Income Tax Appellate Tribunal - Mumbai
Oman International Bank S.A.O.G., ... vs Assessee on 5 September, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "L",
MUMBAI
BEFORE SHRI B.R. MITTAL, JUDICIAL MEMBER AND
SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER
ITA No. 1609/Mum/2008
Assessment Year : 2004-05
Dy. Director of Income tax M/s. Oman International Bank
(International taxation)-4(2) SAOG
133, Scindia House, Ballard 201, Raheja Centre, Free Press
Pier Vs. Journal Marg
Mumbai-400 038. Nariman Point
Mumbai-400 021.
PAN No.AAACO 0440 M
(Appellant) (Respondent)
ITA No. 1786/Mum/2008
Assessment Year : 2004-05
M/s. Oman International Bank Astt. Director of Income tax
SAOG (International taxation)-3(2)
201, Raheja Centre, Free Press 1st Floor, Scindia House, N.M.
Vs.
Journal Marg, Nariman Point Marg
Mumbai-400 021. Mumbai-400 020.
PAN No.AAACO 0440 M
(Appellant) (Respondent)
Assessee by : Shri P.J. Pardiwala
Revenue by : Ms. Neerja Pradhan
Date of hearing : 05/09/2013
Date of Pronouncement : 13/09/2013
ORDER
PER B. R. MITTAL, JM:
These cross appeals are filed by the Department and the Assessee against the order of ld. CIT(A) dated 31st December, 2007 for the assessment year 2004-05.
2 ITA No.6809 & 1786/M/08A.Y.04-05 1.1 Firstly we take up appeal filed by the Department being ITA No.1609/M/2008:
1.2 The department has taken up the following grounds of appeal:-
"1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to allow the interest paid to Head Office of Rs.51,35,800/-.
2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to allow assessee's claim for deduction u/s. 37 of The Act of Rs.17,59,457/- representing travelling expenses of head office personnel to India and Certificate fee paid to Auditors.
3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of transaction charges of Rs.16,56,533/- made on NOSTRO account u/s. 409a)(i) of the I.T. Act.
4. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing to allow the claim for bad debts of Rs.21,75,000/-.
5. The appellant prays that the order of the ld. CIT(A), Mumbai on the above ground(s) be set aside and the order of AO be restored."
1.3 Vide letter dated 26.02.2013 the department has filed additional ground of appeal on the ground that the taxability of interest income received from head office could not have been taken up earlier, as lower authorities have held that the amount of income received from head office is taxable and the decision of Sumitomo Mitsui Banking Corpn. vs. Dy.DIT(IT), Mumbai (136 ITD 66)(Mum)(SB) was rendered by the Special bench only on 30th March, 2012. In view of the above the additional ground may be admitted for consideration. The additional ground reads as under :-
3 ITA No.6809 & 1786/M/08A.Y.04-05 "Whether provisions of section 14A of the I.T. Act will be applicable in the event it is held that the interest received by the Assessee from its head office is not taxable in the hands of Indian branch office?"
1.4 We consider it prudent to also state the Grounds of appeal taken by the Assessee in ITA No.1786/Mum/08 which are as under :-
"1. The CIT(A)-33, Mumbai erred in upholding the action of the Astt. DIT(IT)-3(2), Mumbai in considering interest Rs.64,60,038/- received from Head Office as forming part of taxable income.
2. The CIT(A)erred in upholding the action of AO in bringing to tax year end provision of Rs.4,11,385/- made for expenses which subsequently turned out to be in excess.
3. Without prejudice to the contention that broken period interest paid on purchase of securities should be allowed as a deduction in the year of purchase of securities, in the event of any authority reversing the decision of the CIT(A)/Tribunal in the earlier year i.e. assessment year 2002-03 that the broken period interest paid to the sellers at the time of purchase of securities is allowable as Revenue expenditure in that year, then AO be directed to allow deduction for the broken period interest disallowed in assessment year 2002-03 in respect of securities sold during the previous year relevant to the assessment year 2004-05.
4. In the event of any authority reversing the decision of the ITAT for the assessment year 1995-96 that the claim of bad debts written off of Rs.21.75 lacs, in respect of Biogenics (I) Ltd. is allowed as a deduction in the assessment year 1995-96 (being the assessment year relevant to the previous year in which such debts were written off), then the AO be directed to allow deduction for the same in the assessment year 2004-05 as the appellants have not recovered any amount till date.
5. The CIT(A) ought to have directed AO to grant interest upto the date of receipt of refund order."
1.5 The relevant facts are that the Assessee is a non-resident company and carried on business of banking including foreign exchange transactions. The Assessee bank is incorporated under the relevant Omani Legislation. For the assessment year under consideration the 4 ITA No.6809 & 1786/M/08 A.Y.04-05 Assessee filed return of income on 31st October, 2004 declaring total loss of Rs.1,97,55,060/-. AO made the assessment at a loss of Rs.1,0016,239/- vide order dated 13/11/2006 u/s. 143(3) of the Act by making certain additions/disallowances. The Assessee filed appeal before the first appellate authority. The ld. CIT(A) by the impugned order allowed appeal of the Assessee in part. Hence, these appeals by the Department as well as by assessee.
1.6 Ground No.1 taken by the department is connected with ground No.1 taken by assessee.
1.7 The Assessee bank in the computation of income filed along with return of income, has reduced a sum of Rs.64,60,038/- as interest received from Head Office not taxable since received from self. The AO stated that similar issue was involved in previous years. That the Assessee is a branch of foreign bank and has its Head Office abroad. That foreign company is taxed in India on income arising or accruing through any business connection or source or asset in India. That a non- resident company is taxable on income accrued or deemed to accrue in India as per provisions of section.5 of the Income tax Act, 1961 (the Act). The income for tax in India would thus be limited to income of the branch, which has permanent establishment of the Assessee company in India. That the branch is considered as an independent company in order to estimate the income that has been earned by it during the year. That the Assessee bank during the year has placed funds with the head Office on pure business consideration and has correctly shown the interest received as income in its P & L Account of the branch. It is a business decision to place funds with the Head Office as that was perhaps the best option at that point of time. In view of the above, AO stated that the profit earned by the Assessee in activities of borrowing funds from India and lending it abroad, the borrowing takes place in 5 ITA No.6809 & 1786/M/08 A.Y.04-05 India, therefore profit attributable to the borrowing activity shall be taxable in India. AO held that the claim of the Assessee that interest received from head Office should be allowed as deduction in the computation of income is not acceptable and same is hence disallowed. Being aggrieved Assessee filed appeal.
1.8 Before the first Appellate authority the ld. CIT(A) has stated that identical issue had been decided by his predecessor for assessment years 1996-97 to 2002-03 in assessee's own case. He further stated that ITAT Mumbai Bench has also decided the said issue against the Assessee and accordingly held that AO is justified in bringing to tax an amount of Rs.64,60,038/-. Ld. CIT(A) has further held that it was submitted that in the event interest received from Head Office is taxable in India interest of Rs.51,35,818/- paid to Head Office should not be added while computing total income. Therefore, the ld. CIT(A) held that AO is directed to allow interest paid to Head Office of Rs.51,35,800/-. Hence both parties are in appeal before Tribunal .
1.9 At the time of hearing the ld. Representative of both parties submitted that the above issue is now covered by the decision of the Hon'ble Special Bench of the Tribunal in the case of Sumitomo Mitsui Banking Corpn. Vs. Dy. DIT(IT), Mumbai (136 ITD 66) (supra), whereby the Special Bench of the Tribunal held that interest income received from Head Office is not chargeable to tax being income to self and therefore, the principle of mutuality as provided under the Income tax act would be applicable in respect of such income. The relevant part of the decision of the Special bench is reproduced as under :
"Keeping in view all the facts of the case and the legal position emanating from the interpretation of the relevant provisions of the domestic law as well as that of the treaty as discussed above, we are of the view that although interest paid to the head office of the assessee-bank by its Indian branch which constitutes its permanent 6 ITA No.6809 & 1786/M/08 A.Y.04-05 establishment in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the permanent establishment which is taxable in India as per the provisions of article 7(2) and (3) of the Indo-Japanese treaty read with paragraph 8 of the protocol which are more beneficial to the assessee. The said interest, however, cannot be taxed in India in the hands of the assessee- bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domestic law. Even otherwise, there is no express provision contained in the relevant tax treaty which is contrary to the domestic law in India on this issue. This position applicable in the case of interest paid by Indian branch of a foreign bank to its head office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the head office. At the time of hearing before us, the learned representatives of both sides have also not made any separate submissions on this aspect of the matter specifically. Having held that the interest paid by the Indian branch of the assessee bank to its head office and other branches outside India is not charge able to tax in India, it follows that the provisions of section 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the permanent establishment, the question of disallowance of the said interest by invoking the provisions of section 40(a)(i) does not arise. Accordingly we answer question No.1 referred to this Special Bench in the negative, i.e ., in favour of the assessee and question 2 in affirmative, i.e., again in favour of the assessee."
1.10 The Tribunal in assessee's own case by following the said decision of the Special bench has decided the issue in favour of the Assessee that the interest income received from Head Office is not chargeable to tax being it is an income to self. Consequently the interest paid by the Assessee Branch PE in India to Head Office is also not to be allowed as deduction. In view of Ground No.1 of the appeal taken by the department as well as by the Assessee are allowed by reversing the order of CIT(A).
7 ITA No.6809 & 1786/M/08A.Y.04-05
2. In respect of ground No.2 taken by the department we observe that the said expenses comprising of Rs.17,59,457/- for travelling expenses incurred by Head Office on its employees and executives to monitor the operations of India branch and Rs.45,420/- is service fee paid to auditors for issuance of certificate of expenses and Assessing Officer disallowed the said claim that these expenses are within the purview of section 44C of the Act and not additional deduction or allowance as permitted under provisions of the Act. Being aggrieved the Assessee filed appeal before ld. CIT(A). The ld. CIT(A) by following the order of his predecessors in respect of assessment year 2001-02 and 2002-03 and also considering the decision of Hon'ble Bombay High Court in the case of CIT vs. Emirates Commercial Bank Ltd. (262 ITR 55) decided the issue in favour of the Assessee and directed AO to allow deduction of Rs.17,59,457/- u/s. 37 of the Act.
2.1 At the time of hearing the ld. Authorized Representative submitted that the same very issue has also been considered by the Tribunal in Assessee's own case for assessment year 1996-97 and the Tribunal had held vide its order dated 29.06.2012 in ITA No.1981/Mum/2001 that the travelling expenses incurred by the Head Office on travelling of its own staff and directly in connection with India branches is allowable u/s. 37(1) of the Act and section 44C is not applicable to it. We observe on perusal of the said order of ITAT dated 29th June, 2012 that the Tribunal while deciding the said issue considered the decision of the Hon'ble Jurisdictional High Court in the case of Emirates Commercial Bank Ltd.(supra), and also the decision of ITAT dated 28th February, 2007 in the case of American Bank Limited. Vs. DCIT in ITA No.2770 and 2439/Mum/1996 . The ld. DR at the time of hearing could not controvert the fact that the above issue is covered in favour of the Assessee by the aforesaid decision(supra), save and except relying on the order of AO. We, respectfully following the earlier order of the Tribunal in Assessee's own 8 ITA No.6809 & 1786/M/08 A.Y.04-05 case (supra), confirm the order of the ld. CIT(A) and reject ground no.3 taken by the department.
2.3 In respect of Ground no.3 of the appeal the relevant facts are that AO disallowed transaction charges of Rs.16,56,533/- paid on NOSTRO Account. The transaction charges on NOSTRO account are bank charges for maintaining the accounts with the banks outside India and for administrative charges. These charges are recovered directly by way of debtors account of the Assessee with these banks. These charges represented the business income of those banks which accrue /arise outside India. The Assessee contended that no tax is required to be deducted at source on the above amount paid. But Assessing Officer did not agree with the contention of the Assessee and disallowed the claim of the Assessee u/s. 40(a)(i). However, in the first appeal the ld. CIT(A) deleted the said disallowance by following his order in assessee's own case in assessment year 2001-02 and 2002-03. Hence, this appeal by the department.
2.4 At the time of hearing the ld. DR relied on the order of AO whereas the ld. Authorized Representative submitted that similar issue was considered by the Tribunal in Assessee's own case for assessment year 2002-03, 2003-04 in ITA Nos.2762/Mum/2006 and 1785/mum/2008 vide common order dated 22nd March, 2013 along with other appeals of the Assessee and the Tribunal vide para-28 decided the issue in favour of the Assessee and against the Revenue copy of the said order was placed before us to substantiate the above submission. On consideration of the orders of authorities below and earlier order of the Tribunal in Assessee's own case for assessment year 2002-03 and 2003-04 dated 22/03/2013 we observed that the Tribunal decided the case in favour of the Assessee and against the department and respectfully following the same we reject the ground No.3 of the appeal taken up by the department.
9 ITA No.6809 & 1786/M/08A.Y.04-05
3. In respect of Ground No.4 taken by the department the ld.AR conceded that claim of bad debt of the above amount has been allowed in earlier assessment year 1995-96 and consequently the order of the ld. CIT(A) is to be reversed and confirm the action of Assessing Officer. In view of the above, ground No.4 taken by the department is allowed by confirming the action of Assessing Officer.
3.1 In respect of additional ground taken by the department the ld. Authorized Representative submitted that in view o the Special Bench decision in the case of Sumitomo Mitsui Banking Corpn. (supra), that the interest income received from head Office does not give rise to income and accordingly the Tribunal in Assessee's own case has held that the expenditure incurred by the Assessee in relation to such income cannot be allowed. The ld.AR conceded that the issue has been considered by the Tribunal in Assessee's own case vide order dated 22/03/2013 and accordingly the above additional groud taken by the department is to be allowed in favour of the department and against the Assessee and that the provisions of section.14A are applicable on the exempt interest income earned from Head Office/overseas branches. Hence, additional ground taken by department is allowed.
4. Now we take ground of appeal taken by the assessee in ITA No.1786/Mum/2008.
4.1 Ground No.2 of the appeal taken by the assessee is in regard to excess provision of Rs.4,11,385/- for which the ld. CIT(A) has upheld the action of AO in disallowing the said amount with direction that a reversal thereof in subsequent year should not be brought to tax. At the time of hearing the ld. AR submitted that the above ground is not pressed for as the said amount has been taxed in this assessment year and is not taxed 10 ITA No.6809 & 1786/M/08 A.Y.04-05 in next year when it was offered to tax by the assessee. In view of above Ground No.2 taken by the assessee is rejected.
4.2 In respect of Ground No.3 and 4 of the appeal the ld. AR submitted that the above grounds are not pressed for as assessee has been allowed the deduction of the broken period interest on purchase of securities in the assessment year 2002-03 and also was allowed deduction of bad debts of Rs.21.75 lacs in respect of Biogenic (I) Ltd. in assessment year 1995-96 by the Tribunal and the department also accepted the order of the Tribunal in respect of both the above claim, the said grounds are not pressed for. In view of the above submission of the ld. AR, Ground No.3 and 4 taken by the assessee are rejected as no claim of the assessee survives for both the grounds in the assessment year under consideration.
5. In the result the appeals of the Department as well as the Assessee for assessment year 2004-05 are allowed in part.
Order pronounced in the open court on 13th September, 2013.
Sd/- Sd/-
(D. KARUNAKARA RAO ) (B. R. MITTAL )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 13/09/2013.
Jv.
11 ITA No.6809 & 1786/M/08
A.Y.04-05
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT(A) Concerned, Mumbai
The DR " " Bench
True Copy
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.