA No 110 of 2009) (Born) • Cheminvest Ltd., v/s. CIT (2015) 378 ITR 33 (Delhi) • ACIT vs. Lafarge India Holding (P) Ltd., (2008)-(19 SOT 121) (Mum Trib) • CIT v/s Shivam Motors Pvt Ltd., (2015) 230 Taxman 63 (Allahabad) • CIT v/s. Corrtech Energy Pvt. Ltd.. (233 Taxman 130) (Gujarat) • ACIT v/s. Mr. M. Baskaran (ITA No.1717/Mds/2013) • CIT v/s.Lakhani Marketing Inc (2015) 226 Taxman 45 (P & H) • Huntsman International (India) P. Ltd., v/s DCIT (2016] 66 taxmann.com 325 (Mum, Trib) 6. Contention of assessee before us was that no expenditure has been incurred or claimed by the Indian Branch in respect of interest earned by the Head Office (which is not taxable). Accordingly, it was pleaded that provisions of Section 14A are not applicable to the said case.
7. We found substantial merit in the contention of learned AR, however, in the interest of justice, we restore the matter back to the file of the AO to find out if assessee was in receipt of any exempt income vis-a-vis interest paid to head office. If the AO found that assessee was not in receipt of any exempt income, no disallowance is to be made. Accordingly AO is directed to decide afresh after verification.
Learned DR fairly conceded that similar grounds have been taken by Revenue In the assessment year 2011-012. 9. We have gone through the orders of the authorities below following the reasoning given in the Assessment Year 2010-11. we do not find any infirmity in the order of CIT(A) for the A.Y 2011-012. 10. In the result, appeals filed by the Revenue are dismissed in terms indicated hereinabove". 4.4. Since the facts of the present case before us are similar to the facts of the case as decided by the Co-ordinate Bench in the AYs. 2010-11 & 2011- 12 (supra) in assessee's own case, we , therefore , respectfully following the decision of the Co- ordinate Bench, uphold the order of CIT(A) and the grounds raised by Revenue is dismissed.”
In this view of the matter and consistent with view taken by the Co- ordinate Bench in assessee’s own case for earlier years, we are of the considered view that there is no error in the findings of the ld. CIT(A) in deleting additions made towards disallowance of expenditure incurred in relation to exempt income u/s. 14A of the Act. Hence, we are inclined to upheld the findings of ld. CIT(A) and reject the ground taken by the revenue.
In the result appeal filed by the revenue is dismissed.
ITA No.679/Mum/2018 (A.Y.2014-15) 19. The facts and issues involved in this appeal are identical to the facts and issues which we have already considered in . The reasons given by us in the preceding paragraphs shall mutatis mutandis apply to this appeal also. Therefore, for the reasons given in the preceding paragraph in the appeal filed by the revenue is dismissed. 20. In the result, both the appeals of the revenue are dismissed.