Income Tax Appellate Tribunal - Mumbai
Joint Official Liquidator Of Bank Of ... vs Joint Cit on 25 November, 2005
Equivalent citations: [2006]6SOT391(MUM)
ORDER
Pramod Kumar, AM The three issues that we are required to adjudicate in this appeal are :
"(a) whether or not the provisions of section 115A of the Income Tax Act will apply to a case where a non-resident has placed deposits with Indian branch of a foreign bank;
(b) whether or not the levy of interest under section 234B of the Income Tax Act can be made when entire income of the non-resident assessee was liable to the deduction of tax at source under section 195 of the Act; and
(c) whether or not the interest paid by Indian branch of a foreign bank to the non-resident assessee before us, on the facts of this case, will qualify for exemption under section 10(15)(iv)(1a) of the Act."
2. Out of the three issues identified above, the first two issues emerge out of the grievances raised by the assessee, as set out in the memorandum of appeal, which are as follows:
"The learned Commissioner (Appeals) erred in confirming the action of the assessing officer in computing the tax on the interest income at the rate of 48% as against 20% as specified in section 115A of the Income Tax Act, 1961.
The learned Commissioner (Appeals) erred in holding that the Indian branch of Nova Scotia is not an Indian concern within the meanings of section 115A.
The learned Commissioner (Appeals) erred in confirming the levy of interest under section 234B of Rs. 5,99,404. The Commissioner (Appeals) ought to have deleted the interest levied under section 234B."
3. The third main issue, as identified by us, emerges out of the additional ground of appeal filed by way of letter dated 20-7-2005 which was as follows :
'The learned Joint CIT erred in treating the interest income of Rs. 42,76,580 received by the appellant on deposits with bank of Nova Scotia as being taxable under the Income Tax Act ("the Act)". He erred in not holding that the said income was exempt under the provisions of section 10 of the Act.'
4. The facts giving rise to this appeal before us are like this. The assessee-appellant before us is a non-resident company in liquidation. In the relevant previous year, the assessee has placed the fixed deposits aggregating to US $ 50,95,135.83 in FCNR (Foreign Currency Non-Resident) accounts with bank of Nova Scotia's Mumbai branch. While scrutinizing its income-tax return for the assessment year 1998-99, in the course of assessment proceedings under section 143(3) of the Income Tax Act, the assessing officer noticed that the only source of assessee's income was interest on fixed deposit placed with bank of Nova Scotia's Mumbai branch, and that the assessee had paid tax @ 20%, under section 115A of the Act, on the income of Rs. 42,76,580 so earned by way of interest on fixed deposit. The assessing officer was of the view that section 115A can only be applied when the interest is earned from an Indian concern and that bank of Nova Scotia cannot be treated as an Indian concern. The assessee's contention was that since the expression 'Indian concern' has not been defined anywhere in the Act, and in the light of observations made by the Hon'ble Bombay High Court in the case of Dr. JM. Mokashi v. CIT (1994) 207 ITR 252 (Bom) and in the light of the CBDT Circular No. 740 dated 17-4-1996, Indian branches of foreign banks should also be treated as 'Indian concerns'. The assessing officer, however, was far from impressed by the stand of the assessee. He was of the view that a foreign company, by no stretch of logic, could be treated as an Indian concern, and, accordingly, section 115A could not apply to the facts of this case. He was also of the view that since the assessee admittedly did not incur any expenditure in earning this interest income, entire interest income is to be taxed @ 48%, i.e., rate applicable to a company other than a domestic company. Aggrieved, assessee carried the matter in appeal before the Commissioner (Appeals) but without any success. The Commissioner (Appeals) upheld the action of the assessing officer, and, infact fortified the same by observing that "the phraseology 'Indian concern' has to be read together and if it read together, the inescapable inference is that it must be a concern rooted to the Indian soil, must have residential status in India"and that "... in a taxing statute, one has to find out the intention of the Legislature and here the intention is definitely 'an Indian concern alias an Indian company' and certainly not the branch of a foreign company". Learned Commissioner (Appeals) then reproduced an extract from the State of Tamil Nadu v. Kodikanal Motor Union (P.) Ltd. (1986) 3 SCC 91 referring to Lord Denning's observation to the effect that it would be idle to expect every statutory provision to be drafted with divine prescience and perfect clarity and Justice Hand's words that we must not make a fortress out of a dictionary but remember that statutes must have some purpose or object whose imaginative discovery is judicial craftsmanship. The Commissioner (Appeals) was of the view that in the light of these observations, "the learned counsel should not make a fortress of dictionary meaning and should continue himself to the legislative intent as explained above". The plea of the assessee regarding applicability of section 115A on the facts of this case was thus dismissed by the Commissioner (Appeals) as well. As regards the appeal against levy of interest under section 234B, the Commissioner (Appeals) held that no appeal lies against the same. The assessee is not satisfied by the order of the Commissioner (Appeals) either, and is in second appeal before us.
5. We have heard the rival contentions, perused the material on record and duly considered facts of the case as also the applicable legal position.
6. Let us first take up the issue whether or not the provisions of section 115A of the Income Tax Act will apply to a case where a non-resident has placed deposits with Indian branch of a foreign bank. Section 115A, so far as it relates to the issue before us, provides that where the total income of a non-resident (not being a company) or of a foreign company "includes interest received from Government or an Indian concern on monies borrowed or debt incurred by Government or the Indian concern in forcign currency", the income-tax payable on such income will be calculated at the rate of twenty per cent. It is also provided that no deduction in respect of any expenditure or allowance shall be allowed to the assessee under sections 28 to 44C and section 57 in such a case. The expression 'Indian concern', however, remains undefined under this section, or, for that purpose, in the entire Income Tax Act. For our purposes, it is not necessary to go any further into the scope of the provisions of section 115A. The scheme of section 115A, so far as applicable to the interest income is like this. The interest income of non-residents is to be taxed on gross basis though at a concessional rate of 20%. As the income is to be taxed on the gross basis, there is no question of any deductions being allowed under sections 28 to 44C, or under section 57. As the rate of tax is also given in the section itself, there is no need for separate prescription of the rate, as was the practice till section 115A was introduced vide Finance Act, 1976. The applicability of this exemption of interest income is, however, confined to 'interest received from Government or an Indian concern on monies borrowed or debt incurred by Government or the Indian concern in foreign currency". Even as this section refers to interest received from an Indian concern, the connotations of the expression 'Indian concern' are not expressly defined in this section or, for that purpose, anywhere else in the entire Act.
7. In terms of section 5(2) of the Income Tax Act, subject to the provisions of the Act, total income of a non-resident includes all income, from whatever source derived, which is (i) received or is deemed to be received in India by or on behalf of such non-resident; or (ii) accrues or arises or is deemed to accrue or arise in India. It is important to bear in mind the fact that interest income arising in India is deemed to be 'accrue or arise in India' by virtue of section 9(1)(v) of the Act which provides as follows :
"(1) The following income shall be deemed to accrue or arise in India:-
(v) income by way of interest payable by
(a) the Government; or
(b) a person who is resident, except when the interest is payable in respect of any debt incurred, or moneys borrowed and used for the purpose of business or profession carried on by such person outside India or for the purpose of making or earning any income outside India;
(c) a person who is non-resident, where the interest is payable by in respect of any debt incurred, or moneys borrowed and used, for the purpose of a business or profession carried on by such person in India."
A plain reading of the above deeming provision makes it unambiguously clear that in construing as to whether the income is deemed to accrue or arise in India or not, the emphasis is on the business being carried on in India and not on the domicile of the person who is carrying on such baseness. Even when a non-resident is carrying on business in India and incurs a debt in that connection, deeming fiction under section 9(1)(v)(c) comes into play on the interest paid by the non-resident in respect of such a debt, while even when a person resident in India incurs a debt in connection with business being carried on outside India or for the purpose of making or earning any income outside India, exclusion clause embedded in section 9(1)(v)(b) ensures that interest paid on such debt in not deemed to accrue or arise in India. It is thus clear that what is important is the place where a business is being carried on, rather the residential status of the person who is carrying on such business. Section 9(1)(v) and section 115A are closely connected in the sense that while section 9(1)(v) sets out the circumstances in which income is deemed to accrue or arise in the hands of a non-resident, section 115A prescribes the rate at which interest income in the hands of non-resident is to be taxed. Unless an interest income received by the non-resident abroad is deemed to accrue or arise in India under section 9(1)(v), there cannot be any occasion to tax the same in India under section 115A. It is also clearly discernible from the scheme of section 9(1)(v) that a resident carrying on business in India and a non- resident carrying on business in India are at par so far as the interest paid by them to a non-resident is required to be treated as 'accruing or arising in India'.
8. The question then arises as to whether there can be different treatment to interest payable by a non-resident in connection with business carried on in India vis-a-vis the interest payable by a resident in connection with business carried on in India.
9. There cannot be, in our humble understanding, any good reasons to do so, particularly as the statute does not specifically lays down such a differential treatment. The expression used in the statute is 'Indian concern' and there is nothing to suggest that the scope of this expression is to be inferred as confined to an'assessee resident in India'. The meaning to be assigned to an expression must flow from the context in which it is used. If we are to see the context, it is in respect of business carried on by the assessee, and not the residential status of the assessee, that interest income is deemed to accrue or arise in India. In the case of Dr. J M. Mokashi (supra), Hon'ble Bombay High Court had an occasion to deal with the scope of the expression 'concern' though in the context of section 64(1)(iii) of the Act. Their Lordships observed that "the word 'concern' is of wide import and it conveys different ideas or meanings depending upon the context and setting in which it appears" and that it "takes within its sweep and ambit all organizations or establishments engaged in business or profession; whether owned by a company, partnership, individual or any other entity". This observation by the Hon'ble Bombay High Court makes it clear that there can be a distinction between a company and a concern, and that a company can be larger than a concern, inasmuch as a company can own a concern. In this view of the matter, merely because Indian branch office of the bank of Nova Scotia is fully owned by a non-resident company, i.e., the bank of Nova Scotia, it could not be said that the Indian branch office of bank of Nova Scotia is a foreign concern. It is also important to appreciate that in the international tax treaties, a branch office outside the country of domicile is treated as a separate entity so far as computation of profits are concerned. It is treated as a separate profit centre for the purposes of taxation in the country in which such a branch is operating and what is really taxed is not the actual profits earned by the branch but the hypothetical profits which such permanent establishment, i.e., the branch, might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independent of the enterprise of which it is the permanent establishment. That is the common thread in all the tax treaties and in US, OECD and UN Model Conventions. Therefore, there is a difference in the connotations of a foreign company in India and its permanent establishment in India. These expressions are neither synonymous nor devoid of any distinction. Therefore, a harmonious interpretation would suggest that the meaning of an Indian concern should be taken as a business carried on in India which may essentially include a business carried on in India even by a non-resident. Undoubtedly, taxable entity is only the foreign company, though in respect of profits attributable to the permanent establishment in India, and not such permanent establishment itself, but then the Central Board of Direct Taxes itself has taken a view that "the branch of a foreign company/ concern in India is a separate entity for the purpose of taxation" and that "interest paid/payable by such branch to its head office or any branch located abroad would be liable to tax in India and would be governed by the provisions of section 115A of the Act" (CBDT Circular No. 740 dated 17-4-1996). However, if we are to uphold the stand of the revenue that permanent establishment of a foreign company cannot be treated as anything but a foreign concern, we end up holding that there is no distinction between a foreign company in India and its permanent establishment in India. The emphasis shifts from 'business activity' to 'ownership' of the concern. Such a shift is not only contrary to the scheme of the Act, but also diametrically opposed to the stand taken by the CBDT in the aforesaid circular. It is also to be noted that, in this very circular, the Board has taken a stand that interest paid by branch of a foreign company/concern will be governed by the provisions of section 115A of the Act. No doubt this circular is in the context of interest paid by the branches to the head office but once revenue takes a stand that the branch and head office are required to be treated as separate taxable entities, it does not make a difference whether the interest is paid to the head office or to any other person. In any event, what is important from the point of view of section 115A is whether the payment is made by an Indian concern to a non-resident or not. Once the Board takes the stand that the interest payable by the branch office of a foreign concern/ company to its head office/overseas branches is entitled to be taxed under section 115A, it cannot be open to the assessing officer to decline application of section 115A to the assessee only for the reason that the interest is paid by Indian branch of a foreign bank. it is only elementary in the scheme of things under the Income Tax Act that beneficial circular is binding on the revenue authorities. In the context of the case before us, and to the extent this circular recognizes that the provisions of section 115A will also govern the cases in which interest is payable by Indian branches of foreign banks, this circular is clearly a beneficial circular to the assessee. For the present purposes, we need not examine the contents of the CBDT Circular 740 beyond this aspect of the matter. The conclusion that we have arrived at is thus also supported by the aforesaid circular. In his impugned order, the Commissioner (Appeals) has observed that "the phraseology'Indian concern' has to be read together and if it read together, the inescapable inference is that it must be a concern rooted to the Indian soil, must have residential status in India" and that "... in a taxing statute, one has to find out the intention of the Legislature and here the intention is definitelv 'an Indian concern alias an Indian company' and certainly not the branch of a foreign company". We are, however, unable to find anything to even remotely suggest that the intent of Legislature is that Indian concern is the same thing as an Indian company or that the reference is to an assessee having residential status in India. As regards Commissioner (Appeals)'s reliance on the observations of Lord Denning and Justice Hand reproduced by Their Lordships of Hon'ble Supreme Court, we see no assistance to revenue's case. A co-ordinate Bench of this Tribunal, in the case of Satyam Enterprises v. Joint CIT (2005) 93 ITD 606 (Mum.) and having taken note of these observations, concluded that "One of the thing which is clearly discernible from the above observations of Their Lordships is that while interpreting the statutes, one must not surrender to become the prisoner of the words employed and thereby disregard the context and the underlying scheme of the legislation in which the words are set out". Viewed in this perspective also, we have to approve an interpretation in harmony with the scheme of the Act, and, therefore, we have to hold that, in the context of section 115A read with section 9(1)(v), an Indian concern includes a business carried on in India by a non-resident.
10. For the reasons set out above, we are of the considered view that the expression 'Indian concern', for the purposes of section 115A, will also include Indian branch offices of foreign companies. Accordingly, the correct rate of tax applicable on the income earned by the assessee, by way of interest earned on foreign currency deposits with the bank of Nova Scotia's Mumbai branch, will be 20%. The plea of the assessee is correct and meets our approval. The first issue is thus decided in favour of the assessee.
11. Ground Nos. 1, 2 and 3 are thus allowed.
12. The next issue that we are required to adjudicate is whether or not the levy of interest under section 234B of the Income Tax Act can be made when entire income of the non-resident assessee was liable to the deduction of tax at source under section 195 of the Act.
13. The Commissioner (Appeals) dismissed this grievance of the assessee as not maintainable by observing that "no appeal lies against charging of interest, and that "however, the appellant company will get consequential relief". That stand certainly cannot be approved in the light of settled legal position now. Having heard the rival contentions on this issue, however, we are of the considered view that the Commissioner (Appeals) ought to have admitted the ground of appeal and decided the same on merits. In this view of the matter, we deem it fit and proper to remit the matter to the file of the Commissioner (Appeals) for adjudication on merits of the matter.
14. Ground No. 4 is also thus allowed for statistical purposes.
15. That takes us to the third issue that we are required to decide in this appeal ie., whether or not the interest paid by Indian branch of a foreign bank to the non-resident assessee before us, on the facts of this case, will qualify for exemption under section 10(I 5)(fa) of the Act.
16. This issue is raised by the assessee by way of an additional ground of appeal. An application has also been filed for admission of this additional ground, and parties have been heard on this application as well. The issue raised by the assessee being purely legal, and in the light of the Hon'ble Supreme Court's judgment in the case of National ThermalPower Co. Ltd v. CIT(1998) 229 ITR 383 (SC), we deem it fit and proper to admit this ground of appeal.
17. Section 10(15)(iv)(fa) prescribes that interest payable by a scheduled bank to a non-resident "on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the Reserve bank of India" shall not be included in total income of the assessee. This plea has not been taken at any stage before any of the authorities below. There is no finding by any of the authorities below that the 'acceptance of such deposits'was approved by the Reserve bank of India for the purposes of section 10(15)(iv)(fa). Learned counsel for the assessee has filed some correspondence entered into by the assessee with the Reserve bank of India and contended that as the Reserve bank of India had permitted the assessee to keep these deposits in foreign currency with a scheduled bank, it should be treated as a sufficient compliance with the conditions laid down under section 10(15)(iv)(fa). Learned departmental Representative, on the other hand, submitted that the approval needed for the purpose of exemption under section 10(15)(iv)(fa) has to be recipient specific, that the approval has to be specifically for the purposes of the said section and that merely because permission has been granted, in some other context, to the assessee to keep funds in the scheduled bank, it cannot be inferred that the Reserve bank of India has granted approval to the 'acceptance of deposits by the scheduled bank'. It was also contended that since the assessee did not take up this issue at any other stage, relevant facts have not been scrutinized by the assessing officer or the Commissioner (Appeals). If at all we decide to admit the ground, this issue can at best be rcmitted to the file of the assessing officer or the Commissioner (Appeals) for fresh adjudication after ascertainment of the facts.
18. We are not inclined to uphold, based on the facts found by the authorities below, the plea of the assessee, or even examine, at this stage, the evidences filed in support of the contention that the 'acceptance of such deposits by the scheduled bank'was approved by the Reserve bank of India. The evidences which are now filed by the assessce were not before any of the authorities below for the purposes of examining whether or not the conditions laid down under section 10(15)(iv)(fa) was fulfilled or not. In fact, this aspect of the matter has not been considered at all. However, as we have admitted the appeal on this important legal issue, we deem it fit and proper to remit the matter to the file of the assessing officer for adjudication on this plea by way of a speaking order, in accordance with the law and after giving due and fair opportunity of hearing to the assessee.
19. As we are restoring this issue to the file of the assessing officer for adjudication de novo, we refrain from making any observations on the merits of assessee's case on this issue.
20. The additional ground filed by the assessee is thus allowed.
21. In the result, the appeal is partly allowed.