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Income Tax Appellate Tribunal, “L” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K PRADHAN
PER BENCH
This bunch consists of an appeal by the Department and cross– objection by the assessee for assessment year 2007–08 and two sets of cross–appeals for assessment years 2008–09 and 2009–10. All these appeals and cross objections arise out of three separate orders passed by the learned Commissioner (Appeals)–10, Mumbai.
./2012 Revenue’s Appeal – A.Y. 2007–08
In ground no.1, the department has challenged the decision of learned Commissioner (Appeals) in holding that the interest paid by Indian Branch to its foreign Head Office and other overseas Branches is deductible in computing the total income.
4 DBS Bank Limited
Brief facts are, as stated by the Assessing Officer, the assessee is a non–resident Banking Company operating in India as Branch of DBS Bank Limited, Singapore. The assessee is engaged in the Banking activities permitted by the Reserve Bank of India including Corporate and Institutional Banking, Trade Finance, Transactional and Treasury Solutions etc. For the assessment year under dispute, the assessee had filed its return of income on 31st October 2007, declaring income of ` 134,07,89,502. During the assessment proceedings, the Assessing Officer noticed that in the relevant previous year, assessee has debited an amount of ` 1,63,73,490 towards payment of interest to Head Office and Branches at Singapore, Hong Kong and London. Noticing that similar expenditure claimed was disallowed in assessment year 2003–04, 2004–05 and 2006–07, he called upon the assessee to explain why the expenditure claimed should not be disallowed. In response, it was submitted by the assessee that since the interest payment is an allowable expenditure under section 36(1)(iii) of the Income Tax Act, 1961 (for short “the Act”), it cannot be disallowed. Further, it was submitted that the assessee has also deducted tax at source while making such payment. The assessing officer, however, did not find merit in the submissions of the assessee. Referring to Article–5 of India–Singapore Tax Treaty, the Assessing Officer observed that assessee constitutes a Permanent Establishment (PE) of the Head Office in India. Further, referring to Article–7 of the Tax
5 DBS Bank Limited Treaty, the Assessing Officer held, for the purpose of taxation in India, the P.E. is an entity which is separate from the assessee. The Assessing Officer observed, though, the conditions of section 40(a)(i) of the Act are not violated, however, assessee’s claim of expenditure towards interest payment cannot be allowed since such payment constitutes income of the Head Office chargeable in India by virtue of its PE and such expenditure relates to the PE. Thus, following the order of the learned Commissioner (Appeals), disallowing such expenditure in assessment year 2003–04, the Assessing Officer disallowed the interest expenditure of ` 1,63,73,490. Assessee challenged the disallowance before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee and following the Special Bench decision of the Tribunal, Mumbai Bench, in Sumitomo Mitsui Banking Corporation v/s DCIT, [2012] 19 taxmann.com 364 (SB) (Mum.) allowed assessee’s claim of deduction.
We have heard the learned Counsels appearing for both the parties and perused materials on record. It is agreed before us by both the sides that the issue in dispute has been decided in favour of the assessee by the Tribunal in assessment year 2003–04, 2005–06 and 2006–07. As could be seen from the impugned assessment order itself, the Assessing Officer referring to the order of the learned
6 DBS Bank Limited Commissioner (Appeals) in assessment year 2003–04, has made the disallowance. However, in assessment year 2003–04, the Tribunal in ITA no.248/Mum./2007, dated 7th October 2013, has decided the issue in favour of the assessee holding as under:–
“2.3 We have perused the records and considered the matter carefully. The dispute is regarding deduction on account of interest paid by the assessee, being an Indian branch to the head office of the bank. We find that the same issue had been considered by the larger special bench of Tribunal in case of Sumitomo Mitsui Banking Corpn. Vs. DCIT (Supra) and special bench in that case held that under the domestic law the interest paid by the Indian branch to the head office was not allowable as deduction as this was payment to self. Further it was also held that the interest payment was allowable as deduction while determining the profit attributable to the PE being the Indian branch under the provisions of Article 7(2) and 7(3) of Indo Japanese treaty read with paragraph 8 of the protocol. The special bench also held that the said interest cannot be taxed in the hands of the assessee bank in India under the domestic law as it was payment to self. There was no express provisions in the relevant tax treaty which was contrary to the domestic law. Therefore, interest payment was not taxable in the hands of the bank and thus there was no question of any tax deducted at source. The issue is thus covered in favour of the assessee and we accordingly set aside the order of CIT(A) and allow the claim of expenditure on account of interest.”
Following the aforesaid decision, the Tribunal has allowed assessee’s claim in assessment year 2005–06 and 2006–07 in ITA no. 8671/Mum./2010, dated 3rd March 2017 and ITA no.9067/Mum./2010, dated 12th February 2018, respectively. There being no difference in fact brought to our notice by the learned Departmental Representative, following the consistent view of the Tribunal on the disputed issue arising in assessee’s own case in the preceding
7 DBS Bank Limited assessment years, we uphold the order of the learned Commissioner (Appeals). Ground raised is dismissed.
In ground no.2, the Department has challenged the decision of the learned Commissioner (Appeals) in allowing loss claimed on valuation of unmatured forward exchange contract.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction of an amount of ` 36,62,07,457, on revaluation of forward contracts called upon the assessee to explain why the claim should not be disallowed. In response, it was submitted by the assessee that the Bank is in the business of dealing in foreign exchange with customers on day–to–day basis and foreign exchange is an item of stock–in–trade of the Bank. Therefore, the loss arising out of revaluation of foreign exchange forward contract as at 31st March 2007, is allowable. Further, it was submitted that by following the aforesaid accounting policy consistently, the assessee is either offering profits on revaluation of forward contract or claiming loss on such revaluation. The Assessing Officer, however, did not find merit in the submissions of the assessee and disallowed assessee’s claim. Assessee challenged the disallowance before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee and following the decision of the Tribunal
8 DBS Bank Limited in the case of Bank of Bahrain and Kuwait BSC, 132 TTJ 505 as well as the decision of the Tribunal in assessee’s own case for assessment year 1998–99 allowed the claim.
We have heard the learned Counsels appearing for both the parties. It has been agreed before us that the disputed issue has been decided in favour of the assessee by the Tribunal in assessment year 1998–99 and 2003–04 to 2006–07. On a perusal of the order dated 7th October 2013, in ITA no.248/Mum./2007, it is noticed that the Tribunal while deciding identical issue in assessee’s own case for assessment year 2003–04, has held as under:–
4.2 We have heard both the parties, perused the records and considered matter carefully. The dispute is regarding allowability of loss on account of revaluation of foreign exchange contracts which had not matured during the year on the balance-sheet date. The AO had disallowed the loss as contingent in nature as contract had not matured and also held that it was notional. CIT(A) has allowed the claim following some decisions of Tribunal. We find that the issue is covered by the judgment of Hon’ble Supreme Court in case of CIT. Vs. Woodward Governor India Private Limited (312 ITR 224) in which it has been held that adjustment on account of foreign exchange fluctuation can be made on each balance-sheet date in respect of any forward foreign exchange contract pending actual payment and any loss arising there from has to be allowed as an item of expenditure u/s 37(1). We, therefore, see no infirmity in the order of CIT(A) in allowing the claim of loss of the assessee. The order of CIT(A) is, therefore, upheld on this issue.
Similar view has been expressed by the Tribunal in other assessment years also. In fact, the Hon'ble High Court while deciding the Department’s appeals for assessment year 1998–99 and 2004–05, has upheld the view expressed by the Tribunal on the disputed issue
9 DBS Bank Limited which is evident from the copies of the orders passed by the Hon'ble High Court as placed in the case law compilation. In view of the aforesaid, we uphold the order of the learned Commissioner (Appeals) on this issue. Ground raised is dismissed.
In ground no.3, the Revenue has challenged deletion of disallowance made of ` 25,500, paid to Clearing Corp. of India Ltd. (CCIL).
Brief facts are, during the assessment proceedings, the Assessing Officer while verifying the expenditure claimed of ` 25,500, found that the amount was paid to CCIL on account of short position on security deal, hence, in the nature of penalty. Referring to Explanation to section 37 of the Act, the Assessing Officer disallowed the expenditure.
The learned Commissioner (Appeals) while deciding assessee’s appeal on the issue held that the payment made not being in the nature of penalty is allowable.
We have considered rival submissions and perused materials on record. As could be seen from the facts on record, the assessee is required to maintain certain limit with CCIL, however, due to shortage in that limit an amount of ` 25,500 was paid to CCIL. As rightly observed by the learned Commissioner (Appeals), the Assessing Officer has not established on record that the payment was on account
10 DBS Bank Limited of an offence or was prohibited by law. On the contrary, the payment made by the assessee appears to be compensatory in nature. The Tribunal while deciding more or less identical issue in assessee’s own case in assessment year 1999–2000, vide ITA no.1787/Mum./2004, dated 20th April 2011, has deleted the disallowance. In the aforesaid view of the matter, we uphold the decision of the learned Commissioner (Appeals) on this issue.
In ground no.4, the Department has challenged the decision of the learned Commissioner (Appeals) in holding that interest paid by the Indian P.E. of a foreign Bank to its Head Office and overseas Branches is not taxable in India.
Apropos ground no.1, while deciding identical issue in assessee’s own case for assessment year 2003–04 (supra) it has been held that the interest payment being a payment made to self is not taxable in computing the income of the Bank in India. In view of the aforesaid, we do not find any infirmity in the order of the learned Commissioner (Appeals) on this issue. Ground raised is dismissed.
In the result, Revenue’s appeal is dismissed.
C.O. no.8/Mum./2014 – By Assessee 19. In view of our decision in ITA no.6865/Mum./2012, the grounds raised in the cross–objection have become infructuous, hence, dismissed.
11 DBS Bank Limited
In the result, assessee’s cross objection is dismissed. ./2014 Assessee’s Appeal – A.Y. 2008–09
Grounds no.1 to 4 are in relation to taxability of interest of ` 26,69,04,500, earned on investments made in Indian securities by DBS Bank Ltd., Singapore as Foreign Institutional Investor (FII).
Brief facts are, during the assessment proceedings, the Assessing Officer noticed that as per notes to computation of income, the assessee has earned short term capital gain of ` 2,10,35,143, and interest income of ` 26,69,04,500 from FII. The Assessing Officer observed that while the assessee has offered the interest income from FII operations to tax, short term capital gain has been claimed as exempt. Referring to the decision of the Dispute Resolution Panel (DRP) in assessee’s own case for assessment year 2006–07, the Assessing Officer, though, accepted assessee’s claim that short term capital gain is exempt, however, he treated the interest income on FII operations as business income of the assessee and taxed @ 42.23%. Being aggrieved of the aforesaid decision of the Assessing Officer, assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee, however, upheld the decision of the 12 DBS Bank Limited Assessing Officer by referring to the directions of the DRP in assessment year 2006–07.
The learned Authorised Representative submitted that the Indian Branch is in no way involved with the FII operations as the Head Office directly carried out such activities. The learned Authorised Representative submitted that while deciding identical dispute in assessment year 2006–07 the Tribunal in ITA no.9067/Mum./2010 dated 12th February 2018, has accepted assessee’s claim by directing the Assessing Officer to assess the interest income as per Article–11 of India–Singapore Tax Treaty.
The learned Departmental Representative, though, agreed that the issue has been decided in favour of the assessee by the Tribunal, however, he relied upon the observation of the learned Commissioner (Appeals).
We have considered rival submissions and perused materials on record. As could be seen, identical issue arose before the Tribunal in assessee’s own case for the assessment year 2006–07 in ITA no. 9067/Mum./2010, dated 12th February 2018, wherein, the Tribunal has held as under:–
“16. We heard learned Departmental Representative and perused the record. We noticed that investments have been made by the head office of the assessee in its category as “FII” by bringing funds from abroad. It is also not in dispute that 13 DBS Bank Limited these investments do not form part of assets of the PE. It is also not on record that the PE was engaged in the investment activities of FII. Under these set of facts, we are of the view that the asset test/activity test explained by the Delhi Special Bench in the case of Clough Engineering Ltd. (supra) does not get satisfied in the instant case. Accordingly, we are of the view that the Assessing Officer was not justified in assessing the income as business income of the assessee. Accordingly, we set aside the order passed by the Assessing Officer on this issue and direct him to assess the interest income from Government Bonds under Article 11 of Indo-Singapore Treaty.”
There being no difference in fact brought to our notice by the Department, respectfully following the aforesaid decision of the Co– ordinate Bench, we direct the Assessing Officer to assess the interest income from Government Bonds on gross basis as per Article–11 of the India–Singapore Tax Treaty. These grounds are allowed.
Grounds no.5 to 7 are not pressed, hence, dismissed.
In ground no.8, the assessee has sought a direction to grant refund of tax deducted at source on the interest paid to Head Office.
We have heard the parties on this issue. It is the contention of the assessee that since the interest paid is not taxable at the hands of the head office, the tax deducted at source on interest payment should be refunded. As could be seen, the learned Commissioner (Appeals) in Para–20 of the impugned order has already directed the Assessing Officer to examine assessee’s claim. In view of the above, we direct the Assessing Officer to verify the claim of the assessee and allow
14 DBS Bank Limited consequential relief in terms of the order passed by us on the disputes raised in these appeals. This ground is allowed for statistical purposes.
Grounds no.9 is not pressed, hence, dismissed.
In the result appeal is partly allowed.
6038/Mum./2014 Revenue’s Appeal – A.Y. 2008–09
The dispute in this appeal is confined to the decision of the learned Commissioner (Appeals) in deleting the disallowance of interest expenditure claimed by the assessee.
While deciding identical issue raised by the Department in ground no.1 of ITA no.6865/Mum./2012, we have upheld the decision of the learned Commissioner (Appeals) in deleting the disallowance. In consonance with our aforesaid decision, we uphold the order of the learned Commissioner (Appeals) on this issue. Ground raised is dismissed.
In the result, Revenue’s appeal is dismissed. ./2014 Assessee’s Appeal – A.Y. 2009–10
The issue raised in ground no.1 to 4 of this appeal is identical to the issue raised in grounds no.1 to 4 of ITA no.4948/Mum./2014.
15 DBS Bank Limited Following our decision therein, we direct the Assessing Officer to assess the interest income from Government Bonds on gross basis as per Article–11 of the India–Singapore Tax Treaty. These grounds are allowed to the extent indicated above.
Ground no.5 is not pressed, hence, dismissed.
In the result, assessee’s appeal is partly allowed. ./2014 Revenue’s Appeal – A.Y. 2009–10
In ground no.1, the Revenue has challenged deletion of disallowance of interest expenses.
This ground is identical to ground no.1 of ITA no.6865/Mum./ 2012 (supra). Following our decision therein, we uphold the order of the learned Commissioner (Appeals) on this issue. Ground raised is dismissed.
Ground no.2 is on applicability of section 40(a)(i) of the Act.
While deciding ground no.4 of ITA no.6865/Mum./2012, it has been held that since the interest paid to Head Office is not taxable at its hands, there is no requirement of deduction of tax under section 40(a)(i) of the Act. Accordingly, the ground raised has to be dismissed.
16 DBS Bank Limited
In the result, Revenue’s appeal is dismissed.
To sum up, Revenue’s appeals are dismissed, assessee’s appeals are partly allowed and cross objection is dismissed. Order pronounced in the open Court on 15.06.2018