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Income Tax Appellate Tribunal, “L” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI RAVISH SOOD, JM
सुनवाई की तायीख / : 31.05.2018 Date of Hearing घोषणा की तायीख / : 13.08.2018 Date of Pronouncement आदेश / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER:
The present appeals filed by the revenue are directed against the respective orders passed by the CIT(A)-55, Mumbai, dated 28.03.2016, which in itself arises from the orders passed by the A.O under Sec. 143(3) r.w.s. 144C(3) of the Income Tax Act, 1961 (for short ‘Act’), dated 31.01.2011 and 15.02.2012 for A.Y. 2007-08 and A.Y. 2008-09, respectively. As common issues are involved in the aforementioned appeals, hence the same are being taken up and disposed off by way of a composite order. We shall first take up the appeal of the revenue for A.Y. 2007-08. The DCIT(IT)-3(2)(2) Vs. M/s Mizuho Corporate Bank Ltd. – A.Y. 2007-08 & 2008-09 revenue assailing the order of the CIT(A) has raised before us the following grounds of appeal:- “1. Whether on facts and in circumstances of the case in law, the CIT(A) is correct in holding that the addition has been wrongly made without appreciating the fact that the PE in India has to be treated as separate entity and the interest payable by the said PE is to be taxed in India in the hands of PE as income.
2. Whether on facts and in circumstances of the case in law, the CIT(A) is correct in holding that the provisions of section 40(a)(i) do not apply without appreciating that the interest was chargeable to income.
3. Whether on facts and in circumstances of the case in law, the CIT(A) is correct in holding that the appellant was under a legal obligation to settle the foreign exchange contract as and when they would arise and therefore the claim was not contingent.
4. The Appellant prays that the order of the Ld. CIT(A) on the above ground(s) be set aside and that of the Assessing officer be restored.
5. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.
2. Briefly stated, the assessee which is a foreign bank incorporated in Japan and carrying out its banking operations in India through branches situated at Mumbai and Delhi had e-filed its return of income for A.Y. 2007- 08 on 31.10.2007, declaring total income of Rs. 22,01,16,464/-. The return of income was thereafter revised by the assessee on 14.11.2007 at an income of Rs. 18,83,53,281/-. The case of the assessee was thereafter selected for scrutiny assessment under Sec. 143(2) of the Act.
The issue involved in the present appeal lies in a narrow compass. The A.O while framing the assessment observed that the branches of the assesses bank at Mumbai and Delhi through which it was carrying out its banking operations in India were the Permanent Establishment (for short ‘P.E’) of the assessee in India within the meaning of the India-Japan Double Taxation Avoidance Agreement (for short ‘DTAA’). It was observed by the A.O that the Indian branch of the assessee bank had during the year under consideration paid interest amounting to Rs. 2,15,304/- to its head office on the funds which were advanced to it by the head office in the normal course of its banking business. The A.O being of the view that as the branch office DCIT(IT)-3(2)(2) Vs. M/s Mizuho Corporate Bank Ltd. – A.Y. 2007-08 & 2008-09 same was in the nature of a payment to self. The A.O while concluding as hereinabove, took support of the order of the ‘Special Bench’ of the Tribunal in the case of ABN Amro Bank N.V. Vs. ADIT (2005) 97 ITD 89 (SB). Still further, the A.O held a conviction that as the source of the interest income earned by the head office was the latters branch office in India, thus the same as per Sec. 9(1)(v)(c) of the Act having deemed to have accrued or arisen in India, was therefore taxable in India as per the domestic law i.e. the Income Tax Act, 1961. It was further held by the A.O that as the interest was paid by the branch office, hence the latter automatically became the representative assessee/agent as per Sec. 163(1)(c) of the Act. In the backdrop of the aforesaid facts, the A.O concluded that the interest income received by the head office was taxable in India @10% of the gross amount as per Article 11(2)(a) of the India-Japan DTAA.
4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions advanced by the assessee before him, observed that an identical issue had came up before the Tribunal in the assesses own case for A.Y. 2005-06. It was observed by the CIT(A) that the issue pertaining to allowability of the interest expenditure in the hands of the branch of the assessee bank was decided by the Tribunal in the favour of the assessee. The CIT(A) further observed that the Tribunal had further concluded that the interest income received by the head office of the assessee bank was not chargeable to tax in India. On the basis of the aforesaid deliberations, the CIT(A) adjudicated the aforementioned issues in favour of the assessee, observing as under :
“6.4 I have considered the order of the AO and submissions of the AO. During the appellate proceedings, the assessee’s AR submitted copy of the order of the Hon’ble ITAT in the assessee’s own case for the A.Y. 2005-06 wherein identical case for A.Y. 2005-06 wherein identical issues have been dealt by the Hon’ble ITAT. The relevant portion of the order is as under :
DCIT(IT)-3(2)(2) Vs. M/s Mizuho Corporate Bank Ltd. – A.Y. 2007-08 & 2008-09 “The Revenue is in appeal against order of CIT(A) in deleting the disallowance made under Section 40(a)(ia). We have considered rival contentions and found that disallowance had been made by the AO on the plea that branch office in India has been treated as permanent establishment and has filed return of income as per IT Act. The AO observed that although the branch office is an extension of head office, but it is located in India, tax jurisdiction, as per Article 5 of DTAA between India and Japan PE includes the branch office. The AO further observed that assessee has permanent establishment in the form of branch office, therefore, as per Article 7 of DTAA, provides permanent establishment will be taxable in India finally the AO treated the head office and branch office as two different entities as per the domestic law as well as DTAA, therefore, disallowed the interest payment for non-deduction of tax under Section 40(a)(ia). We found that issue is squarely covered by the decision of the ITAT Special Bench in the case of ABN Amro Bank, 97 ITD 89. Recently the issue is also dealt by the ITAT Special Bench at Mumbai in the case of Sumitomo Mistu Banking Corp. 136 ITD 66 (Mum) (SB), wherein it has been held interest paid by the Indian Branch of the assessee bank to its overseas head office is not chargeable to tax in India. It was further held that the provisions of section 195 consequently would not be attracted in case of such payment of interest by the Indian Branch to overseas Head Office and the question of disallowance of the said interest by invoking the provisions of Section 40(a)(ia) does not arise. Respectfully following the said decision of the Special Bench, we upheld the impugned order of CIT(A) for deleting the disallowance of interest made under section 40(a)(ia) of the I.T. Act.” Similarly, on the issue of amount of interest received by the HO, the Hon’ble ITAT has held as under : “The Ld. D.R, however, has fairly and frankly conceded that both the issue involved in this appeal of the revenue are squarely covered by the recent decision of Special Bench of the Tribunal in the case of Sumitomo Mitsu Banking Corp. Vs. DDIT 136 ITD 66 (Mum)(SB) wherein it has been held that interest paid by the Indian Branch of the assessee bank to its overseas head office is not chargeable to tax in India. As further held by the Special Bench in the said case, the provisions of sec. 195 consequently would not be attracted in case of such payment of interest by the Indian Branch to overseas Head Office and the question of disallowance of the said interest by invoking the provisions of Sec. 40(a)(i) does not arise. Respectfully following the said decision of the Special Bench of this Tribunal, we uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on both the issues involved in this appeal of the revenue and dismiss the said appeal.”
DCIT(IT)-3(2)(2) Vs. M/s Mizuho Corporate Bank Ltd. – A.Y. 2007-08 & 2008-09 Hon’ble ITAT in the assessee’s own case have been adjudicated in favour of the assessee and in view of this, these parts of grounds of appeal are allowed. One more issue which has been raised is that a notice under section 163(1) of I.T. act, 1961 was not given to the assessee branch treating it as agent to its head office. First of all, even though the branch has been treated as agent to head office, it is not necessary to invoke provisions of section 163 and give notice under section 163 because branch and the head office are the same entity and only for assessing the income under I.T. Act, 1961, these two are being treated separately. Hence, it is held that it was not necessary to issue notice under section 163 of I.T. Act, 1961 to the branch of the bank as agent of the head office of the bank. In nutshell, ground of appeal is partly allowed.”
5. The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. We find that the assessee respondent despite having been put to notice as regards the date of hearing of the appeal, has neither put up an appearance nor any application seeking adjournment of the hearing of the appeal has been filed before us. We thus, in the backdrop of the aforesaid facts are constrained to dispose of the appeal as per Rule 25 of the Appellate Tribunal Rules, 1963, after hearing the appellant revenue and perusing the orders of the lower authorities. The Learned Departmental Representative (for short ‘D.R’) vehemently submitted that the CIT(A) had failed to appreciate that as the Indian PE and the head office of the assessee bank were two separate entities, thus the interest received by the head office from the Indian PE was liable to be brought to tax in India. The Ld. D.R further averred that the CIT(A) had erred in loosing sight of the fact that as the interest paid by the Indian PE to the head office was in the nature of an income chargeable to tax in India, thus the provisions of Sec. 40(a)(i) of the Act were clearly attracted. However, on being confronted with the fact that the order of the ‘Special Bench’ of ITAT, Kolkata in the case of ABN Ambro NV (supra) had been reversed by the Hon’ble High Court of Calcutta in the case of ABN Amro Bank, N.V. Vs. CIT & Anr. (2012) 343 ITR 81 (Cal), as well as the said view of the ‘Special Bench’ of the Tribunal in the case of ABN Ambro NV (supra) had been dislodged by the ITAT, Special Bench, Mumbai in the case of Sumitomo Mitsui Banking Corporation Vs. DDIT DCIT(IT)-3(2)(2) Vs. M/s Mizuho Corporate Bank Ltd. – A.Y. 2007-08 & 2008-09 (2012) 136 ITD 66 (SB)(Mum), the Ld. D.R failed to bring to our notice any judgment/order wherein a contrary view had been taken.
We have heard the Ld. D.R, perused the orders of the lower authorities and the material available on record. We find that our indulgence in the present appeal has been sought for adjudicating two issues viz. (i) whether the interest paid by the branch office of the assessee bank to its head office is allowable as an expenditure in the hands of the branch office; and (ii) whether the interest received by the head office is chargeable to tax in India. We find that the assessee had claimed an interest expenditure of Rs. 2,15,304/- which was paid by it on the funds that were advanced to it by its head office in the normal course of its banking business, after deducting tax at source under Sec. 195 of the Act. The assessee had claimed the gross amount of interest paid as a deduction in its computation of income by taking support of the protocol to Article 7(3) of the India-Japan DTAA which allows deduction of interest paid by a PE to its head office when such foreign enterprise is a banking institution. However, as observed by us hereinabove, the A.O disallowed the claim of the assessee for deduction of the interest expenditure by relying on the decision of the ‘Special Bench’ of the ITAT, Kolkata in the case of ABN Amro Bank N.V. Vs. ADIT (2005) 97 ITD 89 (SB), and therein holding that as the branch office and the head office were not separate entities for income tax purposes, thus the payment of the interest being in the nature of a payment to self could not be allowed as an expenditure in the hands of the branch office. Simultaneously, the A.O further observing that as the interest received by the head office from the Indian PE had accrued and arisen in India, thus brought the same to tax @ 10% on the gross amount as per Article 11(2)(a) of the India-Japan DTAA.
We have deliberated at length on the issues under consideration and are of the considered view that the same are squarely covered by the order passed by a coordinate bench of the Tribunal in the assesses own case for A.Y. 2005-06. We find that the Tribunal while disposing off the appeal of the DCIT(IT)-3(2)(2) Vs. M/s Mizuho Corporate Bank Ltd. – A.Y. 2007-08 & 2008-09 assessee for A.Y. 2005-06 had relied on the order passed by the ‘Special Bench’ of the ITAT, Mumbai in the case of Sumitomo Mitsui Banking Corporation Vs. DDIT (2012) 136 ITD 66 (SB)(Mum). As observed by us hereinabove, the Tribunal had in the aforementioned case concluded that interest paid by the Indian branch of the assessee bank to its overseas head office would not be chargeable to tax in India. We thus, are of the considered view that in the backdrop of the fact that the issue as regards the chargeability to tax of the interest income received by the head office of the assessee bank from its Indian PE had already been adjudicated by the Tribunal in the assesses own case in A.Y. 2005-06 by following the order passed by the ‘Special Bench’ of the Tribunal in the case of Sumitomo Mitsui Banking Corporation (supra), thus finding no reason to take a different view, we respectfully follow the same. We thus, uphold the order of the CIT(A) to the extent the latter had concluded that the interest income received by the head office of the assessee bank would not be chargeable to tax in India.
We shall now advert to the issue as regards the allowability of the interest paid by the branch of the assessee bank to its head office as an expenditure in the hands of the branch office. We find that the claim of the assessee as regards the interest expenditure was disallowed by the A.O, for the reason that he held a conviction that as the branch and head office of the assessee bank were not separate entities as per domestic law as well as DTAA, thus the payment of the interest by the branch office to its head office, being in the nature of a payment to self could not be allowed as an expenditure. We find that the A.O while arriving at the aforesaid view had taken support of the order passed by the ‘Special Bench’ of ITAT, Kolkata in the case of ABN Amro Bank N.V. Vs. ADIT (2005) 97 ITD 89 (SB). However, as observed by us hereinabove, the decision of the ‘Special Bench’ of ITAT, Kolkata in the case of ABN Ambro N.V. (supra) had thereafter been reversed by the Hon’ble High Court of Calcutta in the case of ABN Amro Bank, N.V. Vs. CIT & Anr. (2012) 343 ITR 81 (Cal). The High Court in its aforesaid order had observed that though a branch and head office are the same person in general law, the Article 5 and Article 7 of the India-Netherland DCIT(IT)-3(2)(2) Vs. M/s Mizuho Corporate Bank Ltd. – A.Y. 2007-08 & 2008-09 DTAA provided that the PE shall be assessable as a separate entity. We find that in the backdrop of the aforesaid facts the Hon’ble High Court had held that the payment of interest by the Indian PE of the Bank to its head office was to be allowed as deduction while computing the income of the PE chargeable to tax. We find that in the case of the assessee before us, the Article 7(3) of India-Japan DTAA expressly provides for deduction of interest on money advanced by the Head office to its Indian PE when such foreign enterprise is a banking institution. We are of the considered view that in the backdrop of our aforesaid observations, the interest paid by the branch office of the assessee bank in India to the head office of the bank on the amounts advanced by the latter in the normal course of its banking business is allowable as a deduction while computing the income of the Indian PE i.e. the branch of the assessee bank in India. We thus, not finding any infirmity in the order of the CIT(A) that the interest paid by the branch of the assessee bank to its head office is allowable as a deduction in the hands of the branch of the assessee bank, uphold the same. The Grounds of Appeal No. 1 to 3 raised by the revenue are dismissed in terms of our aforesaid observations.
The Grounds of Appeal No. 4 & 5 being general are dismissed as not pressed.
The appeal of the revenue is dismissed. A.Y. 2008-09
We shall now advert to the appeal of the revenue for A.Y 2008-09. The revenue assailing the order of the CIT(A) has raised before us the following grounds of appeal :
“1. Whether on facts and in circumstances of the case in law, the CIT(A) is correct in holding that the addition has been wrongly made without appreciating the fact that the PE in India has to be treated as separate entity and the interest payable by the said PE is to be taxed in India in the hands of PE as income.
DCIT(IT)-3(2)(2) Vs. M/s Mizuho Corporate Bank Ltd. – A.Y. 2007-08 & 2008-09 2. Whether on facts and in circumstances of the case in law, the CIT(A) is correct in holding that the provisions of section 40(a)(i) do not apply without appreciating that the interest was chargeable to income.
3. The Appellant prays that the order of the Ld. CIT(A) on the above ground(s) be set aside and that of the Assessing officer be restored.
The appellant craves leave to amend or alter any ground or add a new ground which may be necessary 12. Briefly stated, the assessee bank had e-filed its return of income for A.Y. 2008-09 on 29.09.2008, declaring total income of Rs. 33,38,98,770. The case of the assessee was thereafter taken up for scrutiny assessment under Sec. 143(2) of the Act.
During the course of the assessment proceedings, it was observed by the A.O that the assessee had paid interest on inter office accounts maintained with its head office and London branch amounting to Rs, 2,28,81,479/- on which no tax was deducted at source. The A.O observing that the assessee had failed to deduct tax at source while making the payment of interest to its head office and London branch, thus disallowed the same. Still further, the A.O being of the view that the source of interest earned by the head office was from its branch office in India, thus the same having deemed to have accrued and arisen in India, was thus liable to be brought to tax in India as per Sec. 9(1)(v)(c) of the Act. On the basis of his aforesaid deliberations, the A.O holding the branch office of the bank which had paid the interest to the head office as a representative assessee/agent as per Sec. 163(1)(c) of the Act, subjected the said amount to tax @ 10% on the gross amount of interest under Article 11(2)(a) of the India-Japan DTAA.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions advanced by the assessee before him, observed that the issue as regards the allowability of the interest expenditure in the hands of the branch office and the chargeability of the amount of the interest income received by the head office to tax in India had been decided in favour of the assessee by the Tribunal in the assesses own DCIT(IT)-3(2)(2) Vs. M/s Mizuho Corporate Bank Ltd. – A.Y. 2007-08 & 2008-09 case for A.Y. 2005-06. On the basis of the aforesaid deliberations the CIT(A) allowed the appeal of the assessee.
The revenue being aggrieved with the order passed by the CIT(A) has carried the matter in appeal before us. We find that as the issues involved in the present appeal remains the same as were there before us in the appeal of the revenue in the assesses own case for A.Y. 2007-08, viz thus our order passed in context of the issues under consideration while disposing off the aforesaid appeal shall apply mutatis mutandis in the present appeal of the revenue for A.Y. 2008-09. In terms of our aforesaid observations the Grounds of Appeal No. 1 & 2 raised by the revenue are dismissed.
The Grounds of Appeal No. 3 & 4 being general are dismissed as not pressed.
The appeal of the revenue is dismissed.
The appeals of the revenue for A.Y. 2007-08, viz. and A.Y. 2008-09, viz. , are dismissed.