Indian Kanoon - Search engine for Indian Law

PER PRASHANT MAHARISHI, A. M.

1. This appeal is filed by the assessee against the assessment order passed by the Assistant Commissioner of Income Tax, (IT), Circle-2(2)(1), New Delhi (ld AO), u/s 143(3) of The Income Tax Act (The Act) dated 29.08.2019 for Assessment Year 2015-16.

2. The assessee has raised following grounds of appeal:-

"1 Disallowance of salary paid overseas to expatriates of the Appellant working in India by the Head Office („HO‟) and the Indian taxes paid thereon by the HO: INR 48,41,53,789 1.1 That on the facts and in the circumstances of the case and in law, the Hon‟ble Dispute Resolution Panel („DRP‟) erred in confirming the addition, as proposed in the draft assessment order, for an amount of INR 48,41,53,789 paid as salaries by the HO overseas, in foreign currency (including Indian taxes thereon), without appreciating that such salary paid by the HO to the expatriate employees working in India exclusively for the Permanent Establishment ('PE') of the Appellant, is fully allowed as deduction under section 37(1) of the Act.

Page | 1

2. Interest amounting to INR 34,99,476 accrued/ received by the Indian PE from its HO overseas branches.

2.1 That on the facts and in the circumstances of the case and in law, the Hon‟ble DRP erred in confirming the addition, as proposed in the draft assessment order, for an amount o INR 34,99,476 being the interest accrued/ received by the Indian PE of the Appellant on funds lying with the HO/ other Overseas branches. 2.2 That on the facts and in the circumstances of the case and in law, the Hon‟ble DRP erred in not following the favourable decisions of the Hon‟ble Tribunal in the Appellant‟s o wn case for earlier years.

Page | 2 6.2 Under the provisions of Article 24 of the DTAA, the applicable rate of tax on the income of the Appellant attributable to its PE in India cannot exceed the applicable rate of tax (as per the Finance Act for the subject AY) in the case of Domestic Companies and consequential directions may kindly be issued in this regard.

7. Short grant of credit for TDS That on the facts and circumstances of the case and in law, the Id. AO erred in not granting credit of tax of INR 1,92,29,851 withheld by income-tax department on interest on income tax refund.

7. Assessee aggrieved with the above order of the learned assessing officer has preferred an appeal before us.

8. The Ground no [1] of appeal is against the disallowance of salary paid to overseas expatriates of the appellant working in India by the Head Office (HO) and Indian taxes paid thereon by the head office amounting to Rs. 484153789/-. Facts show that head office of the assessee is situated in Japan and has deputed certain employees to work in its branches situated in India. The sole responsibility of such expatriates employees while deputation in India is to exclusively manage the business operation of the branches of the assessee in India. According to the employment and remuneration policy of the assessee part of the salaries for the services rendered by the expatriates employees in India are paid to such expatriates employees outside India i.e. by the head office of the bank Japan and the balance amount is paid to such employee is in India. It is claimed that entire salary including which is paid outside India is exclusively towards the services rendered by the employees for Indian operations of the bank while on reputation in India. Such salaries are accounted by debiting only that portion of salary paid to the expatriate employees which was paid in Indian rupees by the branches in India. Salary paid in the foreign currency by the head office was not routed through the profit and loss account of the Indian branches and such salaries accounted for at the head office level. The assessee bears the Indian tax payable on the salaries paid to the expatriate‟s employees including the salary paid by the head office in Japan computed after grossing up of the salaries paid to such expatriates employees. Tax deduction u/s 192 of the income tax act was also carried out. Accordingly in computing the taxable income of the assessee‟s permanent establishment India for the impugned assessment year the assessee claimed deduction of ₹ 484,153,799/- in respect of salaries paid by the head office to the expatriates employees and taxes paid thereon but not debited in the books of PE in India . The claim of the assessee is as the sum paid represented expenditure incurred for the purpose of the business operation of the India of Indian branches of the assessee and therefore same are allowable as a deduction. The learned assessing officer recorded the facts as per paragraph number [5] of his order wherein he held that these employees worked for head office as well as for its branch offices in India. There was no exclusivity of work and it cannot be accepted that the services given by these employees were wholly and exclusively for the purpose of the branch office in India only. Under the circumstances he held that the part of the work which was done for the purpose of the permanent establishment‟s business was remunerated by the permanent establishment and head office paid for the work Page | 6 pertaining to the head office or other branches. Therefore he placed reliance on the judgment of the honourable Calcutta High Court in case of ABN Amro Bank NV versus Commissioner of income tax wherein the honourable court held that for taxation purposes head office and PE are to be treated as separate entities. He further held that it is the duty of the assessee to substantiate any claim made by it by proper evidence for it is to be allowed as a deduction under the act. He held that looking to the composite nature of employment there is no demarcation to show that the expenses incurred by the head office were incurred wholly and exposure for the purposes of the business of the permanent establishment. Therefore, he held that the salary paid to expatriate employees by the head offices not allowed as a deduction u/s 37 of the act for comuting income of PE as being not incurred wholly and exclusively for the purposes of the business of the permanent establishment. He further held that in respect of expenses incurred by the head office deduction of 5% of the adjusted total income of its permanent establishment in India is allowed to the assessee as per the provisions of Section 44C of the act as other income is at a be taxed at gross basis as per the provisions of the India Japan DTAA. He further noted that the honourable High Court of Delhi in ITA number 604/2015 and 605/2015 for assessment year 2007 - 08 and 2008 - 09 the issue is squarely decided in favour of the assessee. However as the revenue has not accepted the above order of the honourable High Court and SLP has been filed to keep the issue alive, he followed the stand taken by the Department in earlier years and made the disallowance.