DBS BANK LTD,MUMBAI vs. ADIT (IT) 1(2), MUMBAI

The assessee is a non-resident banking company registered in Singapore and is operating in India through its branches located in Mumbai and New Delhi. The branches constitute PE of the assessee. The Branches of the assessee are engaged in banking activity which includes corporate and institutional banking, trade finance, transactional and treasury solutions.

First issue relates to disallowance of interest paid by the Branches to the head office/overseas branches. The Assessing Officer noticed that the assessee has paid a sum of Rs. 99.31 lakhs as interest on funds given by the head office. The Assessing Officer proposed to disallow the same by invoking provisions of section 40(a)(i) of the Act. The assessee contended that it has deducted tax at source on such payments and also contended that interest

We have heard learned Departmental Representative and perused the record. We noticed that the Tribunal has adjudicated an identical issue in assessee’s own case in A.Y. 2005-06 by following the decision rendered in A.Y. 2003-04. For the sake of convenience, we extract below decision rendered by the Tribunal in A.Y. 2005-06 :-

The Assessing Officer noticed that the assessee has claimed loss of Rs. 62.83 lakhs relating to loss on revaluation of outstanding forward foreign exchange contracts as on 31.3.2006. When questioned, the assessee submitted that it has been consistently following policy of revaluing outstanding contracts and accordingly offering profit on revaluation to tax and claiming loss on such revaluation as deduction. The Assessing Officer did not accept the same and he disallowed the same by following decision rendered by Hon'ble Madras High Court in the case of CIT Vs. Indian Overseas Bank (183 ITR 200). Before learned DRP the assessee submitted that an identical disallowance made in earlier years have been decided in favour of the assessee by the ITAT following the decision rendered in the case of Bank of Bahrain & Kuwait. Learned DRP noticed that the decision of ITAT rendered in the case of 4 DBS Bank Limited Bank of Bahrain & Kuwait has not been accepted and challenged by filing the appeal before the High Court. Accordingly, learned DRP approved the disallowance made by the Assessing Officer.

The Learned AR submitted that an identical issue was considered by the Coordinate Benches in assessee’s own case in A.Y. 2003-04 and 2005-06 and disallowance has been deleted by the Tribunal.

We heard learned Departmental Representative and perused the record. We noticed that the Tribunal has allowed an identical claim made by the assessee in A.Y. 2003-04 & 2005-06 by following the decision rendered by Hon'ble Supreme Court in the case of CIT Vs. Woodward Governor India Pvt. Ltd. (312 ITR 224). For the sake of convenience we extract below the order passed for A.Y. 2005-06 :-

Consistent with the view taken in earlier years by the Tribunal, we set aside the order passed by the learned CIT(A) on this issue and direct him to delete this disallowance.

The Next issue contested by the assessee relates to assessment of interest income of Rs. 574.20 lakhs earned by the Government of India Bonds by the assessee in its status as “FII” The AO assessed the above said interest income as part of business income of the assessee and accordingly applied higher rate of tax at 41.82%.

The Learned AR submitted that the head office of the assessee was registered as a “FII” and has accordingly invested in Indian market in shares and bonds by bringing funds from abroad. He submitted that the PE of the assessee (branches in India) has no connection with the above said activities of the Head office (FII). The Head office of the assessee has earned dividend income, capital gains and interest on bonds from investments so made by it. The Assessing Officer has accepted that the dividend income is exempt. He noticed that the capital gain was brought to tax in earlier year and accordingly the Assessing Officer assessed short term capital gain of Rs. 804.64 lakhs earned by the assessee and also assessed interest income of Rs. 574.20 lakhs earned by the assessee on Government of India Bonds. The Assessing Officer however applied higher tax rate of 41.82% by treating the above receipts as business income of the assessee. The Learned DRP has, however, directed the Assessing Officer to exclude short term capital gains earned by the assessee as FII, as it is not assessable in the hands of the present assessee in terms of Article 13 of Indo-Singapore Treaty. In respect of interest income, even though learned DRP observed that the Indian branches of the assessee were not the custodian of Government Bonds and they were directly held by the FII, yet learned DRP took the view that the interest income forms a part of receipts of 6 DBS Bank Limited PE (branches) and accordingly held that it is connected to PE. Accordingly, the learned DRP held that interest income is assessable as business profit under Article 7 and accordingly upheld the order of the Assessing Officer in applying tax rate applicable to the business income.

The Learned AR submitted that learned DRP has accepted the fact that head office of the assessee has held the GOI bonds and they were not held by the branches. Since the head office of the assessee has been registered as FII and investments have been made directly by the head office in Indian market by bringing funds from abroad, the learned AR contended that the interest income is not attributable to PE (branches) of the assessee. Accordingly he submitted that the learned DRP was not correct in law in holding that interest income forms part of receipts of PE. The Learned AR invited our attention to paragraph 67 of the order passed by the Special Bench in the case of Sumitomo Mitsui Banking Corporation (supra), wherein it was held that concerned asset should form part of the “assets of the permanent establishment”. The Learned AR also placed reliance on the decision rendered by Delhi Special Bench in the case of ACIT Vs. Clough Engineering Ltd. (2011) 130 ITR 137, wherein it was held that the income should be connected with the PE either on the basis of “asset test” or “activity test”. In the above said case, the issue decided by the Special Bench related to taxability of interest received from income-tax refund and the Special bench has held that interest on income tax refund is not effectively connected with the PE either on the basis of “asset test” or on the basis of “activity test”.

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 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.

The Next issue contested by the assessee relates to net loss on exchange transactions of Rs. 1073.93 lakhs. The assessee has also raised an additional ground as an alternative contention on this issue, wherein it is stated that a sum of Rs. 62,83,946/- which has already been disallowed by the AO is also included in the above said figure of Rs.1073.93 lakhs and hence the same results in double disallowance.

The assessee claimed a sum of Rs.1073.93 lakhs as Net loss on exchange transactions. The AO asked for details of the same, which the assessee did not furnish. The assessee also did not explain as to whether these losses pertained to derivatives or investments. The AO noticed that the assessee has reported only gains arising in exchange transactions to the TPO. Hence the AO took the view that the loss claimed by the assessee in exchange transactions is contingent in nature and hence not allowable. In view of the above and also for the reason that the assessee did not furnish documentary

We heard the parties on this issue. The Ld A.R submitted that above said figure of Rs.1073.90 lakhs included the amount of Rs.62.83 lakhs relating to provision created for loss arising on revaluation of outstanding foreign exchange contracts as on 31.3.2006. He submitted that the AO has separately disallowed the claim of Rs.62.84 lakhs and hence the disallowance of entire amount of Rs.1073.90 lakhs results in double disallowance to the extent of Rs.62.84 lakhs. The Ld A.R further submitted that the assessee has booked actual loss arising in foreign exchange transactions and hence it cannot be considered as Contingent in nature. He submitted that the loss was incurred during the course of carrying on business and accordingly he submitted that the same is allowable as deduction.

When a specific query was put to Ld A.R as to whether the assessee could furnish break-up details of loss, he submitted that the assessee may not be in a position to collate the details due to passage of time.

We notice that the assessee has failed to furnish the details of loss arising from exchange transactions before the AO, DRP and also before us. There should not be any doubt that the initial onus to substantiate the claim is placed upon the assessee. The ld A.R submitted that the impugned loss is actual loss incurred in exchange transactions during the course of carrying on business of the assessee. The Ld A.R may be right in his submissions, but it is the prerogative of the tax authorities to examine the submissions and claim and to take a decision thereon. It may be possible that the above said loss may include loss pertaining to capital transactions, which could not allowed as deduction. The Ld A.R also submitted that due to passage of time of about 10 years, it may be difficult for the assessee to collate the details relating to loss.

The next issue urged by the assessee relates to the claim of Rs.151.65 lakhs relating to provision for bad and doubtful debts. The assessee created a provision of Rs. 216.67 lakhs on standard assets as per the requirements of RBI circulars. However, the assessee claimed a sum of Rs.151.65 lakhs only as per provisions of sec. 36(1)(viia)(b) of the Act. The AO, however, held that the provision for bad debts is not allowable as deduction u/s 37 of the Act and accordingly disallowed the claim. The Ld DRP also confirmed the same.

We heard the parties on this issue and perused the record. We notice that sec.36(1)(viia)(b) allows deduction of “Provision for bad and doubtful debts” created by the assessee. The said provision reads as under:- “36(1)(viia) in respect of any provision for bad and doubtful debts made by---- (a) ……. (b) a bank, being a bank incorporated by or under the laws of country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A).” We notice that the AO and Ld DRP have failed to examine the claim of the assessee in terms of provisions of sec. 36(1)(viia)(b) of the Act. The Ld A.R submitted that the assessee had made higher provision of Rs.216.67 lakhs,

We find merit in the submissions of Ld A.R. Accordingly we set aside this issue to the file of the AO with the direction to examine the claim of the assessee in terms of sec. 36(1)(viia)(b) of the Act and allow eligible amount subject to a maximum amount of Rs.216.67 lakhs, being the amount of provision actually created by the assessee during the year under consideration.

The next issue contested by the assessee pertains to the claim of set off of brought forward loss. Since the assessment orders passed for earlier years have been challenged by the assessee/revenue before appellate authorities, the eligible amount of brought forward loss would undergo change. Hence the assessee has taken this ground before us. We set aside this issue also to the file of the AO with the direction to allow the eligible amount of brought forward loss that is computed after giving effect to the orders of appellate authorities.

The next ground relates to the interest charged u/s 234B of the Act. Charging of interest is consequential in nature and hence this ground does not require adjudication.

In the result, the appeal of the assessee is treated as partly allowed for statistical purposes.