Income Tax Appellate Tribunal - Mumbai
Credit Lyonnais , vs Department Of Income Tax on 22 May, 2013
आयकर अपील य अ धकरण, धकरण मुंबई यायपीठ 'क के', मुंबई ।
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES "K", MUMBAI सव ी आर.एस. याल, लेखा सद य एवं ववेक वमा, या यक सद य, के सम ।
Before Shri R.S.Syal, AM and Shri Vivek Varma, JM ITA No.9596/Mum/2004 : Asst.Year 2001-2002 M/s.Credit Lyonnais The Asstt.Director of Income-tax (through their successors : Calyon Bank) बनाम/ (International Taxation) - 1(2) Hoechst House, 11th, 12th, 14th Floors Mumbai.
Nariman Point, Mumbai - 400 021. Vs. PAN :AAACC1441J.
(अपीलाथ /Appellant) ( यथ /Respondent)
ITA No.214/Mum/2005 : Asst.Year 2001-2002
The Deputy Director of Income-tax M/s.Credit Lyonnais
(International Taxation) - 1(2) बनाम/
Credit Agricole Inc. & Corp. Banking
Mumbai. Hoechst House, 11th Floor
Vs. Nariman Point, Mumbai - 400 021.
(अपीलाथ /Appellant) ( यथ /Respondent)
CO No.305/Mum/2006 : Asst.Year 2001-2002
M/s.Credit Lyonnais The Asstt.Director of Income-tax
(through their successors : Calyon Bank) बनाम/ (International Taxation) - 1(2) Hoechst House, 11th, 12th, 14th Floors Mumbai.
Nariman Point, Mumbai - 400 021. Vs.
( या ेपक/Cross Objector) ( यथ /Respondent)
राज व क ओर से /Revenue by : Shri Mahesh Kumar [CIT-DR]
& Shri A.K.Jain [CIT-DR]
नधा रती क ओर से /Assessee by : Shri Madhur Agarwal सन ु वाई क तार ख / घोषणा क तार ख / Date of Hearing : 16.05.2013 Date of Pronouncement :22.05.2013 आदे श / O R D E R Per R.S.Syal (AM) :
These two cross appeals - one by the assessee and the other by the Revenue - and a cross objection by the assessee arise out of the order passed by the Commissioner of Income-tax (Appeals) on 4th October, 2004 in relation to the assessment year 2001-2002.2 ITA No.9596/M/2004 & 214/M/2005.
M/s.Credit Lyonnais.
2. First ground of the assessee's appeal is against the direction of the learned CIT(A) to charge business income to tax at the rate of 48%, being the rate applicable to foreign companies for the year under appeal. At the outset, it was admitted by the learned Counsel for the assessee that similar issue has been consistently decided by the Tribunal against the assessee in earlier years. Respectfully following the orders so passed by the Tribunal, we dismiss this ground of appeal.
3. Ground no.2 of the assessee's appeal is against the confirmation of action of the A.O. for bringing to tax interest of 10,14,90,408 received on Nostro Account and overseas placements with branches outside India. Ground no.3 of the appeal is against not allowing deduction of 87,212 being interest paid to HO / overseas branches.
4. Having heard the rival submissions on this point and perused the relevant material on record, it is noticed that albeit in the earlier years the ground of chargeability of interest income was decided in favour of the assessee, but in the current year the assessee chose not to press this ground because of an additional ground which was initially sought to be raised by the Revenue for the consequential disallowance u/s 14A of Income-tax Act, 1961 (hereinafter also called as `the Act') but subsequently abandoned because of the assessee not pressing of this ground. In view of the fact that the learned AR has accepted the taxability of this amount of interest 3 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
earned from Head office / overseas branches, ground no. 2 is dismissed. The natural corollary which, therefore, follows is that the interest paid to HO / overseas branches is deductible. Ground no. 3 is allowed.
5. Ground no.5 of the assessee's appeal is against the confirmation of the action of the A.O. in levying interest of 91,22,475 u/s 234D of the Act. This issue is no more res integra in view of the judgment of the Hon'ble Bombay High Court in the case of CIT v. Indian Oil Corporation Limited [(2012) 254 CTR 113 (Bombay)] deciding it against the assessee. As the assessment in this case was admittedly completed on 09.03.2004, that is, after 01.06.2003, being the cut off date stipulated for application of section 234D, the interest has to be charged. This ground is not allowed.
6. Ground no.1 of the Revenue's appeal is against granting full exemption to interest income of 4.54 crore u/s 10(15)(iv)(h) of the Act. It is seen that similar issue arose in the assessee's appeals for assessment years 1998-99 to 2000-2001. In the order passed by the tribunal for such years, a copy of which has been placed on record, exemption u/s 10(15) has been granted on the gross amount of interest. At the same time, section 14A has also been held to be applicable by the tribunal. Adverting to the facts of the instant year, we find that the Assessing Officer made disallowance on account of interest and operating expenses on pro-rata basis. Insofar as the disallowance of interest is concerned, it is an admitted position that 4 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
the assessee's capital and free reserves are far in excess of the amount invested in securities earning interest free income. That being the position, there cannot be any disallowance on account of interest paid for making investment in such securities. Similar view has been canvassed in the afore-noted tribunal order passed in assessee's onw case. As regards the operating expenses, the Tribunal in earlier years has directed to sustain disallowance at the rate of 2% of exempt income. In the absence of any distinguishing facts for the current year having been brought to our notice, we also hold that 2% of the exempt income should be disallowed u/s 14A towards operating expenses. This ground is partly allowed.
7. Ground no.2 is against the claim for loss of 10,52,194 on account of valuation of investments. The assessee wrote back provision for revaluation of investment amounting to 10.52 lakh in its account for the current year. The Assessing Officer charged such amount to tax against the assessee's contention of non-taxability. The learned CIT(A) noticed in para 8.2 of the impugned order that in the earlier years, the loss arising on revaluation of investment was held to be an allowable deduction and as such : "the above claim of the appellant that the A.O. ought to have excluded the write back does not survive for consideration". From the above extracted part of the impugned order, it is discernible that the learned CIT(A) has decided this issue against the assessee and resultantly there was no occasion for the Revenue to challenge the same. Be that as it may, it is simple and plain that when deduction has been allowed on account of loss 5 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
arising on revaluation of investments in earlier years, the subsequent write back of the same amount cannot escape taxation. We, therefore, hold that the amount is chargeable to tax. However, the A.O. is directed to ensure that the same amount is not taxed twice in the assessment for the current year.
8. Ground no.3 of the Revenue's appeal is against the direction of the learned CIT(A) that the benefit of 1,38,48,130 on account of unmatured forex contracts as on 31.03.2000 credited to the Profit and loss account for the year under appeal should be excluded in computing the total income. Admittedly, the facts and circumstances of this ground are mutatis mutandis similar to those of the preceding years. This issue has been discussed by the Tribunal in para 22 of its afore-noted order deciding it in favour of the Revenue by relying on some earlier years' orders. Respectfully following the precedent, we hold that the amount of 1.38 crore credited to the Profit and loss account for the year under consideration is chargeable to tax. This ground is allowed.
9. Fourth ground of the assessee's and the Revenue's appeals deal with a common issue. The factual matrix of this issue is that the assessee claimed deduction of 13.88 crore on account of mobilization of India Millennium Deposit (hereinafter called "IMD") issued by the State Bank of India, by giving following note to its computation of income :-
6 ITA No.9596/M/2004 & 214/M/2005.M/s.Credit Lyonnais.
"The bank has earned commission on collection and mobilization of deposits for the State Bank of India under its India Millenium Deposit Scheme (IMD). The bank has also incurred expenses including Sub- arrangers fees for this purpose. The net amount has been amortised in the books of accounts. In the return of income the entire amount has been taken into account for the purpose of computing the total income."
10. On being called upon to furnish details of the same, the assessee stated that State Bank of India (SBI) appointed it as (i) Arranger for mobilizing the deposits from the eligible depositors under the IMD programme; and (ii) Collecting bank for receiving and handling application forms. For rendering the above services, SBI paid Arranger fee as per the approved structure of 0.5% to 1.5% of the amount of deposits mobilized by it and commission of 0.25% on the amounts collected by the designated branches of the assessee- bank. The assessee, in turn, appointed Sub-arrangers for mobilizing IMDs both in and outside India for which it paid fees at 1.75% and agency commission at 0.5% onwards on the basis of the amount of IMDs mobilized by them. The assessee received a sum of 22.19 crore from SBI as Arranger fees and commission. An amount of 37.07 crore was paid by way of sub-arranger fees and commission. It was stated that the net expenditure of 14.87 crore was amortized over a period of 60 months in the books of account. Accordingly, a sum of 99.16 lakh for a period of four months (from December 2000 to March 2001) was debited to the Profit and loss account for the current year. However, the entire amount of 14.87 crore was 7 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
claimed as deduction in the computation of income. It was submitted that this amount of 14.87 crore was deductible in the year because it was incurred for its business purpose. The assessee further clarified that it was in its business interest to garner more and more IMDs as SBI agreed to lend 50% of such deposits as long term deposits for a period of 5 years. The assessee explained that it mobilized deposits worth 1235.8 crore and SBI accordingly provided it a long term deposit of 617.9 crore for a period of 5 years. The Assessing Officer noticed that a sum of 26.75 crore, out of total amount of 37.07 crore paid to the sub-arrangers by way of sub-arranger fees and commission, was paid in US$ to non-residents. As the assessee failed to deduct tax at source before making such payments, the A.O. held that the provisions of section 40(a)(i) read with section 195 were applicable and hence this amount was not deductible. In reaching this conclusion, the Assessing Officer held that the payment made to sub- arrangers was in the nature of `Fees for technical services' covered u/s 9(1)(vii) of the Act. Without prejudice to the disallowance of 26.75 crore u/s 40(a)(i) read with section 195 of the Act, the A.O. also proceeded to examine the relevance of incurring expenditure of 37.07 crore against the receipt of Arranger fees of 22.19 crore. He took note of the fact that the assessee was not the only Arranger and there were several other foreign banks which had acted as Arrangers for SBI. As other banks did not pay sub-arranger fees in excess of the amount received by them, the AO opined that the excess expenditure of 14.87 crore was not allowable on this score. Without prejudice to his above discussed two view points, he further noticed that the net 8 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
expenditure of 14.87 crore was amortized over a period of 60 months with a deduction of 99.16 lakh for the current year. In his opinion, only such sum of 99.16 lakh was deductible in the light of the judgment of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Limited v. CIT [(1997) 225 ITR 802 (SC)]. In the final computation of total income, the Assessing Officer made disallowance of 26.75 crore. In the first appeal, the assessee explained the nature of services rendered by Arrangers / Sub-arrangers and collecting banks. By highlighting certain other important facets of the case, the assessee contended that the amount paid to various sub-arrangers was in the nature of `Brokerage/commission' and not `Fees for technical services'. The learned CIT(A) got convinced with the assessee's contention in this regard and held that the amount paid to sub-arrangers was in the nature of commission/brokerage/incentives and not `Fees for technical services' (FTS) u/s 9(1)(vii). Consequently, there was held to be no question of deducting tax at source from such payments. Then he proceeded to summarily examine the Double Taxation Avoidance Agreements with UAE / Canada and Nigeria / Kuwait and Qatar in a generalized manner for coming to the conclusion that the amount paid to sub-arrangers would not constitute `FTS' under the treaties as well. Thereafter, he took up the A.O.'s alternative point of view that excess expenditure of 14.87 crore was not for the assessee's business purpose. In this regard, he noticed that the purpose of incurring the said expenditure was to obtain deposits of a magnitude of 617.9 crore for a period of 5 years. As the deposits 9 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
facilitated the assessee to carry on its business in a more effective and proper manner, he held that and the expenditure so incurred was deductible on the ground of business expediency. He, however, did not agree with the assessee's contention for allowing deduction of the entire amount of 14.87 crore in the year in question. Relying on the judgment of the Hon'ble Apex Court in Madras Industrial Investment Corporation Limited (supra), he held that only a sum of 99.16 lakh, being the amount amortized for a period of 4 months of the current year, was deductible. Both the sides are in appeal on their respective stands. The Revenue is aggrieved against the direction of the learned CIT(A) that : "the expenditure of 26,75,92,141 has been incurred by way of commission for the purpose of business and on the grounds of business expediency and therefore, do not constitute fees for technical services and is not chargeable to tax in India and thus are permissible as a deduction without deduction of tax at source." The assessee wants deduction of entire amount of 14.87 crore incurred on securing IMDs without restricting it to amortized sum of 99.16 lakh.
11. We have heard the rival submissions and perused the relevant material on record. Insofar as the Revenue's grouse is concerned, we find that the Assessing Officer made disallowance of 26.75 crore u/s 40(a)(i) of the Act for the failure on the part of the assessee to make deduction of tax at source u/s 195 in respect of such amount paid in US dollars to non-residents. The relevant part of section 195 (1) of the Act mandates that : `Any person responsible for paying to a non- resident, not being a company, or to a foreign company, any interest 10 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
..... or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force...'. Section 5(2) of the Act provides that the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which - (a) is received or deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Section 9 of the Act explains the incomes which are deemed to accrue or arise in India. Circular No.786 dated 07.02.2000 states that commission paid to non-resident agents is not chargeable to tax in India as they operate outside the country and no part of income arises in India. In view of this Circular, it is clear that if the amount paid to such non-resident sub-arrangers assumes the character of commission / brokerage, then it would not be chargeable to tax in their hands. If the amount is not chargeable to tax in the hands of the non-residents, the obvious upshot is that section 195 cannot apply and naturally, there can be no disallowance u/s 40(a)(i). This appears to have prevailed upon the AO in characterizing the amount as a receipt in the nature of `fees for technical services' covered u/s 9(1)(vii) of the Act, which is chargeable to tax in the hands of non-residents. The ld. CIT(A) ruled this issue in favour of the assessee by holding it as a receipt in the nature of commission to the non-residents. The Revenue has assailed 11 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
the decision of the ld. first appellate authority by contending that it should be held as `Fees for technical services'.
12. The first thing which we need to adjudicate upon is whether the sum of 26.75 crore in the hands of the non-residents sub- arrangers can be described as a receipt in the nature of `Fees for technical services'. Any income by way of fees for technical services payable by a person who is a non-resident, where it is payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India, as per clause (c) of section 9(1)(vii), is deemed to accrue or arise in India. Explanation (2) to this provision defines the expression `fees for technical services' as under: -
"For the purposes of this clause, "fees for technical services"
means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries"."
13. It emerges from a bare perusal of the above Explanation that `fees for technical services' means any consideration for rendering of managerial or technical or consultancy services including the provisions of services of technical or other personnel but does not include consideration for any construction, assembly etc. It is not the 12 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
case of the A.O. that the payment was made in lieu of rendering "provision of services of technical or other personnel" by the non- resident sub-arrangers. In the like manner, it is not the case of the assessee that it is a consideration for any construction or assembly etc. In that view of the matter, we need to concentrate on determining as to whether such payment made to sub-arrangers can be described as a consideration for "managerial" or "technical" or "consultancy services". In order to appreciate the true character of payment made to sub-arrangers, it is of paramount importance to consider the exact nature of services rendered by them, which are extracted hereunder from the impugned order:-
"(a) Arranger / sub-arranger * Canvassing for the IMD amongst the NRIs in the country through the branches.
* Explaining to the potential customers, the salient features of IMD.
* If necessary, printing own marketing material.
* Distributing the stationery and other printed material.
* Assisting the customers in filling the application.
* Obtaining necessary documentation.
* Ensuring that the local laws are complied with.
* Forwarding to the collecting banker, the duly filled
in application forms.
13 ITA No.9596/M/2004 & 214/M/2005.
M/s.Credit Lyonnais.
(b) Collecting Banks.
* Ensuring that each cheque/draft is made in favour of
`SBI, NRI branch, Mumbai a/c IMD' and payable in US/UK or Germany for USD, GBP and EURO series respectively.
* Ensuring that application is accompanied by requisite certificates in case of applications in fiduciary capacity.
* Issuing acknowledgement along with data (since the interest will be paid from the date of receipt of application.) * Preparing daily remittance schedules (DRSs) recording details of applications received by the collecting banks on a daily basis in quadruplicate, separately for USD, GBP and Euro applications.
* Sending the first and second copy of DRS along with cheques / drafts to SBI New York / SBI London / SBI Frankfurt for USD, GBP and EURO applications respectively.
* Sending the third copy along with the original applications forms and supporting documents to MCS Limited (the Registrars) at Mumbai.
* Sending the DRSs along with the cheques / drafts should be done within a day or else the interest for the delayed period will be debited to the collecting banker.
* Recording the returned instruments in co-ordination with the agents, SBI NRI branch and entering the same in the next day's DRS.
14 ITA No.9596/M/2004 & 214/M/2005.M/s.Credit Lyonnais.
* At the end of the campaign sending a consolidated statement to SBI, New York, London / Frankfurt with a copy to the Registrars."
14. Above description of the scope of work or responsibilities of the arranger or sub-arrangers of IMD indicates that the ultimate object of the entire exercise was to explain and convince the NRIs for subscribing to such deposits. On successfully inducing the NRIs, the sub-arrangers were required to assist them in filling the requisite application forms and forwarding the same to the collecting banker. The primary duty of sub-arrangers as collecting banks was consequential to persuading the NRIs to invest in such IMDs. It was to help them in sending the subscription amount at the correct destination, by making cheque / draft in favour of SBI, NRI branch, Mumbai account IMD, issuing acknowledgement. Thereafter, they were to prepare daily remittance schedule, sending copies of such daily remittance schedule to SBI and others at the end of the campaign to New York, London / Frankfurt with a copy to the Registrars. An overview of the duties of sub-arrangers and collecting banks makes it abundantly clear that these are in the nature of soliciting NRI customers for IMD of SBI and then to remit the amount invested by them to the designated branches. Now we will test such duties/responsibilities on touchstone of Explanation 2 to section 9(1)(vii) for ascertaining as to whether they fall within the purview of managerial or technical or consultancy services.
15. The learned Departmental Representative was fair enough to candidly accept, and rightly so, that the activities done by the sub-
15 ITA No.9596/M/2004 & 214/M/2005.M/s.Credit Lyonnais.
arrangers were not in the nature of "consultancy services". In that view of the matter, we are left with examining as to whether the services rendered by the sub-arrangers can be construed as managerial or technical. Firstly we espouse `technical services'. In order to bring a particular service within the purview of `technical service', it is sine qua non that some sort of technical knowledge or technical skill or technical education must be essentially required for doing the activity. If the work does not require any technical knowledge, qualification or experience, then the same cannot be designated as rendering of a `technical service'. On a pointed query, the learned Departmental Representative could not elaborate as to how and what sort of technical knowledge or qualification or expertise was required for discharging the functions as sub-arranger or collecting bank. From the discussion made above about the nature and scope of services rendered by the sub-arrangers, it is manifest that no technical knowledge, expertise or qualification was required. Simply convincing the potential customers and if they get convinced, then helping them in filling requisite forms and sending the amount to the designated branchs, cannot by any stretch of imagination be considered as a `technical service'. We, therefore, countenance the view taken by the ld. CIT(A) in this regard.
16. The last ingredient for consideration is "managerial services". The learned Departmental Representative vehemently argued that, in the alternative, the amount paid to the sub-arrangers 16 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
should be treated as a consideration for rendering `managerial services'. He stated that the sub-arrangers were, in a sense, managing a part of the overall IMD issue. In the name of a precedent, he relied on the order of the Special Bench of the Tribunal in the case of Mahindra & Mahindra Limited v. DCIT [(2009) 122 TTJ 577 (Mum.) (SB)]. Per contra, the ld. AR supported the impugned order on this issue. His submissions were reiteration of the reasoning adopted by the ld. CIT(A) in holding that there were no managerial services involved in it.
17. `Manager' in common parlance is a person who supervises and provides directions in the manner in which the activities are to be carried out. The Hon'ble Supreme Court in R. Dalmia vs. CIT [1977] 106 ITR 895 (SC) has pointed out that "management" includes `the act of managing by direction, or regulation or superintendence'. Thus, managerial service essentially involves controlling, directing or administering the business. When we talk of rendering managerial services in relation to some activity, it is the management of such overall activity. Doing bits or small parts of overall activity independently here and there cannot be considered as rendering of a managerial service in relation to such activity. In the case of Mahindra and Mahindra Ltd. (supra), which is a trump card of the ld. DR, the assessee came out with a Global Depository Receipts issue. An agreement was entered into between that assessee and some foreign entity who were appointed as lead managers. The agreement provided for payment of management and underwriting commission 17 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
and also selling commission at a particular rate. The nature of services rendered by the lead managers, as discussed in the order, were related to : "... all the aspects of bringing out the Euro issues including the fixing of the price of the issue, analyzing the accounting results and resource basis of the company with a view to find out the strengths and weakness of the company, presenting them in a proper format, updating the accounting results of the assessee in tune with the international audit practices, getting them printed, putting up road shows and in totality marketing the issue successfully". Even a cursory glance at the services rendered in the case of Mahindra & Mahindra (supra) gives a fair idea of `management of the GDR issue'. The activities of the lead managers exended to all the aspects of the GDR issue. If the lead managers in that case had outsourced one or more activities from some outside party, was it possible to contend or accept that such outside party, doing separate activity incapable of independently achieving the desired overall result, was also manager to the issue. The answer is ostensibly in the negative. If execution of sub-activities of the overall activity are considered as managing the activity independently, then even a peon carrying cheque for deposit in bank would also claim that he also rendered the managerial services because it was he who planned and then executed the safe deposit of cheque into bank. The nutshell is that doing small parts of the overall activity cannot be regarded as rendering managerial services.
18 ITA No.9596/M/2004 & 214/M/2005.M/s.Credit Lyonnais.
18. Reverting to the facts of the instant case we find that it was SBI who came out with IMD issue with SBI Capital Markets Ltd. as Advisor and Lead arranger. The services rendered by the arrangers or sub-arrangers were only a small part of the management of the IMD issue. It is further significant to note that the assessee was only one of the several banks soliciting subscribers to SBI's IMD. Even within the same territory, there were several banks competing with each other to find out customers. To be more precise, in India alone there were several banks including the assessee, contesting with each other to reach the potential subscribers. Another factor which is of prime importance is that SBI reserved right to reject any application forwarded by the assessee without assigning any reason, as is evident from the brochure of IMD scheme, a copy of which is available on pages 35 to 38 of the paper book. The relevant clause empowering SBI to reject any application forwarded by the assessee or any other bank reads as under:-
"(i) SBI reserves the right to accept or reject any application without assigning any reason. If any application is not accepted within sixty days of receipt thereof, the whole of the amount received with such application will be refunded to the applicant without any interim interest."
19. In view of the above discussion, it is clear that the sub- arrangers were no where near the management of IMD issue. What to talk of managing, even the fate of the applicants sent by them was not certain as to acceptability. Under such circumstances, it cannot be 19 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
said that by doing their activities, the sub-arrangers were rendering any `managerial services' to the assessee in connection with IMD issue of SBI. They were simply acting as commission agents or brokers for which they were entitled to a particular rate of commission. It is further vital to note that in several cases, the sub- arrangers paid incentive to the actual depositors for alluring them to the IMD issue. In some of such cases, the assessee directly made payment to the subscribers instead of routing it through the sub- arrangers. Further in some cases, the sub-arrangers themselves subscribed to IMDs for which they got the requisite fees. Viewed from any angle, the said sum of 26.75 crore cannot be considered as fees for `managerial services'.
20. The AO seems to have been swayed by the designation of `fees' given to sub-arrangers in adopting a view that it was a fees for technical services. It goes without saying that the nomenclature of a transaction does not change its true character. It is the real essence and character of a transaction which needs to be looked into. On examination of all the relevant facts obtaining in this case, we have no hesitation in concluding that it was simply a commission or brokerage paid by the assessee to its sub-arrangers. The fact that it was characterized as "fees", is of no consequence.
21. We, therefore, sum up our conclusion by holding that the amount paid by the assessee to the non-residents sub-arrangers is not a fees for managerial or technical or consultancy services. Hence, the same cannot be brought within the ambit of `fees for technical 20 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
services' as per section 9(1)(vii) of the Act. If this payment is not fees for technical services but only commission, the provisions of section 195 requiring the assessee to make deduction of tax at source before remitting or crediting the amount to the accounts of sub-arrangers, cannot apply. If no deduction of tax at source is required, obviously the provisions of section 40(a)(i) do not come into play. Once it is held that the said commission / brokerage is not chargeable to tax in the hands of non-resident sub-arrangers under the provisions of the Act, there remains no need to examine the taxability or otherwise of this amount in their hands under the respective Double taxation avoidance agreements. In that view of the matter, we are of the considered opinion that the learned CIT(A) was justified in reversing the AO's order insofar as the applicability of section 40(a)(i) is concerned. Consequently, the ground raised by the Revenue fails.
22. Now we take up the ground taken by the assessee, as per which the unamortized part of the net expenditure also ought to have been held as deductible. Here it is relevant to mention that the Assessing Officer did not accept the deductibility of excess expenditure of 14.87 crore on the ground that there was no business expediency. The learned CIT(A) reversed this finding of the Assessing Officer and held the expenditure was incurred by the assessee for the purpose of its business. The Revenue has not challenged the decision of the learned CIT(A) on the otherwise deductibility of the entire sum of 14.87 crore on account of commercial expediency over the life of deposit. The assessee wants 21 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
deduction in respect of the unamortized part of the excess expenditure also, which the learned CIT(A) held to be deductible over the remaining life of long term deposits of 617.9 crore. The learned CIT(A) took this view by relying on the judgment of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Limited (supra). In that case the assessee issued debentures at a discount of 2%, redeemable after 12 years. Total discount amounted to 3 lakh. The assessee wrote off 12,500 being the proportionate amount of discount by taking into account the period of 12 years of redemption of debentures. The ITO did not allow deduction. The AAC accepted the assessee's claim. It was argued on behalf of the assessee before the Tribunal that the entire amount of 3 lakh should be granted deduction in the first year. The Tribunal accepted this position by holding that the entire discount of 3 lakh be allowed in one go as expenditure incurred for the purpose of business. The Hon'ble High Court refused to grant deduction for 2,87,500 representing the unamortized part of the discount on debentures. When the matter came up before the Hon'ble Summit Court, it was found that though the liability was incurred in the accounting year but such liability was continuing one which stretched over a period of 12 years. It, therefore, held that the deduction of only 12,500 was allowable. It is in the backdrop of the ratio emanating from this judgment, that the learned CIT(A) held that the unamortized expenditure of 13.88 crore was not deductible in the current year which was required to be spread over the remaining period of 5 years.
22 ITA No.9596/M/2004 & 214/M/2005.M/s.Credit Lyonnais.
23. At this stage, it would be relevant to note the judgment of the Hon'ble Supreme Court in India Cement Limited v. CIT [(1966) 60 ITR 52 (SC)], in which it has been held that the expenditure incurred in raising a loan is a revenue expenditure liable to be allowed in the year of its incurring.
24. Broadly, there may be three types of expenses in relation to debentures. First are the expenses which are incurred for issuing debentures, such as the expenses for bringing out the debenture issue, cost of complying with the statutory and other legal formalities in connection with such issue and underwriting commission. These expenses are incurred prior to the actual issuance of debentures. Second are expenses in the nature of discount on issue of debentures or premium on redemption of debentures. If a debenture with face value of 100 is issued for 95, the difference of 5 is discount on issue of debentures. It is the debenture-holder who is benefitted with the amount of discount inasmuch as by paying 95, he becomes entitled to the refund of 100 on the redemption of debentures. There may be another case in which instead of issuing debentures on discount, the company may undertake to pay premium on redemption of debentures. If a debenture of the face value of 100, on payment of 100 by a debenture-holder is undertaken to be redeemed at 105, it is this benefit of 5 to which the debenture-holder becomes entitled to. There is no qualitative difference between discount on debentures and premium on redemption of debentures. Third is the amount of interest paid on debentures at the agreed rate over the 23 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
period of debentures. The Hon'ble Supreme Court in Madras Industrial (supra) considered the second item of expenditure, being the discount on issue of debentures going to the coffers of the debenture-holders. It is this expenditure which was held to be deferred revenue expenditure deductible proportionately over the life of the debentures. In the case of India Cements (supra), the Hon'ble Supreme Court considered the first item of expenses, being the amount spent in connection with the raising of loan and held the same to be deductible in entirety in the year of incurring. Presently we are concerned with the expenses akin to the first category which have been incurred for raising loan/deposit of 617.9 crore for a period of five years. It is not a case that the SBI shall be entitled to receive, apart from interest, any thing over and above this principal amount after a period of five years. The expenses in question incurred by the assessee are of the nature of the first category of the expenses incurred for issuing debentures eligible for deduction in full in the year of incurring as per the ratio decidendi of India Cements (supra). The authorities below have wrongly matched it with the second category by relying on the ratio decidendi of Madras Industrial (supra) thereby by allowing amortization over the period of deposit. The expenditure has no relation whatsoever with the life of long term deposits received by the assessee bank from SBI. As this expenditure is revenue in nature and not a deferred revenue expenditure, the same has to be allowed as deduction in entirety in the year of incurring itself without spreading it over the term of deposit. We, therefore, set aside the impugned order on this score and 24 ITA No.9596/M/2004 & 214/M/2005. M/s.Credit Lyonnais.
direct that the deduction should be allowed for 14.87 crore in the year under consideration. The AO is directed to ensure that no allowance of the unamoritzed expenditure is allowed in subsequent years. The ground raised by the assessee in this regard is accordingly allowed.
25. In view of our decision on the cross appeals filed by the assessee as well as the Revenue, the cross objection filed by the assessee has become academic.
26. In the result, the cross appeals are partly allowed and the cross objection is dismissed.
Order pronounced on this 22nd day of May, 2013.
आदे श क घोषणा दनांकः को क गई ।
Sd/- sd/-
(Vivek Varma) (R.S.Syal)
या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
ु ई Mumbai; दनांक
मंब Dated : 22nd May, 2013.
Devdas*
आदे श क त ल प अ े षत/Copy
षत of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु (अपील) / The CIT, Mumbai.
4. आयकर आयु / CIT(A)-XLII, Mumbai
5. वभागीय त न ध, आयकर अपील य अ धकरण, मुंबई / DR, ITAT, Mumbai
6. गाड फाईल / Guard file.
आदे शानुसार/ BY ORDER,
स या पत त //True Copy//
उप/सहायक पंजीकार (Dy./Asstt.
उप/ Registrar)
आयकर अपील य अ धकरण,
धकरण, मुंबई / ITAT, Mumbai
Fit for Publication
(Judicial Member) (Accountant Member)