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Income Tax Appellate Tribunal, “L” Bench, Mumbai
Before: Shri B.R. Baskaran (AM) & Shri Ravish Sood(JM)
O R D E R Per B.R. Baskaran (AM) :-
The appeal filed by the assessee is directed against the order dated 28.10.2010 passed by the Assessing Officer under section 143(3) read with section 144C(13) of the Act in conformity with the directions issued by the learned Dispute Resolution Panel (DRP).
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
2 DBS Bank Limited paid by the PE (branches) to its head office is not in the nature of income in the hands of the head office as interest payment was made to self. The Assessing Officer did not accept the same and accordingly disallowed the interest expenses of Rs. 99.31 lakhs. The Learned DRP also confirmed the same by following the decision rendered by Kolkata Special Bench in the case of ABN Amro Bank.
4. The Learned AR submitted that an identical issue came to be considered by the Coordinate Benches in assessee’s own case in A.Y. 2003-04 (ITA No. 248/Mum/2007 dated 7.10.2013) and also in A.Y. 2005-06 (ITA No. 8671/Mum/2010 dated 3.3.2017). The learned AR submitted that the Coordinate Benches has decided this issue in favour of the assessee by following decision rendered by the Special Bench in the case of Sumitomo Mitsui Banking Corporation (2012)(SB)(136 ITD 66)(Mum).
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 :-
We have considered the rival contention of the parties and seen that similar disallowance was made in assessment year and the assessee bank filed appeal before the Tribunal vide order dated in passed the following order: 2.3 We have perused the record 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 Corporation Versus DCIT(136 ITD 66) and the 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
3 DBS Bank Limited 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 provision 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.
5. Considering the decision of Coordinate bench in assessee s own case we find that the grounds of appeal
raised by assessee is fully covered in favour of the assessee, thus respectfully following the decision of Tribunal the ground No.1 of appeal is allowed.
6. Consistent with the view taken in earlier years, we hold that the impugned disallowance is not warranted in terms of the decision rendered by the Special bench in the case of Sumitomo Mitsui Banking Corporation (supra). Accordingly we set aside the order passed by the AO on this issue and direct him to delete the disallowance.
Ground No. 2 relates to disallowance of Rs. 62.83 lakhs relating to loss 7. on revaluation of unmatured forward foreign exchange contracts as on 31.3.2006.
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 :-
We have considered the rival contention of the parties. We have seen that in Assessment Year, the assessing officer not allowed the similar relief to the assessee; however on appeal before Commissioner (Appeals) the relief was granted. Aggrieved by the order of Commissioner (Appeals) the revenue filed appeal before the Tribunal. In appeal before Tribunal the order of Commissioner (Appeals) was sustained by order dated 7 October 2013in ITANo.248/M/2007. The Tribunal passed the following order:
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 decision of tribunal. We find the issue is covered by the judgment of Hon’ble Supreme Court in case of CIT versus Woodward Governor India Private Limited (312 ITR 224) in which it has been held that adjustments on account of foreign exchange fluctuation can be made on each balance-sheet in respect of any forward foreign exchange contract pending actual payment and any loss arising therefrom has to be allowed as an item of expenditure under section 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.
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16. Considering the decision of Tribunal in assessee s own case for AY and keeping in view the principle of consistency the ground No.6 of assessee s appeal is allowed and the ground No.1&2 raised in revenue s appeal is dismissed.
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”.
15. He further submitted that the Government of India Bonds is not “assets of Permanent establishment” and hence it fails to satisfy “asset test” required for linking income to the permanent establishment. He also submitted that the PE (branches) played no role in connection with GOI bonds investments and hence the activity test also fails. Accordingly, by drawing support from the aforesaid decisions, the learned AR submitted that interest earned by the head office of the assessee as FII is not effectively connected to the PE of the 7 DBS Bank Limited assessee either on the asset test or activity test and accordingly contended that the interest income has to be assessed under Article 11 of Indo-Singapore Treaty and not as business income.
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
8 DBS Bank Limited evidences, the AO disallowed the claim of Rs.1073.90 lakhs referred above. The Ld DRP directed the AO to allow the claim by following the decision rendered by Hon’ble Supreme Court in the case of Woodward Governor. However, the AO sustained the disallowance.
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.
9 DBS Bank Limited There is merit in this submission also. Since the assessee has failed to furnish the details and since considerable time has already elapsed, in our view, this issue may be put to rest by making adhoc disallowance in order to take care of revenue leakages, if any. The assessee has submitted that the claim of Rs.1073.90 lakhs included the loss on revaluation of foreign exchange contract of Rs.62.84 lakhs. Hence the net amount of loss claimed by the assessee is Rs.1011.06 lakhs. In our view, a disallowance of 20% of Rs.1011.06 lakhs would put this issue to rest. Accordingly, we modify the order passed by the AO on this issue and direct him to restrict the disallowance to 20% of Rs.1011.06 lakhs and the same, in our view, would meet the ends of justice. We order accordingly.
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,
10 DBS Bank Limited since the eligible amount prescribed under above section would depend upon the total income determined. Accordingly he prayed that this matter may be restored to the file of the AO with the direction to compute eligible amount of deduction as per the provisions of sec. 36(1)(viia)(b) subject to a maximum amount of Rs.216.67 lakhs, being the amount of provision created by the assessee.
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.
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In the result, the appeal of the assessee is treated as partly allowed for statistical purposes.
Order has been pronounced in the Court on 12.2.2018.