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Assessee by : Sh. Percy J. Pardiwalla Sr. Advocate along with Sh. Madhur Aggarwal Advocate Revenue by Sh. Jasbir Chauhan (Sr CIT- : DR) Date of hearing : 05.12.2016 Date of Pronouncement : 03.03.2017 Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER:
ITA No.8671/M/2010, CO No.250/M/2012 D.B.S. Bank Ltd.
These two cross appeals and Cross Objection are directed against the order of Commissioner (Appeals)-10, dated 05.10.2010 for Assessment Year 1994-95. Both the appeals and Cross Objection are arising of the same order thus clubbed together, heard and are decided by common order to avoid the conflicting decision. The assessee has raised following grounds of appeal:
(1) The Commissioner (Appeals) erred in upholding the disallowance of Rs.1,87,79,288/- being interest paid to head office/overseas branches. (2) The Commissioner (Appeals) erred in upholding the disallowance of Rs.28,503/- being interest paid to NOSTRO accounts. (3) The Commissioner (Appeals) erred in upholding the amount of Rs.79,47,690/- claimed for provision of standard asset written back. (4) The Commissioner (Appeals) erred in upholding the 1/5th of fee paid for Corporate Club membership. (5) The Commissioner (Appeals) erred in upholding of taxing the Capital Gain of Rs.10,69,688/-pertaining to DBS FII operations in India as “business income” in the hand of appellant. (6) (a) In alternative, the assessee raised plea that in the event of loss of Rs. 6,74,26,015/- for AY 2005-06 is disallowed, the same may be reduced while computing the total income for the Assessment Year 2006-07, being the year of reversal. (b) Further in alternative, the assessee tastefully that in the event of loss of Rs. 9 519 9815/-being loss on revaluation of unmatured foreign forex exchange contract as on 31st of March 2004 pertaining to the Assessment Year 2004-05 is disallowed, the same may be reduced while computing the total income for the Assessment Year 2005-06, being the year of reversal. In cross appeal the revenue has raised following grounds of appeal: (1) on the facts and in the circumstances of the case and in law, whether the ld Commissioner (Appeals) was justified in holding that the claim of loss on revaluation of unmatured forward exchange contract is an allowable deduction without appreciating that such loss is a notional in nature and without appreciating that forward exchange contracts cannot be construed as stock in trade. (2) On the facts and in the circumstances of the case and in law, whether the ld Commissioner (Appeals) was justified in applying the decision in the case of CIT versus Woodward Governor (P) limited to the facts of the case. The appellant prays and submit that the decision in the case of CIT versus Woodward Governor India Private Limited (2009) 223 CTR 001SC was rendered in the factual context where liability for expenditure was already incurred but the quantum was contingent and dependent on the fluctuation of rate of exchange. The issue which accordingly arose was whether such varying amounts would qualify for deduction as “expenditure” under section 37 of the Income Tax Act. This is distinguishable from the present case where the loss was notional in nature, as there was no accrual.
ITA No.8671/M/2010, CO No.250/M/2012 D.B.S. Bank Ltd.
(3) On the facts and in the circumstances of the case and in law whether learned Commissioner (Appeals) was justified in holding that the Assessing Officer has wrongly applied the provision of section 44C in allowing head office expenses of Rs. 68,81,733/- In Cross objection the assessee bank has raised following grounds of appeal: (1) The Commissioner (Appeals) ought to have directed the assessing officer to grant refund of tax deducted at source on the interest paid to head office/overseas branches. (2) The Commissioner (Appeals) ought to have held that interest of Rs.14,22,021/- received by the Indian branch from head office should be excluded while computing taxable income of the branch in India.
2. Brief facts of the case are that assessee is a non-resident Banking Company in India being a branch of DBS Bank Ltd Singapore. The assessee filed return of income for relevant assessment year on 31st October 2005 declaring total loss of Rs. 28,58,789/-. The assessment was completed on 23 December 2008 under section 143(3). The assessing officer while framing assessment order besides the other addition and disallowance, disallowed interest expenses of Rs.1,87,79,288/- on account of head office/overseas branch, disallowed interest expenses of Rs. 28,503/-on account of NOSTRO accounts, disallowed notional loss of Rs. 6,74,26,015/- on revaluation of unmatured outstanding forward foreign exchange contracts, disallowed the head office expenses of Rs.68,81,733/-, disallowed deduction under section 44C on head office expenses of Rs. 40,13,250/-, disallowed Rs. 7947690/- claim for provision for standard asset written back , allowed only Rs. 6 lakh out of 1/5 of Rs. 30 lakhs for entrance fees paid for corporate club membership, taxed the capital gain of Rs. 10,69,688 /- . On appeal before Commissioner (Appeals) the claim of loss on revaluation of unmatured forward exchange contract and head office expenses of Rs.68,81,733/- was allowed. Rests of the disallowance were sustained. Accordingly, both the parties filed appeal against the order of ld Commissioner (Appeal). The assessee filed appeal against the sustaining the various disallowance is claimed under various grounds of appeal. Similarly, the revenue has challenged the deletion of head office expenses and allowing the claim of loss on revaluation of unmatured forward exchange contract. The assessee bank ITA No.8671/M/2010, CO No.250/M/2012 D.B.S. Bank Ltd. further filed Cross Objection for appropriate direction to the assessing officer to grant refund on tax deducted at source on the interest paid to head office and that interest of Rs. 14,22,021/- received by Indian branch from head office should be excluded while computing taxable income of the branch in India.
We have heard the ld AR of the assessee and the ld DR for the revenue and perused the material available on record. Ground No.1 relates to the interest disallowance of Rs.1,87,79,288/- paid to head office/overseas branches. The learned AR of the assessee argued that this ground is covered in favour of the assessee in assessee’s own case for Assessment Year 2003-04 in ITA No. 248/M/2007. The ld and AR for revenue not disputed the contention of AR for assessee.
We have considered the rival contention of the parties and seen that similar disallowance was made in assessment year 2003-04 and the assessee bank filed appeal before the Tribunal vide order dated 07.10.2013in 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 ITD66) 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 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.
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 ITA No.8671/M/2010, CO No.250/M/2012 D.B.S. Bank Ltd.
assessee, thus respectfully following the decision of Tribunal the ground No,1 of appeal is allowed.
Ground No. 2 relates to disallowance of Rs.28,503/- interest paid to NOSTRO accounts. The ld AR of the assessee argued that that during the previous year relevant to the assessment year under consideration assessee have paid interest on NOSTRO account overdrawn. The interest has been directly debited from the Overseas Bank i.e. Bank of New York USA and it pertains to the branch in India. The ld AR explained that NOSTRO account is an account maintained by an Indian Bank including foreign Banks branch in India, which is denominated in foreign currency. The Indian bank charged interest if the NOSTRO account has overdrawn balances. Interest paid by the assessee on overdrawn on NOSTRO account are on the Banks account maintained with foreign banks and not with NOSTRO account maintained with the head office/overseas branches of the assessee. Thus, consideration by Commissioner (Appeals) by placing reliance on the basis of ground No. 1 is factually incorrect. In alternative it was argued that if the deduction on account of interest paid to head office is allowable then the deduction on NOSTRO account is also allowable deduction. On the other hand the ld DR for the revenue supported the order of authorities below.
We have considered the rival contention of the parties and gone through the orders of authorities below. The assessing officer disallowed the interest paid to NOSTRO account holding that interest paid can be claim only by the head office of the Bank. The ld CIT(A) upheld the action of the assessing officer holding that interest paid on NOSTRO account overdrawn is a payment by the assessee bank to overseas branch, accordingly, decided in accordance with disallowance of claim of deduction of interest paid to head office. In our view the disallowance of interest paid on account of NOSTRO not sustainable, the assessee Bank has to maintain an account abroad, this is to be denominated in foreign currency. The bank charged with interest if the NOSTRO account has overdrawn balances. Thus, we are fully convinced with the submission of ld AR ITA No.8671/M/2010, CO No.250/M/2012 D.B.S. Bank Ltd.
of the assessee that the interest on NOSTRO account overdraw maintained with foreign Bank i.e. Bank of New York U.S.A. is pertains to Branch in India. The alternative plea of the ld AR for the assessee is also acceptable one as deduction has to be allowed in view of the Ground No.1 allowed in favour of assessee. Hence, the ground No. 2 raised by assessee is allowed.
Ground No. 3 relates to disallowance of provision for standard asset written back of Rs. 79,47,690/- the ld AR of the assessee argued that the assessee have been following the consistent policy of offering to tax the provisions made for standard assets in all years and, consequently, excluded from income such provision for standard asset written back. It was further submitted that the details of provision for standard asset for assessment year 2002-03 to 2005-06 were provided to the lower authorities and copies of all those evidences are placed on record. The assessee was consistently offering to tax the provisions made for standard assets and claiming as deduction the provisions return back. The provisions of written back during the year represents amounts which were disallowed in earlier assessment year and therefore should be allowable in the year of written back. The ld AR in support of submission relied upon the decision of Delhi High Court in case of Steel and General Mills Co Ltd(96 ITR 438) and Madhya Pradesh High Court in case of Nathabhai Desabhai (130 ITR 238). On the other hand the learned DR for the revenue supported the order of authorities below.
We have considered the rival contention of the parties and further gone through the orders of authorities below. The assessing officer disallowed the provisions for standard asset written back holding that assessee has failed to furnish the information as to what extent such income had been offered in the earlier years for which write back has been claimed. The learned Commissioner (Appeals) confirmed the disallowance holding that AO has no alternative to add back in absence of any detail. We have seen that the assessee bank have been consistently offering to tax the provisions made for standard asset and claiming as deduction the provision written back (as shown on page 50 to 113 of PB). The ITA No.8671/M/2010, CO No.250/M/2012 D.B.S. Bank Ltd.
ld AR for the assessee made the submission that provision written back during the year represents amounts which were disallowed in earlier years and therefore should be allowed in the year of written back. In our view the contention raised by the assessee require consideration by assessing officer, therefore, this ground of appeal is remanded to the assessing officer to appreciate and consider the above fact and pass the order afresh in accordance with law. In the result this ground of appeal is allowed for statistical purpose.
10. Ground No. 4 relates to entrance fees paid for Corporate Club membership. The ld AR of the assessee argued that this ground of appeal is covered in favour of assessee by the decision of all built Supreme Court in case of United Glass MGF Company and in Taparia Tools Ltd(2015) 231 Taxman 5(SC). Per contra the landed AR for the revenue is defended the order of authorities below.
11. We have considered the rival contention of the parties and find that the ground of appeal under consideration is squarely covered by the decision of Hon’ble Supreme Court in case of CIT Vs United Glass MGF Ltd in SLP (C) No. 30146 of 2008 dated 12 September 2012 wherein it was held that Club membership fees for employees incurred by the assessee is business expenses under section 37 of the Income Tax Act. Thus, respectfully following the decision of Hon’ble Supreme Court this ground of appeal is allowed in favour of assessee.
12. Ground No.5 relates to taxability of Capital Gain of Rs. 10,69,688/- pertaining to DBS FII operation in India as business income. The learned and AR of the assessee argued that DBS is separately registered with security and exchange board of India (SEBI) as a Foreign Institutional Investors (FII) vide registration No (IN-SG-FD -0940-04). DBS investment into Indian securities under its FII registration are undertaken directly from Singapore office and are entirely dependent on the operation of ‘DBS’ branch in India. The income earned by DBS in the capacity of an FII do not form part of business property of its branch in India, thus, the income and by DBS in the capacity of an FII is not directly or indirectly attributable to the branch in India as per the provisions of India- Singapore Double Taxation Avoidance Agreement (DTAA) Capital Gains on FII ITA No.8671/M/2010, CO No.250/M/2012 D.B.S. Bank Ltd. investment is not chargeable to tax in India. The ld AR of the assessee further submitted that activities of the Indian Permanent Establishment (PE) are independent of the activities of FII. Hence, it is erroneous to conclude that because of the Indian branch is also holding investments and is showing business income, Gain on investment made by FII would also be taxable in the hands of Indian branch as ‘business income’. In support of the submission the ld AR of the assessee relied upon the registration certificate obtained by FII and Article 13 of India-Singapore DTAA. It was also argued that as per SEBI Regulations 1995, FIIs can only make investment in Indian securities and so cannot and business income. The RBI guidelines also provide that a FII should use their funds for purpose as enumerated in the SEBI Regulations. The ld AR of the assessee finally submits that the DRP vide order dated 16 September 2010 for assessment year 2006-07 and the assessing officer vide orders dated 14th Feb 2011 for assessment year 2007-08 dated 2nd Feb 2012 for assessment year 2008- 09 dated 26 March 2014 for the assessment year 2010-11 dated 18th March 2016 for assessment year 2012-13, in assessee’s own case have decided this issue in favour of the assessee and held that Capital Gains arising on the sales of securities by DBS FII is not taxable in India as per article 13 of DTAA. On the other hand the ld DR for the assessee honestly supported the order of authorities below.
We have considered the rival contention of the parties. Further, we have considered the contention of ld AR of the assessee that DRP vide order dated 16 September 2010 held that Capital Gain arising on the sale of securities by DBS FII is not taxable in India as per Article 13 India-Singapore DTAA. Further, the revenue has not tax the Capital Gains on sale of securities by DBS FII for Assessment Year 2006-07 to 2012-13. Considering, the factual position narrated above, we direct the assessing officer to allow the similar relief to the assessee after verification if the Capital Gain on sale of securities by DBS FII is not tax for Assessment Year 2006-07 to 2012-13. Hence, this ground of appeal is allowed in favour of assessee.
ITA No.8671/M/2010, CO No.250/M/2012 D.B.S. Bank Ltd.
Ground No. 6 relates to loss of revaluation of unmatured forward foreign exchange contracts. The revenue has also raised ground No. 1 and 2 in its cross appeal. Thus, the ground No. 6 of assessee’s appeal and ground No.1 & 2 raised by revenue in its cross appeal are taken together. The ld AR of the assessee argued that these grounds of appeal
are covered in favour of assessee by the decision of Mumbai Tribunal in assessee’s own case for assessment year 2003- 04 in ITA No. 744/M/2007. The learned DR for the revenue relied upon the decision of lower authorities.
15. We have considered the rival contention of the parties. We have seen that in Assessment Year 2003-04, 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.”
16. Considering the decision of Tribunal in assessee’s own case for AY 2003-04 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.
ITA No.8671/M/2010, CO No.250/M/2012 D.B.S. Bank Ltd.
Ground No. 3 in revenue’s appeals relates to applicability of provisions of section 44C in allowing head office expenses. The ld DR for the revenue supported the order of Assessing officer and argued that ld CIT(A) wrongly allowed the relief to the assessee. On the other hand the ld AR of the assessee argued that assessee has submitted the details of expenses aggregating to Rs. 68,81,733/-, which are available at Annexure-III of Transfer Pricing Report, copy of which is placed on record. The expenses consisting of reimbursement to the head office/branches for specific revenue expenses and the cost of staff. The learned AR for the assessee further submitted that the expenses are incurred specifically for the purpose of business operation carried out in India and in view of Article 7(3) of tax treaty between India-Singapore; these expenses are allowable as a deduction in computing the total income. In support of submission the learned AR of the assessee relied on the decision of Tribunal in assessee’s own case for assessment year 1999 -00 to 2001-02 dated 20 April 2011 and assessment year 2002-03 dated 17 May 2013.
We have considered the rival contention of the parties and found that similar disallowance is was made by assessing officer for assessment year 1999-00 to 2002-03 and the matter Travel up to Tribunal and the disallowance was allowed in favour of assessee vide order dated 20 April 2011 for assessment year 1999- 00 & 2001-02 and vide order dated 17 May 2013 for assessment year 2002- 03.Considering the contention of the ld AR for the assessee that the ground of appeal is covered by the decision of Coordinate bench of Tribunal in assessee’s as referred above. The order of the Tribunal are subsequent to the impugned order dated 05.10.2010. The assessing officer and the ld CIT(A) have not benefit of the finding of the Tribunal. Thus, in all fairness the assessing officer is directed to verify the fact and decide the issue in accordance with law. Needless, to order that the assessing officer shall grant the opportunity to assessee before passing the order. Thus, this ground of appeal is allowed for statistical purposes. In the result the appeal of the revenue is partly allowed. Cross Objection No.250/M/2012 by assessee in ITA No.434/M/2011 ITA No.8671/M/2010, CO No.250/M/2012 D.B.S. Bank Ltd.
The ld AR for the assessee submitted that he is not pressing the grounds of appeal
raised in Cross Objection. The ld DR has no objection if the grounds raised in CO are dismissed. Considering the contentions of both the parties the Cross Objections filed by the assessee in Revenue’s appeal are dismissed.
20. In the result the appeal filed by assessee is allowed, and the appeal filed by the revenue is partly allowed and the Cross objections of the assessee is dismissed. Order announced in the open court on 03 day of March 2017. Sd/- Sd/- (D.KARUNAKARA RAO) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 03/03/2017 Copy of the Order forwarded to :