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Income Tax Appellate Tribunal, DELHI BENCHES: “ G ” NEW DELHI
Before: SHRI I. C. SUDHIR & SHRI O. P. KANT
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: “ G ” NEW DELHI
BEFORE SHRI I. C. SUDHIR, JUDICIAL MEMBER AND SHRI O. P. KANT, ACCOUNTANT MEMBER ITA. No. 3578/Del/2013 Assessment Year : 1995-96. Standard Chartered Grindlays Pty Ltd., Dy. Director of Income-tax, C/o. Ms. Shashi M. Kapila, Vs. Circle : 2 (2), 17 – Mahatma Gandhi Road, International Taxation, NH Lajpat Nagar – IV, New Delhi. [Near Metro Hospital]; New Delhi – 110 024. PAN : AAACA 1049 A (Appellant) (Respondent) Appellant by : Ms. Shashi M. Kapila, Adv.; & Shri Pravesh Sharma, Adv.; Respondent by : Shri Anuj Arora, CIT [DR]; Date of Hearing : 24.01.2017 Date of Pronouncement :10.03.2017
O R D E R PER I. C. SUDHIR, J. M. :
The assessee bank has questioned first appellate order on the following grounds :-
“ 1. The ld. CIT (Appeals) has erred in confirming a time-barred assessment made on 3rd December, 2010 by the ld. Assessing Officer much after 9 months prescribned by the second proviso to Section 153(2A) of the Incxome Tax Act, 1961 (the Act). 2. Under the second proviso to section 153(2A) of the Act, matters set aside by the Tribunal under section 254 of the Act, for fresh adjudication must be finalized within a period of 9 months from the date on which the order is received by the Chief Commissioner/Commissioner. The order was passed by the Tribunal on 18.8.2006 and the order reframing the assessment was made on 3.12.2010, much after the limitation period statutorily prescribed, hence it is time barred. Hence, assessment is made beyond the statutory limitation period, it is time barred and hence null and void in the eyes of law. 3. The ld. CIT (Appeals) has also erred in interpreting the limitation period of 9 months provided in the second proviso to section 153(2A) as being restricted only to cases when the entire assessment is set aside by the Tribunal under section 254 of the Act. 4. The ld. CIT (Appeals) has erred in law and on facts by disallowing the deduction of interest of Rs.24,86,73,000/- paid by thje Indian branch to its Head Office for its Indian business, as this interest is fully allowable under the exception clause to Article 7(7) of the India-UK Double Taxation Avoidance Agreement. 5. The ld. CIT (Appeals) has grossly erred in law by ignoring the settled law laid down in the following decisions including decision of Special Bench in the case of Sumitomo Bank etc. which allow tax deductibility of interest paid by branch to its head office by banking companies under the Double Taxation Avoidance Agreements.
i) Sumitomo Banking Corporation Vs. DDIT (2012) 16 ITR (Tribunal) 116 (Mum) [5 judges of Special Bench of Truibunal]; ii) Shinhan Bank Vs. DDIT 54 SOT 140 (Mum.) iii) Kolkata High Court decision in case of ABN Amro Bank, where the Revenue SLP has been dismissed by the Supreme Court. 6. The ld. CIT (Appeals) has erred in confirming the withdrawal of grant of interest under section 244A of Rs.88,56,062/-. 7. The ld. CIT (Appeals) has erred in ignoring the fact that the levying interest of Rs.18,67,14,012/- under section 220(2) of the Act, issuance of Notice of Demand under section 156 of the Act is mandatory. Further, ld. CIT (Appeals) erred in holding that appellant has not made submission on this ground. In this regard, it may be noted that appellant has made written submission vide their letter dated 5.07.2011. The ld. CIT (Appeals) has failed to adjudicate on this issue. “
At the outset of hearing the ld. AR pointed out that the issue raised in ground Nos. 4 and 5, which is the main grievance of the assessee against the first appellate order in the present appeal is fully covered by the decision of Special Bench of the Tribunal in the case of Sumitomo Banking Corporation Vs. DDIT (2012) 16 ITR (Trib.) 116 (Mum.)(SB).
Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.
The facts in brief are that the assessee was a banking company incorporated in U.K. for the period under consideration. It carried on business of banking and other related activities in accordance with the provisions of the Banking Regulation Act, 1949 through its network of branches in India during the year relevant to assessment year 1995-96. The return of income, based on the audited profit and loss account and balance sheet for the banks’ Indian operations was filed by the assessee and the assessment was framed in which several additions were made. The ld. CIT (Appeals) deleted most of the additions. Both the parties went in appeals before the Tribunal and the Tribunal vide its order dated 18.08.2006 upheld most of the deletions made by the ld. CIT (Appeals), but set aside the issue regarding the allowability of interest paid by the Indian PE to its head office amounting to Rs.24,86,73,000/- for adjudication after ascertaining the correct facts. While giving appeal effect under section 250/254 the Assessing Officer disallowed interest paid by the branch office (PE) in India to its head office. The assessee again went in first appeal against the said disallowance of interest, but could not succeed. The assessee also could not succeed on other issues i.e. time limitation for giving appeal effect, interest charged under section 244A and 220(2) of the Act, hence present appeal has been preferred by the assessee.
Ground Nos. 1, 2 and 3 : In these grounds the claim of the assessee is that the assessment order dated 3.12.2010 is barred by time limit.
5.1 In support of the above grounds, the ld. AR contended that the assessment order dated 3.12.2010 has been passed much after nine months prescribed time limit by the second proviso to section 153(2A) of the I. T. Act. She submitted that the Tribunal had set aside the matter vide its order dated 18.08.2006 to the file of the Assessing Officer for fresh adjudication and thus as per second proviso to section 153(2A), the Assessing Officer was required to adjudicate the matter finally within a period of nine months from the date on which the order of the Tribunal was received by the Chief Commissioner/Commissioner of Income Tax. She pointed out that the order was passed by the Tribunal on 18.08.2006 and the order in compliance of the direction of the Tribunal has been passed by the Assessing Officer on 3.12.2010 i.e. much after the limitation period statutorily prescribed. She contended further that the ld. CIT (Appeals) has erred in enterpretting the limitation period of nine months provided in the second proviso to section 153(2A) as has been restricted only to cases, when the entire assessment is set aside by the Tribunal under section 254 of the Act. In support the ld. AR placed reliance on the following decisions :-
(i) Instruments & Control Co. Vs. Chief CIT & Others, (2012) 349 ITR 357 (Guj.);
(ii) CIT Vs. Bhan Textile P. Ltd. (2008) 300 ITR 176 (Del.);
5.2 The ld. CIT (DR), on the other hand, has tried to justify the orders of the authorities below on the issue with this contention that provisions laid down under section 153(2A) are applicable for computation of limitation period, only when entire assessment order is set aside by the appellate authority, whereas in the present case, entire assessment was not set aside by the Tribunal, but it was limited to the issue of allowability of interest paid by the Indian PE to its head office amounting to Rs.24,86,73,000/- for adjudication after ascertaining the correct facts. The provisions of section 153(3)(ii) were thus applicable in the present case to compute the prescribed time limit for passing the order by the Assessing Officer in compliance with the directions of the Tribunal. He placed reliance on the following decisions :-
(i) S.M. Dalvi Vs. ACIT (2011) 44 SOT 11 (Mum.)
(ii) Smt. Mohammadi Begum Vs. CIT (1986) 27 Taxman 247 (AP ).
5.3 After having gone through the above cited decisions by the parties, we find that the ratio laid down therein is that when entire assessment is set aside or cancelled in order to give effect to findings and consequent directions of the appellate authority, then
limitation as laid down under section 153(2A) would apply. However, where appellate authority has given certain finding and consequent direction to the Assessing Officer to make assessment in accordance therewith, then limitation laid down under section 153(3)(ii) would apply and not one given under section 153(2A) of the Act. Thus, the issue raised in the grounds before us is as to whether the order dated 3.12.2010 passed by the Assessing Officer in compliance of the order dated 18.08.2006 of the Tribunal can be treated as fresh assessment order or a particular aspect of the assessment order. In other words, vide order dated 18.08.2006 had the Tribunal set aside the entire assessment order or had it remanded the matter back to the Assessing Officer for disposal of a particular aspect.
5.4 When we go through the order of the Tribunal in view of the above ratio laid down by the cited decisions, we find that the Tribunal vide order dated 18.08.2006 had not set aside the entire assessment order in question before it, instead one of the issues regarding allowability of interest paid by the Indian PE to its head office amounting to Rs.24,86,73,000/- was set aside to the file of the Assessing Officer to adjudicate it after ascertaining the correct facts. The view that the entire assessment order was not set aside is also strengthened with the wording of the conclusion of the Tribunal “12. In the result, for statistical purposes, the four appeals filed by the Revenue shall be treated as partly allowed.” We thus, fully concur with the finding of the ld. CIT (Appeals) that it is not a
case where prescribed time limit for compliance of the order of the Tribunal is required to be computed under section 153(2A) of the Act as entire assessment order was not set aside by the Tribunal, rather a particular aspect of the assessment order relating to allowability of interest paid by the Indian PE to its head office after ascertaining the correct fact, was set aside by the Tribunal for fresh adjudication. The prescribed time limit for such compliance thus has been rightly held by the ld. CIT (Appeals) to be computed under the provisions of section 153(3) of the Act. The same is upheld. Ground Nos. 1, 2 and 3 are thus, rejected.
GROUND NOS. 5 & 6 :
The ld. AR clarified the background facts pertaining to the payment of interest for borrowing foreign currency loan by the Indian PE from its head office for making deposit in India were that as follows:
a) In May 1992, certain disputes arose between Grindlays and NHB (a body corporate constituted under sec.3 of the National Housing Bank Act, 1987, and a wholly owned subsidiary of the RBI.)
b) The disputes was with respect to 9 Account payee cheques aggregating to 506.54 crores which were issued by NHB and credited to the account of a Mumbai based broker Harshad S. Mehta.
c) The Reserve Bank of India issued a directive under sec.35A of the Banking Regulation Act dt.7.10.1992 directing the assessee to make payment of the disputed amount to NHB (National Housing Bank). Pursuant to the Directive of the RBI under section 35A of the Banking Regulation Act, 1949. The assessee Bank deposited the sum of Rs.506,54,54,878/- on 4.11.1992 with NHB, subject to resolving the dispute through Arbitration proceedings. This was agreed to by all parties.
d) Sec. 35A of the Banking Regulation Act, 1949 reads as follows:
Under sec. 35A where the RBI is satisfied that:-
a) in the public interest; or
aa) in the interest of banking policy; or
b) to prevent the affairs of the banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or
c) to secure the proper management of any banking company generally;
The RBI may from time to time issue such directions as it deems fit, and the banking companies or the banking company as the case maybe, shall be bound to comply with such directions.
e) It is mandatory for a banking company operating in India to comply with a Directive issued by the RBI under sec. 35A of the Banking Regulation Act, 1949. Accordingly the Assessee bank fully complied with the RBI Directive issued under section 35A of the banking Regulation Act, 1949 and paid the disputed sum to NHB.
f) Pursuant to a Directive issued by Reserve Bank of India on 7.10.1992 under sec.35A of the Banking Regulation Act, 1949, the assessee Grindlays Bank deposited a sum of Rs.506,54,54,878/- on 4.11.1992 with National Housing Bank.
g) To make the aforesaid payment, the Indian PE borrowed funds from its Head Office. In accordance with the directions of the Reserve Bank of India. The Assessee Bank- Indian PE paid interest at LIBOR amounting to Rs. 248,673,000 on this borrowing to its head office during the year under consideration.
h) In order to make the above deposit, the Indian Branch PE had to borrow funds from amounting to USD 162.5 million its Head Office ANZ Grindlays London UK, for its business in India.
i) The Assessee Bank paid interest at LIBOR on this borrowing in accordance with the directions of the Reserve Bank of India.
1) Copy of RBI Directive dt. 7.10.1992 is attached as pages 12-13 to the Paper Book.
2) Copy of RBI Letter dt. 20.4.1994 regarding the maintenance of CRR/SLR on foreign currency deposit of US$ 174 million is attached as pages 14 to the Paper Book.
3) Letter from Chief Officer, Dept. of Banking operations and Development, Reserve Bank of India dt. 27.02.1996 is attached as pages 15 to the Paper Book.
4) Copy of RBI letter permitting the refund of US$ 162.5 million, pursuant to Special Court Order dated 17.04.1997 is attached as pages 16 to the Paper Book.
j) This interest payment was claimed as deduction in computation of business income, in accordance with Article 7(7) of the Indo –UK Double Taxation Avoidance Agreement. Article 7(7) provides that payments made by a PE to the head office of the enterprise such as royalties, fees etc. are not allowable except in the case of a banking enterprise interest paid to head office on monies lent to the PE. Thus the Indo-UK DTAA specifically permits tax deductibility of interest paid by the PE of a banking company to its Head office for monies borrowed for the business of the PE.
k) Under Sec. 90(2) of the Income Tax Act, 1961 an assessee can avail of either Treaty provisions or the domestic law whichever is more favorable to it. As Article 7(7) of the Indo-UK DTAA specifically permits tax deductibility of interest paid by the Indian Branch of a banking company to its Head Office for monies borrowed for its business in India, the claim for the deduction of the interest expenses was made in accordance with the exception clause to Article 7(7).
l) In the assessment order passed in pursuance to giving appeal effect under sec.250 dt.3.12.2010 the Ld. AO has dis-allowed this deduction by following the Third Member Tribunal Order in the case of ABN
AMRO Bank. For AY 1996-97 in the assessee’s case this issue came up in appeal before the Income Tax Appellate Tribunal, wherein the Tribunal followed the judgement of the Third Member Order in the case of ABN AMRO Bank which is reported in 97 ITD 87 which held that interest paid by a PE to its head office was not an allowable expense as it was payment to self.
m) Thereafter the Third Member Judgement of ABN AMRO Bank was reversed and over-ruled by the Kolkotta High Court in ABN Amro v. CIT this judgment is reported in 343 ITR 81. The Kolkatta High Court held that interest payment to be fully allowable as deduction. The court also held that such payment did not attract any with-holding tax as it was payment to self and therefore there was no obligation under Sec. 195 of the Act. Hence the case law relied upon by the Ld. AO is no longer good law as it stand over-ruled by the judgement of the Kolkota High court. High Court in the case of ABN Amro Bank reported in 343 ITR 81.
n) Thereafter this entire issue was again thoroughly re- examined by a 5 Member Special Bench of the Tribunal in the case of Sumitomo Banking Corporation Vs. DDIT (2012) 16 ITR (AT) 116 (Mum.).
After examining the entire conspectus of law, the Special Bench ruled that interest payments made by the PE in India to the head office for borrowings made for business purposes are allowable expenses in accordance with the Double Taxation Avoidance Agreements.
o) The Tribunal has ruled that - Where an Indian branch of a foreign bank pays interest to head office and other overseas branches of said foreign bank, on advances received by it, said interest is neither deductible in hands of Indian branch nor chargeable to tax in hands of head office and overseas branches, all being the same juridical entity
p) Having held that the interest paid by the Indian branch of the Bank to its head office and other branches outside India is not chargeable to tax in India, it follows that the provisions of section 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the PE, the question of disallowance of the said interest by invoking the provisions of section 40(a)(i) does not arise.
q) Although interest paid to the head office of the assessee bank by its Indian branch which constitutes
its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the PE which is taxable in India as per the provisions of Articles 7(2) & 7(3) of the Indo-Japanese treaty read with paragraph 8 of the protocol which are more beneficial to the assessee. In this context they examined several other treaties such as the Netherlands Treaty etc. All treaties have similar provisions.
As on date there is no judgement or ruling as of now which supports the Revenue’s stand.
r) It is submitted that as the Indo-UK DTAA specifically permits tax deductibility of interest paid by the PE of a banking company to its Head office for monies borrowed for the business of the PE. Any contrary interpretation will render this exception clause 7(7) in Indo-UK DTAA lifeless and inert and nugatory.
s) Applying the above law to the facts of our case, it is submitted that payment of interest by the Indian Branch of ANZ Grindlays to its Head Office in London of Rs. 24.86 crores is allowable as a deduction as per exception clause to Article 7(7) of the Indo-UK DTAA and this issue is fully covered in favour of the
assessee. Hence this issue is fully covered in favour of the assessee.
t) It is submitted that this issue is fully covered in favour of the assessee by several rulings as follows:-
(i) ABN Amro Bank Vs. DDIT reported in 343 ITR 81 (Kolkatta HC)
(ii) Sumitomo Banking Corporation Vs. DDIT [2012] 16 ITR (Tribunal) 116 (Mum) [5 judges Special Bench Tribunal].
iii) BNP PARIBAS SA V/S D.D.I.T [150 TTJ 395(MUM)]
iv) D.D.I.T V/S Mizuho Corporate Bank Ltd. (54 SOT117) (MUM)
v) Shinhan bank v/s D.D.I.T 54 SOT 140 (MUM)
vi) D.D.I.T v. Banque Indosuez 19 ITR (TRIB) 463 (MUM)
To the best of our knowledge as on date there is no conflicting judgment or any ruling in favour of the Revenue, hence on this ground along this issue should be decided in favour of the assessee.
I. Interest paid is exempt u/sec. 10(15)(iv)(fa) of the Income Tax Act, 1961
1) The third argument advanced by the assessee was that in any event on the facts of our case the interest paid to head office on account of making a foreign currency deposit in India of US $ 162.5 Million with National Housing Bank squarely falls within the ambit of Sec 10(15)(iv)(fa) and hence such Interest is exempt from withholding tax.
2) It was clarified that : placements of funds by the assesse bank with NHB constitutes a deposit as understood in banking laws. Any placement of funds constitutes a deposit. The term bank deposit refers to an amount of money in cash or cheque form or sent via a wire transfer that is placed into a bank account. Any placement of funds constitutes a deposit. Thus, the funds placed by the assessee bank with National Housing Bank were "deposit" as understood in banking laws.
3) Further the funds were brought into India in explicit compliance with a Directive issued by the Reserve Bank of India under sec.35A of the Banking Regulation Act, 1949 on 7.10.1992. In order to make the above deposit, the Indian PE had to borrow funds from, its Head Office ANZ Grindlays London UK, for its business in India. The head office in turn borrowed funds amounting to USD 162.5 million from the London interbank market. Thus clearly the RBI approval was
there as this foreign currency deposit was made in compliance with and at the behest of the RBI.
4) Further Grindlays was a scheduled bank during A Y 1995-96. Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a)of the Reserve Bank of India Act,1954. The banks included in this schedule list should fulfill two conditions.
The paid capital and collected funds of bank should not be less than Rs. 5 lac.
Any activity of the bank will not adversely affect the interests of depositors.
Every Scheduled bank enjoys the following facilities.
Such bank becomes eligible for debts/loans on bank rate from the RBI Such bank automatically acquire the membership of clearing house.
ANZ Grindlays is a scheduled bank as listed in the second schedule to the Reserve Bank of India Act, 1934. Please see
copy of Second Schedule of the Reserve Bank of India Act, 1934 as pages 116-124 to the Paper Book.
6.1 In light of the above position in law, looked at from any angle, the interest of Rs. 248,673,000 paid to the head office for its business in India is fully allowable as a deduction. Hence it is prayed that the assessee's appeal be allowed.
The ld. CIT [DR], on the other hand, placed reliance on the orders of the authorities below. He submitted that the basic issue involved is whether interest paid by branch office to head office is cash deductible. It is undisputed as also held in the decision of the Special Bench of the Tribunal in the case of Sumitomo Banking Corporation Vs. DDIT 16 ITR (TRIB.) 116 (Mum.) (SB) that under the domestic law, payment by a branch office to head office is in the nature of payment to self, which is neither taxable nor tax deductible in the hands of the assessee. The Special Bench has further held that though payment to self is not tax deductible under domestic tax law, but it is tax deductible under Article 7 of the Indo UK DTAA. He contended that it is clear from the provisions in Article 7(5) that for the purpose of determination of profit attributable to PE, deduction of all expenses incurred for the purpose of business PE including executive and general administrative expenses is allowed irrespective of whether these expenses are incurred in the State of PE or elsewhere. He contended that such a deduction is subject to limitations of
domestic law of State of PE which means that if under domestic tax law if any expenditure is not allowable, it will not be allowable even under Article 7(5) of the DTAA. Article 7(5) says that if certain expenses are not allowable under domestic tax law, those shall not be allowed under DTAA also. In the present case payment of interest by PE to HO (Head Office) amounts to payment to self and, therefore, it is not tax deductible under domestic law. Thus, interest paid by PE to HO on money lent by HO to PE shall not be allowed as deduction in accordance with the provisions of Article 7(5) read with Article 7(7) of Indo-US DTAA. He pointed out that the decision of the Special Bench in the case of Sumitomo Banking Corporation Vs. DDIT (supra) is not applicable in the present case as in the present case Indo-UK DTAA is involved whereas in the case of Sumitomo Indo-Japan DTAA was involved. In the present case interest paid by PE to HO is neither tax deductible under I.T. Act, 1961 nor it is so under Article 7(5) read with Article 7(7) of Indo-UK DTAA.
The ld. CIT (DR) further contended that the case of assessee is also not covered under section 10(15)(iv)(fa) of the I. T. Act, hence, the claimed exemption from taxation by the assessee cannot be allowed since it is subject to TDS in India.
The ld. CIT (DR) contended that in none of its letters dated 7.10.1992, 20.10.1994, 27.02.1996, 9.05.1997 referred by the assessee, the RBI has given its approval to the fact that the amount borrowed by BO (Branch Office) to HO was nature of deposit in
foreign currency. The last letter talks about repayment of outstanding loan by BO to HO. The money flow from HO to branch was in the nature of loan and RBI never approved it as deposit in foreign currency.
7.1 The ld. CIT (DR) submitted further that the decision of Hon’ble Kolkata High Court in the case of ABN Amro Bank N.V. Vs. CIT, 343 ITR 81 (Kol.) relied upon by the ld. AR, is also not helpful to the assessee as in that case the issue was as to whether interest paid by branch to its Head Office is subject to TDS and hence, not allowable as deduction under section 40(a)(i) read with section 195 of the Act. However, in the present case the issue involved is as to whether the interest paid by branch to HO is tax deductible per se or not. The ld. CIT (DR) concluded his argument justifying the action of the authorities below in disallowing deduction of interest of Rs.24.86 crores paid by the branch office of the assessee in India to its HO, in view of above submission. He also placed reliance on the following decision :-
(i) Standard Chartered Grindlays Bank Ltd. Vs. DDIT (International Taxation), (2010) 127 TTJ 319 (Del).
We have already discussed the relevant facts in brief in para No. 4 hereinabove. The issue involved is as to whether interest paid by the branch office to head officer is tax deductible. In support,
the assessee placed reliance on the decision of Special Bench of the Tribunal in the case of Sumitomo Banking Corporation Vs. DDIT (supra). The assessee claimed that the issue raised is also covered by the decision of Hon’ble Kolkata High Court in the case of ABN Amro Bank N.V. Vs. CIT (supra) followed in the other decisions cited by the ld. AR hereinabove. The contention of the Revenue, while supporting the orders of the authorities below, remained that the decisions relied upon by the ld. AR are distinguishable as in those cases Indo Japan Tax Treaty was the subject matter, whereas in the present case before us is the Indo-UK DTAA. It was also submitted by the Revenue that in the case of ABN Amro Bank N.V. Vs. CIT (supra) the issue was, as to whether interest paid by branch to its head office is subject to TDS and hence not allowable as deduction under section 40(a)(i) read with section 195 of the Act, which is otherwise tax deductible, whereas in the present case the issue involved is as to whether interest paid by branch to HO is tax deductible per se or not. The grievance of the assessee remained that under the domestic tax law, payment by branch office to head office is in the nature of payment to self, which is neither taxable nor tax deductible in the hands of the assessee. It was also argued that though payment to self is not tax deductible under domestic tax law, it is tax deductible under Article 7 of relevant DTAA. The assessee also contended that the interest paid by the branch to head office is covered under section 10(14)(iv)(fa) of the I. T. Act and is thus, exempt from taxation and hence, not subject to TDS in India.
8.1 Since the assessee has been emphasizing that the issue raised is fully covered in favour of the assessee by the decision of Special Bench of the Tribunal in the case of Sumitomo Banking Corporation Vs. DDIT (supra), we find it fit to examine this aspect for the sake of brevity. While doing so we have to examine the difference between Indo Japan Tax Treaty on which the decision of Special Bench is based as pointed out by the ld. CIT (DR) and the Indo-UK DTAA on which the present case before us on the issue is based upon. The relevant Article 7 of both the Treaties are being reproduced hereunder for a ready reference :-
INDO – UK DTAA ARTICLE 7 BUSINESS PROFITS “ 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. 2. Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, the profits which that permanent establishment might be expected to make if it were' a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment shall be treated for the purposes of paragraph 1 of this Article as being the profits directly attributable to that permanent establishment. 3. Where a permanent establishment takes an active part in negotiating, concluding or fulfilling contracts entered into by the enterprise, then, notwithstanding that other parts of the enterprise have also participated in those transactions, that proportion of profits of the enterprise arising out of those contracts which the contribution of the permanent establishment to those transactions bears to that of the enterprise as a whole shall be treated for the purposes of paragraph 1 of this Article as being the profits indirectly attributable to that permanent establishment 4. Insofar as it has been customary in a Contracting State according to its law to determine the profits to be attributed to a permanent establishment on the basis of an appointment of the total profits of the enterprise to its various parts, nothing in paragraphs 1 and 2 of this Article shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be necessary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles laid down in this Article.
Subject to paragraphs 6 and 7 of this Article, in the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, which are allowed under the provisions of and subject to the limitations of the domestic law of the Contracting State in which the permanent establishment is situated. 6. Where the law of the Contracting State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and the restriction is relaxed or overridden by any Convention between that Contracting State and a third State which is a member of the Organisation for Economic Cooperation and Development or a State in a comparable stage of development; and that Convention enters into force after the date of entry into force of this Convention, the competent authority of that Contracting State shall notify the competent authority of the other Contracting State of the terms of the relevant paragraph in the Convention with that third State immediately after the entry into force of that Convention and, if the competent authority of the other Contracting State so requests, the provisions of this Convention shall be amended by protocol to reflect such terms. 7. Paragraph 5 of this Article shall not apply to amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise by way of interest on monies lent to the permanent establishment; nor shall account be taken in the determination of the profits of a permanent establishment of amounts charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on monies lent to the head office of the enterprise or any of its other offices. 8. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 9. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. ”
INDO – JAPAN TAX TREATY
Article 7 “ 1. The profits of an enterprise of a Contracting State shall be taxable, only in that Contracting State unless the enterprise carries on business in the other Contracting State through in permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were in distinct and separate enterprise engaged in the same or similar activities under the same or similar condition and dealing wholly independently with the enterprise of which it is a permanent establishment. 3. ' In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere. 4. Insofar us it has been customary in a Contracting State to determine the profits to be attributed to
a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary the method of apportionment adopted shall, however, be such that the result shall be in accordance with he principles contained in this Article. 5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 6. For the purpose of the provisions of the preceding paragraphs of this Article, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 7. Where profits include items of income which are dealt with separately, in other Article of this Contention, then the provisions of those Articles shall not be affected by the provisions of this Article.”
8.2 Having gone through the relevant Articles of both the treaties i.e. Indo-UK DTAA and Indo Japan Tax Treaty, we concur with the difference pointed out by the ld. CIT (Appeals) between the two treaties. The difference pointed out by the ld. CIT (Appeals) between the two is that as per Article 7(3) of Indo Japan DTAA, deduction of expenses is allowable and there is no stipulation, as appearing in Indo-UK DTAA that these deductions shall be subject to limitation of domestic tax law. As a result, limitation under domestic tax law of tax deductibility of interest paid by branch office to head office shall not apply, where Indo Japan DTAA is applicable. Thus the situation in the present appeal is that interest paid by PE to HO is neither tax deductible under I. T. Act nor is it so under Article 7(5) read with Article 7(7) of DTAA. These findings are based on Article 7(5), and 7(7) of the Indo–UK DTAA and Article 7(3) of the Indo Japan Tax Treaty.
As per Article 7(5) of Indo-UK Treaty, for the purpose of determination of profits attributable to PE, deduction of all expenses incurred for the purpose of business of PE including
executive and general administrative expenses is allowable irrespective of whether these expenses are incurred in the State of PE or elsewhere. However, such deduction is subject to limitation of domestic law of the State of PE, meaning thereby that if under domestic tax law, if any expenditure is not allowable, it will not be allowable even under Article 7(5) of the treaty. Article 7(7) contains an exception, as per which Article 7(5) shall not apply to certain amount by PE to HO by way of royalties, fees and interest on moneys lent to PE by HO. However, there is an exception to this exception contained in Article 7(7) as per which in case of banking enterprises, interest paid by PE to HO on moneys lent to PE by the HO shall be subject to provisions of Article 7(5). Article 7(5) says that if certain expenses are not allowable under domestic tax laws, those shall not be allowed under DTAA also. Since it has not been disputed by the assessee that payment of interest by PE to HO amounts to payment to self and, therefore, it is not tax deductible under domestic tax law, the ld. CIT (Appeals) in our view was justified in coming to the conclusion that the interest paid by PE to HO on money lent by HO to PE shall not be allowed as deduction in accordance with provisions of Article 7(5) read with Article 7(7) of Indo-UK DTAA. While coming to this conclusion, the ld. CIT (Appeals) has noted that as per Article 7(3) of Indo Japan DTAA, deduction of expenses is allowable and there is no stipulation, as appearing in Indo-UK DTAA that these deductions shall be subject to limitation of domestic tax law, to which we fully concur with.
8.3 We further concur with the finding of the ld. CIT (Appeals) that interest paid by branch to HO is not covered under section 10(15)(iv)(fa) of the I. T. Act. There are two basic pre-conditions for the applicability of this section. Firstly, there should be a deposit in foreign currency on which interest is paid by scheduled bank to a non-resident (NR) or not ordinarily resident (NOR) and secondly, such deposit is approved by the RBI. The relevant facts in the present case are that certain dispute arose in the year 1992 between the assessee and National Housing Bank (NHB) regarding cheques issued by NHB and credited to account of Harshad S. Mehta, a stock broker, worth Rs.506.54 crores. Subsequently, Reserve Bank of India (RBI) issued a directive under section 35A of the Banking Regulation Act to the assessee to deposit a sum of Rs.5,06,54,54,878/- with NHB. Pursuant to this direction, Indian branch office of the assessee borrowed funds from its head office (HO) in London and Indian branch office (PE) paid interest at LIBOR amounting to Rs.24,86,73,000/- on this borrowing from HO. The said borrowed funds were deposited with NHB as per RBI directive issued under section 35A of Banking Regulation Act. The assessee claimed that the sum paid by it to NHB is in the nature of “deposit” and also RBI had approved this deposit by virtue of its directive, within the meaning of section 10(15)(iv)(fa) of Income Tax Act. The further contention of the assessee remained that it was duty-bound to follow RBI’s directive and, therefore, interest payable on such borrowing is in the nature of business expenditure and hence, tax deductible. It submitted that its amount lying in NHB was in the
nature of deposit. The authorities below did not agree with these submissions of the assessee on the ground that requirement of section 10(15)(iv)(fa) is that the amount on which interest is paid by scheduled bank to non-resident should be in the nature of deposit in foreign currency, whereas in the present case, interest is paid by branch office to head office in respect of borrowing made by the branch from its head office and thus, this amount is in the nature of loan from head office to branch office and it is not the case of the assessee even that this amount is in the nature of deposit. We fully concur with the finding of the authorities below that submission of the assessee is based on the nature of transaction between BO and NHB, whereas according to section 10(15)(iv)(fa), the nature of transaction on which interest is paid to non-resident should be in the nature of deposit in foreign currency. So far as the second pre- condition of the section that such deposit should be approved by RBI is concerned, the directive of the RBI in the present case says that BO should make payment to NHB, and therefore, such directive is with reference to transaction between the BO and NHB only. Undisputedly, RBI has not given any direction regarding source from which the BO can raise funds. We thus fully concur with the finding of the authorities below that there was no question of approval by RBI of fund flow from HO to BO as deposit in foreign currency. We thus hold that provisions of section 10(15)(iv)(fa) are not applicable in the present case and, therefore, the contention of the assessee that interest paid by BO to HO is exempt from taxation under the said section and hence, not subject to TDS is not tenable
in the eyes of law. We are also fully agreeable with the finding of the authorities below that the decision in the case of ABN Amro Bank N.V. Vs. CIT (supra) relied upon by the ld. AR having different issue is not applicable in the present case as in that case issue was as to whether interest paid by branch to its head office is subject to TDS and hence, not allowable as deduction under section 40(a)(i) read with section 195 of the Act, which is otherwise tax deductible, whereas in the present case the issue involved is as to whether interest paid by the branch office to HO is tax deductible per se or not. The first appellate order in this regard is thus upheld. Ground Nos. 4 and 5 are thus rejected.
Ground Nos. 6 and 7 : In these grounds withdrawal of grant of interest under section 244A of Rs.88,56,062/- and interest of Rs.18,67,14,012/- charged under section 220(2) of the Act have been questioned. The ld. CIT (Appeals) has disposed off these grounds on the basis that the assessee had not made any specific submission in respect of these grounds and these are consequential in nature. He accordingly directed the Assessing Officer to recompute these interest after giving effect to his order.
Before us, the ld. AR contended that it is not correct to say on the part of the ld. CIT (Appeals) that assessee had not made any specific submission in respect of the above two grounds. On the contrary, the assessee has made written submission vide their letter
dated 5.04.2011 addressed to the ld. CIT (Appeals). She contended that interest under section 220(2) has been charged without issuance of notice of demand under section 156 of the Act, which is mandatory.
The ld. CIT (DR), on the other hand, placed reliance on the orders of the authorities below.
So far as withdrawal of grant of interest under section 244A of Rs.88,56,062/- is concerned, we fully concur with the approach of the ld. CIT (Appeals) that it is consequential in nature and hence, does not need independent adjudication. We, however, agree with the contention of the ld. AR that for levy of interest under section 220(2) of the Act it is a pre-condition to issue notice of demand under section 156 of the Act first. We thus, set aside the matter to the file of the Assessing Officer to examine the contention of the assessee on the basis of material available on record that notice of demand under section 156 was issued or not and decide the matter afresh as per the law after affording opportunity of being heard to the assessee. The ground No. 7 is thus allowed, for statistical purposes.
In result, appeal is partly allowed.
The order is pronounced in the Open Court on 10th March, 2017.
Sd/- Sd/- ( O. P. KANT ) ( I. C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: the 10th March, 2017 *MEHTA* Copy of the Order forwarded to: 1. Appellant; 2. Respondent; 3. CIT; 4. CIT (A); 5. DR; By Order
ASSISTANT REGISTRAR
Date Draft dictated on 10.03.2017 Draft placed before author 10.03.2017 Draft proposed & placed before the second member Draft discussed/approved by Second Member. Approved Draft comes to the Sr.PS/PS Kept for pronouncement on File sent to the Bench Clerk Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order.