Income Tax Appellate Tribunal - Delhi
The Bank Of Tokyo Mitsubishi Ufj, New ... vs Dcit, Circle- 3(1)(1), International ... on 11 June, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-1', NEW DELHI
Before Sh. N. K. Saini, AM and Sh. K. N. Chary, JM
ITA No. 7212/Del/2017 : Asstt. Year : 2013-14
The Bank of Tokyo-Mitsubishi Vs Deputy Commissioner of Income-
UFJ Ltd., 5th Floor, Worldmark-2, tax, Circle-3(1)(1), International
Asset 8, Aerocity, NH-8, Taxation, New Delhi
New Delhi-110037
(APPELLANT) (RESPONDENT)
PAN No. AABCT3880D
Assessee by : Sh. Nishant Thakkar, Adv. &
Sh. Hiten Chande, Adv.
Revenue by : Ms. Meeta Sinha, CIT DR
Date of Hearing : 17.05.2018 Date of Pronouncement : 11.06.2018
ORDER
Per N. K. Saini, AM:
This is an appeal by the assessee against the order dated 31.10.2017 passed by the AO u/s 144C(13) r.w.s. 143(3) of the Income Ta x Act, 1961 (hereinafter referred to as the Act).
2. Following grounds have been raised in this appeal:
"1. Disallowance of salary paid overseas to expatriates of the Appellant working in India by the Head Office (HO) and the Indian taxes paid thereon by the HO: INK 37,12,44,563.
1.1 That on the facts and in the circumstances of the case and in la\v, the Hon'ble Dispute Resolution Panel ('DRP') erred in confirming the addition, as proposed in the draft assessment order, for an amount of IN R 37,12,44,563 paid as salaries by the HO overseas, in foreign currency (including Indian taxes thereon), 2 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
without appreciating that such salary paid by the HO to the expatriate employees working in India exclusively for the permanent establishment ('PE') of the Appellant, is fully allo wed as deduction under section 37(1) of the Act.
1.2 That on the facts and in the circumstances of the case and in law, the Hon'ble DRP and the Id. AO have erred in not following the favourable decision of the Hon'ble Delhi High Court/Hon'ble Tribunal in the Appellant's own case for earlier years.
1.3 Without prejudice to above, the Id. AO erred in not refunding the tax deducted at source on such salaries in view of the fact that the deduction for such salaries paid to expatriate employees outside India was not allowed by him.
2. Interest amounting to INR 846,996 accrued/ received by the Indian Permanent Establishment ('PE') from its HO/ overseas branches.
2.1 That on the facts and in the circumstances of the case and in la w, the Hon'ble DRP erred in confirming the addition, as proposed in the draft assessment order, for an amount of INR 846, 996 being the interest accrued/ received by the Indian PB of the Appellant on funds lying with the HO/other Overseas branches.
2.2 That on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in not following the favourable decisions of the Hon'ble Tribunal in the Appellant's own case for earlier years.
3. Addition on account of interest received on External Commercial Borrowings ('ECBs') given to the Indian Borrowers.
3.1 That on the facts and in the circumstances of the case and in law, the Hon'ble DRP and ld. AO were 3 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
unjustified in holding that interest received by the Appellant on ECBs given to Indian borrower parties are taxable in India.
3.2 That on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in not following the favourable decisions of the Hon'ble Tribunal in the Appellant's own case for earlier years.
3.3 Without prejudice to above ground, on the facts and circumstances of the case and in law, the ld. AO has erred in not determining the correct amount of deduction under section 44C of the Act, by ignoring the alleged addition made to the total income on account of interest received by the assessee on KCBs.
4. Taxability of interest under section 244A of the Act on income tax refund 4.1 That on the facts and circumstances of the case and in la w, the Ld. AO has erred in taxing the interest under section 244A on income-tax refund amounting to INR 8,00,57,085 at tax rate of 40 % (excluding surcharge and education cess) instead of beneficial tax rate of 10 % as provided under Article 11 of India - Japan DTAA.
5. Short grant of credit for TDS That on the facts and circumstances of the case and in law, the ld. AO erred in not granting the complete TDS credit in the impugned assessment order, which was claimed by the Appellant in its return of income filed for AY 2013-14.
6. Levy of interest under section 234B of the Act That on the facts and circumstances of the case and in law, the ld. AO erred in levying interest under section 234B of the Act.
4 ITA No. 7212/Del/2017Bank of Tokyo-Mitsubishi UFJ Ltd.
7. Excess withdrawal of interest under section 244A of the Act That on the facts and circumstances of the case and in law, the ld. AO erred in withdrawing the interest under section 244A(3) of the Act.
8. Excess levy of interest under .section 2340 of the Act That on the facts and circumstances of the case and in law, the ld. AO erred in levying excess interest under section 234D of the Act.
9. Transfer Pricing adjustment 9.1 That on facts and in law, the Hon'ble DRP and Ld. AO/TPO erred in making an adjustment of IN R 13,66,36,735 to the returned income of the Appellant in respect of the international transaction pertaining to "receipt of counter guarantee commission" ("impugned international transaction') to its Associated Enterprise ('AE').
9.2 That on the facts and circumstances of the case and in law, the Hon'ble DRP and Ld. AO/TPO have erred in rejecting the primary as well as corroborative analysis undertaken by the Appellant for determining the arm's length price ('ALP') of the impugned international transaction, in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ('Rules') and conducting a fresh economic analysis for the determination of ALP of the Appellant's impugned international transaction and holding that the impugned international transaction is not at arm's length.
9.3 That on the facts and circumstances of the case and in law, the Hon'ble DRP and Ld. AO/TPO have erred in characterizing the impugned international transaction as corporate/financial guarantee wi thout appreciating 5 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
the distinction in functions performed, risks undertaken & asset utilized ('FAR') betwe en the impugned international transaction and corporate/financial guarantee undertaken by independent third party banks.
9.4 That on the facts and circumstances of the case and in law, the Hon'ble DRP and Ld/ AO/TPO have erred in using erroneous comparable uncontrolled price ("CUP") data, obtained by issuance of 133(6) notice for computing the ALP of the impugned international transaction.
9.5 That on the facts and circumstances of the case and in law, the Hon'ble DRP and Ld/ AO/TPO have erred in not providing any opportunity to cross examine the 133(6) data relied for the purpose of determining the ALP of the impugned international transaction thereby violating the principle of natural justice.
9.6 That on the facts and circumstances of the case and in law, the Hon'ble DRP and Ld. AO/TPO have erred in not considering the principle of consistency while determining the ALP of the impugned international transaction.
10 Applicable Rate of Tax 10.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP and the Id. AO erred in imposing the tax rate of 40 % (plus surcharge and education cess) on the income of the Appellant.
10.2 Under the provisions of Article 24 of the DTAA, the applicable rate of tax on the income of the Appellant attributable to its PE in India cannot exceed the applicable rate of tax (as per the Finance Act for the subject AY) in the case of Domestic Companies and consequential directions may kindly be issued in this regard.
6 ITA No. 7212/Del/2017Bank of Tokyo-Mitsubishi UFJ Ltd.
11 That on the facts and in the circumstances of the case and in law, the Id. AO has erred in initiating penalty proceedings, being against the provisions of the Act.
12 General
a) Each of the above ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant.
b) The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable your Honour to decide this appeal according to law."
3. The first issue vide ground nos. 1 to 1.3 relates to the disallowance of salary paid to overseas expatriates of the assessee working in India by the Head Office amounting to Rs.37,12,44,563/-.
4. As regards to this issue, the ld. Counsel for the assessee at the very outset sated that it is covered in favour of the assessee in assessee's own case for the assessment year 2007-08 in ITA No.5364/Del/2010, order dated 19.09.2014 which has bee n confirmed by the Hon'ble Jurisdictional High Court vide order dated 08.04.2016 in ITA 604/2015 (copies of the said orders were furnished which are placed on record). The ld. CIT DR could not controvert the aforesaid contention of the ld. Counsel for the assessee.
7 ITA No. 7212/Del/2017Bank of Tokyo-Mitsubishi UFJ Ltd.
5. It was further sub mitted that subsequently in ITA No. 1174/Del/2015 for the assessment year 2010-11, this issue has also been decided by this Bench of the ITAT vide order dated 25.01.2017 in assessee's favour (copy of the said order was furnished which is placed on record).
6. We have considered the sub missions of both the parties and carefully gone through the material available on the record. It is noticed that a similar issue has already been adjudicated in assessee's own case for the assessment year 2007-08 vide order dated 19.09.2014 reported in (2014) 49 Taxmann.co m 441 wherein the relevant findings have been given in paras 10.1 to 12 whic h read as under:
"10.1 We have considered the rival submissions and have perused the record of the case.
11. The facts are not disputed. The expatriates were working in India and salary had been subjected to tax for which form no. 16 was also issued to the expatriates. Therefore, there cannot be any dispute regarding verifiability of these expenses. The expenses had been incurred wholly and exclusively for the Indian branch and, therefore, no part of these expenses could be allocated to any other branch by head office. We find that this issue is now no more res integra as has been demonstrated by Id. Sr. Counsel for the assessee with reference to various decisions. He has rightly pointed out that the decisions in the case of ABM Amro Bank N.V. (supra] is squarely applicable because there was no dispute amongst the members in regard to non- applicability of provisions u/s 44C. The issue before third member was not at all in regard to allowability of deduction u/s 44C and only following points of differences were before him for adjudication:8 ITA No. 7212/Del/2017
Bank of Tokyo-Mitsubishi UFJ Ltd.
"(a) Whether or not, on the facts and in the circumstances of the case, the assessee is entitled to deduction of tax component of salary of expatriate employees, relating to asst. yrs. 1990-91 and 1991-92, in the asst. yr. 1995-96, i.e., the year in which the tax has been paid by the assessee.
(b) Whether or not, on the facts and in the circumstances of the case, the assessee was entitled to deduction of interest levied u/s 201(1A).
(c) Whether or not, on the particular facts and in the particular circumstances of this case, the assessee was entitled to deduction on account of operational loss of Rs. 9,57,58,904/-."
11.1 Thus, Id. DRP has not correctly appreciated the facts of the case.
12. Respectfully following the decisions of Hon'ble Bombay High Court in the case of Emirates Commercial Bank Ltd. (supra), this ground is allowed."
7. The said order has been affirmed by the Hon'ble Jurisdictiona l High Court in ITA No. 604 & 605/2015 vide order dated 08.04.2016 and the relevant findings have been given in paras 9 & 10 whic h read as under:
"9. The first question urged concerns the payment of salaries to the expatriates. In deciding this issue in favour of the Assessee, the ITAT has in the impugned common order referred to and relied upon the decision of its coordinate bench at Kolkata in ABN Amro Bank v. JCIT (2005)97 ITD 1(ITAT [Kol]). Further the ITAT followed the decision of the Bombay High Court in CIT v. Emirates Commercial Bank Ltd. (2003) 262 ITR 55 (Bom.) where the Bombay High Court approved the view taken by the ITAT. The ITAT agreed that the expenses 9 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
have been incurred wholly and exclusively by the Indian branch and therefore no part of these expenses can be allocated to any other branch of the HO and that there was no dispute with regard to the non-applicability of Section 44C of the Act.
10. This Court has perused the order of the Bombay High Court in Emirates Commercial (supra) where on identical facts, the issue was decided in favour of the Assessee. This order of the Bombay High Court has been affirmed by the Supreme Court by order dated 26 t h August 2008 in Commissioner of Income Tax v. M/s Emirates Commercial Bank Ltd., which in turn referred to an order of the same date in Com missioner of Income Tax v. Deutsche Bank AG (CA No. 1544 of 2006)."
8. Thereafter, the issue was decided in assessee's favour in ITA No. 1174/Del/2015 for the assessment year 2010-11 in assessee's own case vide order dated 25.01.2017 and the relevant findings have been given in paras 8 & 8.1 which read as under:
"8. Having gone through the above cited decisions, we find that the issue raised in the ground under the similar set of facts is fully covered by the order dated 19.09.2014 of the Tribunal in the case of the assessee itself for the assessment years 2007-08 and 2008- 09 (supra), the relevant para No. 11, 11.1 and 12 thereof are being reproduced hereunder tor a ready reference:-
11. The facts are not disputed. The expatriates were working in India and salary bad been subjected to tax for which form no. 16 was also issued to the expatriates. Therefore, there cannot be any dispute regarding verifiability of these expenses. The expenses had been incurred wholly and exclusively for the Indian branch and, therefore, no part of these expenses could be allocated to any other branch by head office. We find that this issue is now no more res Integra as has been demonstrated by Id. Sr. Counsel for the assessee with reference to various decisions. He has rightly pointed out that the decision in the case of ABM Amro is squarely applicable because there was no dispute amongst the members in regard to non applicability of 10 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
provisions u/s 44C. The issue before third member was not at all in regard to allowability of deduction u/s 44C and only following points of differences were before him for adjudication:
"(a) Whether or not, on the facts and in the circumstances of the case, the assessee is entitled to deduction of tax component of salary of expatriate employees, relating to asstt. yrs. 1990-
91 and 1991-92, in ITA Nos. 5364/D/2010 & 5104/D/2011 the asst. yr. 1995-96, i.e., the year in which the tax has been paid by the assessee.
(b) Whether or not, on the particular facts and in the circumstances of the case, the assessee was entitled to deduction of interest levied u/s 201(1A).
(c) Whether or not, on the particular circumstances of this case, the assessee was entitled to deduction on account of operational loss of Rs. 9,57,58,904/-.
11.1 Thus, Id. DRP has not correctly appreciated the facts of the case.
12. Respectfully following the decisions of Hon'ble Bombay High Court in the case of Emirates Commercial Bank Ltd. (supra), this ground is allowed.
8.1. It is also pertinent to point out over here that the above decision of the Tribunal on the issue has also been upheld by the Hon'ble High Court of Delhi vide its order dated 8.04.2016 in the appeal preferred by the Revenue vide ITA No. 604/2015 and others. Besides, the issue is also covered by the decision of Hon'ble Bombay High Court in the case of Emirates Commercial Banking Ltd. (2003) 262 ITR 55 (Bom.) followed by the Tribunal. The Hon'ble Supreme Court has also been pleased to uphold the said decision of Hon'ble Bombay High Court by dismissing the appeal preferred by the Revenue vide order dated 26.08.2008 in Civil Appeal No. 1527 of 2006. Respectfully following these ratio laid down on the issue, hold that since the benefits reaped by the Indian branch or PK in India have been accounted for as Indian 11 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
income, therefore, there was no reason as to why the deduction of expenditure should not be allowed. The ground No. 2 is accordingly allowed.
9. Since, the facts for the year under consideration are similar to the facts involved in the assessment years 2007-08 and 2010-11. So, respectfully following the aforesaid referred to orders, this issue is decided in assessee's favour and the impugned addition of Rs.37,12,44,563/- is deleted.
10. Vide ground nos. 2 to 2.2, the grievance of the assessee relates to the addition of Rs.8,46,996/- made by the AO on account of interest accrued/received by the Indian PE on the funds lying with the HO/other overseas branches.
11. As regards to this issue, the ld. Counsel for the assessee submitted that it is also covered in assessee's favaour in ITA No. 1174/Del/2015 for the assessment year 2010-11 and in ITA No. 306/Del/2016 for the assessment year 2011-12 (copies of the said orders were furnished which are placed on record). The ld. CIT DR could not controvert the aforesaid contention of the ld. Counsel for the assessee.
12. After considering the submissions of both the parties and the material on record, it is noticed that an identical issue has alread y been adjudicated in the aforesaid referred to orders and the relevant findings have been given in paras 13 to 15 in ITA No. 1174/Del/2015 for the assessment year 2010-11 which read as under:
12 ITA No. 7212/Del/2017Bank of Tokyo-Mitsubishi UFJ Ltd.
"13. Ground No. 5 : It is regarding taxing of interest received by the Indian PE / branches of the assessee from its head office / other overseas branches amounting to Rs.14,10,452/-. During the year the Indian PE / branches of the assessee received interest for the accounts maintained with its head office / other overseas branches. The said amount received by the Indian PE / branches from its head office other overseas branches although credited to the profits and loss account of the Indian branches of the assessee was claimed to be not taxable being payment of self. The authorities below have held that TDS should have been deducted under section 195 from the interest paid by the Indian branches to head office and other branches.
13.1 In support of the above ground, the ld. AR has made following submissions:-
"The coordinate bench in the assessee's own case for the order dated September 19, 2014 passed for AYs 2007-08 and 2008-09 has decided this ground against the assessee and held that interest received by the Indian branches of the assessee from its HO/other overseas branches is taxable under the Act under section 9(1)(v) of the Act.
At the outset, it is submitted that the issue stands covered in favour of the assessee by the recent judgment of the Bombay High Court in the case of Credit Agricole Indoseuz in ITA No. 1430 of 2013 wherein the Bombay High Court held that it is a settled position that no person can make profit out of its self and accordingly, interest received by the Indian PE from its HO is not taxable in India (refer para 7 at page nos. 5 to 8 of the Bombay High Court judgment enclosed as Annexure-3). Therefore, although the Tribunal in the assessee's own case for the order passed for AYs 2007-08 and 2008-09 has decided this issue against the assessee, the earlier decision of the Tribunal in the assessee's own case is not a good la w 13 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
in view of the subsequent favorable decision of the Bombay High Court in the case of Credit Agricole Indoseuz (supra).
In the absence of the decision of the jurisdictional High Court on a particular point/issue, the order of the non- jurisdictional High Court should be followed by the Tribunal. Reliance in this regard is placed on the following judgments:
(i) CIT vs Smt. Godavaridevi Saraf [1978] 113 ITR 589 (BOM.)
(ii) CIT vs G.M. Mittal Stainless Steel Ltd. [2004] 271 ITR 219 (MP)
(iii) ITO vs. Ranisati Fabric Mills (P.) Ltd. [2009] 118 ITD 293 (Mumbai) Without prejudice to above argument, the Tribunal in its order dated September 19, 2014 has not considered certain aspects and, hence, the earlier Tribunal order should not be followed on account of the following also:
(i) The Tribunal in its order dated September 19, 2014 ignored the principle of mutuality upheld by the Special (Larger) Bench in the case of Sumitomo Mitsui Banking Corporation (ITA Nos. 5402/Mum/2006 and 5458/Mum/2006). The relevant observations of the Special Bench are as under:
a. Indian branch office and HO/other overseas branch are not separate entity for the purpose of taxation under the domestic law (refer para 50 of the decision of Special Bench) b. The position under the domestic law is clear that one cannot make profit out of himself and if the payment of interest is made by the Indian PE to the HO/overseas branches, it cannot give rise to any income which is chargeable to tax in India as per the 14 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
domestic law. (Refer para 59 of the decision of Special Bench) c. Interest received by the HO/other overseas branches from the Indian branches cannot be brought to tax under section 9(1)(v)(c) of the Act (refer para 74 of the decision of Special Bench).
(ii) Reference can be made to the decision of Mumbai Tribunal in the case of Oman International Bank S.A.O.G (ITA No 2518/Mum/2004 & 4492/Mum/2005 ) wherein the ratio of mutuality laid down by the Special Bench inter-alia in the case of Sumitomo Mitsui Banking Corporation has been applied to interest received by the Indian branches from its HO/other overseas branches. On the basis of mutuality, it was held by the Mumbai Tribunal that there can be neither any income in respect of interest earned from its overseas branches, nor there can be deduction for interest expenditure paid by the Indian branch to HO/other overseas branches.
With respect to interest paid to HO/other overseas branches, no treaty provision was examined in the case of Oman International Bank and therefore, no deduction was allo wed for interest paid by the Indian branches to HO/other overseas branches. Indo- Japanese treaty specifically provides for deduction to Indian branches for interest paid to HO/overseas branches as held by the Special (Larger) Bench in the case of Sumitomo Mitsui Banking Corporation.
(iii) Several double tax avoidance agreements entered into by India (for e.g. India-Netherland treaty) have specifically provided that where deduction is allowed to banking companies for the amounts paid by the PE to HO, amounts earned by the PE from HO shall be taken into consideration for the purposes of computing profits. However, such provision is absent in the Indo- Japanese treaty and hence the amounts received by the 15 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
Indian branches cannot be taken into consideration for the purposes of computing profits of the Indian branches.
(iv) Vide Finance Act 2015, w.e.f. AY 2016-17, an Explanation has been inserted to section 9(1)(v) of the Act providing therein that in case of a banking enterprise, interest payable by the PE in India to its HO/other overseas branches shall be deemed to accrue or arise in India. Ho wever, no amendment has been made under the domestic law to tax the interest received by the PE in India from its HO/other overseas branches and therefore, such interest receipts by the PE in India is not taxable being receipt from self under the domestic law even post amendment by the Finance Act 2015."
14. The ld. CIT [DR], on the other hand, placed reliance on the orders of the authorities below. He submitted that the Tribunal in the case of assessee itself for the assessment years 2007-08 and 2008-09 has decided the issue against the assessee.
15. Considering the above submission, we find that during the year the Indian PE / branches of the assessee had received interest for the accounts maintained with its head office / other overseas branches. The said amount received by Indian PE / branches from its head office / other overseas branches although credited to the profit and loss account of the Indian branches of the assessee was claimed to be not taxable being payment to self. The authorities below did not agree. The Tribunal vide its order dated 19.02.2014 in the assessment years 2007-08 and 2008-09 (supra) has decided the issue against the assessee with this finding that interest received by the Indian branches of the assessee from its head office / other overseas branches is taxable under the Act under section 9(1)(v) of the Act. However, now it has been brought to our notice by the ld. AR that there is no decision of Hon'ble jurisdictional High Court on this issue, but Hon'ble Bombay High Court in the case of 16 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
Director of Income-tax Vs. M/s. Credit Agricole Indoseuz in ITA. No. 1430 of 2013 vide its order dated 17.06.2015 has been pleased to hold that it is a settled position that no person can make profit out of its self and accordingly, interest received by the Indian PE from its head office is not taxable in India. The relevant para No. 7 of the said order of the Hon'ble Bombay High Court is being reproduced hereunder for a ready reference:-
"7 Regarding question 5 -
(a) Mr. Tejveer Singh, the learned counsel for the Revenue submitted that this question ought to be admitted as a similar issue has been admitted by this Court. In support Mr. Singh tenders the order dated 14 February 2013 of this Court in Income Tax Appeal (L) No.2078 of 2012, in Director of Income Tax (IT)1 Vs. M/s Antwerp Diamond Bank N.V. The question on which the above appeal was admitted reads as under:
a) Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that interest payable by the Indian Permanent Establishment of the foreign bank to its HO and other overseas branches, is deductible in computing the total income?
(b) Mr. Pardiwala the learned Senior counsel for the Respondent contests the submission on behalf of the Revenue and submits that in the present case the question as raised by the Revenue is not in respect of deducting the payment of interest to compute total income but with regard to the chargeability to tax of the interest received by the Indian Permanent Establishment (PE) from its Head Office in computing the total income. It is pointed out that the Indian PE and the head office are one and the same person. It is settled position that one cannot make a profit out of oneself as held by the Apex Court in Sir Kikabhai Premchand v. Commissioner of Income tax (Central) Bombay 24 ITR page 506. The impugned order 17 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
of the Tribunal also places reliance upon the Special Bench decision in the case of Sumitomo Mitsui Banking Corpn. Vs Deputy Director of Income tax (IT), Range- 2(1), Mumbai [(2012) 19 Taxmann.com 364 (Mum.) (SB)] to hold that man cannot make profit out of himself and therefore the interest received by the Assessee from it's own Head Office is not chargeable to tax.
(c) So far as the reliance by the Revenue on order dated 14 April 2013 of this Court admitting the appeal in M/s Ant werp Diamond Bank N.V.(supra), is concerned, deduction on account of interest paid by the Indian PE to its Head office was in the specific context of Articles 7(2) and 7(3) of the Indo-Belgium DTAA. The case of M/s Ant werp Diamond Bank N.V. (supra) before the Tribunal was a part of the Special Bench decision in Sumitomo Mitsui Banking Corpn.(supra) wherein at para 50, it is held as under:
"50. As regards the deduction of interest payable to the head office in the hands of Indian PE for the purpose of computing profits attributable to the said PE, there is no dispute that such deduction is not permissible under the Indian Income tax Act (domestic law) being the payment made to self. Both the Indian PE and the foreign GE of which it is a part are not separate entities for the purpose of taxation under the domestic law and the same being one and the same entity recognized as one assessee under the domestic law, interest payable by Indian PE to foreign GE of which it is a part, cannot be treated as expenditure allowable as deduction being payment to self. This position which is well settled under the domestic law has not been disputed even by the learned representatives of the assessees during the course of hearing before us. They, however, have relied on the relevant tax treaties in support of the assessee's claim for deduction on account of interest payable to GE while computing the profits attributable to PE in India as per article 7(2) and 7(3) read with paragraph No.8 of the protocol.18 ITA No. 7212/Del/2017
Bank of Tokyo-Mitsubishi UFJ Ltd.
51. .......................
52. A combined reading of article 7(2) and 7(3) of the treaty and paragraph No.8 of the protocol thus makes it clear that for the purpose of computing the profits attributable to the PE in India, the said PE is to be treated as a distinct and separate entity which is dealing wholly independently with the general enterprise of which it is a part and deduction has to be allowed for all the expenses which are incurred for the purpose of PE whether in India or elsewhere barring the amount paid by a permanent establishment to the head office of GE or any other offices thereof, inter alia, by way of interest on moneys lent to the permanent establishment except where the enterprise is a banking institution."
(Emphasis supplied) It would thus be noticed from the order of this Court dated 14 February 2013 admitting the Revenue's Appeal, in the case of M/s Antwerp Diamond (supra) arose from a different factual matrix viz. specific provision of DTAA allowing deduction and not under the regular provisions of Income tax Act. Thus the fact that the Appeal in the case of M/s Antwerp Diamond (supra) is admitted would have no relevance for admitting the present appeal on the proposed Question No.5. It is also necessary to point out that the Tribunal in the impugned order has recorded the fact that the Respondent Assessee has admitted before it that to bring about parity, it is not claiming any deduction of interest paid by it to its Head Office while computing the taxable income.
(d) Accordingly, in view of the above settled position that no person can make profit out of itself, the proposed question of law not being substantial, is not entertained."
It is a settled position of law that in absence of the decision of Hon'ble jurisdictional High Court on an 19 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
issue, the order of the non-jurisdictional High Court should be follo wed by the Tribunal. Besides, the Tribunal while passing its order on the issue in the appeals for the assessment years on 19.09.2014 was having no benefit of the decision of Hon'ble Bombay High Court in the case of DIT Vs. M/s. Credit Agricole Indoseuz (supra) dated 17.06.2015. In view of this position we are bound to follow the decision of Hon'ble Bombay High Court in the case of DIT Vs. M/s. Credit Agricole Indoseuz (supra) on the issue. We thus respectfully following the ratio laid down in the decision, hold that the authorities below were not justified in taxing the interest received by the Indian PE / branches of the assessee from its head office / other overseas branches as no person can make profit out of its self. The Assessing Officer is, therefore, directed to delete the addition in question. Ground No. 5 is accordingly allowed."
13. Similarly, for the assessment year 2011-12 in ITA No. 306/Del/2016, the relevant findings have been given in paras 5 to 8 as under:
"5. On ground no. 1, assessee challenged the addition on account of interest amounting to Rs. 15,79,194/- accrued / received by India permanent establishment (PE) from its head office / overseas branches.
6. The assessee submitted before DRP that during the previous year relevant to assessment year under appeal, India branches of the assessee has received a sum of Rs.
15,79,194/- from its overseas branches / HO. The assessee submitted that such interest is not income in the hands of the branch as the same has been received from the head office and thus, being a receipt for self, in view of the principles laid down by the Supreme Court in the case of Sir Kikabhai Premchand vs. CIT 24 ITR
506. The DRP ho wever noted that ITAT Delhi Bench in assessee's own case for assessment year 2007-08 and 2008-09 has decided the matter against the assessee.
20 ITA No. 7212/Del/2017Bank of Tokyo-Mitsubishi UFJ Ltd.
The DRP following the order of the Tribunal rejected the objections of the assessee. Learned counsel for the assessee submitted that identical issue was considered by ITAT Delhi Bench 'C' in assessee's own case for assessment year 2010-2011 in ITA No. 1174/2015 dated 25 t h January, 2017 in para 15 of the order and identical addition has been deleted. The order of the Tribunal is reproduced as under:
"Considering the above submission, we find that during the year the Indian PE / branches of the assessee had received interest for the accounts maintained with its head office / other overseas branches. The said amount received by Indian PE / branches from its head office / other overseas branches although credited to the profit and loss account of the Indian branches of the assessee was claimed to be not taxable being payment to self. The authorities below did not agree. The Tribunal vide its order dated 19.02.2014 in the assessment years 2007- 08 and 2008-09 (supra) has decided the issue against the assessee with this finding that interest received by the Indian branches of the assessee from its head office / other overseas branches is taxable under the Act under section 9(1)(v) of the Act. However, now it has been brought to our notice by the ld. AR that there is no decision of Hon'ble jurisdictional High Court on this issue, but Hon'ble Bombay High Court in the case of Director of Income Tax vs. M/s Credit Agricole Indoseuz in ITA No. 1430 of 2013 vide its order dated 17.06.2015 has been pleased to hold that it is a settled position that no person can make profit out of its self and accordingly, interest received by the Indian PE from its head office is not taxable in India. The relevant para No. 7 of the said order of the Hon'ble Bombay High Court is being reproduced hereunder for a ready reference:-
"7 Regarding question 5 -21 ITA No. 7212/Del/2017
Bank of Tokyo-Mitsubishi UFJ Ltd.
(a) Mr. Tejveer Singh, the learned counsel for the Revenue submitted that this question ought to be admitted as a similar issue has been admitted by this Court. In support Mr. Singh tenders the order dated 14 February 2013 of this Court in Income Tax Appeal (L) No.2078 of 2012, in Director of Income Tax , (IT) 1 Vs. M/s Antwerp Diamond Bank N.V. The question on which the above appeal was admitted reads as under:
a) Whether oh the facts and in the circumstances of the case and in law the Tribunal was justified in holding that interest payable by the Indian Permanent Establishment of the foreign bank to its HO and other overseas branches, is deductible in computing the total income ?
(b) Mr. Pardiwala the learned Senior counsel for the Respondent contests the submission on behalf of the Revenue and submits that in the present case the question as raised by the Revenue is not in respect of deducting the payment of interest to compute total income but with regard to the chargeability to tax of the interest received by the Indian Permanent Establishment (PE) from its Head Office in computing the total income. It is pointed out that the Indian PE and the head office are one and the same person. It is settled position that one cannot make a profit out of oneself as held by the Apex Court in Sir Kikabhai Premchand v.Commissioner of Income tax (Central) Bombay 24 ITR page 506. The impugned order of the Tribunal also places reliance upon the Special Bench decision in the case of Sumitomo Mitsui Banking Corpn. Vs Deputy Director of Income tax (IT), Range2(1), Mumbai [(2012) 19 Taxmann.com 364 (Mum.) (SB)] to hold that man cannot make profit out of himself and therefore the interest received by the Assessee from its own Head Office is not chargeable to tax.22 ITA No. 7212/Del/2017
Bank of Tokyo-Mitsubishi UFJ Ltd.
(c) So far as the reliance by the Revenue on order dated 14 April 2013 of this Court admitting the appeal in M/s Antwerp Diamond Bank N.V.(supra), is concerned, deduction on account of interest paid by the Indian PE to its Head office was in the specific context of Articles 7(2) and 7(3) of the Indo Belgium DTAA. The case of M/s Antwerp Diamond Bank N.\/. (supra) before the Tribunal was a part of the Special Bench decision in Sumitomo Mitsui Banking Corpn. (supra) wherein at para 50, it is held as under:
"50. As regards the deduction of interest payable to the head office in the hands of Indian PE for the purpose of computing profits attributable to the said PE. There is no dispute that such deduction is not permissible under the Indian Income tax Act (domestic law) being the payment made to self. Both the Indian PE and the foreign GE of which it is a part are not separate entities for the purpose of taxation under the domestic law and the same being one and the same entity recognized as one assessee under the domestic law, interest payable by Indian PE to foreign GE of which it is a part, cannot be treated as expenditure allowable as deduction being payment to self. This position which is well settled under the domestic law has not been disputed even by the learned representatives of the assessees during the course of hearing before us. They, however, have relied on the relevant tax treaties in support of the assessee's claim for deduction on account of interest payable to GE while computing the profits attributable to PE in India as per article 7(2) and 7(3) read with paragraph No. 8 of the protocol.
51......
52. Acombined reading of article 7(2) and 7(3) of the treaty and paragraph. 8 of the protocol thus makes it clear that for the purpose of computing the profits 23 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
to the PE in India, the said PE is to be treated as a distinct and separate entity which is dealing wholly independently with the general enterprise of which it is a part and -, deduction has to be allowed for all the expenses which are incurred for the purpose of PE whether in India or elsewh ere barring the amount paid by a permanent establishment to the head office of GE or any other offices thereof, inter alia, by way of interest on moneys lent to the permanent establishment except where the enterprise is a banking institution."
(Emphasis supplied) It would thus be noticed from the order of this Court dated 14 February 2013 admitting the Revenue's Appeal, in the case of M/s Antwerp Diamond {supra) arose from a different factual matrix viz, specific provision of DTAA allowing deduction and not under the regular provisions of Income tax Act. Thus the fact that the Appeal in the case of M/s Ant werp Diamond (supra) is admitted would have no relevance for admitting the present appeal on the proposed Question No.5. It is also necessary to point out that the Tribunal in the impugned order has recorded the fact that the Respondent Assesses has admitted before it that to bring about parity, it is not claiming any deduction of interest paid by it to its Head Office while computing the taxable income.
(d) Accordingly, in view of the above settled position that no person can make profit out of itself, the proposed question of law not being substantial, is not entertained."
It is a settled position of law that in absence of the decision of Hon'ble jurisdictional High Court on an issue, the order of the non-jurisdictional High Court should be followed by the Tribunal. Besides, the Tribunal while passing its order on the issue in the 24 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
appeals for the assessment years on 19.09.2014 was having no benefit of the decision of Hon'ble Bombay High Court in the case of DIT Vs. M/s. Credit Agricole Indoseuz (supra) dated17.06.2015. In view of this position we are bound to follow the decision of Hon'ble Bombay High Court in the case of DIT Vs. M/s. Credit Agricole Indoseuz (supra) on the issue. We thus respectfully following the ratio laid down in the decision, hold that the authorities below we are not justified in taxing the interest received by the Indian PE / branches of the assessee from its head office / other overseas branches as no person can make profit out of its self. The Assessing Officer is, therefore, directed to delete the addition in question. GroundNo.5 is accordingly allowed."
7. It is not in dispute that issue is covered in favour of the assessee.
8. Considering the facts of the case in the light of the order of the Tribunal dated 25 t h January, 2017, (supra), we are of the view that the issue is covered in favour of the assessee by the above order of the Tribunal in the case of assessee. We accordingly set aside the impugned order and direct the AO to delete the addition. This ground of appeal of assessee is allowed."
14. So, respectfully following the aforesaid orders in assessee's own case, this issue is also decided in favour of the assessee.
15. Ground Nos. 3 to 3.2 of the appeal relate to the addition o n account of interest received on External Co mmercial Borrowings given to the Indian Borrowers.
16. As regards to this issue, the ld. Counsel for the assessee submitted that it is covered in favour of the assessee vide orde r dated 25.01.2017 in ITA No. 1174/Del/2015 for the assessment year 25 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
2010-11 and order dated 26.04.2017 in ITA No. 306/Del/2016 for the assessment year 2011-12. The ld. CIT DR although supported the order of the AO but could not controvert the aforesaid contention of the ld. Counsel for the assessee.
17. After considering the submissions of both the parties and the material available on record, it is noticed that an identical issue having similar facts has been adjudicated by the ITAT Delhi Bench 'C', New Delhi in ITA No. 1174/Del/2015 for the assessment year 2010-11 wherein vide order dated 25.01.2017. The relevant findings have been given in paras 20 to 26 which read as under:
"20. Ground No. 7: It is regarding addition on account of interest received from external commercial borrowings (ECB) given to Indian borrowers.
21. The facts in brief are that the head office / other overseas branches of the assessee are in receipt of interest earned from the external commercial borrowings (ECB) given to the Indian borrowers parties. Indian branches of assessee help its Indian customers in arranging funds through its overseas branches as the banks in India cannot lend in foreign currency except for providing export credit to its customers as per the extant Reserve Bank of India Regulations. Indian branches of the assessee, based on the request of the customers pass on the lead to the overseas branches along with the credit evaluation report, terms and conditions of approval and details of security documents to be entered into. Indian branches evaluate the customer on an on-going basis and passes on the lead information to its overseas branches on activities related to credit rating, monitoring of covenants etc. On receipt of the information from the Indian branches of the assessee, the overseas branches of the bank do the booking of the loan based on the terms and conditions of 26 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
the approval. The agreement and security documentations are entered between overseas branches and the borrowers. Indian branches receive syndication fees from its head office / other overseas branches for the services rendered by it in relation to ECB.
22. The case of authorities below is that interest income accrues and arises as under:
(i) Interest income accrues and arises in India under section 9(1)(v) of the Act. Since the ECB do not form part of the asset base of the PE in India and is not effectively connected with the PE, ECB interest is chargeable to tax under Article 11 of the Treaty between India and Japan (para 9.2 and 9.3 at page nos. 207-208 of appeal set).
(ii) No tax credit, ho wever is allowable to the assessee, since, any new claim can be made by the assessee only through a revised return of income (para 9.7 at page 210 of appeal set)
(iii) Since interest is payable on a net of tax basis i.e. tax has been borne by the borrowers, the ECB interest is grossed up for arriving at the income to be included in the computation of total income of the assessee (para 9.8 at page 210 of appeal set).
23. In support of the ground the ld. AR made following submissions:-
(i) At the outset, we wish to submit that due to lack of the details/information, the Tribunal in the order passed for AYs 2007-08 and 2008-09 had remanded back the issue of taxability of ECB interest to the file of the AO for denovo consideration. However, as noted by the DRP, since all the requisite details have been filed by the assessee for AY 2010-11 and the issue has been decided accordingly, it is submitted that the matter is not required to be 27 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
restored back to the AO for AY 2010-11 and the same be decided by the Tribunal on merits.
(ii) ECBs given to the Indian customers are effectively connected with the Indian PE of the assessee and an amount i.e. syndication fee, which is commensurate with the role played by the Indian PE and is attributable to the Indian PE has already been offered to tax, by the assessee, in the computation of its income taxable in India as per the provisions of Article 7 of the Indo-Japanese treaty; and therefore, in view of Article 11(6) read with Article 7 of Indo- Japanese treaty, nothing further can be brought to tax in India.
(iii) During the year under consideration, the Indian PE/branches of the assessee received an amount of Rs 14,58,92,297 as syndication fee from its HO/other overseas branches for the services performed by the Indian branches in relation to ECBs, which has been credited to profit & loss account of the Indian branches of the assessee and offered to tax in the return of income filed by the assessee. Apart from this, the assessee has offered to tax an amount of Rs 2,14,77,903 as transfer pricing adjustment with respect to ECB syndication fee in the return of income. Therefore, the assessee has already offered to tax an amount of Rs 16,73,70,200 (Rs.14,58,92,297 + Rs 2,14,77,903) as fee received by the Indian PE of the assessee from its HO/other overseas branches for the services performed in relation to ECBs, which has been accepted to be an arms' length price by the Revenue.
(iv) The Mumbai Tribunal in the case of Credit Lyonnais (ITA No. 1935/Mum/2007) has held that ECB interest is not attributable to the Indian branches of the assessee and only the fee is taxable in the hands 28 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
of the Indian branches of the assessee for the role played by it in arranging the ECBs.
(v) Without prejudice to the claim of non-taxability of ECB interest income, the AO has erred in not allowing the credit for tax deducted at source on ECB interest. Sample copies of TDS certificates were also furnished to the AO. Further, that the taxes have been deducted is an admitted position since the AO has himself grossed up the entire amount of ECB interest by the amount of tax borne by the borrowers. Once this is so, in view of section 205 of the Act, the necessary credit has to be given to the assessee.
(vi) Tax at source has been deducted as evident from the sample copies of TDS certificates furnished before the AO and the AO has also admitted the same by grossing up the ECB interest by the amount of tax borne by the borro wers, therefore, no interest under section 234B of the Act can be levied for the tax demand on account of ECB interest.
(vii) Even on merits, interest under section 234B of the Act is not applicable since ECB interest received by the assessee from the borrowers is subject to tax deduction at source under section 195 of the Act. Reliance is placed on the judgment of the Delhi High Court in the case of GE Packaged Power Inc. [2015] 373 ITR 65 wherein it has been held by the Delhi High Court that no interest under section 234B of the Act can be levied where the payment to non-resident payee is subject to tax deduction at source.
24. The ld. CIT [DR], on the other hand, contended that ECB interest has been earned by the HO/other overseas branches of the assessee from third party. Such ECB is not the debt claim of the Indian 29 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
branches of the assessee and, therefore, ECB interest is not effectively connected with the Indian branches.
If tax is borne by the borrowers, credit for TDS on ECB interest is not allowable to the assessee.
If direction is issued for allowability of TDS credit, the same should be granted to the assessee subject to verification of the same from the deductors/borrowers.
25. The ld. AR rejoined with the submission that when the tax is born by the payer of the income, income is grossed up by the amount of tax born by the payer and such grossed up interest is taxed in the hands of the payee. Any taxes with-held by the payer is allowable as credit to the payee of income against the income taxed in the hands of the payee. He submitted that CBDT vide its Circular No. 785 dated 24.11.1999 has also clarified that where the payment is made of taxes i.e. tax is borne by the payer of the income, the payer is under obligation to issue TDS certificate to the payee, since such grossed up income is taxable in the hands of the payee and the payee is eligible to claim the credit of such taxes with- held against the income taxed in the hands of the payee.
26. After having gone through the above cited decision, we find that Mumbai Bench of the Tribunal in the case of Credit Lyonnais (supra) has held that ECB interest is not attributable to the Indian branches of the assessee and only the fee is taxable in the hands of the Indian branches of the assessee for the role played by it in arranging the ECB. The Hon'ble High Court of Delhi in the case of GE Package Po werink (supra) has been pleased to hold that no interest under section 234B of the Act can be levied where the payment to non-resident payee is subject to tax deduction at source. In the present case, the Assessing Officer himself had admitted by grossing up the ECB interest by the amount of tax 30 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
borne by the borrowers that tax at source has been deducted. We are thus of the view that no interest under section 234B of the Act can be levied for the tax demand on account of ECB interest and interest under section 234B is also not chargeable since ECB interest received by the assessee from the borrowers was subject to tax deduction at source under section 195 of the Act. The Assessing Officer is thus directed to delete the addition made on account of interest received from ECB given to Indian borrowers. The ground No. 7 is accordingly allowed."
18. Similarly, for the assessment year 2011-12, the sa me issue had been adjudicated in ITA No. 306/Del/2016 vide order dated 26.04.2017. The relevant findings have been given in paras 9 to 13 which read as under:
"9. On ground no. 2 assessee challenged the addition on account of interest received on external commercial borrowings (ECB's) given to Indian borrowers. The assessee submitted before the DRP that it is in receipt of interest earned from ECB's given to Indian borrowers parties. Indian branches of the bank help its Indian customers in arranging funds through its overseas branches as the banks in India cannot lend in foreign currency, except for providing export credit to its customers as per the extent Reserve Bank of India Regulations. Therefore, the Indian branches of the bank, based on request of customer pass on the lead to the overseas branches alongwith the credit evaluation report, terms and conditions of the approval and details of security documents to be entered into. The assessee submitted that taxability of the interest in respect of ECB's will be governed by Article 7(3) of DTAA and not as per Article 11 of the DTAA, in view of paragraph 6 of the Article DTAA which craves out an exception from applicability of Article 11 in a case where the loan / debt claim is connected with PE, in which case the taxability of the same shifts to article 7 of DTAA. ECB's 31 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
are connected with the PE and therefore the interest so received shall be brought to tax in accordance with the provisions of Article 7 of the DTAA. Further, it was submitted that as per provisions of Article 7 of DTAA, a portion of the interest which is attributable to the operations of PE in India, has already been offered to tax by the assessee and therefore no further addition was called for on this count. The Indian branches of the bank have received an amount of Rs. 23.56 Crore for the services performed by it with respect of ECB loan, which has been credited to the profit and loss account. The same has been offered to tax and the return of income filed by the bank. Further, since interest payment is net of taxes i.e. taxes are to be borne by the borrowers, the borrowers have deducted TDS on such interest as per Article 11 of the DTAA, therefore as per provisions of the Act, no demand of tax in respect of this interest can be recovered from the assessee as that has already been discharged by way of TDS by payer.
10. The learned DRP however held that contention of the assessee that such interest is taxable under Article 7 because of provisions contained in Article 11(6) of DTAA is not correct because debt claim in respect of which interest is arisen is not effectively connected with PE of the assessee in India. Indian PE of the assessee is just providing processing services to the assessee for ECB loans being availed by Indian residents and is being remunerated by services fees also. The objection was accordingly rejected.
11. Learned counsel for the assessee reiterated submissions made before authorities below and referred to PB 124 i.e. objection filed before DRP in which the assessee has also explained that bank has offered to tax an amount of Rs. 2.29 Crores as transfer pricing adjustment with respect to ECB syndication fees in its return of income in addition to amount of Rs. 23.56 Crore. Therefore, the bank has already offered to tax an amount of Rs. 25.85 Crores as income which is 32 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
attributable to the PE in India in respect of interest received / earned by the assesse's branches from Indian borrowers. He has referred to PB 269 which is order of the TPO which also confirmed that assessee has reported Rs. 25.85 Crore on account of international transaction for ECB syndication. He has also referred to PB 332 with regard to the addition of Rs. 10.43 Crore as enhanced u/s 92 C.A. of the Income Tax Act. Learned counsel for the assessee also submitted that identical issue was considered by ITAT Delhi 'C' Bench in the case of assessee in preceding assessment year 2010-11 vide order dated 25 t h January 2017 (supra) in which in para 26 the entire addition have been deleted. Para 26 of the order is reproduced as under:
"After having gone through the above cited decision, we find that Mumbai Bench of the Tribunal in the case of Credit Lyonnais (supra) has held that ECB interest is not attributable to the Indian branches of the assessee and only the fee is taxable in the hands of the Indian branches of the assessee for the role played by it in arranging the ECB. The Hon'ble High Court of Delhi in the case of GE Package Powerink (supra) has been pleased to hold that no interest under section 234B of the Act can be levied where the payment to non resident payee is subject to tax deduction at source. In the present case, the Assessing Officer himself had admitted by grossing up the ECB interest by the amount of tax borne by the borrowers that tax at source has been deducted. We are thus of the view that no interest under section 234B of the Act can be levied for the tax demand on account of ECB interest and interest under section 234B is also not chargeable sicne ECB interest received by the assessee from the borrowers was subject to tax deduction at source under section 195 of the Act. The Assessing Officer is thus directed to delete the addition made on account of interest received from ECB given to Indian borrowers. The ground no. 7 is accordingly allowed."33 ITA No. 7212/Del/2017
Bank of Tokyo-Mitsubishi UFJ Ltd.
12. Learned DR stated that identical issues have been decided in favour of the assessee.
13. Considering the facts of the case in the light of the order of the Tribunal dated 25 t h January, 2017 in the case of assessee, we are of the view that issue is covered in favour of the assessee by order of Tribunal dated 25 t h January, 2017. It is also an admitted fact that assessee has already offered to tax an amount of Rs. 25.85 Crore therefore no further addition should have been made on this issue. Following the order of the Tribunal dated 25 t h January, 2017 (supra), we set aside the impugned orders and direct the AO to delete the addition made on account of interest received on ECB given to Indian borrowers. This ground of appeal of assessee is allowed."
19. So, respectfully following the aforesaid referred to order in assessee's own case, this issue is decided in favour of the assessee.
20. Vide ground no. 4 & 4.1, the grievance of the assessee relates to the taxability of interest u/s 244A of the Act on the income ta x refund a mounting to Rs.8,00,57,085/-.
21. The ld. Counsel for the assessee submitted that the AO did not charge any interest u/s 244A of the Act in the draft assessment order but the interest had been charged in the final assessment order. It was also stated that this issue has been decided by the ITAT Delhi Bench 'B' (Special Bench) in the case ACIT, Range-I, Dehradun Vs Clough Engineering Ltd. reported at (2011) 11 Taxmann.com 70 and that the said order was followed by the ITAT Bo mbay Bench in the case of M/s DHL Operations B.V., The Netherlands Vs DCIT has been confirmed by the Hon'ble Bo mba y 34 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
High Court in ITA No. 431/2012 vide order dated 17.07.2014 and the said order has been followed by the Hon'ble Bo mbay High Court in ITA No. 1430/2013 in the case of Director of Inco me Tax (IT)-I, Mumbai Vs M/s Credit Agricole Indosuez vide order dated 17.06.2015 (copies of the said order were furnished which are placed on record). The CIT DR could not controvert the aforesaid contention of the ld. Counsel for the assessee.
22. After considering the submissions of both the parties and the material on record, it is noticed that a similar issue has been adjudicated by the ITAT Delhi Bench 'B' (Special Bench) in the case of ACIT, Range-I, Dehradun Vs Clough Engineering Ltd. (2011) 11 Taxmann.co m 70 wherein the relevant findings have bee n given in para 11.4 which read as under:
"11.4 Thus, we are again left with the fundamental question as to whether the debt-claim in this case can be said to be effectively connected with the PE. We have already held that the claim is connected with the PE in the sense that it has arisen on account of tax deduction at source from the receipts of the PE. However, it is also a fact that payment of tax is the responsibility of the foreign company. The same is determined after computation of its income and the tax forms not an expenditure for earning the income but an item of appropriation of profit. Therefore, even if the debt is connected with the receipts of the PE, it cannot be said to be effectively connected with such receipts because the responsibility to pay the tax lies on the shoulders of the assessee-company from the final profit ascertained as on the last date of the previous year and on closing the books of account. It is for the company to pay the tax from any source available with it. It so happened in this case that the tax got automatically deducted from the receipts of the PE by operation of law. Such 35 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
collection of tax by force of law would not establish effective connection of the indebtedness with the PE as ultimately it is only the appropriation of profit of the assessee company. Ho wever, we may add that we do not venture to say that the interest income has to be necessarily business income in nature for establishing the effective connection with the PE because that would render provision contained in paragraph 4 of Article XI redundant. Thus, there may be cases where interest may be taxable under the Act under the residuary head and yet be effectively connected with the PE. The bank interest in this case is an example of effective connection between the PE and the income as the indebtedness is closely connected with the funds of the PE. However, the same cannot be said in respect of interest on income-tax refund. Such interest is not effectively connected with PE either on the basis of asset-test or activity-test. Accordingly, it is held that this part of interest is taxable under paragraph No. 2 of Article XI. Thus, the ground referred to the Special Bench is partly allowed. The Division Bench shall dispose off the appeal in conformity with this order."
23. On a similar issue, the Hon'ble Bombay High Court in the case of DIT(IT), Mumbai Vs M/s Credit Agricole Indosuez held as under:
"However we find that the decision in Clough Engineering (supra) of the Special Bench had been followed by the Tribunal in ITA No. 183/Mum/2010 - [M/s DHL Operations B. V., The Netherlands Vs. Dy. Director of Income Tax] . The issue before the Tribunal was the rate of tax on which Incom e tax refund is to be taxed i.e. on the basis of the Articles of DTAA or under the Act. The Tribunal on examination of the DTAA in the above case concluded that interest on income tax refund is not effectively connected with the PE (Permanent Establishment) either on asset test or activity test. Therefore, taxable under the Article 11(2) of Indo- Netherlands tax treaty. The Revenue carried the 36 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
aforesaid decision of M/s DHL Operations B.V. (supra) in appeal to this Court, being Income Tax Appeal No.431 of 2012. This Court by order dated 17 July 2014 refused to entertain the appeal. In the circumstances no fault can be found with the impugned order of the Tribunal in restoring the issue to the Assessing officer to determine / adopt the rate of tax on refund in the light of the relevant clauses of Indo- France DTAA and the decision of Special Bench in Clough Engineering (supra). Accordingly, question 4 does not raise any substantial question of law so as to be entertained."
24. So, respectfully following the aforesaid referred to orders, we restore this issue to the file of the AO to be decided afresh in accordance with the directions given by the ITAT Delhi Benc h 'B'(Special Bench) and the Hon'ble Bombay High Court in the aforesaid referred to orders.
25. Ground No.5 of this appeal relates to the short grant of credit for TDS and Ground No. 8 relates to the excess levy of interest u/s 234D of the Act.
26. As regards to these two issues, the ld. Counsel for the assessee submitted that an application dated 27.03.2018 has bee n moved to the AO for making the necessary rectification but till date the AO has not passed any order. The CIT DR could not controvert the aforesaid contention of the ld. Counsel for the assessee.
27. After considering the submissions of both the parties, we direct the AO to expedite the matter and decide the aforesaid application moved by the assessee u/s 154 of the Act.
37 ITA No. 7212/Del/2017Bank of Tokyo-Mitsubishi UFJ Ltd.
28. As regards to Ground Nos. 6 & 7 relating to levy of interest u/s 234B of the Act and excess withdrawal of interest u/s 244A o f the Act. It was the commo n contention of both the parties that these are consequential in nature. We order accordingly.
29. Ground Nos. 9 to 9.6 relates to the issue on transfer pricing adjust ment. The main grievance of the assessee in these grounds is that the ld. DRP/AO/TPO used the erroneous co mparable uncontrolled price (CUP) data obtained by issuing the notices u/s 133(6) of the Act but without providing any opportunity to the assessee, while determining the arm's length price of the international transaction.
30. The ld. Counsel for the assessee submitted that the ld. DRP decided, the similar issue in the assessment years 2010-11 and 2011-12 in favour of the assessee and the department had not preferred any appeal against the directions of the ld. DRP. Therefore, by keeping in view the principles of consistency, this issue is required to be decided in favour of the assessee and no addition could have been made on account of receipt of Counter Guarantee Co mmission. The reliance was placed on the judgment o f the Hon'ble Supreme court in the case of Bharat Sanchar Niga m Ltd. and Another Vs Union of India and Others reported at (2006) 2 SCC 1.
31. In her rival submissions, the ld. CIT DR supported the orders of the AP/TPO.
38 ITA No. 7212/Del/2017Bank of Tokyo-Mitsubishi UFJ Ltd.
32. We have considered the sub missions of both the parties and perused the material available on the record. In the present case, it appears that the AO/TPO collected comparable uncontrolled price (CUP) data by issuing the notices u/s 133(6) of the Act and used the said data for the purpose of determining the ALP of the international transactions entered into by the assessee with its AE. It is well settled that nobody should be conde mned unheard. In the present case, it is alleged that the AO/TPO did not confront the assessee with the data obtained by issuing the notices u/s 133(6) of the Act while determining the arm's length price. We, therefore, deem it appropriate to set aside this issue back to the file of the AO/TPO to be decided afresh after confronting the data obtained by issuing the notices u/s 133(6) of the Act to the assessee. The AO is also directed to keep in mind the directions of the ld. DRP given in subsequent years i.e. assessment years 2010-11 and 2011-12 on the same issue and decide it afresh in accordance with law.
33. As regards to Ground No. 10 relating to applicability of the tax rate at 40% plus surcharge and educational cess.
34. The ld. Counsel for the assessee was fair enough to concede that this issue has been decided against the assessee by the ITAT Delhi Bench 'C', New Delhi in assessee's own case in ITA No.1174/Del/2015 for the assessment year 2010-11 vide order dated 25.01.2017 and in ITA No. 306/Del/2016 for the assessment year 2011-12 vide order dated 26.04.2017.
39 ITA No. 7212/Del/2017Bank of Tokyo-Mitsubishi UFJ Ltd.
35. After considering the submissions of both the parties and the material on record, it is noticed that this issue has been decided against the assessee in the preceding assessment years and the relevant findings have been given by the ITAT Delhi Bench 'I-1', New Delhi in ITA No. 306/Del/2016 for the assessment year 2011- 12 in assessee's own case vide order dated 26.04.2017 in paras 17 to 19 which read as under:
"17. On ground no. 4 assessee challenged the applicability of rate of taxation. It is stated in the ground of appeal that authority below have erred in not adjudicating that under the provisions of Article 24 of DTAA, the applicable rate of tax on the income of the assessee attributable to its PE in India cannot exceed applicable rate of tax in the case of domestic companies. The DRP noted that as per provisions contained in explanation 1 to section 90 of the Act, higher rate of tax charged to foreign company as compared to domestic company shall not be regarded as less favourable treatment in respect of foreign company. This objection was dismissed.
18. Learned counsel for the assessee submitted that ITAT Delhi Bench 'C' in the case of the same assessee in preceding assessment year vide order dated 25th January, 2017 (Supra) decided this issue against the assesse. Para 35 of the order is reproduced as under:
"It is regarding applicability of rate of tax. Having gone through the order dated 19.09.2014 of the Tribunal in the case of assessee itself for the assessment years 2007-08 and 2008-09 (supra), we find that the issue raised is covered against the assessee. The Tribunal has dealt with this issue in the appeal for the assessment year 2007-08 vide para numbers 87 and 87.1 of the order, which has been followed on the issue in the assessment year 2008-09. The Tribunal while referring Explanation (1) to section 90(2) has rejected the contention of the assessee that the applicable rate of tax on the income of the assessee attributable to its PE in India cannot exceed the 40 ITA No. 7212/Del/2017 Bank of Tokyo-Mitsubishi UFJ Ltd.
applicable rate of tax in the case of domestic companies. In the said Explanation (1) to section 90(2) it has been declared that the charge of tax in respect of foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company. Thus the grievance of the assessee that the authorities below have not adjudicate the issue under the provisions of Article 24 of DTAA does not stand. The ground is accordingly rejected."
19. In view of the submissions of learned counsel for the assessee in the light of the order of the Tribunal, it is admitted fact that the issue is covered against the assessee by order of ITAT Delhi Bench in the case of same assessee (Supra). This ground of appeal of assessee is accordingly dismissed."
36. So, respectfully following the aforesaid referred to order, this issue is decided against the assessee.
37. Ground Nos. 11 & 12 are general in nature so do not require any comments on our part.
38. In the result, the appeal of the assessee is partly allowed for statistical purposes.
(Order Pronounced in the Court on 11/06/2018) Sd/- Sd/-
(K. N. Chary) (N. K. Saini)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 11/06/2018
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5.DR: ITAT
ASSISTANT REGISTRAR