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Before: SHRI R. K. PANDA & MS SUCHITRA KAMBLE
PER BENCH These appeals are filed by the assessee as well as the Revenue against the order dated 31/3/2014 passed by CIT(A)-XXV, New Delhi for Assessment Year 2005-06.
2 ITA Nos. 3707 & 3755/Del/2014
The grounds of appeal are as under:-
1 Disallowance of salary paid overseas to expatriates of the Appellant working in India by the Head Office and the Indian taxes paid thereon by the Head Office: Rs. 142,664,438
That on the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in confirming the action of the Ld. AO of not allowing deduction in respect of a sum of Rs. 142,664,438 paid as salaries by the Head Office overseas, in foreign currency, to the expatriates working in India exclusively for the permanent establishment (‘PE’) of the Appellant in India, on which taxes have been duly deducted/deposited in India, and accordingly the order of the Hon’ble CIT(A) is erroneous in law as well as on facts on the following counts:
a) That the Hon’ble CIT(A) has failed to appreciate that the salary has been paid to the expatriates who are stationed in India and are working exclusively for business operations of the Indian PE of the Appellant and is thus an allowable expenditure as per Article 7(3) of DTAA;
b) That the Hon’ble CIT(A) has erred in observing that the nature of expense is covered under section 44C of the Act, even though, the said amount is incurred exclusively and for direct benefit of Indian operations of the Appellant. c) That the Hon’ble CIT(A) erred in not appreciating that the allowability of deduction is not dependent upon the entries in books of accounts of the Indian PE.
2 Non-applicability of the provisions of Sec 115JB of the Act relating to Minimum Alternate Tax (‘MAT’)
That on the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in upholding the contention of the Ld. AO of invoking the provisions of 115JB of the Act in the assessment order, and accordingly the order of the Hon’ble CIT(A) is bad in law on the following counts:
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a) The Hon’ble CIT(A) has erred in not appreciating the contention of the Appellant that being a banking company, the provisions of section 115JB of the Act is not applicable to the Appellant for the subject year.
b) The Hon’ble CIT(A) has erred in not appreciating the contention of the Appellant that operations of its Indian PE are taxable in accordance with provisions of Article 7(3) of the India-Japan DTAA and in view of the provisions of section 90 of the Act, the provisions of section 115JB of the Act cannot be applied.
3 Reduction for write back of provision for bad and doubtful debts amounting to Rs.9,288,687 and depreciation on investment amounting to Rs.3,400,710
That on the facts and the circumstance of the case and in law and without prejudice to the ground no. 2 above, the Hon’ble CIT(A) has erred in not allowing the reduction for write back of provision for bad and doubtful debts and depreciation on investment while computing the book profits under section 115JB of the Act on the following counts:
a) The Hon’ble CIT(A) has erred in not adjudicating the issue of treatment of write back of provision for bad and doubtful debts and deprecation on investment while computing book profits under section 115JB of the Act.
b) The Hon’ble CIT(A) has erred in not allowing the reduction for write back of provision for bad and doubtful debts and depreciation on investment in accordance with clause (i) of explanation 1 to section 115JB of the Act ignoring the fact that the Ld. AO has increased the book profits of the Appellant by the amount of provision for bad and doubtful debts and depreciation on investment in the earlier years.
4 Deduction for expenditure incurred on Japanese Foodstuff: Rs 256,598 That on the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) has erred in dismissing the ground of the appellant on the following counts:
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a) The Hon’ble CIT(A) has erred in not allowing the deduction for Japanese Foodstuff by ignoring the fact that such expenditure constitutes as business expenditure for the Appellant.
b) The Hon’ble CIT(A) dismissed the ground without appreciating the fact that the same has been allowed in favour of the Appellant by the Hon’ble CIT(A) himself in the order passed for Assessment Year 2002-2003 by following the judgment of Hon’ble ITAT in Appellant’s own case.
5 Applicable Rate of Tax
That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) has erred in not upholding the contention of the Appellant that under the provisions of Article 24 of the India-Japan DTAA, the applicable rate of tax on the income of the Appellant attributable to its PE in India cannot exceed the applicable rate of tax (as per the Finance Act for the subject assessment year) in the case of Domestic Companies and consequential directions may kindly be issued in this regard.
6 General
a) Each of the above ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant.
b) The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable your Honour to decide this appeal according to law.
I.T.A .No. 3755/DEL/2014
“1. On the facts and in the circumstances of the case and law, Ld. CIT(A) has erred in deleting the addition made by the AO on account of provision of wealth tax to the P&L account for computing the book profit u/s 115JB, as he has ignored the fact that the provision for wealth tax was neither reflected in liability side nor was reduced from the asset side against the advance made
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by the bank.
On the facts and in the circumstances of the case and law, Ld. CIT(A) was correct in deleting the addition on account of interest paid to Head Office and income received on account of interest from Indian branches of Rs. 2,39,12,393/-, when it was clearly recorded by the AO that not only the PE of the assessee bank is separate entity for the purpose of taxation but the assessee has also claimed the deduction of the same in the Income tax return. The interest paid by this PE to the Head Office is liable to tax in India.
On the facts and in the circumstances of the case and law, Ld. CIT(A) has erred in allowing the deduction on account of Head Office expenditure u/s 44C ignoring the fact that there was no invoice raised and also no debit notes raised. Merely, on deemed basis, no deduction u/s 44C was allowable to the assessee.”
The Bank of Tokyo-Mitsubishi UFJ, Ltd. was a company incorporated in Japan and was the tax resident of Japan within the meaning of Article 4 of the Agreement for Avoidance of Double Taxation between India and Japan (in short DTAA) during the year under consideration. It was carrying on its banking business in India through its four branches at Mumbai, New Delhi and Chennai during the relevant Assessment Year. These branches of the assessee in India constituted Permanent Establishment (PE in short) of the assessee in India within the meaning of Article 5 of the DTAA. Therefore, the assessee claimed that it was liable to tax in India on the profit earned by the PE in accordance with the provisions of Article 7 of DTAA. During the A.Y. 2005-06, the assessee filed its original return of income u/s 139(1) of the Income Tax Act, 1961 on 30.10.2005, declaring NIL income before the ADIT, Circle - 2(2), Intl. Taxation, New Delhi. Consequent upon the filing of the return, the return was processed u/s 143(1) on 21.12.2006 accepting the income disclosed by the assessee. Subsequently, the case was selected for scrutiny in pursuance
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whereof notices u/s 143(2) & 142(1) were issued to the assessee from time to time. However the return was later on transferred to the ADIT, Circle 1(1), International Taxation, New Delhi who continued the proceedings from the stage it was left by the erstwhile AO. While scrutiny proceedings on the basis of the original return were in progress a revised return of income u/s 139(5) was filed by the assessee on 30.03.2007 which was taken up for continuing scrutiny proceedings afresh on the basis of the revised return of income. The Assessing Officer conducting the scrutiny proceedings issued notices u/s 143(2) of the Act along with questionnaire requisitioning certain details from the assessee on 28.09.2007. The revised return was taken as the basis for scrutiny proceedings by the Assessing Officer. The assessment was completed on 31.12.2007 on the basis of the revised return of income and the Assessing Officer made certain additions/disallowances to the returned income computed under the normal provisions of the Act as well as u/s 115JB of the Act. The Assessing Officer held that the income of the assessee under the normal provisions of the Act was assessed at Rs. 68,23,72,860/- as against Rs. 45,00,99,039/- disclosed by the assessee. Tax @ 41.82% was levied resulting in demand of Rs. 29,07,13,730/-. Simultaneously the income of the assessee was also computed u/s 115JB determining the total income of the assessee at Rs. 58,82,64,841/- on which tax @ 7.81425% amounting to Rs. 4,61,27,317/- was charged. Since the tax payable under the normal provisions of the Income Tax Act was more than the tax payable on the MAT the tax liability of the assessee was fixed as per the normal provisions of the Act. The additions made by the Assessing Officer consisted of the following:-
i. Disallowance of provision written back for wealth tax while computing book profits under Section 115JB for Rs. 2,69,200 ii. Deferred Bank Guarantee Commission for Rs. 99,64,030 iii. Salary paid to Expatriate employees for Rs.14,26,64,438 iv. Expenditure on Japanese Food Stuff for Rs. 2,56,598
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v. Disallowance of write back of income-tax provisions while computing book profits under section 115JB for Rs. 8,34,30,738 vi. Interest received by HO/Overseas Branches from Indian PE for Rs. 2,39,12,393 vii. Interest received by Indian PE from HO/Overseas Branches for Rs. 48,67,806 viii. Non-applicability of MAT ix. Provision for doubtful debts and depreciation on investment while computing book profits under section 115JB for Rs. 34,00,710 and 9,26,88,687 x. Deduction of Head Office Expenditure as per section 44C of the Act The most of the above additions were similar to those made in past assessment years by the concerned Assessing Officers in the case of the assessee itself which on challenge by way of appeal/writ by the assessee against those additions stood adjudicated by the Appellate Authorities as well as the Hon’ble High Court.
Being aggrieved by the order of the Assessing Officer, the Assessee filed appeal before the CIT(A) which was partly allowed. The CIT(A) dismissed the issues relating to deferred Bank Guarantee, Salary paid to expatriate, disallowance of write back of income tax authorities while computing book profits under Section 115JB, expenditure on Japanese Food stuff as well as applicable rate of tax. The CIT(A) allowed the issues relating to disallowance of provision written back for wealth tax while computing book profits under Section 115JB, interest paid to HO/Overseas Branches by Indian PE and received by Indian PE from HO/Overseas branches and allowance of deduction under Section 44C of the Act.
The Revenue as well as the assessee are in appeals before us.
8 ITA Nos. 3707 & 3755/Del/2014
The Ld. AR submitted that Ground No. 1 relating to Disallowance of Salary paid to Expat employees amounting to Rs. 14,26,64,438/- made by the Assessing Officer is covered in favour of assessee by the Delhi High Court order dated 08.04.2016. As regards to Ground No. 2 relating to non applicability of provisions of MAT, the same is also covered in favour of assessee as per the Hon’ble Delhi High Court decision dated 08.04.2016. Ground No. 3 and 4 are not pressed as the CIT(A) in rectification order dated 26.10.2015 granted the issue in favour of the assessee. For Ground No. 5 relating to applicable rate of tax, the said issue is covered against the assessee by the ITAT, Delhi vide order dated 19.09.2014 for A.Y. 2007-08 & 2008-09 in assessee’s own case.
In respect of Revenue’s appeal, for Ground No. 1 relating to addition of provision for wealth tax while computing book profit under section 115JB of the Act therein, the Ld. AR submitted that the same is purely academic if the Ground No. 2 of the Assessee’s appeal is allowed in favour of the assessee. The Ld. AR relied upon the decision in case of JCIT vs. Usha Martin Industries Ltd. (2007) 104 ITD 249 (Kol.) (SB) and CIT vs. Echjay Forgings (P.) Ltd. (2001) 251 ITR 15 (Bombay HC). The Ld. AR submitted that wealth tax is not required to be added while computing book profits for the purpose of MAT. As relates to Ground No. 2 regarding deduction for interest paid by the Indian branches to HO/other overseas branches and Taxability of interest received by HO/other overseas branches from the Indian branches is covered in favour of the assessee by the Hon’ble Delhi High Court vide order dated 08.04.2016. As relates to Ground No. 3 regarding allowance of deduction under Section 44C of the Act, the Ld. AR submitted that the same is covered in favour of the assessee by DRP directions for AY 2007-08.
The Ld. DR relied upon the orders of the TPO and DRP.
We have heard the parties and perused the records.
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9.1 As relates to Ground No. 1 of the Assessee’s appeal, the Hon’ble Delhi High Court in Assessee’s own case (ITA No. 604/2015 order dated 08.04.2016 held that
“Salaries paid to expatriates
The first question urged concerns the payment of salaries to the expatriates. In deciding this issue in favour of the Assessee, the ITAT has in the impugned common order referred to and relied upon the decision of its coordinate bench at Kolkata in ABN Amro Bank v. JCIT (2005)97 ITD 1(ITAT (Kol). Further the ITAT followed the decision of the Bombay High Court in CIT v. Emirates Commercial Bank Ltd. (2003) 262 ITR 55 (Bom.) where the Bombay High Court approved the view taken by the ITAT. The ITAT agreed that the expenses have been incurred wholly and exclusively by the Indian branch and therefore no part of these expenses can be allocated to any other branch and the HO and that there was no dispute with regard to the non- applicability of Section 44C of the Act.
This Court has perused the order of the Bombay High Court in Emirates Commercial (supra) where on identical facts, the issue was decided in favour of the Assessee. This order of the Bombay High Court has been affirmed by the Supreme Court by order dated 26th August 2008 in Commissioner of Income Tax v. M/s. Emirates Commercial Bank Ltd., which in turn referred to an order of the same date in Commissioner of Income Tax v. Deutsche Bank AG (CA No. 1544 of 2006).
In that view of the matter, this Court declines to frame a question on this issue.”
The facts of the present appeal are also identical therefore, Ground No. 1 is allowed.
9.2 As relates to Ground No. 2 of the Assessee’s appeal, the Hon’ble Delhi High Court in Assessee’s own case (ITA No. 604/2015 order dated 08.04.2016 held that
“Applicability of Section 115JB
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The ITAT has after an elaborate discussion had come to the conclusion that the Assessee’s claim for lower tax will have to be accepted because Section 115JB is subject to Section 90(2) of the Act and the taxable income of the Assessee would have to be computed in terms of Article 7(3) of the DTAA. What is significant is that the profit and loss account of the Assessee has not been prepared in terms of Part II of Schedule VI of the Companies Act, 1956 and in fact could not have been prepared in terms thereof. Consequently, the question of applicability of Section 115JB did not arise. As rightly pointed out till the insertion of Section 115JB, banking companies were required to prepare their accounts in terms of special acts that they were governed by, and therefore there were no computation provisions as regards such banking companies. The change brought out by Section 115JB was therefore not retrospective.
The reasoning and the conclusion of the ITAT on this issue appears to suffer from no legal infirmity. Consequently, the Court declines to frame any question on this issue as well.”
The facts of the present appeal is also identical therefore, Ground No. 2 is allowed.
9.3 As relates to Ground Nos. 3 and 4 of the Assessee’s appeal, the same are not pressed as the CIT(A) in rectification order dated 26.10.2015 granted the issue in favour of the assessee. Thus, Ground No. 3 and 4 are dismissed.
9.4 As relates to Ground No. 5 of the Assessee’s appeal, the said issue is covered against the assessee by the ITAT, Delhi vide order dated 19.09.2014 for A.Y. 2007-08 & 2008-09 in assessee’s own case. The ITAT held as under:
“87. Ground No. 9 is regarding applicability of rate of tax. The assessee’s grievance is that ld. DRP and AO did not adjudicate this under the provisions of Article 24 of the DTAA. The contention is that the applicable rate of tax on the income of the assessee attributable to its PE in India cannot exceed the applicable rate of tax (as per the Finance Act for the assessment year) in the case of domestic companies.
87.1 Having heard both the parties, we find that this issue is covered
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against the assessee by Explanation 1 to section 90(2), which read as under:
“Explanation 1.-For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.”
In view of above explanation this ground is rejected.”
The facts of the present appeal is also identical therefore, Ground No. 5 of the assessee’s appeal is dismissed.
9.5 As relates to Revenue’s appeal, since ground No. 2 of the assessee’s appeal is allowed, the same becomes academic only and hence Ground No. 1 of the Revenue’s appeal is dismissed.
9.6 As relates to Ground No. 2 of the Revenue’s appeal, the same is covered in favour of assessee by the Hon’ble Delhi High Court vide order dated 8.04.2016 wherein it is held as under:
“12. This issue appears to be covered against the revenue by the decision of the Calcutta High Court dated 23rd December 2010 in ABN Amro Bank(2012) 343 ITR 81 (Cal). The ITAT has followed the above decision of the Calcutta High Court and decided the question in favour of the Assessee.
On this issue, the Court further finds that the order of the Calcutta High Court dated 17th November 2014 in ITA No. 175 of 2004 (Bank of Tokyo- Mitsubishi Ltd. v. Director of Income Tax, International Taxation, Mumbai) has also decided this issue in favour of the Assessee by following its judgment of ABN Amro Bank (supra). The two specific questions urged by the Assessee in that case were answered in its favour:
(i) Whether interest payment made by the Indian Branch of the appellant to its head office abroad was to be allowed as a deduction in computing the profits of the appellant’s branch in India?
(ii) Whether making such payment to the head office, the appellant’s said branch was required to deduct tax at source under section 195 of the Income
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Tax Act, 1961?
It is significant that in the aforementioned order, the Calcutta High Court noted the fact that the Special Leave Petition preferred by the Revenue against the judgment of the Calcutta High Court in ABN Amro Bank (supra) was dismissed by the Supreme Court on 3rd August 2012.
Accordingly, this Court declines to frame any question on this issue of interest paid to the HO as well as the interest received from the Indian branches.”
The facts of the present appeal is also identical therefore, Ground No. 2 of the Revenue’s appeal is dismissed.
9.7 As relates to Ground No. 3 of the Revenue’s appeal, the said issue is covered in favour of the assessee by DRP directions for A.Y. 2007-08, hence the Revenue cannot deviate from their own stand in subsequent years. The facts of the present appeal is also identical therefore, Ground No. 3 of the Revenue’s appeal is dismissed.
In result, the Appeal of the Assessee is partly allowed for statistical purpose and the Appeal of the Revenue is dismissed.
Order pronounced in the Open Court on 19th September, 2017.
Sd/- Sd/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 19/09/2017 R. Naheed * Copy forwarded to: 1. Appellant 2. Respondent 3. CIT
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CIT(Appeals) 5. DR: ITAT
ASSISTANT REGISTRAR ITAT NEW DELHI
Date 1. Draft dictated on 28/07/2017 PS 2. Draft placed before author 28/07/2017 PS 3. Draft proposed & placed before .2017 JM/AM the second member 4. Draft discussed/approved by JM/AM Second Member. 5. Approved Draft comes to the PS/PS Sr.PS/PS 19.09.2017 6. Kept for pronouncement on PS 7. File sent to the Bench Clerk PS 19.09.2017 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.