Income Tax Appellate Tribunal - Delhi
Standard Chartered Grindlays Bank, New ... vs Adit International Taxation, New Delhi on 26 October, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'D', NEW DELHI
Before Ms. Sushma Chowla, Vice President
Dr. B. R. R. Kumar, Accountant Member
(Through Video Coferencing)
ITA No. 2920/Del/2008 : Asstt. Year : 2001-02
Standard Chartered Grindlays Vs Asstt. Director of Income Tax
Bank-Tax Department, (International Taxation), Circle-
H-2, Connaught Circus, 2(2), New Delhi
New Delhi-110001
(APPELLANT) (RESPONDENT)
PAN No. AAHCS3380Q
ITA No. 2995/Del/2008 : Asstt. Year : 2001-02
Deputy Director of Income Vs Standard Chartered Grindlays
Tax (International Taxation), Bank, H-2, Connaught Circus,
Circle-2(2), New Delhi New Delhi-110001
(APPELLANT) (RESPONDENT)
PAN No. AAHCS3380Q
Assessee by : Sh. Shashi M. Kapila, Adv.
Revenue by : Sh. Satpal Gulati, CIT DR
Date of Hearing: 27.08.2020 Date of Pronouncement: 26.10.2020
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals have been filed by assessee the and the revenue against the orders of the ld. CIT (A)-XXIX, New Delhi dated 11.07.2008.
2 ITA Nos. 2920 & 2995/Del/2008Standard Chartered Grindlays Bank
2. In ITA No. 2920/Del/2008, following grounds have been raised by the assessee:
"1. The Ld. CIT(A) had erred in law and on facts is sustaining an ad hoc & surmiseful addition of 20% of NRI expenses amounting to Rs. 16,92,655/- on the grounds that these are in the nature of 'head office' expenses and ignoring the IT AT order dt. 18.8.2006 which has held that NRI expenses are fully allowable and no portion of these are head office expenses.
2. The Ld. CIT(A) was not justified in law in igno ring the order of a superio r judicial forum in the appellant's own case for earlier years wherein it was held that the NRI expenses are fully allowable and no part of them are in the nature of Head office expenses.
3. The learned Ld. CIT(A) has e rred in law and on facts in upholding an excessively high pitched estimate of as much as 94% of the gross receipts amo unting to Rs.3,04,60,516/- as e xpenses attributable to earning income on fo reign currency syndicated term loans under Sec. 115A(3) of the Income Tax Act, 1961.
4. (i) The learned Ld. CIT(A) has erred in law and on facts in making an ad hoc addition of Rs.15,00,000/- on account of expe nses incurred on earning foreign currency syndicated term loans.
(ii) On page 14, para 6.1 o f the CIT(A)'s Orde r, when dealing with the expenses on foreign currency syndicated terms loans, the CIT(A) has erroneously quoted an extract of the AO's orde r with respect to deduction under sec.36(1)(viia), which is not relevant to the gro und of appeal being discusse d. Hence this AO's quotation in this para should be expunged as it is quoted out of context.
5. The learned Ld. CIT(A) has e rred in law and on facts in disallowing the entrance fee expenditure of Rs.30,000/- on payments made to clubs on the grounds that it is capital expenditure.3 ITA Nos. 2920 & 2995/Del/2008
Standard Chartered Grindlays Bank
6. The Ld. CIT (A) has e rred in law and on facts in making an estimate d disallowance of managerial and administrative expenses of Rs. 2,50,000/- for earning dividend income by treating this as tax free income, whereas dividend income is strictly not a tax free item of inco me as it is subject to dividend distribution tax in the hands of the company which pays the dividends.
7. Without prejudice to above and in the alternative, it is respectfully submitted that -
(a) Section 10(33) exempts dividends referred to in section 115-O. Section 115-O refers to any amount declared, di stributed or paid by a domestic company.
Thus, what is exempt in the hands of recipient is the amo unt declared, distributed or paid by a dome stic company and not the sum, which is income in the hands of the assessee;
(b) No part of the expenses incurred for the purposes of business of the Appellant can be said to be attributable to earning of dividend income in view of various decisions as under -
CIT v/s. Indian Bank Ltd. - 56 ITR 77(SC) Rajasthan State Ware housing Corp. v/s. CIT - 242 ITR 450(SC) CIT v/s. Maharashtra Sugar Mills - 82 ITR 452(SC) CIT v/s. Industrial Inve stment Trust Co. Ltd. - 67 ITR 436(Bom)
8. The Ld. CIT (A) has e rred in law and on facts in disallowing the sum of Rs.30,15 ,52,101/- as relating to acce ss and user of technology related service s for its credit cards business in India, on which full taxes were duly deducted at source and paid to the Indian Government @ 15% in accordance with Article 12 of the Indo -Australia Double Taxation Avoidance Agreement (DTAA) read with section 195(1) of the Income Tax Act, 1961.
4 ITA Nos. 2920 & 2995/Del/2008Standard Chartered Grindlays Bank
9. The Ld. CIT(A) has erred in law and on facts by denying deduction of fees paid for access and user of technology related services for the credit cards business of India, as such fees were incurred wholly, necessarily and exclusively for the Appellant's business in India, hence this is a permissible deduction under sectio n 40(a)(i) read with section 37(1) of the Income Tax Act, 1961 and Article 7 of the Indo-Australia DT AA and CBDT Circular No.649 dated 31.3.1993.
10. The Order o f the Ld. CIT(A) suffers from an error apparent: on the face of the records on the following ground:
The CIT (A) has allowed us the tax deductibility of CBS costs, and Operations & Technology costs for the following periods: 1.4.1999 to 31.3.2000 & 1.4.2000 to 31.7.2000. This was in acco rdance with the provisions of sec. 40(a)(i) as with- holding tax was paid on such payments in May 2000.
However when granting relief in figures, the CIT(A) has corre ctly taken the CBS costs & Ops /Tech costs for the period 1.4.1999 to 31.3.2000.
But fo r the period 1.4.2000 to 31.7.2000 he has erroneously bunched up the costs of CBS.+ Operations Technology + Credit Cards Support Costs and treated the entire amount as Credit Cards Support Costs costs. This would be ex- facie evident from CIT(A)' s order itself as well as the records.
Therefore although the relief is computed by him of Rs.379,366,666/- actually there is a further relief available per his order of:
CBS co sts for 1.4.2000 to 31.7.2000 -
Rs.91,601,740 + Operations / Technology co sts for 1.4.2000 to 31.7.2000 of Rs.1,94,31,463.
This totals to Rs.111,033,203.
5 ITA Nos. 2920 & 2995/Del/2008Standard Chartered Grindlays Bank Therefore the total relief on tax deductibility of access and user of CBS & Ope rations Technology fees this item would be Rs.379,366,666 for period 1.4.1999 to 31.3.2000 + Rs.Rs.111,033,2 03 for 1.4.2000 to 31 .7.2000 = Rs.490,499 ,869/-.
In additio n Midanz costs are operations and technology co sta allowed by CIT(A), hence the se too are allowable- Rs.26,72,100/-.
As this is a clear error & mistake apparent from the CIT(A)'s Order itself as well as the records, this should be rectified and additional relief may properly be granted to us.
11. It is prayed that the AO be directed to give proper credit for TDS as pe r records.
12. lt is prayed that the interest u/s.234B & 234C may properly be computed consequent to this appeal.
13. Pursuant to this order the learned Assessing Officer be directed to re-compute the allo wance in respect, of provision for bad and doubtful debts u/s 36(1)(viia) @ 5% of adjusted total income as determined by him in the Assessment Order.
14. Pursuant to this order the learned Assessing Officer be directed to re¬compute the allowance in respect of the allowable Head Office expenses u/s 44C@ 5% of the "adjusted total income" as determined by him in the Assessment Order."
NRI Expenses:
3. The assessee is a non-resident banking company which carries on the business of banking and othe r relate d activities through its branches in India in accordance with the provisions of Banking Re gulation Act, 1949. During the year, Indian Permanent Establishme nt (in short PE) of the assessee bank in India incurred NRI expense s for soliciting and mobilization of deposits in foreign curre ncy from Non Resident Indian (NRIs) to 6 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank be placed in India. As these expenses were related wholly and exclusively to the Indian PE of the asse ssee's business, it had claimed the expense as deduction in the computation of Business Income of the PE earned in India.
4. The Assessing Officer rejected this claim for deduction of expenses holding that this expenditure was not reflecte d in the assessee's Indian books of acco unts that this expenditure was in the nature of 'head office expenses' in respect of which deduction under section 44C has already been allowed. T he AO placed reliance on the judgment of the Calcutta High Court in the case of UCO Bank Vs. CIT, 200 ITR.
5. The ld. CIT (A) directed to re-compute the disallowance @80% of NRI deposit mobilization expense s u/s 37(1) of the Income Tax Act, 1961 and 20% of NRI expenses u/s 44C.
6. This issue has been adjudicated by the ITAT Delhi Bench in the case of the assessee fo r the assessment years 1993-94 to 1998-99 in IT A No. 4988/Del/2003 dated 24.10.2008 and ITA No. 1106/Del/2017 dated 30.11.2017. The relevant portion of the order of the ITAT is as under:
"6. We have consi dered the rival sub missions. Th e Trib unal while consideri ng similar clai m in earlier year held as u nder (ITA Nos.1850 /Del/1997 , 2376, 2818 & 2819/Del/99, ord er dated 18 t h A ugu st, 2006). We have careful ly consid ered the rival subm issions: The xxxxx x ab road were brought to India in f oreign c urrency xxx x and kept in I ndia for the Indian b usin ess of t he assesse e bank. The b enefits reaped by the India branch or Permanent Establishm ent in Ind ia have b een accounted for as Indian inc om e. We, t heref ore, see no reason as to why the ded ucti on of expenditure· should not allowed. Thes e expenses incurred for p rocu rement of b usines s cann ot b e u nderst ood as H ead O ffice exp ens es a nd th e learned A ssessing O fficer, therefore, erred in treatin g 7 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank them as H ead O ffice expenses within the m eaning of secti on 44 C of the A ct. We, therefore, d irect "the l earne d A ssessing O fficer to all ow the asse ssee d eductio n of actual exp end iture basis and for that purp ose if necessary the learned A ssessing O fficer m ay wi thdraw corresponding ded ucti on allowed, if any under the provisions of section 4 4C."
Thoug h th e allowabili ty of expens es in relati on to raising deposits from NRI abroad is not subj ect to f urther di scussion, howev er, what is to be found i s that when the expe nses were incurred and deposits were raised , what was the deposit rai sed and whether it was brought into Ind ia in resp ect of Ind ian business or not is not forthcom ing from t he m aterial on record . O n exam ination of balance-s heet o f the assessee w e do not find that th e deposits raised at Dubai were brou ght into I nd ia and w ere util ized in resp ect of business carried on in Ind ia. We, theref ore, rem and the matter b ack to the file of the A ssessing O fficer. The ass essee shall furnish details as to what were the de posits raised and how t he same were brought i nto Ind ia in respect of b usi ness carried on in Ind ia. The A ssessing O fficer shall also exami ne the d etails of expenses and t he b asis of allocati on of such expenses for considering allowability of the same. The matter is accordingly restored b ack to the f i le of the A ssessing O fficer for re-exam inati on. If it is found that the dep osits raised abroad from NRI were account ed by th e I ndian branches a nd are treated as d eposits from NR I on w hich even the interest is payable b y Indian branches, the sam e m ay b e allowed as exp enses subj ect to satisfacti on as regards allocati on of the sam e. Th e assessee s hall fi le necessary d etail s in this regard."
A s the issue bef ore us in t he instant case is exactly identical of th e earlier years wherein the Hon'ble Tribunal has already taken a view in this re gard. Therefore respectfully following the same we allow the appeal of the assessee in terms of above. Thus, the ground of appeal of the assessee is allowed for statistical purposes."
7. Subsequent to the directio ns of the ITAT, it was brought to our notice that the re venue has allowed the complete expenses including the 20% expenses disallowed in the earlier years.
8 ITA Nos. 2920 & 2995/Del/2008Standard Chartered Grindlays Bank Hence, this issue is no more re s integra. The appeal of the assessee on this ground is allowed.
Disallowanc e of Expenses:
8. Brief facts of the case are that the asse ssee has shown an amo unt of Rs. 3,24,04,804/- as interest inco me from foreign currency loans to its Indian customers, taxable u/s 115A(3). The AO held that under section 115A(3), no deduction is permissible for the income covered under the said provision and the corresponding expenditure is to be disallowed. Based on the gross receipts and expenditure shown in the P&L account fo r the year of Rs.14,82,24,25,000/- and Rs.13,94,24,89,000/- respectively, the AO held that the assessee had incurred expenses in the ratio of 94% of the gross receipts. The refore, the AO esti mated the expenditure relatable to income of Rs.3,24,04,804/- at Rs. 3,04,60,516/-.
9. The ld. CIT (A) confirmed the addition on the grounds that in absence of any details, the AO is correct in estimating the disallowance .
10. Before us, it was submitted that the bank earned interest of Rs.3.24 crores on FCNR - B Rules and this interest duly offered at the rate of 20% in accordance with the provisions of Section 115A(1) of the Income Tax Act, 1961.
11. This issue has been adjudicated by the ITAT Delhi in the case of the assessee for the assessment years 1993-94 to 1995- 96 and 1996-97 to 1998-99. The relevant portion of the orde r of the ITAT is as under:
9 ITA Nos. 2920 & 2995/Del/2008Standard Chartered Grindlays Bank "42. The issue for our adjudication relates to the disallowance s to be worked out for indirect expenses incurred by the assessee in relation to such impugned income of interest. On perusal of AO o rder we observed that he has made the disallowance on proportionate basis between the total operating expenses viz a viz gross receipt of the assessee. In our considered view the method adopted by the AO suffers from several infirmities as detailed below:-
i) The lower authorities have worked out the ratio between the total expenses viz a viz total receipt and that ratio has been applied to the impugned interest income on the same gross revenue .
ii) The product of foreign currency loan was in ope ration only for four months effective from Dece mber 96 to March 97 for the year under consideration.
iii) There are certain costs which are fixed in nature and therefore all such costs canno t be attributed to this product.
43. In view of above, we dire ct the AO to adopt the following method for working out the disallowance of indirect expenses incurred in relation to such impugned interest income.
i) Work out the ratio between the total revenue viz a viz the gross inco me earned by the assessee on foreign currency loan.
ii) Based on the above ratio the indirect e xpenses will be determined for four months for the purpo se of disallowance u/s 115A of the Act.
44. We further find that there is no dispute with regard to the e xpenses already disallowed by the assessee in its income tax return. In vie w of the above we direct the lower authorities to make the disallowance s u/s 115A of the Act in the light of above discussion. T hus the ground of appeal of the assessee is allowed for statistical purpose ."
10 ITA Nos. 2920 & 2995/Del/2008Standard Chartered Grindlays Bank
12. Since, the facts remain unaltered and in the absence of any tangible change, we, following the earlier order of the ITAT we hereby direct the AO to compute the disallowance as pe r the formula mentioned at sub-para (43) above . In the result, the appeal of the assessee on this gro und is allowed for statistical purpose.
Disallowanc e of Expens es on Tax Free interest are foreign currency Syndicated Term Loan :
Disallowanc e of Expenses out of Dividend Income The grounds are being adjudicated together.
13. The AO disallowed Rs.81.31 lakhs on account of expenses incurred on earning foreign currency syndicated term loan of Rs.86.50 lakhs which is tax free. The ld. CIT (A) confirmed the addition to the tune of Rs.15 lakhs on the grounds that estimation of disallowance of expenditure of 17.34% on the exempt income .
14. With regard to dividend, the AO disallowed an amount of Rs.16,60,280/- out of the dividend income earned of Rs.17,66,255/-. The ld. CIT (A) confirmed the addition to the extent of Rs.2,50,000/- on estimate basis.
15. Before us, the ld. AR relied on the order of the Hon'ble Supreme Court in the case of Walfo rt Shares & Stock Brokers Pvt. Ltd. 326 ITR 1. The ld. DR relied on the order of the ld. CIT (A).
16. The relevant portion of the judgment of the Hon'ble Supreme court is as under:
11 ITA Nos. 2920 & 2995/Del/2008Standard Chartered Grindlays Bank "Section 14A of the Inco me-tax Act, 1961 , cl arifies that expen ses incu rred can be allowed only to the extent they are relatable to the earn ing of taxable in come. In many cases th e natu re of expen ses in curred by the assessee may be relatable partly to exempt income and partly to tax able income. In the absence of section 14A, the expen diture incurred in respect of exempt inco me was being claimed again st taxable i nco me. The mandate of section 14 A is clear : i t desires to curb the practice of claiming deduction of expen ses incurred in relation to exemp t income ag ainst taxable income and at the same time avail of the tax incentive b y way o f exempt income withou t making any apportionment o f exp enses incurred in relation to exempt income. The basic reason for Inserti on o f section 14A is that certain in comes are not includ ible while computing th e total income because these are exempt under certain p ro visions of the Act.
Th e b asi c princip le of taxation is to tax th e n et in come, ·i.e., gross Income minus expenditure. On th e same an alog y, exemption is also in respect of net income. The theo ry of apportionment of expend iture between taxab le an d non-taxable has, in principle, been now widen ed under section 14A.
17. We find that the AO has disallowed the amount invoking the provisions of Section 14A. While there is no dispute regarding the disallowance of expenditure incurred in relation to exempt income unde r both the heads, the Act prescribes proper proce dure of computing such disallowance u/s 14A(2). We find that the revenue has not invoked the procedure as specified unde r the said section whe rein the AO has to record his dissatisfaction as to the correctness of the claim with regard to the accounts of the assessee. Owing to the procedural tumble, we he reby delete the disallowance made by the Assessing Officer.
12 ITA Nos. 2920 & 2995/Del/2008Standard Chartered Grindlays Bank Disallowanc e of Club Expenditure:
18. The ld. CIT (A) confirmed the amount of Rs.30,000/- paid on account of entrance fee of a club. The club membership fee is take n fo r promoting business of the bank and for better customer relationship. No asset of enduring in nature has been created. Hence, following the order of the ITAT in ITA No.1106/Del/200 6 for the assessment 1996-97 dealing with expenses of club membership fee and keeping in view the fact that no new asset has come into existence, we hereby delete the addition confirmed by the ld. CIT (A).
Disallowanc e of Fee for Technical Services:
19. The AO has rejected the claim of deduction of Rs. 68,10,18,767/- u/s 37(1) o f the Act for following reasons:
(a) that the payments totaling to Rs. 68,10,18,767/- were not made by Indian PE of appellant but by the HO o f appellant in Melbourne
(b) that the payments totaling to Rs. 68,10,18,767/- were not debited in books of account of appellant for the year.
(c) that payme nt made on behalf of appellant suffered withholding taxes @ 15% whereas claim o f deductio n of these payments resulted in reduction of tax liability of appellant @ 48% which incurred revenue loss of 33% on such claim.
20. The ld. CIT (A) was confirmed the addition to the tune of Rs.30,15,52,101/- and granted the relief of Rs.37,94,66,666/-. The revenue is in appeal against the relief grante d and the 13 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank assessee's in appeal against the addition confirmed by the ld. CIT (A).
21. For the sake of ready reference and fo r detailed facts, the order of the ld. CIT (A) is reproduced as under:
"10.3.2 Th e AR stated that the appell ant had made paymen ts totali ng to Rs. 68,10,18,767 /- to Au stralia and New Zealand and Ban king Group (in short ANZ) through HO of appellant in Melbou rn e Australia, after ded uction of withholding tax in the year under consideratio n in lieu of technical services rend ered by ANZ to PE of ap pellant in India u nder three agreements. It was argu ed that copies of original ch allan evidencing paymen ts of withholdi ng tax alo ngwith interest u/s 201(1 A) were attached to the return of inco me for th e year and detail s of p ayments were disclo sed in tax au dit report for A.Y. 2000-01 and A.Y. 2 001-02 . It was contend ed by th e AR th at th e expen diture was incu rred whol ly and exclusivel y fo r the purpose of the bu siness o f Ind ian PE of appellant and was claimed as allowab le deduction by way of no tes attached and forming p art of th e computation of income filed alon gwith retu rn of income for the year under con sideration, accordingly, the claim of deduction of expen diture was allowable deductio n u/s 3 7(1) read with proviso to section 40(a)(i) of the Act. It was further contended that genuineness of the expenditure was sup ported by the co pies of ag reement, in voices of expenditure and report of external auditor. I have examin ed the abo ve claim of ap pellant with referen ce to notes attached to the computation of in come for the year filed al ongwith return of income and have noted that the claim of ap pellant is factu ally correct. The appellant had made claim of deduction in return of income by filin g a detailed no te and necessary eviden ce alongwith tax audi to r report. For shake of clarity relevant no te is reproduced as under: "NOTES ATTACHED TO AND FORMING PART OF THE 14 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank COMPUTATION OF INCOME FOR THE Y EAR ENDED 31 MARCH 2001.
1) The n ame of ANZ Grindlays Bank Limited has been chan ged to Stan dard Chartered Grindlays B ank Limited effecti ve 23 S eptember 20 00.
2) (i) During the Fin ancial Year 1.4.99 to 31.3.2000 the Bank had made the following payments fo r obtaining technical sendees for its Indian operations fro m ANZ Ban king Grou p for access and use of:
(a) Commercial Bankin g System for its Indian op erations - R s.
30 4.353.33 3 Original challans evid encing payment of withholding tax of Rs. 4,56,53,0 00 al ongwith interest u/s 201 (1A) of Rs. 44 ,99,000 is attac hed as Ann exu re A-I.
(b) Operatio ns and Technology service s for its Indian Operatio ns- Rs.75,113,3 33 Origin al challans eviden cing payment of withholding tax of Rs. 1,12,67,000 alongwith interest u/s 20 1(1 A) of Rs. 11 ,36,000 is attac hed as Ann exu re A-2
(c) Cards technolog y services for its Indian op erakons- Rs.134,033,333 Original chall ans evidencing p ayment of with holding tax of Rs. 2,01,0 5,000 alo ngwith interest u/s 201 (1A) of Rs.14,88,00 0/- is attach ed as Annexure A-3 Th e B ank had duly deducted taxes at source on the payments in to the paid in acco rdance with Article 11 of Indo-Australian Double Tax Treaty and p aid interest u/s 201 (1 A) an d mad e payment Go vernment on 31st May 2000 . Since such taxes have b een the current acco unting perio d, the above expen ses are ded uctible as b usin ess expen diture from the Pro fits and Gain s of Business in acco rd ance with Proviso to section 40 (a)(i).
(i) Original challans evid encing payment of withholdin g taxes are attached.
(ii) Report of External Audito rs - KPMG certifying th e payments made for availi ng of technical services are attach ed.
15 ITA Nos. 2920 & 2995/Del/2008Standard Chartered Grindlays Bank
(ii) For the period 1.4.2000 to 31.7.20 00 the Bank continued to avail of the technical servi ces fro m ANZ Banking Gro up Ltd. Of:
(a) Commercial Banking system (CBS) for i ts Indian operati ons
(b) Op eration s and Technology services for its Indian operati ons
(c) Cards Technology services for its Indian operations Fo r whi ch payment of Rs. 16,48,46,668/- was made during th e year.
Th e Bank h as duly pai d withhol ding taxes to th e Indian Govt., in acco rd ance wi th Article 11 of th e Indo-Australian Doub le Tax Treaty within prescribed time. Since the taxes were paid in this financi al year th e abo ve sum is dedu ctible as busin ess expend itu re from Profits and Gains of busin ess in accordance with the Proviso to sec. 40 (a)(i). The details are as fo llows -
(i) Withholding tax paid in the month of April 2000 is Rs.68,38,00 0/- alongwith interest u/s 20 1(1 A) o f Rs.103,0 00/- - Ann exu re IV.
(ii) Wi th holdi ng tax p aid on June 6, 2000 is Rs. 67,98 ,000/- - Ann exu re V.
(iii) Wi th holdi ng tax pai d on July 6, 2000 is R s.70,8 1,000/- - Ann exu re VI.
(iv) Wi th holdi ng tax paid on Au gust 6, 2000 is Rs. 40 ,10,000/- - Annexure VII.
(v) Original challans evidencing paymen ts of withholding taxes are attached .
Report of Externa l Auditors - KPMG Certifyin g the above paymen ts made for availing of the said 'technical servi ces' are attached."
(extracted from notes attached to and forming p art of computatio n of income filed alongwi th retu rn of income fo r the year) 16 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank In view of above u ndisputed facts. I am not inclined to agree with the view of the AO that app ellant h ad no t made clai m of deductio n of expen diture of Rs.68,10,18 ,767/- before hi m.
10 .3.3 In o rd er to examine the claim that the expenditure was incurred for the p urpose of the bu sin ess of appellant, I have carefully examined all the three agreemen ts between HO of th e ap pellant and ANZ Australia titled ''Ag reement fo r access to and use of the Commercial Banking System (CBS)", "operation and technology support services and licence memorandum" and "credit cards su pport services memo randum". The ag reement fo r access to an d use of the commercial b anking system (CBS) provid e fo r use of the system by PE o f ap pellant in India. For sh ake o f clarity relev ant part of the agreement is reproduced as under:
"1. ACCESS TO ANDN USE OF THE CBS SYSTEM 1.1 Th e 1 s t Party provided the 2 n d P arty access and user of the CBS together with all asso ciated documentation during the period 1 s t April 19 99 upto 31 s t March 2000 . The 2 n d Party Bank had access to, and made use of, the CBS system for this banking operation s in Ind ia. Toward s this p urpose, th e 1st Pa rty had sup plied th e requisite number of copies o f the CBS system to the 2 n d Party.
1.2 The right of the 2 n d p arty Bank to u se the CBS System for its op erations in India was exclu sive, and non-transferable.
1.3 Th e entire ownership rights in the CBS System has at all poin ts of time vested with the 1 s t Party. T he 2nd Party had on ly access to, an d u se of this system during the term of the Agreemen t between the p arti es."
(extracted from CBS agreemen t between HO of appellan t and ANZ dated 1.4.19 99) 17 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank Th e operations and techno logy support and services and licence ag reement also stip ulates operati on an d support services in Indi a.
"THE PARTIES AGREED UPON THE FOLLOWING:
1. OPER ATIONS & TEC HNOLOGY SUPPORT SER VICES AND SOFTWARE LICE NCES AND MAINTENANCE PROVIDED BY THE 1 st PARTY TO THE 2nd PARTY FOR ITS BANKING OPER ATIONS IN INDIA:
Th e 1st Party provid ed the followi ng operati ons an d technolog y nd suppo rt services including software licences to th e 2 Pa rty, for its bu siness in India d uring the exten ded p eriod of 4 months.
Maintenance Based Systems: The lsl Party has d eveloped and maintain ed various Main frame based Comp uter systems at Melbou rn e such as:
- IT Service Delivery
- IT Software Solutions (o ther than CBS Fail & Fix)
- Pa yment Services
- Telecommunication s
- Operations & Technology International Co sts
- BTS (ANZLINK, Chequeout)
- MIDANZ Suppo rt an d Enh ancements
- ANZIT Recon Suppo rt
- Projects : Y2K
- Projects : Business Planning & Reo rganizing
- Projects : TEP
- Projects : Telephone Banking
- Projects : MARS Th e 1 st Party granted the 2nd Party the op erations and technolog y suppo rt services comprising of access to and use of the Mainframe based systems. This in clud ed access to Glob al S erver and Desktop suppo rt, Cards mainframe, Swift mainframe, CDM/CTA (Cred it Cards 18 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank Assessment and collections modules), AS400 Support, Unix S uppo rt, an d for Y2K and other projects."
(extracted fro m "op eration and technology support service and licence memorand um between HO of appellant and ANZ dated 1.4.1 99) Wh ereas 'credit cards sup port service memo randum' do es not sti pulate that ANZ would provid e credi t card s su pport service to PE of appellant in India. Fo r shake of clarity relevant p art o f agreement is reproduced as un der:
"THE REASONS FOR THE AGREEME NT:
A. The 1 s t Pa rty p ro vided support services to the 2nd Party for its Cred it Cards related to business operations. These included technical, managerial an d consultancy services includi ng p ro viding of services of technical or other personn el in relati on to the same.
B. The 2nd Party required and utilized the suppo rt services p ro vided by the 1st Pa rty for i ts Cred it Cards b usin ess operation s, including technical, managerial and co nsu ltancy services.
C. This Memorandum records and details the support services p ro vided to the 2 nd Party by the 1 s t Party, d uring the 12 months' period 1.4.99 to 31.3.2000 ".
(extracted fro m credit cards support se rvice memoran dum between FIO of appellant and ANZ dated 1.4.1999 ) It is evid ent fro m abo ve extract relevant part o f the agreement that unlike other two ag reement credit cards support service agreement do es not stipulate providing credit card su pport services to PE of ap pellant in India.
10 .3.4 It is evid ent from scrutiny of above referred to th ree ag reements that paymen t of Rs. 7,51,13,333 /- under the agreement 19 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank for operation an d tech nology suppo rt an d service and payment of Rs. 30 ,43,53,33 3/- under commercial banking system ag reement were incurred for pu rpose of the b usi ness of PE of appell ant in Ind ia whereas the claim of app ellan t that paymen t of Rs. 13 ,4 0,53,33 3/-, Rs. 26,72,100 /- and R s. 16,48,46,668/- were incurred on credi t card suppo rt service to PE of app ellant in India was not proved before me as the relevant agreemen t does no t stipul ate credit card su pport service i n Ind ia. The AR did not fi le any other evidence to prove if credit card servic es were actuall y rend ered in Indi a for the PE of ap pellant. In ligh t of these fi nding s it is h eld that paymen t totaling to Rs. 30155 2101 was not incurred for the purpose of business of the ap pellant and was not dedu ctible u/s 37(1) of the Act. For afo restated reaso ns, I am of considered view th at out of to tal expen diture of Rs. 68 ,10,18,767/- payments of Rs. 7 ,51,13,33 3/- for op eration and technology support in In dia an d Rs. 30 ,43,53,33 3/- for CBS technical services in India were incurred wholly and exclusively for th e p urpose of the bu siness of the PE of app ellant in India and were al lowable dedu ction u /s 37(1) of th e Act an d balance amount of payment of Rs. 30,1 5,52,101 /- was not p ro ved to b e incurred for th e pu rpose of th e business o f appellant in India and th e same canno t b e claimed as allowable deduction u/s 37(1) of the Act. It is pertin ent to mention here th at appellant had filed evidence of payments of Rs. 7,51,13,333 /- and Rs. 30,4 3,53,333/- in form of in voice ch allan s of withholding taxes an d external auditor repo rt accordingly, genuineness of expenditure to talling to Rs. 37,9 4,66,66 6/- (Rs. 7,51,13,3.33/- + Rs. 30,43,53,333/-) was also proved.
10 .3.5 The AR had conten ded that ab ove referred to payments were in the technical fee and the same d id not fall under the head 'head office' expen diture as stipulated u /s 44C of the Act. In support of the claim appellant placed re lance on 20 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank Board's Circular no. 64 9 as reported in (1993 200 ITR (Stat) 0 230B). I have examined the claim of the app ellan t with the n ature of services and have reached to followin g co nclu sion:
(a) It is evid ent from co pies of th e in voices that appel lant had made the payment o f Rs. 30 ,43,53,33 3/- for access and use of CBS system for ban king operation of app ellan t's PE in India and for receivi ng software maintenance and other technical su pport services by PE of app ellant fo r use of CBS system in India. It is further no ted that p ayment of Rs. 7 ,51,13,333/- was in curred in receiving op eration and technolog y suppo rt for u se of IT services delivery, ANZIB:MIDANZ sup port and maintenance ANZ software and ANZ IT Recon support etc.
(b) It is evident from the nature of services rendered by ANZ to the PE of th e app ellan t in India that exp endi tu re of Rs.
30 ,43,53,33 3/- and Rs. 7,51,13 ,3 33/- incurred b y appellant was in the n ature of technical service.
(c) I have careful ly gon e th rough the conten ts of Circular no . 649 as relied by th e app ellan t and have noted that p ara 2 of the circular clear stipul ates that tech nical fees are not covered under the head office executive and general administra ti ve exp endi ture as specified in section 44C of th e Act.
In light of abo ve facts and circumstances, I am of firm view that payments of Rs. 30,43,53,333/- and Rs. 7,51,13,333/- were not covered u /s 4 4C and same were allowable exp endi ture u/s 37 (1 ) of the Act.
10 .3.6 It is pertinent to mention here th at d ifference in withholding tax rate and tax rate charged on the in come of appellant could not be a ground for making disallo wance u/s 37 (1) and AO had mispl aced himself in applying such prepo sition which i s not sti pulated u/s 37(1) 21 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank of the Act. I have further noted that a p art of the expenditure claimed as d eduction in the year pertai ned to the earlier year on which the appellant had d educted and paid TDS in th e year u nder consideratio n according ly the proviso to section 40(a)(i) is attrac ted an d th e claim of ap pellant was allowable u /s 37(1) read wi th p ro viso to section 40(a)(i).
10 .3.7 After having con sidered aforesaid findings and circumstances, 1 am of the considered view that appellan t had proved that expenditure of Rs. 7,5 1,13,33 3/- an d Rs. 30,43,53,333 /- was genuine reven ue expenditure which were incurred wholly and exclu sively for th e purpose of the business of the PE o f appellant in India an d appell ant had discharged its onu s u /s 37 (1) of the Act. Accordi ngly, AO was not justified in makin g disallowan ce o f Rs. 30 ,43,53,33 3/- and Rs. 7,51 ,13,333/-. I have also held that ap pellant had no t discharg ed its onus to p ro ve th at balance expen diture o f Rs. 30,15,52,101/- incurred fo r th e pu rpose of the bu siness of the app ellan t in India. According ly, disallowance of Rs. 68 ,10,18,76 7/- mad e b y the AO is restricted to Rs. 30,15,52,101/- an d appellan t gets relief Rs. 37,94,66,666/- (Rs. 30,43,53,333 + Rs. 7,51,13,333 /-). This g round of appeal is p artially allowed ."
22. We find that the ld. CIT (A) has disallowed an amount of Rs.30.15 lakhs as the expenses not incurred fo r the business of the assessee and was not deductible u/s 37(1) on the ground that the credit cards support services memorandum has not stipulate that ANZ would provide cre dit cards support services to PE of the assessee in India.
23. Before us during the arguments, the ld. AR relied on,
1. Tax Audit Report - To prove the expenses were incurred for the assessee's business in India
2. Payment of taxes pertaining to these expenses 22 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank
3. Certificate by the Auditors re garding the expenditure
4. Memorandum of agreement - showing tax deducted at source
5. Agreement be tween the assessee and ANZ Grindlays.
24. On the othe r hand, the ld. DR relied on the order of the ld. CIT (A) and argued that the agreement do not mention specifically that the amounts have paid fo r the assessee's exclusive use in India.
25. Heard the arguments of bo th the parties and perused the material available on reco rd.
26. The Memorandum of agreement with re gard to payment of taxes as under:
MEMORA NDUM TH IS MEMORANDUM RECORDS TH E TERMS O F TH E AGREEMENT FO R CR EDIT CARDS TECH NICA L AND MANAG ERIAL SUPPO RT SERVICES BETWEEN: AUS TRALIAN AND NEW ZEALAND BANK ING GRO UP LIMITED [ANZ], the registered offi ce of w hich is located at Level 6, 100 Queen S treet , Melbourne, Victoria, 3000, Australia hereinaft er referred to as the '1 st Party'.
AND ANZ GRINDLAYS BANK LIMITED [ANZG B ] the reg istered offi ce of which i s located at Level 2, 100 Q ueen Street, Victoria 3000, Melbourn e, A ustralia herei naft er referred to as the '2nd Party'.
WH ICH WAS IN O PERATION DURING TH E EX TENDED P ERIOD 1 S T APRIL 2000 TO 31 S T JULY 2000.
23 ITA Nos. 2920 & 2995/Del/2008Standard Chartered Grindlays Bank THE REASONS FOR THE AGREEMENT:
A. T hat the parties had entered into an Agreement for a period of 12 months which expired on 31 s t March 2000, whe reby the 2 n d Party had availed of technical, managerial and consultancy services provide d by the 1st Party for its Credit Cards business ope rations.
B. That upon the expiry of the above-mentioned period of 12 months, the parties had agreed to further extend the use of Credit Cards related support services for a further period of 4 months w.e.f. 1 s t April 2000 to 31 s t July 2000.
C. This Memorandum records and details the support services provided to the 2 n d Party by the 151 Party during the extended four month period from 1 s t April 2000 to 31st July 2000.
1. CREDIT CARDS SUPPORT SERVICES PROVIDED BY THE 1 S T PARTY TO THE 2ND PARTY:
The 1 s t Party had provided the followi ng support services to the 2nd Party for its Credit Cards business operations:
1.1 Risk Management & Compliance-
The risk management compliance services which included monthly credit portfolio reviews, advice o n fraud & collection matters, advice re garding po rtfolio improvement strategies, advice regarding the establishme nt of external debt collection age nts, de velopment of an operations manual, technological support for international cards operations, scorecard & policy development, design documentation of collection system.
24 ITA Nos. 2920 & 2995/Del/2008Standard Chartered Grindlays Bank 1.2 International Cards Operations:-
The inte rnational cards operations services comprised the providing of co nsultancy for delivery of card operation services, support to resolve operational issues, co nsistency of processes, cost reduction, coordination of projects, the proposed centralized processing of charge-backs and voucher processing.
1.3 International Cards Marketing:-
The international cards marketing services co mprised of product development and marketing initiatives, analysis & planning, promotion and operational support, study and feasibility of new markets, strategic management and business developme nt.
1.4 Management Analysis:-
Management analysis services included strategic and financial analysis, management of the production of monthly performance reports, analysis of key Management Information System, preparation of business plan, operating plan and fore cast, providing assistance with acco unting advice, budgeting and forecasting support, assistance with service transfer pricing information requirements and Global Software Suppo rt Management.
1.5 Partnership 'Business System Management':
Partnership Business System management services comprised of providing operations and technological support for the Credit Cards business which included imple mentation of Cards Software Support System, CDM/CTA/TRIAD implementation, application, project support and interlink release. Furthe r, software suppo rt included:25 ITA Nos. 2920 & 2995/Del/2008
Standard Chartered Grindlays Bank 1.5.1: Vision Plus Development, is a software support related to the Cards business.
1.5.2: Information Technology (IT) Software Solutions services included Y2k work for Vision Software and related IT solutions.
1.5.3: Information Technology (IT) service delivery included services - processing co re software platfo rms for Vision Plus, interlink suppo rt, which involved mainframe processing and project resources.
1.5.4: Mainframes Based Systems: The 2nd Party had access to and use o f the operations and technology suppo rt services through the Mainframe systems situated at Me lbourne. This included access to Global Server and Desktop suppo rt, Cards mainframe , Swift mainframe, CDM/CTA (Credit Cards Assessment and collections mo dules), AS400 Support, Unix Suppo rt, and technical support service s fo r Y2K and other projects.
2. CONSIDERATION The 1 s t Party has raised challan for the credit cards suppo rt services including technical and managerial se rvices provided by it to the 2 n d Party. The se challan alongwith details of payments made by the 2nd Party thereunder, are annexed herewith in the Schedule attached to this Memorandum.
2.2 The 2nd Party has deducted taxes at source in accordance with Art. 12 of the Indo-Australian Double Tax Avoidanc e Treaty @ 15% on the abovementioned amount, 26 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank and remitted taxes to the Indian Government, as per the tax laws prevailing in the country.
2.3 The telegraphic transfer buying rate of State Bank o f India on the spe cified date on which tax is required to be deducted at source was used as the exchange rate fo r conversion of Australian Dollars into Indian Rupees.
27. We have gone through the notes attac hed to and forming part of the computation of income for the year ended 31 March 2001 w hic h is as under:
1) The name of ANZ Grind lays Bank Limited has been changed to Standard Chartered Grind lays Bank Limited effective 23 September 2000.
2) (i) During the Financial year 1.4.99 to 31.3.2000 the Bank had made the following payments fo r obtaining technical services for its Indian operations fro m ANZ Banking Group for access and use of :
(a) Commercial Banking System for its Indian operations-
Rs.304,353 ,333 Original challans evidencing payment of withholding tax of Rs.4,56,53,000 along with interest under section 201(1A) of Rs.44,99,000 is attached as Annexure A-1.
(b) Operation and Technology services for its Indian Operations- Rs.75,113,333 Original challans evidencing payment of withholding tax of Rs.1,12,67,000 along with interest under section 201(1A) of Rs.11,36,000 is attached as Annexure A-2.
27 ITA Nos. 2920 & 2995/Del/2008Standard Chartered Grindlays Bank
(c) Cards technology services for its Indian operations- Rs.134,033,333 Original challans evidencing payment of withholding tax of Rs.2,01,05,000 along with interest under sec tion 201 (1A) of Rs.14,88,000 is attached as Annexure A-3.
The Bank had duly deducted taxes at source on the payments in accordance with Article 11 of Indo-Australian Double Tax Treaty and paid interes t under sec. 201(1A) and made payment to the Government on 31st May 2000. Since such taxes have been paid in the current accounting period, the above expenses are deductible as business expenditure from the Profits and Gains of Business in accordance with Proviso to Section 40(a)(i).
(i) Original challans evidencing payment of withholding taxes are attached.
(ii) Report of External Audito rs - KPMG certifying the payments made for availing of technical services are attache d.
(ii) For the perio d 1.4.2000 to 31.7.2000 the Bank continued to avail of the technical services from ANZ Banking Group Ltd. of:
(a) Commercial Banking System (CBS) for its Indian operations
(b) Operation and Technology services for its Indian operations (c ) Cards Technology services for its Indian operations For which payment of Rs. 16,48,46,668 was made during the year.28 ITA Nos. 2920 & 2995/Del/2008
Standard Chartered Grindlays Bank The Bank has duly paid withholding taxes to the Indian Govt. in accordance with Artic le 11 of the Indo-Australian Double Tax Treaty within prescribed time. Since the taxes were paid in this financial year the above sum is deductible as business expenditure from Profits and Gains of business in accordance with the Proviso to sec.40(a)(i). The details are as follows-
(i) Wi thholding tax paid in the month of April 2000 is Rs.68,38,000 alongwi th interest u/s.201 (1A) of Rs.103,000- Annexure IV.
(ii) Withholding tax paid o n June 6, 2000 is Rs.67,98,000 - Annexure V.
(iii) Withholding tax paid on July 6, 2000 is Rs. 70,81,000 - Annexure VI.
(iv) Withholding tax paid o n August 5, 2000 is Rs.40,10,000 - Annexure VII.
(v) Original challans evidencing payments o f withholding taxes are attached.
(vi) Report of External Auditors- KP MG Certifying the above payments made for availing of the said 'technical services' are attache d.
3) The reversal of excess provisions in respect of the following are not taxable, since the said provisions were added back to the taxable income in the year of creation of such provisions. Accordingly, the same are not taxable on reversal /write back during the year:
(a) Excess provision for bad & doubtful debts written back Rs.124,787 ,880 29 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank
(b) Reversal of interest tax provision Rs. 17,000,000
(c) Re versal of excess general provision for standard assets Rs·11,014,750
(d) Reversal of excess provision for othe r operating losses Rs. 94,442,913
4) (i) In March/April 1992, the Bank purchased from Mr. L.R. Gupta & family (LRG) 9% NHPC (Tax free) bonds of Face Value Rs.16.16 crores (in three transactions of FV Rs.4 .50 crore, Rs.2.58 crore & Rs.9.06 crore). T he interest warrants we re not delivered except for the coupon date 31/3/92 in respect o f FV Rs.4.50 crore & Rs.9.06 crore bonds. All the bonds were maturing on 11 December 1997.
(ii) In June/ July 1992, the bonds were submitted for registration to NHPC. W hile the bonds with FV of Rs.4.5 crore and Rs.2.58 crore were registered in the Bank's name, the bonds of FV Rs.9.06 crore we re not registered due to suspected involvement of a Notifie d Party under the Special Court (TORTS) Act, 1992.
(iii) Having exhausted all avenues, the Bank filed three civil suits in Delhi High Court for recovery of interest warrants on all bonds and in Company Law Board for re gistratio n of bonds of FV Rs.9.06 crore. The suit filed with CLB was later transferred to Special Court in Mumbai.
(iv) In September 1992, LRG en cashed inte rest warrants of Rs.0.73 crore in relation to interest on bonds of FV Rs.16.16 crores. The Bank, the refore, brought a Court injunction to prevent further encashment of interest.30 ITA Nos. 2920 & 2995/Del/2008
Standard Chartered Grindlays Bank
28. The audit report to management of Australia and New Zealand Banking Group Limited reported as under:
Scope We have audited the schedule charges of Operations and Technology Support Service s (Operation and Technology), Credit Cards Support Services (Credit Cards) and Access and Use of the Commercial Banking System (CBS) for the Indian Branch of ANZ Grindlays Bank Limited (the Schedule) in respect of the services provided by the Australia and New Zealand Banking Group (the Co mpany) for the period from l April 1999 to 31 March 2000. The Co mpany's management are responsible for the Schedule and have determined that the accounting policies use d are appropriate to the needs of management. We have conducted an independent audit o f the Schedule in order to express an opinion to management on its preparation and prese ntatio n. No opinion is expressed as to whether the accounting policies used are appropriate to the needs of management.
Our audit has been conducted in accordance with Australian Auditing Standards. Our procedures included examinatio n, on a test basis, of evidence supporting the amounts and other disclosure s in the Schedule . These pro cedures have been unde rtake n to form an opinion whether, in all material respects, the attached Schedule is prepare d in accordance with ge nerally accepted accounting principles, the charges relate to production support, recovery from system failures, troubleshooting, problem investigation, user assistance and right to use the 31 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank system, and have been incurred on behalf of the Indian branch of ANZ Grindlays Bank Limited.
The audit opinion expressed in this report has been formed on the above basis.
Audit opinion In our opinion, the attached Schedule prese nts fairly, in accordance with the generally accepte d accounting principles, charges which relate to production suppo rt, recovery from system failures, troubleshoo ting, problem investigation, user assistance, right to use the system software and services provided in respect of Credit Cards, CBS and other Operation and Technology support, and have been incurred on be half of the Indian branch of ANZ Grindlays Bank Limited for the period from 1 April 1999 to 31 March 2000.
Schedule of Charges for the Access and Use of the Commercial Banking System Allocated to the ANZ Grindlays Bank Limited - India Branch For the year ended 31 March 2000 A$ Charges for
- providing the access to and use of the CBS 6,800,000 system for Indian banking operation for the year 1 April 1999 to 31 March 2000
- providing software maintenance and othe r 4,063,000 technical support se rvices for the use of the CBS system TOTAL 10,863,000 The local currency allocation amount to INR302,567,139 32 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank Schedule of Operatio ns and Technology Charge s Allocated to the ANZ Grindlays Bank Limited -India Branch For the year ended 31 March 2000 A$ Charges for
- provid ing Operatio n and Technology sup port and access to 7 7,000 an d use of 'IT Service Delivery: Mainframes'
-providing Operation and Techno logy support and access to 97 6,000 an d use of 'IT Service Delivery: AS400, Unix, etc'
- suppo rt services in the n ature o f 'I T Software Solutions 10 2,000 (other than CBS Fail & Fix)'
- provid ing access to and u se o f 'Pay men t Services' 9 0,000
- providing 'Telecommunications and International' 86 4,000 communication services
- p ro viding th e serv ices of th e cen tral o peration techno logy 6 2,000 & info rmation techno logy planning team
-providing access to and use of 'BTS: ANZLI NK' 13 5,000
-providing the u se of' ANZIB: MI DANZ Suppo rt & 3 1,000 Maintenance'
- providing support to various ANZ software 'ANZI T Recon 2,000 Support'
- Projects: Y2K 7 5,000
-providing Operation and Techno logy support and access to 2 1,000 an d use of 'IT Service Delivery: Mainframes-Pro ject TE P'
- provid ing Operatio n and Technology su pport and access to 12 5,000 an d use of 'I T Service Deli very: Ma inframes-Project Telephone Bankin g (excludin g Capex)'
-providing Operation and Techno logy support and access to 15 0,000 an d use of 'I T S ervice Delivery: Main frames-Project MARS (exclud ing Cap ex)' TOTA L 2,710,000 Th e local currency allocation amount to INR75,481 ,630 33 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank Schedule of Cards Charges Allocated to the ANZ Grindlays Bank Limited - India Branch For the year ended 31 March 2000 A$ Charges for
-IT Service Delivery: Mainframes 1,051,000
-pro viding consultancy and suppo rt services in 938,000 connection with 'International Cards Operations'
- International Cards Marketing 1,157,000
- providing operations and technological support in 159,000 connection to 'Partnership Relationship'
-pro viding suppo rt services related to 'Vision Plus 535,000 Project Development,' a credit cards software
- IT Software Solutions 800,000
-pro viding processing services through 'IT Service 238,000 Delivery,' in connection with the abo ve mentioned softwares TOTAL 4,878,000 The local currency allocation amount to INR135,866,934 34 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank Independent audit re port to management of Australia and New Zealand Banking Group Limited Scope We have audited the schedule of charges of Operations and Technology Support Service s (Operation and Technology), Credit Cards Support Services (Credit Cards) and Access to and Use of The Commercial Banking System (CBS) for the Indian Branch of ANZ Grindlays Bank Limited (the Schedule) in respect of the services provided by the Australia and New Zealand Banking Group (the Company) for the period from 1 April 2000 to 31 July 2000. The Company' s management are responsible for the Schedule and have determined that the accounting policies use d are appropriate to the needs of management. We have conducted an independent audit o f the Schedule in order to express an opinion to management on its preparation and prese ntatio n. No opinion is expressed as to whether the accounting policies used are appropriate to the needs of management.
Our audit has been conducted in accordance with Australian Auditing Standards. Our procedures included examinatio n, on a test basis, of evidence supporting the amounts and other disclosure s in the Schedule . These pro cedures have been unde rtake n to form an opinion whether, in all material respects, the attached Schedule is prepare d in accordance with ge nerally accepted accounting principles, the charges relate to production support, recovery from system failures, troubleshooting, problem investigation, user assistance and right to use the 35 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank system, and have been incurred on behalf of the Indian branch of ANZ Grindlays Bank Limited.
The audit opinion expressed in this report has been formed on the above basis.
Audit opinion In our opinion, the attached Schedule prese nts fairly, in accordance with the generally accepte d accounting principles, charges which relate to production suppo rt, recovery from system failures, troubleshoo ting, problem investigation, user assistance, right to use the system software and services provided in respect of Credit Cards, CBS and other Operation and Technology support, and have been incurred on be half of the Indian branch of ANZ Grindlays Bank Limited for the period from 1 April 2000 to 31 July 2000.
Michelle So merville Partner Place: Melbo urne Date:36 ITA Nos. 2920 & 2995/Del/2008
Standard Chartered Grindlays Bank Schedule of Charges for the Access and Use of the Commercial Banking System Allocated to the ANZ Grind lays Bank Limited - India Branch For the four months ended 31 July 2000 A$ Charges for
- providing the access to and use of the CBS system 1,962,000 for Indian banking operations for the fo ur months to 31 July 2000
- providing software maintenance and othe r 1,551,000 technical support services for the use of the CBS system TOTAL 3,512,000 The local currency allocation amount to INR91,601,740.37 ITA Nos. 2920 & 2995/Del/2008
Standard Chartered Grindlays Bank Schedule of Operations and Technology Charges Allocated to the ANZ Grindlays Bank Limited -India Branch For the four months ended 31 July 2000 A$ Charges for
- providing Operation and Techno logy support an d (8,000) access to and u se o f 'IT Service Delivery: Mainframes'
-providing Operati on and Technology su pport and access 454,000 to and use of 'IT Service Delivery: AS400, Unix, etc'
- sup port services in the n ature of 'IT So ftware So lutions 26,000 (other than CBS Fail & Fix)'
- provid ing access to and u se o f 'Pay men t Services' 40,000
- p ro viding 'Telecommu nications and In tern ational' 143,000 communication services
- providing the services of the cen tral operatio n 41,000 technology & informatio n technolog y planning team
-providing access to and use of 'BTS: ANZLI NK' 68,0000
-providing th e use of' ANZIB: MIDANZ Support & 0 Maintenance'
- p ro viding sup port to various ANZ software 'ANZI T 1,000 Recon Suppo rt'
- Projects: Y2K 31,000
-providing Operati on and Technology su pport and access (126,000) to and use of 'IT Service Delivery: Mainframes-Project TE P'
- providing Operation and Techno logy support an d 75,000 access to and use of 'I T Service Delivery: Mainframes- Project Telephone Banking (excluding Capex)' TOTA L 745,000 The local currency allocation amount to INR19,431,463.38 ITA Nos. 2920 & 2995/Del/2008
Standard Chartered Grindlays Bank Schedule of Cards Charges Allocated to the ANZ Grindlays Bank Limited -India Branch For the four months ended 31 July 2000 A$ Charges for
-IT Service Delivery: Mainframes 386,000
-pro viding consultancy and suppo rt services in 344,000 connection with 'International Cards Operations'
- International Cards Marketing 464,000
- providing operations and technological support in 24,000 connection to 'Partnership Relationship'
-pro viding suppo rt services related to 'Vision Plus 270,000 Project Development,' a credit cards software
- IT Software Solutions 456,000
-pro viding processing services through 'IT Service 158,000 Delivery,' in connection with the abo ve mentioned softwares TOTAL 2,102,000 The local currency allocation amount to INR54,825,415.
29. On going through the above, we find that the expenses have been inc urred for Indian Banking business.
30. Thus, on going through the M emorandum of agreement, tax report, notes to account and the details of the tax payment under Article 12 of the Indo-Australian Treaty and on going through the challans enclosed at 77 to 84 of the paper book, we hereby hold that the fees for access and user technology related to s ervices for Credit 39 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank Cards Services is meant for the business of the assessee's in India and such expenses are allowable to be c laimed by the assessee u/s 37(1).
31. The appeal of the assessee on this ground is allowe d.
32. The similar issue is also involved in the appeal of the revenue. With regard to the appeal of the revenue fo r the similar expenses which have been deleted by the ld. CIT (A), we concur with the reasoning given by the ld. CIT (A) which has been duly mentioned abo ve. Hence, the appeal of the revenue on this ground [Ground No. 1(d)] is hereby dismissed.
33. Gro und No. 10 of the assessee deals with rectificatio n of the computational errors for which we direct the revenue to dispose o ff the rectification application.
34. The consequential benefits of the order giving e ffect to the order of the ITAT be allowed to the assessee.
ITA No. 2995/Del/2008 (Revenue's Appeal)35. In ITA No. 2995/Del/2008, following grounds have been raised by the revenue:
"1. On the facts and in circumstances of the case the learned CIT(A) has e rred
(a) In deleting the expenses of Rs. 84,63,275/-
incurred by various units outside India for mobilization o f NRI deposits for the purpose of Assessee's business in India.
(b) In deleting the addition o f Rs. 10,00,00,000/- on acco unt of commission earned in by foreign branches of ANZ Grindlays Bank on their credit card 40 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank business overseas, where transactions were completed in India.
(c) In disallowing the expenditure of Rs. 69,93,427/- on the payments made to clubs.
(d) In restricting the disallowance to Rs. 30,15,52,101/- out o f Rs. 68,10,18,767/- made afte r rejecting the deductio n claimed u/s 37(1) of the IT Act, 1961 and witho ut considering the facts that the amo unt has not been debited in books of accounts."
36. Gro und No. 1(a): Disallowance of NRI expenses is dealt in the ground no. 1 of the assessee's appeal. Hence, we hereby hold that the ratio of the adjudication applies to the ground of the revenue .
37. Gro und No. 1(b): Commission payment The AO made e stimated addition of Rs.10 crores on acco unt of the commission earned on Credit Cards issued by the foreign branches and used in India. The relevant po rtion of the orde r of the Assessing Officer is as under:
"For th e last five A.Ys., th e assessee has b een asked to give the details of commission received b y the branches of ANZ Grindl ays Bank abroad on the In tern ational Credit Cards issu ed b y them, where the card holders h ad comp leted their tran sactions in Indict and th e settlement of these transactions was done, using these cards in In dia. Wh atever inco me arises in/from India to ANZ Grindlays Ban k is to be taxed as income of its p erman ent establishment. The assessee however, d id not furnish any details on th is poin t as it has arg ued all along that the commission earn ed on th e Credit Card s issued by forei gn bran ches and u sed i n In dia, is no t tax able i n th e hand s of Grindlays Bank in India. Since A. Y. 19 96-97, it h as been estimated that the commission in come on this account was Rs. 10 crores, as th e assessee gave no speci fi c info rmation . Acco rd ingly, in this year also, the said in come is estimated at Rs. 10 crores and the same is added to the returned income, for the reasons cited in d etail in A.Y. 19 98-99."41 ITA Nos. 2920 & 2995/Del/2008
Standard Chartered Grindlays Bank
38. The ld. CIT (A) deleted the addition holding that the question of attributing income to the PE, under the DTAA, it has to be sai d that as pe r Article 7, o nly such i ncome can be brought to tax as can be attributed to its assets and activities in India. In India its inco me has been earned as commission received by it for honoring the transaction in India on behalf of the fo reign branch. This commission is earned from its activity as an Acquiring bank and has to be taxed in the country where the PE is situated. The income earned by the foreign bank from its client o utside India on the credit given by it there and recovered the re, cannot be said to have arisen in India. But the commission received from the me rchant in India can be said to have arisen in India, as mentioned by the Assessing Officer, and this has been retained by the Acquiring bank, while making the acquiring bank would have been received by the foreign bank, But since the Indian branch, being a PE played a role, this income will be taxed in India in the hands of the Indian branch, being attributable to its activitie s in India. But, this in fact is the income which has already been included by the Indian branch in its 'Commission Income' in its P&L Account and offered for tax in India. Hence, no othe r income can be brought to tax in India. Thus, while the Assessing Office r is right that the income arising in India from transactions in India by using credit cards of foreign branches should be taxed in India, this income can only be the commission income received by the Indian branch and such commission income already stands included in the hands of the Indian branch acting as an Acquiring bank. The income to the foreign branch from the credit given to its card holders outside India cannot be taxed in the hands of the Indian branch since it has not arise n in India 42 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank and also it cannot be attributed to the assets and activities of the Indian branch, as is required by Article 7 of the DTAA.
39. The matter also stands covere d by the order of the ITAT in ITA No. 1345/Del/2006 for the assessment year 1997-98. The relevant portion of the order is as under:
"At the outset, we find that the issue is alre ady covered in favour of assessee in its own case in ITA No. 4988/Del/2003 for the AY 1996-97. The relevant extract of the order is reproduced belo w:-
"We have co nsidered the rival submissions. We are in agreement with the finding of the Learned CIT(A). Where the-foreign branch has issued credit care and e ven if the transaction takes place in India, the credit is given to the customer o utside India and the debt has also arisen outside India. The merchant shipment in India may receive the payment but the merchant shipments do not incur any debt They merely receive charges for the goods sold or services rendered. However, the charges are received by the fo reign branch for providing credit to their card holders outside India. The amo unt payable by the card holders who have acquired the credit card from branches outside India incur the debt outside India. Therefore, the fees in respect of such transaction are not taxable in India. We, therefore, uphold the deletion of addition o f Rs. 10 crores."
40. Respectfully following the order of the above order in the own case of the assessee, we dismiss the ground of appeal filed by the Revenue.
41. Gro und No. 1(c) deals with the club expenses. The club expenses have been allowed as allowable business expenses by the ITAT from the assessment years 1992-93 to 1998-99. Since, the AO could not bring anything on record contrary to the 43 ITA Nos. 2920 & 2995/Del/2008 Standard Chartered Grindlays Bank established facts of the earlier years, we hereby decline to interfere with the order of the Ld. CIT(A).
42. Gro und No. 1(d) stand dealt along with Ground No3 of the appeal of the assesee. With regard to the appeal of the revenue for the similar e xpenses which have been deleted by the ld. CIT (A), we concur with the reasoning given by the ld. CIT (A) which has been duly mentioned above while dealing with the similar grounds. Hence, the appeal of the revenue on this ground is here by dismissed.
43. In the result, the appeal of the assessee is allowed and the appeal of the revenue is dismissed Order Pronounced in the Open Court on 26 /10/2020.
Sd/- Sd/-
(Sushma Chowla) (Dr. B. R. R. Kumar)
Vice President Accountant Member
Dated: 26/10/2020
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR