FIRST ABU DHABI BANK PJSC,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION)-CIRCLE 2(3)(1), MUMBAI

P a g e | 3 ITA No.3279/Mum/2023 First Abu Dhabi Bank Vs. DCIT(IT) Circle 2(3)(1) Each of the grounds of appeal referred above is separate and may kindly be considered independent of each other The Appellant craves leave to add to, alter, amend or withdraw all or any of the grounds of appeal herein above and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law.” 2. The return of income declaring total income of Rs.564, 43,87,490/- was filed on 14.02.2021. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 29.06.2021. The assessee company was incorporated in Abu Dhabi United Arab Emirates (UAE). The assesse received banking license from Reserve Bank of India on 17.12.2014 authorising it to commence its business in India. During the year under consideration the assessee has shown earning of income of balances with Reserve Bank of India and other inter-bank funds, interest on loan and investment, commission, exchange and brokerage and miscellaneous income. The further facts of the case are discussed while adjudicating the ground of appeal filed by the assessee as follows: Ground No.3: Disallowing of “Nostro Account” charges of Rs.84,007/-: 3. During the course of assessment the assessing officer noticed that assessee has paid an amount of Rs.84,007/- as nostral charges to Deutsche Bank AG, Frankfurt, Deutsche Bank Trust Company America’s New York: National Westminster Bank PLC & Sumitomo Mitsui Banking Corporation Tokyo, Japan outside India. The assessee was asked to furnish detail of the TDS made on such payments. The assessee submitted that the aforesaid income was earned by the foreign bank from a source outside India and the said income had no economic nexus with its PE in India and this was not chargeable to tax under the provisions of the Act. However, the AO has not agreed with the submission of the assessee and observed that Sec.40(a)(i) of the Act

P a g e | 4 ITA No.3279/Mum/2023 First Abu Dhabi Bank Vs. DCIT(IT) Circle 2(3)(1) restrict such expenditure if no tax is deducted on the amount paid to non-resident, therefore, the sum of Rs.84,007/- was disallowed u/s 40(a)(i) of the Act as per the draft assessment order passed u/s 144C(1) of the Act on 27.09.2022. 4. The assessee filed objection before the DRP. The DRP vide order dated 28.06.2023 u/s 144C(5) of the Act dismissed the objection filed by the assessee. 5. During the course of appellate proceedings before us the ld. Counsel submitted that Nostro Account are maintained with banks outside India and the bank charges were directly debited by the overseas bank to such Nostral Account and there was no remittance of money made by the assessee in respect of such account as maintenance charges. He further submitted that the identical issue on similar fact has been adjudicated by the ITAT, Mumbai in favour of the assessee in the case of DDIT (IT)-4(2) Vs. Oman International Bank (2013) 40 taxman.com 319 (Mumbai – Trib). On the other hand, the ld. D.R supported the order of lower authorities. 6. Heard both the sides and perused the material on record. Without reiterating the fact as discussed above the assessing officer has disallowed the claim of expenditure as Nostro Account charges by the overseas bank with respect of to Nostro Account maintained outside India. It is undisputed fact that these charges were recovered directly by debiting the account of the assessee maintained outside India with the overseas bank and there was no remittance of money by the assessee in respect of such account maintenance charges. The assessing officer could not controvert the fact that the charges recovered by the overseas bank was not in the nature of managerial, technical or consultancy services and the said income has no nexus with its PE in

P a g e | 5 ITA No.3279/Mum/2023 First Abu Dhabi Bank Vs. DCIT(IT) Circle 2(3)(1) India. Further on this issue the ITAT Mumbai in the case of Oman International Bank as referred supra held that no tax is required to be deducted at source in respect of the bank charges paid on Nostro Account. Therefore, following the decision of ITAT bench and considering above facts the income in the form of bank charges was earned by the foreign bank from a source outside India without attributable to permanent establishment (PE) of the foreign bank in India. The assessing officer is directed to allow the claim of deduction of the charges recovered by the bank with respect to the nostro account maintained by the assesse outside India. Accordingly, this ground of appeal is allowed. Ground No. 4: 7. During the course of assessment proceedings the assessing officer noticed that assessee has disallowed CSR expenses of Rs.1,17,46,555/- (Corporate Social Responsibility) as per explanation to Section 37 of the Act. However, the assessee has claimed part of CSR expenses of Rs.24,53,016/- as donation and claimed deduction in chapter VIA of the Act. However, the assessing officer has disallowed the claim of deduction u/s 80G of Rs.24,53,016/- on the ground that assessee has not spent the amount voluntarily and the same was spent as per the requirement of spending under CSR expenses. 8. The assessee filed the objection before the DRP. The DRP has dismissed the objection raised by the assessee for allowing deduction u/s 80G of the Act. 9. During the course of appellate proceedings before us the ld. Counsel submitted that assesse is eligible to claim the deduction u/s 80G of the Act amounting to Rs.234,53,016/- being 50% of the donation amounting to Rs.49,06,031/-. He further submitted that similar issue on identical fact has been adjudicated in favour of the assessee by the

P a g e | 6 ITA No.3279/Mum/2023 First Abu Dhabi Bank Vs. DCIT(IT) Circle 2(3)(1) various decision of the Mumbai Tribunal and the other Tribunal as follow: 1. Marsh McLennan Global Services India Private Limited (Mumbai ITAT) [ITA No. 2452/MUM/2022) (copy submitted during the hearing) 2. JMS Mining (P.) Ltd v. PCIT (2021] 130 taxmann.com 118 (Kolkata Tribunal) 3. Sling Media (P.) Ltd v. DCIT (2022) 135 taxmann.com 164 (Bangalore Tribunal) 4. Goldman Sachs Services Pvt Ltd v. JCIT (IT(TP)A No. 2355/Bang/2019] 5. First American (India) Pvt. Ltd v. ACIT [ITA No.1762/Bang/2019] 6. Jindal Power Ltd. [2016] (70 taxmann.com 389) (Raipur ITAT) 7. Peerless General Finance & Investment Co. Ltd. [2019] 112 taxmann.com 410 (Kolkata ITAT) 8. Naik Seafoods Pvt. Ltd. (Mumbai ITAT) [ITA No. 490/MUM/2021]

On the other hand, the ld. D.R supported the order of lower authorities. 10. Heard both the side and perused the material on record. During the year under consideration the assessee has debited expenditure of Rs.117,46,555/- towards corporate social responsibility. However, in view of the explanation 2 to Section 37 of the Act the assessee has disallowed the claim of deduction of expenditure incurred towards Corporate Social Responsibility. The assessee has claimed an amount of Rs.49,06,031/- as donation provided to the educational institution and National Function Centre out of the total CSR expenditure of Rs.117,46,555/- and claimed deduction of Rs.24,53,016/- u/s 80G of the Act. We find that there is nowhere provided that assessee is not eligible to claim the deduction u/s 80G of the Act in respect of the expenditure which has been spent as a donation out of the CSR expenses in case all conditions laid down in Section 80G are fulfilled. We have perused the decision of ITAT in the case of March Mclennan Global Services India - Private Ltd. Vs. Assessment Unit, Income Tax Department, vide ITA No. 2452/Mum/2022 dated 27.12.2022 wherein identical issue on similar fact has been adjudicated in favour of the

P a g e | 7 ITA No.3279/Mum/2023 First Abu Dhabi Bank Vs. DCIT(IT) Circle 2(3)(1) assessee. The relevant operating part of the decision is reproduced as under: “9. On perusal of above, it is clear that after considering the position taken by the Assessing Officer and the objections raised by the Appellant, the DRP concluded that even though deduction for CSR Expenses was not allowable under Section 37 of the Act (in view of the Explanation 2 to Section 37 of the Act inserted by the Finance Act, 2014, with effect from 01.04.2015), there was no bar for allowance of the same under Section 80G of the Act (except for the donations made to the Swach Bharat Kosh and the Clean Ganga Fund), provided all the other conditions of Sec. 80G are fulfilled. Therefore, the DRP issued specific direction to allow deduction for INR.28,72,578/- under Section 80G of the Act after verifying whether the other conditions specified under Section 80G were fulfilled. As per mandate of Section 144C(13) of the Act, upon receipt of directions issued by DRP the Assessing Officer was required to complete the assessment in conformity with the directions issued by the DRP. We hold that the Final Assessment Order, dated 27.07.2022, passed by the Assessing Officer was not in conformity with the directions issued by the DRP and is therefore, set aside, being contrary provisions of Section 144C(13) of the Act. The issue is remanded back to the file of Assessing Officer with the directions to pass the Final Assessment Order in conformity with the directions issued by the DRP. Accordingly, Ground No. 2 raised by the Appellant is allowed while all other grounds raised by the Appellant are disposed off as being infructuous.” Since the issue based on similar fact is squarely covered by the decision of the coordinate bench of the ITAT Mumbai as discussed supra in this order therefore, following the decision we consider that assessee is eligible for deduction u/s 80G of the Act in respect of amount spent on donation u/s 80G of the Act if all the conditions laid down in Sec.80G of the Act are fulfilled even though on such expenses deduction for CSR expenses was not allowed. Therefore, this ground of appeal is allowed. Ground No. 5: Treating of payment of interest by the assessee to its head office as income under the head profits and gains from business and profession: 11. During the year under consideration the assessee has paid interest amounting to Rs.13,47,619/- to head office branch as payment towards interest and taxed it @ 5% under India – UAE DTAA instead of @ 40% as per explanation to 9(1)(v) of the Act.

P a g e | 8 ITA No.3279/Mum/2023 First Abu Dhabi Bank Vs. DCIT(IT) Circle 2(3)(1) 12. The assesse filed the objection before the DRP. The DRP has dismissed the objection filed by the assessee. 13. During the course of appellate proceeding before us the ld. Counsel submitted that assessee has rightly offered to tax the interest paid by assessee to its head office @ 5% as per Article 11 of the India UAE DTAA and further submitted that the contracting state in which the interest arises through a PE situated therein or performed in that other state independent personal services from a fixed base situated therein and the debt claim in respect of which the interest is paid is effectively connected with such PE or fixed base. On the other hand, the ld. D.R supported the order of lower authorities. 14. Heard both the sides and perused the material on record. During the year under consideration the assessee has paid interest amounting to Rs.13,47,619/- to its head office. The assessee has offered the said income to tax @ 5% under the provision of Article 11 of India-UAE Double Taxation Avoidance Agreement (DTAA). The assessing officer has taxed the same @ 40% as per explanation to Sec. 9(1)(v) of the Act. During the course of appellate proceedings before us the ld. Counsel submitted that similar issue on identical fact has been adjudicated by the ITAT in the following cases: 1. Special Bench of Mumbai ITAT in Sumitomo Mitsui Banking Corporation v/s DDIT, [2012] 163 ITD 66 (Mum)(SB) 2. Hon'ble Calcutta HC in ABN Amro Bank NV v. CIT (ITA No. 458 of 2005] 3. Hon'ble Mumbai HC in ADIT v. Credit Agricole Indosuez [ITA No. 1430 of 2013] As per Section 90(2) of the Act, where an assessee is a resident of a country with whom India has entered into an agreement for avoidance of double taxation (DTAA) the provisions of the DTAA or the Act, whichever are more beneficial to the assessee shall apply. We have

P a g e | 9 ITA No.3279/Mum/2023 First Abu Dhabi Bank Vs. DCIT(IT) Circle 2(3)(1) perused the Article 11 of the India-UAE Tax Treaty and extract of the same is reproduced as under: “ARTICLE 11- INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed: (a) 5 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution; and (b) 12.5 per cent of the gross amount of the interest in all other cases. 3. ……………. 4. The term interest as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article.” The CBDT vide circular no. 740 dated 17.04.1996 has clarified as under: “3. It is clarified that the branch of a foreign company/concern in India is a separate entity for the purposes of taxation. Interest paid/payable by such branch to its head office or any branch located abroad would be liable to tax in India and would be governed by the provisions of section 115A of the Act. If the Double Taxation Avoidance Agreement with the country where the parent company is assessed to tax provides for a lower rate of taxation, the same would be applicable. Consequently, tax would have to be deducted accordingly on the interest remitted as per the provisions of section 195 of the Income-tax Act, 1961.” We have also perused the decision in the case of Sumitomo Mitsui Banking Corporation Vs. DDIT (2012) 163 ITD 66 (Mum)(SB). The relevant extract is reproduced as under: “The position under the domestic law as emanating from the judicial pronouncements is that one cannot profit out of himself and if the payment of interest made by the Indian PE to the foreign GE of which it is a part is payment to self, it cannot give rise to any income which is chargeable to tax in India as per the domestic law. Revenue, however, has relied on the decision of Supreme

P a g e | 10 ITA No.3279/Mum/2023 First Abu Dhabi Bank Vs. DCIT(IT) Circle 2(3)(1) Court in the case of CIT v. Hyundai Heavy Industries Co. Ltd. (2007) (291 ITR 482), as well as certain articles of the Indo- Japanese treaty in support of its case that the PE in India has to be treated as a separate entity and the interest payable by the said PE has to be brought to tax in India in the hands of GE as income. [Para 59]" The revenue has contended that the deeming fiction created in article 7(2) of the treaty treating the PE in India as separate and independent entity should be extended to article 11 to the treaty. According to it, if the PE in India and the head office abroad are treated as two separate entities, there will be no difficulty in bringing to tax interest paid by Indian PE as income of the GE in India as per article 11(2).”

In view of the decision of the coordinate bench and considering the provision of Article 11 of India-UAE Tax Treaty and circular no. 740 dated 17.04.1996 issued by the CBDT, we find the lower authority have not brought any contrary material to disprove the claim of the assessee that impugned interest income is taxable @ 5% as per India UAE Treaty as discussed supra in this order. Therefore, this ground of appeal of the assessee is allowed. Ground No. 6: “Without prejudice to Ground No 5, the learned AO has erred in doubly computing tax on the interest paid by the Appellant to its HO amounting to INR 13,47,619, firstly at 40% (plus applicable surcharge and health and education cess) as income of the PE under the provisions of the Act and secondly, at 5% as income of the HO under Article 11 of India-UAE DTAA, thereby resulting in the same income being charged to tax twice.”

P a g e | 11 ITA No.3279/Mum/2023 First Abu Dhabi Bank Vs. DCIT(IT) Circle 2(3)(1) 17. This ground of appeal is related to initiation of penalty u/s 270A of the Act for misreporting of income in relation to deduction of health and education cess. The assessee submitted that it has filed form no. 69 for withdrawal of claim of deduction of health and education cess as per copy of the same placed at page no. 185 to 231 of the paper book. This ground of appeal is premature at this stage but AO is directed to place on record the claim of the assessee that it has filed withdrawal of claim for deduction in form no. 69. Ground No.1: Pertaining to initiating and completing assessment proceedings u/s 143(3) of the Act without issuing a valid notice u/s 143(2) of the Act: 18. This ground is academic in nature as we have decided the issue on merit in favour of the assessee therefore the same stand dismissed. Ground No. 2: 19. The assessee stated that the final assessment order passed by the assessing officer is not within the time limit prescribed u/s 153 of the Act is academic in nature as the issue on merit has been adjudicated in favour of the assessee as discussed above in this order, therefore, this ground of appeal of the assessee is left open. 20. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 27.02.2024

Sd/- Sd/- (Amit Shukla) (Amarjit Singh) Judicial Member Accountant Member Place: Mumbai Dated: 27.02.2024 PS: Rohit

P a g e | 12 ITA No.3279/Mum/2023 First Abu Dhabi Bank Vs. DCIT(IT) Circle 2(3)(1) आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. 3. आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. सत्यावपि प्रवि //True Copy// आदेशानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीिीय अतिकरण/ ITAT, Bench, Mumbai.