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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI RAJENDRA & SHRI SAKTIJIT DEY
आयकर अपीऱीय अधिकरण, म ुंबई न्यायपीठ ‘के’ म ुंबई IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI श्री राजेंद्र, ऱेखा सदस्य एवुं श्री शक्तिजीि दे, न्याययक सदस्य के समक्ष BEFORE SHRI RAJENDRA, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER आयकर अऩीऱ सं. / ITA no. 6852/Mum./2012 (ननधधारण वषा / Assessment Year : 2007–08) Abu Dhabi Commercial Bank Ltd. 75B, Rehmat Manzil …….………. अऩीऱधथी / Veer Nariman Road Appellant Mumbai 400 020 PAN – AAACA4216B v/s Asstt. Commissioner of Income Tax ..…….………. प्रत्यथी / (International Taxation), Circle–1(1) 117, Scindia House, Ballard Pier Respondent Mumbai 400 038 ननधधाररती की ओर से / Assessee by : Shri Dhanesh Bafna a/w Ms. Chandani Shah रधजस्व की ओर से / Revenue by : Shri Sanjeev Jain सुनवधई की तधरीख / आदेश घोषणध की तधरीख / Date of Hearing – 28.09.2016 Date of Order – 21.10.2016 आदेश / ORDER शक्तिजीि दे, न्याययक सदस्य के द्वारा / PER SAKTIJIT DEY, J.M.
Captioned appeal at the instance of the assessee is directed against the order dated 31st July 2012, passed by the learned
2 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 Commissioner (Appeals)–10, Mumbai, pertaining to assessment year 2007–08. Grounds raised by the assessee are reproduced hereunder:– “1. The Commissioner of Income-tax (Appeals)-10, Mumbai [hereinafter referred to as the CIT(A)] erred in confirming the disallowance of the entire head office (HO) expenses of Rs.22,123,718 allocated to the Indian branches, as against the appellants claim that the said amount is allowable as a deduction as per the provisions of Article 7(3) of the convention between the Government of U.A.E. and the Government of India (hereinafter referred to as the DTAA) as applicable for the year under appeal. The appellants pray that the AU be directed to allow the entire amount of Head Office expenses. Without prejudice to above, the CIT(A) ought to have directed the AU to allow deduction for HO expense under section 44Cof the Act at the rate 5% of the average adjusted total income as per the proviso to section 44C of the Income Tax Act, 1961. 2. The CIT(A) erred in not following the order of jurisdictional Tribunal in the appellants own case on the ground of allowance of entire HO expenses allocated to the Indian branches. 3. The CIT(A) erred in determining the Arm's length price of the HO expenses to be Nil having failed to appreciate that the HO expenses were allocated to the Indian branches at cost and so was allowable as per Article 7(3) of the DTAA between India - UAE. 4. The CIT(A) erred in confirming the action of AU in restricting the exempt income under section I0(15)(1v)(h) in respect of interest on tax-free bonds to Rs.5,42,867. The CIT(A) ought to have held that exemption u/s 10(15)(iv)(h) was to be allowed in respect of 'gross receipt' of Rs. 14,06,850 and not in respect of 'net income' arising to the appellants. 5. The CIT(A) erred in confirming the action of AU in estimating expenses of ` 863,983 by applying provisions of section 14A read with rule 8D having failed to appreciate that the provisions of Rule 8D which were introduced w.e.f. 24th March, 2008 were not applicable to the year under appeal. The CIT(A) ought to have held that no disallowance under section 14A is applicable as there were no new investments made during the year, since all the investments were made in the earlier years,
3 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 where it has been held that no expenditures were incurred in relation to exempt income as the investment were out of own funds, no interest / administrative expenditure could have been held to be incurred during the year under appeal in relation to such exempt income. 6. The CIT(A) ought to have held that the provisions of I 15JB are not applicable to the Bank. 7. The CIT(A) erred in confirming the action of AO in adding back provision for the HO expenses of Rs.2,000,000 in computing book profit under section 1 15JB having failed to appreciate that the appellants have incurred an amount of Rs.22,123,718 towards the HO expenses allocated for the year and hence the provision is towards an ascertained liability. The appellants pray that the AO be directed accordingly. 8. The CIT(A) erred in not directing the AO to exclude interest received from the HO of Rs.6,560,801, while calculating the taxable income, as this represents receipt from self and therefore not taxable as per Income Tax Act, 1961. The appellants crave leave to add to, amend, alter, vary, omit or substitute the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as they may be advised.
Grounds no.1, 2 and 3 are in respect of disallowance of claim of head office expenditure.
Brief facts are, during the assessment proceedings, the Assessing Officer while verifying the accounts of the assessee, noticed that the assessee has claimed head office expenditure amounting to ` 2,21,23,718, which is not in terms with the provisions of section 44C of the Act. He, therefore, called upon the assessee to explain why the expenditure claimed should not be restricted as per section 44C. In
4 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 response, it was submitted by the assessee that the expenditure claimed is on actual expenditure incurred by the H.O. which is attributable to Indian Branch. It was submitted, limit prescribed under section 44C will not apply to its case and the expenditure attributable to Indian operation should be allowed in full in accordance with Article 7 of the DTAA with U.A.E. The Assessing Officer, however, observing that in earlier assessment years, the issue was decided in favour of the Revenue by the learned Commissioner (Appeals) and the Tribunal held that the assessee is entitled to deduction under section 44C to the extent of the limit prescribed therein. Accordingly, he disallowed assessee’s claim. Being aggrieved of such disallowance assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals) upon considering the submissions of the assessee in the context of facts and material on record observed, though, the assessee had claimed that the issue is covered by the decision of the Tribunal in assessee’s own case for assessment year 1995–96 to 2000–01 vide order dated 20th July 2012, however, she observed that the Assessing Officer has followed the decision of the Tribunal in assessee’s own case for assessment year 1995–96 to 1997–98. She observed, subsequent decision of the Tribunal relied upon by the assessee is on the basis of a new DTAA which is applicable from assessment year 2009–10. She, therefore,
5 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 observed, when the Tribunal has already given a decision earlier on the issue holding that there is no conflict between mandate of Article 7(3) of DTAA and section 44C of the Act, it is difficult to see how without reversing the said finding, the Tribunal could have arrived at a different decision subsequently. Ultimately, she held as there are two conflicting decisions of the Tribunal in assessee’s own case for two different years assessee’s case has to be decided on the basis of the facts involved in the year under consideration. She observed, the entire claim of expenditure of ` 2.21 crore is on account expenditure attributable to the India P.E. After verifying the details, the learned Commissioner (Appeals) observed that in the order passed under section 92CA(3), the Transfer Pricing Officer has not proposed any adjustment with regard to H.O. expenses. She observed, in the transfer pricing study, the assessee has only referred to the provisions of section 44C and has not determined any arm's length price. The assessee had stated that the H.O. expenses are restricted by provisions of section 44C and cannot be overridden by transfer pricing regulations. However, in the appeal proceedings for the impugned year, the assessee is taking a different view by stating that provisions of section 44C are not applicable. The learned Commissioner (Appeals) observed, irrespective of the fact whether the provisions of section 44C apply or not, transfer pricing regulation will definitely be
6 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 applicable to the H.O. expenses and it could be allowed to the extent of arm's length price. The learned Commissioner (Appeals), after verifying the arm's length price computed by the assessee ultimately concluded that there is no basis for allocation of ` 2.21 crore out of H.O. expenses to the Indian Branch. She observed, assessee has failed to establish that the expenditure claimed are attributable to Indian Branch operation. She observed, under the transfer pricing provisions, the onus is on the assessee to calculate arm's length price of an international transaction. Whereas, the assessee merely stated that no mark–up is charged by the H.O. on the assessee. She negated assessee’s contention that when actual cost without mark–up are allocated no arm's length price is required to be determined. She opined as per the mandate of section 92(2) which deals with cost contribution arrangement, the benefit or service received is required to be evaluated and where no benefit or service is received, the arm's length price for such a transaction can be taken as nil. Accordingly, she held that as the assessee failed to determine the arm's length price for the cost contribution arrangement it has to be determined. She further observed, assessee having not shown the receipt of any benefit or service cost, the arm's length price of cost contribution arrangement has to be determined as nil. Therefore, even if section 44C is not invoked, the amount deductible on account of H.O.
7 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 expenditure will be nil. While doing so, she also rejected assessee’s alternative claim of deduction under section 37(1) of the Act.
The learned Authorised Representative submitted, as far as allowability of expenditure incurred by the H.O. attributable to the Indian Branch is concerned, the issue is covered by the decision of the Tribunal in assessee’s own case for the assessment year 2004–05. He submitted, the learned Commissioner (Appeals) has wholly misconceived the facts while observing that the decisions of the Tribunal on the issue are divergent. He submitted, earlier decision of the Tribunal in M.A. taking a view against the assessee, no longer holds good in view of subsequent order of the Tribunal in favour of the assessee in the second round of proceeding for the same assessment years 1995–96 to 2000–01, 2001–02 to 2002–03, 2003–04 to 2004– 05 and again in the assessment year 204–05 to 2006–07. He, therefore, submitted, no disallowance of the H.O. expenditures can be made and even such expenditure cannot be subjected to provisions of section 44C. As far as determination of arm's length price of the H.O. expenses at nil by the learned Commissioner (Appeals), the learned Authorised Representative submitted, at the time of proceedings before the Transfer Pricing Officer assessee had submitted all relevant and necessary information and the Transfer Pricing Officer after examining all necessary details accepted the arm's length price shown
8 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 by the assessee including the H.O. expenses. Learned Authorised Representative further submitted, the Transfer Pricing Officer having found the international transaction relating to the H.O. expenses to be at arm’s length, the learned Commissioner (Appeals) cannot override the same and review the order of the Transfer Pricing Officer as she has no power of revision as prescribed under section 263. Learned Authorised Representative submitted, since the H.O. expenses is an allowable expenditure in terms of Article–7(3) of the DTAA, in terms of section 90(2), provisions of the Act including the transfer pricing provisions cannot be made applicable. He, therefore, submitted, the H.O. expenditure claimed by the assessee is to be allowed.
The learned Departmental Representative, though, agreed that the Tribunal in assessee’s own case for different assessment years have held that H.O. expenditure is allowable under article 7(3) of the DTAA between India and U.A.E., however, as far as the quantum of expenditure is concerned, the arm's length price has to be determined by applying the transfer pricing provisions. He, therefore, submitted, the learned Commissioner (Appeals) was justified in determining the arm's length price of the H.O. expenses at nil, as the assessee failed to provide relevant information.
9 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 7. We have considered the submissions of the parties and perused the material available on record. As far as the issue relating to allowability of H.O. expenses is concerned, we are of the firm opinion that the issue is squarely covered in favour of the assessee by a number of decisions of the Tribunal in assessee’s case for different assessment years. In A.Y. 1995–96 to 2000–01 (reported in 138 ITD 83), the Tribunal, taking note of the amendment made in Article 7(3) w.e.f. 1st April 2008 held that such amendment will have no retrospective effect and ultimately concluded that as per the existing provisions contained under Article 7(3), under India U.A.E., DTAA wherein there was no provision for applicability of domestic law, computation of income and disallowance of expenditure relating to H.O. cannot be made by invoking the provisions of section 44C of the Act. The relevant observations of the Bench in this context are extracted hereunder for better clarity.
Thus, in view of our above finding, we hold that, firstly, in the assessment year involved, limitation clause of applicability of the Act will not apply in Article 7(3), and consequently provisions of section 44C will not be applicable; secondly, the amendment brought by way of provisions of section 44C, will not be applicable; secondly, the amendment brought by way of protocol by which article 7(3) has been amended and limitation clause has been brought in, will apply from 1st April, 2008 and will not have any retrospective effect; thirdly, the judgment of Mashreqbankpsc (supra), is no longer relevant in view of the decision of the Special Bench in the case of Sumitomo Mitsui Banking Corpn.(supra).and Lastly, from the above conclusions, it is held that computation of income and disallowance of expenses relating to head office cannot be made by invoking the provisions of Section 44C of IT
10 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 Act. Thus, in view of the above conclusions, we hold hat income of the PE of the assessee should be computed as business income after allowing all the expenses attributable to its business in India including the head office expenses.
The same view was again reiterated by the Tribunal in assessee’s own case in assessment years 2001–02 and 2002–03, [reported in (2013) 16 SOT 71 (Mum.)] and assessment years 2003–04 and 2004– 05 in ITA no.6530/Mum./2006 dated 3rd August 2012, and ITA no.4926/Mum./2009 dated 29th April 2016 respectively. As far as determination of arm's length price of the H.O. expenses at nil, we are unable to accept the view of the learned Commissioner (Appeals) in this regard. We have noted from the order dated 22nd july 2010, under section 92CA(3), after examining facts and materials submitted by the assessee, the Transfer Pricing Officer had accepted the arm's length price reported by the assessee including the H.O. expenditure. Therefore, the allegation that assessee has failed to substantiate the arm's length price of the H.O. expenses with relevant data is without any basis. On the contrary, the conclusion drawn by learned Commissioner (Appeals) that assessee has failed to establish the benefit derived by incurring such expenditure is more on presumption rather than any material brought on record. More so, when such expenditure incurred by the H.O. attributable to Indian branch in earlier assessment year have been found to be genuine by Tribunal.
11 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 Further, the Tribunal, in assessee’s own case in different assessment years after taking into consideration the existing provisions of India UAE DTAA has held that under Article 7(3), the H.O. expenses are allowable. In the aforesaid view of the matter, respectfully following the consistent decision of the Tribunal in assessee’s own case for the earlier assessment years, we allow H.O. expenses incurred by the assessee. Ground no.1, 2 and 3 are allowed.
Grounds no.4 and 5 relate to disallowance of expenditure relating to earning of exempt income.
Brief facts are, in the course of assessment proceedings, the Assessing Officer found that the assessee in the relevant previous year has earned interest from tax free bonds of ` 14,06,850 and claimed exemption under section 10(15) of the Act, however, assessee has not disallowed any expenditure relating to earning of exempt income. The Assessing Officer also observed, the assessee had claimed deduction under section 10, in respect of gross interest income instead of net income. He observed, gross interest from tax free securities received by the Bank is not eligible for exemption under section 10. He further observed that the assessee borrows funds at various rates of interest apart from having interest free funds. However, the assessee has not been able to co–relate the interest free funds with tax free investment.
12 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 With the aforesaid observations, the Assessing Officer proceeded to compute disallowance of rule 8D and quantified such disallowance at ` 8,63,983. Being aggrieved of such disallowance, the assessee preferred appeal before the first appellate authority. However, the learned Commissioner (Appeals) sustained the disallowance.
The learned Authorised Representative submitted, the issue is decided in favour of the assessee by the Tribunal in assessee’s own case for assessment year 2004–05 to 2006–07.
The learned Departmental Representative, however, relied upon the decision of the Assessing Officer and the learned Commissioner (Appeals).
We have considered the submissions of the parties and perused the material available on record. There is no dispute that the Assessing Officer has made disallowance under section 14A by applying provisions of rule 8D however, as held by the Hon'ble Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. v/s DCIT, [2010], 328 ITR 081 (Bom.), rule 8D is applicable prospectively from the assessment year 2008–09. That being the case, disallowance made by the Assessing Officer in terms of rule 8D cannot be sustained. However, there is no dispute that in the relevant previous year, assessee has earned some exempt income. Therefore, reasonable disallowance
13 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 under section 14A towards expenditure attributable to earning of exempt income has to be made. We have noted that while considering similar issue relating to disallowance of expenditure under section 14A in assessment year 2004–05, the Tribunal in assessee’s own case in ITA no.4926 to 4928/Mum./2009, dated 29th April 2016, has held that 2% of dividend income can reasonably be held to be the expenditure attributable for earning exempt income. Respectfully following the view of the co–ordinate bench in assessee’s own case, as aforesaid, we direct the Assessing Officer to disallow 2% of the exempt income. Accordingly, these grounds are partly allowed.
Grounds no.6 and 7 relate to computation of book profit under section 115JB.
Brief facts are, the Assessing Officer having found that the tax payable under the normal provisions is less than the book profit computed under section 115JB, determined the tax payable under section 115JB of the Act. The assessee challenged the aforesaid decision of the Assessing Officer before the learned Commissioner (Appeals) by contending that the provisions of section 115JB of the Act is not applicable to a banking company. However, the learned Commissioner (Appeals) disallowed assessee’s claim.
14 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 16. The learned Authorised Representative submitted before us that the provisions of section 115JB will not be applicable to a banking company as they are governed under the Banking Regulation Act and not Companies Act. In this context, learned Authorised Representative relied upon the decision fo the Tribunal in case of Krung Thai Bank PCL v/s JCIT, 133 TTJ 435, UCO Bank v/s DCIT, 156 ITD 146.
The learned Departmental Representative relied upon the order of the learned Commissioner (Appeals) and the Assessing Officer.
We have considered the submissions of the parties and perused the material available on record. Undisputedly, the assessee is a banking company governed by the Banking Regulation Act. In the case of Krung Thai Bank PCL (supra), the Tribunal has held that provisions of section 115JB of the Act will not be applicable to a banking company. The same view has also been expressed in UCO Bank (supra). Respectfully following the aforesaid decision of the Tribunal, we hold that the provisions of section 115JB are not applicable to assessee being a banking company whose Profit & Loss account are not prepared in terms of Part–2, Schedule–VI to Companies Act, 1956. In view of our aforesaid decision, the issue raised in ground no.7 has become redundant, hence, not required to be adjudicated.
15 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 19. In ground no.8, the assessee has challenged inclusion of interest received from H.O. in computing taxable income.
Brief facts are, in the course of proceedings before the first appellate authority, the assessee has raised an additional ground stating that interest received from H.O. amounting to ` 65,60,801, was wrongly offered as income in the return of income which is actually not chargeable to tax in India. It was submitted by the assessee that interest earned from H.O. is a transaction between two parties of the same entity and being a transaction with self to self is not taxable. In support of such contention, assessee relied upon the decision of the Tribunal, Special Bench, in Sumitomo Mitsui Banking Corp. v/s DCIT, [2012] 19 taxman 364, the learned Commissioner (Appeals) after considering the submissions of the assessee in the context of relevant facts and material, found that while the assessee has borrowed funds from the H.O., it has also lent money to the H.O. of equal and much larger amounts, therefore, the lending and borrowing transaction with the H.O. in foreign currency relate to a common fund maintained by the Branch for its business purpose. He noted, assessee has itself offered interest income to tax in the return of income. Therefore, such interest income earned by the assessee by utilizing the fund earned from business operations from India has to be taken into account. She observed, assessee has incurred significant
16 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 interest costs in its Indian operation, therefore, interest income has a direct nexus with such interest cost claimed as deduction, therefore, what is allowable or chargeable is the net interest income or expenditure. The learned Commissioner (Appeals) observed if the interest income is not taken into account the Branch profits of Indian operation will be a distorted figure. The learned Commissioner (Appeals) also negated assessee’s claim that interest income earned from H.O. being a transaction between two parties of the same entity is an income from self and the same is not taxable. The learned Commissioner (Appeals), after referring to various judicial precedents ultimately held, when more than one activity is performed by the assessee and only one of the activities is taxable, the profits from the entire activity can be apportioned towards the particular activity and the same would not be in violation of principle that one cannot do trade with oneself. She, therefore, ultimately held, as interest paid to bank or H.O. is allowable expenditure, interest received from the Branch is also taxable under the domestic law.
Learned Authorised Representative reiterating the stand taken before the learned Commissioner (Appeals) submitted, interest received from the H.O. being received from self is not taxable. For such proposition, he relied upon the decision of the Tribunal in DDIT v/s Oman International Bank, [2013] 40 taxman.com 319, and the
17 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08 Hon'ble Jurisdictional High Court in DIT V/s Credit Agricol Indosuez, ITA no.1430/2013, dated 17th June 2015 and DIT(IT) v/s American Express Bank, ITA no.1507/2014.
Learned Departmental Representative relied upon the observations of the learned Commissioner (Appeals).
Having considered the submissions of the parties and perusing the material on record in the light of the decisions relied upon by the learned Authorised Representative, we are of the view that the interest earned from the H.O. will not be taxable under the provisions of the Act on the principle that one cannot earn income from self. However, it is made clear that applying the same principle, assessee cannot claim deduction of interest paid to H.O. This ground is allowed.
In the result, appeal is partly allowed. Order pronounced in the open Court on 21.10.2016
Sd/- Sd/- राजेंद्र, शक्तिजीि दे, ऱेखा सदस्य न्याययक सदस्य RAJENDRA SAKTIJIT DEY ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 21.10.2016
18 Abu Dhabi Commercial Bank Ltd. A.Y. 2007–08
Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary
(Dy./Asstt. Registrar) ITAT, Mumbai