ABU DHABI COMMERCIAL BANK PJSC,MUMBAI V. DCIT (INTERNATIONAL TAXATION)-1(1)(1), MUMBAI

ITA 3404/MUM/2023

AI Insights

The case involves Abu Dhabi Commercial Bank PJSC, a non-resident banking company, appealing against the final assessment order passed by the Deputy Commissioner of Income Tax (International Taxation)-1(1)(1). The primary contention was regarding the set off of business losses of its Permanent Establishment in India against the interest income earned from External Commercial Borrowing (ECB) loans. The assessee argued that the interest income should be taxed at a concessional rate of 5% under the India-UAE Double Taxation Avoidance Agreement (DTAA) and that losses from its PE should be set off against this income. The Assessing Officer and the Dispute Resolution Panel had earlier disallowed this set off, leading to the appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 633501 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-06-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2020-2021
• Other Referred Cases: CIT vs. Davy Ashmore India Ltd. [1991] 190 ITR 626 (Cal.), Foramer S.A. vs. DCIT [1995] 52 ITD 115 (Del), Hitachi Zosen Corporation vs. JCIT [1999] 68 ITD 235 (Mum)
• Laws Referred To: Income Tax Act, 1961, India-UAE Double Taxation Avoidance Agreement
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ASIF KAR MALI
• Assessee Lawyers: DHANESH BAFNA; AW
• Keywords: Business income; Opportunity of being heard; Initiation of penalty proceedings; Double taxation relief; Permanent establishment; CHAPTER IV
• Section: 143(3); 15

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, VP AND MS. PADMAVATHY S, AM ITA No. 3404/Mum/2023 (Assessment Year: 2020-21) Abu Dhabi Commercial Bank PJSC Wework India Management Private Limited 2nd Floor, Express Towers, Ranath Goenka Marg, Nariman Point, Mumbai-400 021 Vs. DCIT (International Taxation)- 1(1)(1) 5th Floor, Room No. 517, AIR India Building, Nariman Point, Mumbai-400 021 PAN/GIR No. AAACA 4216 B (Appellant) : (Respondent) Appellant by : Shri Dhanesh Bafna, Adv. a/w Ms. Chandani Shah & Hinal Shah Respondent by : Shri Asif Karmali Date of Hearing : 21.03.2025 Date of Pronouncement : 11.06.2025 O R D E R Per Saktijit Dey, VP: The captioned appeal has been filed by the assessee, assailing the final assessment order dated 27.07.2023, passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (‘the Act’ for short), in pursuance to the directions of learned Dispute Resolution Panel (ld. DRP for short), pertaining to Assessment Year (A.Y. 2020-21). 2. Though, the assessee has raised multiple grounds, however, at the time of hearing, learned counsel appearing for the assessee, on instructions, submitted that ground nos. 1 to 4 are not to be pressed. Accordingly, these grounds are dismissed as not pressed. 3. He further submitted that ground nos. 6, 7, 9 and 11 would become academic, in case, ground nos. 5 & 8 are decided in favour of the assessee. In sum and substance, ld. Counsel made substantive submissions qua ground nos. 5 & 8 only. In view of the 2 ITA No. 3404/Mum/2023 (A.Y. 2020-21) Abu Dhabi Commercial Bank PJSC vs. DCIT (IT) aforesaid, we would proceed to deal with the issues raised in ground nos. 5 & 8. For deciding these grounds, it is necessary to briefly discuss the relevant facts. 4. The assessee is a non-resident banking company having its head office in United Arab Emirates (‘U.A.E’ for short) and is a tax resident of U.A.E. The assessee has global presence and to carry out its activities, the assessee has opened two branches in India as well, which are located in Mumbai and Bangalore. As stated by the Assessing Officer (AO), the assessee is involved in normal banking activities including financing trade, personal banking services and foreign exchange transactions. In course of its business activity, the assessee had advanced External Commercial Borrowing (ECB) loans to Indian customers/clients directly through head office without the involvement of Indian branches, which admittedly constitute Permanent Establishment (PE) in India. For the assessment year under dispute, the assessee had filed its return of income on 04.01.2021, declaring income of Rs.63,15,58,020/-. In course of assessment proceeding, the A.O., while verifying the return of income filed by the assessee and financial statements, noticed that in the previous year corresponding to the assessment year under dispute, the assessee had earned interest income of Rs.138,48,09,049/- from Indian customers on the ECB loans advanced to them. Taking benefit of India-UAE Double Taxation Avoidance Agreement (DTAA), the assessee had claimed that the interest income so earned would fall within the ambit of Article 11(2) of DTAA. Hence, the assessee, being the beneficial owner of such interest income, would be subject to tax on gross basis at a concessional rate of 5%. Undoubtedly, in the return of income, the assessee has offered the interest income under the head ‘income from other sources’. However, in the assessment year under dispute, the assessee’s PE in India has suffered losses under the head ‘business and profession’. While computing the 3 ITA No. 3404/Mum/2023 (A.Y. 2020-21) Abu Dhabi Commercial Bank PJSC vs. DCIT (IT) income in the return of income, the assessee set off the business losses of PE amounting to Rs.75,32,51,032/- against the interest income and on the balance interest income of Rs.63,15,58,017/-, the assessee computed tax at 5% in terms with Article 11(2) of DTAA. 5. Noticing the above, the A.O. was of the view that once the interest income is taxable on gross basis in terms with Article 11(2) of the Treaty, no further deduction, including, set off of loss against such income, is impermissible. Accordingly, he issued a show cause notice to the assessee to explain why the claim of set off of loss against the interest income should not be disallowed. In response to the show cause notice, the assessee furnished a detailed reply justifying its claim. It was the say of the assessee that the word “gross” used in Article 11(2) has not been defined under the Treaty. It was submitted, the word “gross” means ‘the amount without allowing any deduction on account of expenses’. It was submitted, loss cannot be equated with expenses. However, the A.O. was not convinced with the submissions of the assessee. He was of the view that since Article 11(2) provides for taxation of gross interest income at the concessional rate of 5%, no further deduction including set off of loss can be allowed. In this context, he relied upon CBDT Circular No. 333 dated 02.04.1982 to emphasize that where the DTAA provides for a particular mode of computation of income the same has to be followed irrespective of the provisions in Income Tax Act. Thus, he observed, once the assessee has chosen to be governed by DTAA, it cannot again go back to the provisions of the Income Tax Act for computation of income. He observed, since the Treaty does not provide for set off of loss, the assessee cannot claim such benefit by referring to the Income Tax Act. In this context, he relied upon the decision of the Hon’ble Calcutta High Court in the case of CIT vs. Davy Ashmore India Ltd. [1991] 190 ITR 626 (Cal.) and various other decisions. Referring to Article 31(1) 4 ITA No. 3404/Mum/2023 (A.Y. 2020-21) Abu Dhabi Commercial Bank PJSC vs. DCIT (IT) of Vienna Convention on the Law of Treaties, the A.O. observed that “a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose”. Thus, when the treaty uses the word “gross” tax has to be levied on the gross interest income without any kind of deduction. Accordingly, he framed the draft assessment order disallowing assessee’s claim of set off of business losses of PE against the interest income and computed tax liability at the applicable rate of 5% on the entire interest income earned by the assessee from the Indian customers. Against the draft assessment order so framed, the assessee raised objections before DRP on various grounds. The assessee also took an alternative plea that in terms with section 115A(1)(a)(iiaa) r.w.s. 194LC of the Act, interest earned from Indian customers on ECB loans is taxable @ 5%. While dealing with the objections of the assessee, ld. DRP, in principle, agreed with the view expressed by the A.O. The conclusion drawn by the ld. DRP can be summarized as under: • Since Article 11 does not speak of any deduction/partial deduction, the meaning of the word “gross” used in Article 11(2) of the Treaty would mean ‘the full amount of interest income’. • There is no provision under the Treaty for inter-head adjustment. Once the assessee has claimed the interest income as income under the head ‘income from other sources’, the business profit/loss of the PE, which is covered under Article 7(3), cannot be set off against the interest income. • Once the assessee has chosen to be governed under the Treaty provisions, he cannot again fall back upon the provisions of the Act. Such hybrid method cannot be adopted by the assessee. 5 ITA No. 3404/Mum/2023 (A.Y. 2020-21) Abu Dhabi Commercial Bank PJSC vs. DCIT (IT) • Since the assessee is in banking business, the ECB loan advanced is in course of the business activity. Therefore, the interest earned by the assessee is in the nature of business income and taxable at the base rate of 40% with surcharge and cess. The assessee has mistakenly computed the income under the head ‘income from other sources’. However, since the assessee has taken benefit under the Treaty provisions, interest income has to be brought to tax in terms with Article 11(2), keeping in view the provision contained under Article 7(7) of the Treaty. However, such interest income has to be taxed on gross basis without allowing any deduction including set off of loss. • Assessee’s alternative claim that interest income is taxable @ 5% in terms with section 115A(1)(a)(iiaa) is not acceptable, as, in terms with section 194LC of the Act, the loan agreements have to be approved by the Central Government. It, further held that since under the Domestic Law, the interest income would fall in the category of business income, section 115A, in the first place, would not be applicable. Assuming that it applies, the interest would fall u/s. 115A(1)(a)(ii) and would be taxable at 20%, rather than section 115A(1)(a)(iiaa). In terms with the directions of ld. DRP, the A.O. finalized the assessment, which is under challenge before us. 6. The ld. Counsel appearing for the assessee, more or less, reiterated the submissions made before the Departmental Authorities. He submitted, the word “gross” as used in Article 11(2) of the Treaty, though has not been defined under the Treaty, however, in general parlance, it would mean the amount without allowing any deduction on account of expenses. He submitted, the assessee, as such, has not claimed any expense from the 6 ITA No. 3404/Mum/2023 (A.Y. 2020-21) Abu Dhabi Commercial Bank PJSC vs. DCIT (IT) interest income. He submitted, loss cannot be equated with expense. Drawing our attention to the return of income, he submitted, the assessee has offered the income under the head ‘income from other sources’. He submitted, even the return form provides for set off of losses from the interest income through intra head adjustments. In this context, he drew our attention to Schedule CYLA in the return of income. He submitted, once the return of income itself permits set off of business loss against the interest income, it cannot be said that intra head adjustment is not allowable. He submitted, in terms with section 90(2) of the Act, the assessee has option to choose either to be governed by the treaty provisions or the domestic law, depending upon which is more beneficial. Therefore, there is no bar on the assessee in going back to the Domestic Law, even if it has chosen to be governed by the treaty provisions. In support of such contention, he relied upon a decision of the co- ordinate bench in case of Foramer S.A. vs. DCIT [1995] 52 ITD 115 (Del). 7. Without prejudice, ld. Counsel submitted, even assuming that the assessee cannot adopt the hybrid approach as alleged by the Departmental Authorities, the interest income is covered under the Domestic Law. As per section 115A(1)(a)(iiaa) r.w.s. 194LC of the Act, the interest income is subject to concessional tax rate of 5% with applicable surcharge and cess. He submitted, while negating assessee’s claim and holding that the interest income would be subject to tax @ 20% u/s. 115A(1)(a)(ii), the DRP has completely overlooked the press release dated 21.09.2012 by the CBDT, wherein, it is specifically stated that no specific approval in case of each loan agreement is required to be given by the Central Government, in case, the loan agreement complied with ECB Regulations, as administered by Reserve Bank of India (RBI for short). Thus, he submitted, in view of the aforesaid clarification issued by CBDT, no case to case approval of the Central 7 ITA No. 3404/Mum/2023 (A.Y. 2020-21) Abu Dhabi Commercial Bank PJSC vs. DCIT (IT) Government is required qua the loan agreement. In support of such contention, ld. Counsel relied upon the decision of the co-ordinate bench in case of Hitachi Zosen Corporation vs. JCIT [1999] 68 ITD 235 (Mum). 8. Strongly relying upon the observations of the A.O. and learned DRP, learned Departmental Representative ('ld. DR' for short) submitted, since Article 11(2) of the Treaty provides for applicability of the concessional rate of 5% on the gross amount of interest income, no further deduction from such amount can be allowed. 9. We have given a thoughtful consideration to the rival contentions and perused the materials on record. We have also applied our mind to the judicial precedents cited before us. Undisputedly, the assessee has earned an amount of Rs.138,48,09,049/- towards interest on ECB loans advanced to Indian customers. It is the claim of the assessee that the head office in UAE has advanced the ECB loans directly to Indian customers without any involvement of the PE in India. It is also a fact on record that in the return of income filed for the assessment year under dispute, the assessee had offered the interest income on ECB loans under the head ‘income from other sources’ and claimed concessional rate of tax u/s. 115A(1)(a)(iiaa). Further, the assessee has also chosen to be governed under the India- UAE DTAA and claimed that the interest income is subject to tax at concessional rate of 5% u/s.11(2) of the Treaty. However, the bone of contention between the assessee and department is with regard to claim of set off of business loss of the PE in India against the interest income. While the assessee has justified its claim of such set off of loss against interest income by submitting that the word “gross” used in Article 11(2) only refers to the amount without claiming deduction towards expenses, the department has taken the stand 8 ITA No. 3404/Mum/2023 (A.Y. 2020-21) Abu Dhabi Commercial Bank PJSC vs. DCIT (IT) that the word ‘gross’ would mean ‘the entire amount without making any further deduction including loss’. 10. Keeping in perspective the respective stand of the parties, it is necessary to examine the position under the India-UAE tax treaty. At this stage, we must hasten to add, though, ld. DRP has opined that the interest income on ECB loans should be treated as ‘business income’ under the domestic law, however, ultimately ld. DRP has grudgingly accepted that in terms with Article 11(2) r.w.s. 7(7) of India-UAE Treaty, the interest earned on ECB loans has to be treated as ‘interest income’ under the treaty provision. Even otherwise also, it is a fact on record that the assessee has offered the interest income as income under the head ‘other sources’ in the return of income and there is no change in head of income by the A.O. even in the final assessment order, as the A.O. has taxed the interest income under Article 11(2) of the Treaty, though, after disallowing the set off of loss. Thus, in our opinion, there is no controversy with regard to the nature of income that its interest income taxable under the head ‘income from other sources. Having held so, it is necessary to examine the position under Article 11(2) of the India-UAE treaty, which reads as under: Article 11 INTEREST xxxxxxxxxxx (2) However, such interest may be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed: (a) 5 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a Bonafide banking business or by a similar financial institution; and (b) 12.5 per cent of the gross amount of the interest in all other cases. xxxxxxxxxxxxxxxxxx 11. There cannot be any manner of doubt that the assessee is covered under Article 11(2)(a) of the Treaty. A reading of Article 11(2) shows that it is in two parts. In the first 9 ITA No. 3404/Mum/2023 (A.Y. 2020-21) Abu Dhabi Commercial Bank PJSC vs. DCIT (IT) part, the Article says that the interest income can be taxed in the source country in terms with the domestic law of the source country. The second part of the Article says that if the recipient of the interest income is the beneficial owner of such income, the tax rate applicable would be not in excess of 5% or 12.5%, as the case may be, of the gross amount of interest. Thus, it is very much clear from a reading of Article 11(2) that in the first step, the taxability of interest income has to be determined in terms with the domestic law of the source country. Only after the income is computed in terms with the domestic law, then one has to again revert back to the Treaty Provision for applicable tax rate on such income. Having understood the meaning of the treaty provision, it is necessary to look into the computational provision contained under the Indian Income Tax Act. Chapter IV of the Act provides for computation of total income. Section 14 of the Act defines heads of income and as per the said provision, there are following heads of income: 1. Salaries 2. Income from house property 3. Profits and gains of business and profession 4. Capital gain 5. Income from other sources 12. Sections 15 to 59 provide the mode and manner of computation of income under each of the aforesaid heads of income. Once income under different heads are computed, Chapter VI and VI-A get triggered. While Chapter VI provides for aggregation of income and set off and carryforward of loss, Chapter VIA provides for deduction to be made in computing total income. The expression ‘total income’ has been defined u/s. 66 of the Act. Section 71 provides for set off of current years loss under one head against another, except, income under the head ‘capital gain’. Thus, in terms with section 71 of the Act, the inter- 10 ITA No. 3404/Mum/2023 (A.Y. 2020-21) Abu Dhabi Commercial Bank PJSC vs. DCIT (IT) head set off of current year loss is admissible, except, incase of capital gain. On the income computed after set off of loss, deductions provisions contained under Chapter VIA apply. 13 Thus, as per section 11(2) of India-UAE treaty, firstly, computation of income and its taxability has to be determined in terms with the domestic law, i.e., the Income Tax Act. Therefore, full effect to the computation provisions contained under the Income Tax Act including Chapter VI and VIA have to be given. Article 25(1) of the Treaty provides that laws inforce in either of the contracting States shall continue to govern the taxation of income and capital in the respective contracting States, except, where express provisions to the contrary are made in the agreement. Article 11(2) of the Treaty itself provides for computation and taxability of income in terms with the provisions of the domestic law. Therefore, it cannot be said that the assessee cannot adopt hybrid approach and claim inter- head set off of loss. Thus, in our view, a reading of Article 11(2) along with the provisions of the Act makes it abundantly clear that the assessee can claim set off of current year business loss of PE against the interest income, since, the treaty itself provides for taxability of income in terms with the domestic law provisions. 14. At this stage, we must find the meaning of the word “gross” used in Article 11(2)(a) of the Treaty. It is a fact that the word “gross” is not defined in the Treaty. Though, Article 3(2) of the Treaty permits adoption of the meaning of a particular word given in the domestic law, however, even under the Income Tax Act we were unable to locate any definition given to the word “gross”. Of course, there is a definition of “gross total income” u/s. 80B(5) of the Act. Thus, in absence of any definition of word “gross” either in the Treaty or under the Act, we can make a useful reference to the meaning ascribed to the word “gross” in commentary to OECD Model Tax Convention on Income and Capital, 11 ITA No. 3404/Mum/2023 (A.Y. 2020-21) Abu Dhabi Commercial Bank PJSC vs. DCIT (IT) 2017. As per Paragraph 7.1 of the Commentary on Article 11(2), gross amount of interest means the amount regardless of expenses incurred to earn such interest. Accordingly, in our view, denying the benefit of set off on the ground that Article 11(2)(a) provides for “gross” interest is not correct since, the term “gross” here means interest without claiming deduction towards any expenditure. As discussed earlier, Chapter IV of the Act provides for computation of income under various heads. In so far as computation of income under the head “income from other sources” is concerned, Section 57 of the Act enlists the deductions to be made for computing the income. It is a fact on record that assessee has not claimed any deduction of expenses. Hence, the income computed by the assessee does not violate the conditions of Article 11(2)(a) of the Treaty. Thus, according to our understanding of the relevant provisions, in the first stage, the total income of the assessee has to be computed in terms with the provisions of the Act and after set off of loss as provided u/s. 71 of the Act, the applicable rate of tax as per Article 11(2)(a) can be applied to bring to tax the interest income. Thus, we hold that assessee’s claim of set off of loss of PE against the interest income is allowable. 15. Having held so, it is necessary to look into the alternative claim of the assessee u/s. 115A(1)(a)(iiaa). The ld. DRP has rejected such claim of assessee on the ground that the condition of approval of the loan agreement by the Central Government as provided under Section 194LC has not been satisfied. In this context, we may refer to the following press release by CBDT: SECTION 115A OF THE INCOME TAX ACT, 1961 – FOREIGN COMPANIES – TAX ON DIVIDENDS, ROYALTY AND TECHNICAL SERVICES – APPROVAL OF LOAN AGREEMENTS/ LONG TERM INFRASTRUCTURE BONDS AND RATE OF INTEREST FOR THE PURPOSE OF SECTION 194LC OF THE INCOME-TAX ACT, 1961 PRESS RELASE, DATED 21.09.2012 In order to enable low cost foreign borrowings by Indian companies, the Finance Act, 2012 had amended the Income-tax Act to lower the tax on such borrowings. The amendment to section 115A and insertion of section 194LC in the Income-tax Act provide that the interest income of a non- 12 ITA No. 3404/Mum/2023 (A.Y. 2020-21) Abu Dhabi Commercial Bank PJSC vs. DCIT (IT) resident investor will be taxed at the reduced rate of 5 per cent instead of the existing rate of 20 per cent. Further, the liability of the Indian company to withhold tax on such income would also be at the reduced rate of 5 per cent. This lower rate of taxation will apply to interest paid to a non- resident by an Indian company for money borrowed in foreign currency from a source outside India either under a loan agreement or by way of long-term infrastuture bonds. This is also subject to the condition that the borrowing is made during the period from 1.07.2012 to 30.06.2015 and such borrowing and the rate of interest are approved by the Central Government. With a view to lower the compliance burden and reduce the time lag which would arise on account of case-by-case approval, the Central Government has decided to grant approval to all borrowings by way of loan agreement and long-term infrastructure bonds that satisfy certain conditions. No specific approval in such cases would be required. Broadly, borrowings under a loan agreement or by way of issue of long term infrastructure bonds that comply with External Commercial Borrowings (ECB) regulations as administered by the Reserve Bank of India (RBI) would be eligible for availing of the benefit of this concessional tax regime. Further, in case of long-term infrastructure bonds the end use of the proceeds of such bond issue should be for the infrastructure sector as defined by RBI under its ECB regulations. The details of the conditions to be satisfied are elaborated in the circular on approval of loan agreements/long term infrastructure bonds under section 194LC of Income-tax Act, dated 21.09.12 issued by the Central Board of Direct Taxes (CBDT). 16. A reading of the aforesaid would clearly demonstrate that case to case approval of loan agreement by the Central Government has been dispensed with and the only condition imposed is that the ECB loans must be in consonance with the ECB regulations framed by RBI. There is no allegation by the Departmental Authorities that the ECB loans are in violation of RBI guidelines. That being the case, in our considered opinion, the interest income would be covered u/s.115A(1)(a)(iiaa) of the Act, hence, subject to concessional rate of tax at 5% with applicable cess and surcharge. Thus, ground nos. 5 & 8 are decided in favour of the assessee. 17. In ground no. 10, the assessee has raised the issue of adjustment of refund of Rs.17,37,439/- without issuing ay notice of demand u/s. 156 of the Act or section 245 of the Act. 18. Having considered rival submissions, we direct the A.O. to verify assessee’s claim and decide the issue in accordance with law and after providing reasonable opportunity of being heard to the assessee. 13 ITA No. 3404/Mum/2023 (A.Y. 2020-21) Abu Dhabi Commercial Bank PJSC vs. DCIT (IT) 19. Ground no. 12 on the issue of initiation of penalty proceedings u/s. 271A of the Act being premature at this stage is dismissed. 20. In the result, the appeal is partly allowed. Order pronounced in the open court on 11.06.2025 Sd/- Sd/- (Padmavathy S.) (Saktijit Dey) Accountant Member Vice President Mumbai; Dated : 11.06.2025 Roshani, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai "