THE ADIT (IT) 3(2), MUMBAI V. M/S. BNP PARIBAS,

ITA 2048/MUM/2008

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62544 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-06-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 16-05-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 24-03-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDRA KUMAR
• Assessee Lawyers: ARVIND SONDE
• Keywords: Earning of tax free income
• Section: 6; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH: MUMBAI BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO.2022/MUM/2008 (ASSESSMENT YEAR: 2002-03) ITA NO.2023/MUM/2008 (ASSESSMENT YEAR: 2003-04) BNP PARIBAS SA, FRENCH BANK BUILDING, 62, HOMJI STREET, FORT, MUMBAI -400 001 ..... APPELLANT VS DEPUTY DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION)-3(2), SCINDIA HOUSE, BALLARD ESTATE, MUMBAI -400 001 .... RESPONDENT ITA NO.2048/MUM/2008 (ASSESSMENT YEAR: 2002-03) ITA NO.2049/MUM/2008 (ASSESSMENT YEAR: 2003-04) ASST. DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION)-3(2), R.NO.132, 1ST FLOOR, N.M. ROAD, MUMBAI -400 038 ..... APPELLANT VS BNP PARIBAS SA, C/O. BMR & ASSOCIATES, 3F, CONTRACTOR BUILDING, 41, R KAMANI MARG, BALLARD ESTATE, MUMBAI .... RESPONDENT PAN : AAACB 4868 Q APPELLANT-ASSESSEE BY: SHRI ARVIND SONDE RESPONDENT-REVENUE BY: SHRI NARENDRA KUMAR DATE OF HEARING: 16.05.2012 DATE OF PRONOUNCEMENT: 20.06.2012 O R D E R PER P.M. JAGTAP, AM: ITAS 2022 & 2023/M/2008 ITAS 2048 & 2049/M/2008 BNP PARIBAS SA 2 THESE FOUR APPEALS, TWO FILED BY THE ASSESSEE AND T WO FILED BY THE REVENUE, ARE CROSS APPEALS FOR A.Y. 2002-03 AND 200 3-04 AND SINCE SOME COMMON ISSUES ARE INVOLVED THEREIN, THE SAME H AVE BEEN HEARD AND ARE BEING DISPOSE OFF BY A SINGLE COMPOSITE ORD ER FOR THE SAKE OF CONVENIENCE. 2. FIRST, WE SHALL TAKE-UP THE CROSS APPEALS FOR TH E A.Y. 2002-03 BEING ITA 2022/M/2008 AND ITA 2048/M/2008 WHICH ARE DIRECTED AGAINST THE ORDER OF THE LD. CIT (A)-33, MUMBAI DAT ED 31.12.2007. 3. THE SOLITARY ISSUE INVOLVED IN THE APPEAL OF THE ASSESSEE FOR THE A.Y. 2002-03 RELATES TO THE ADDITION OF ` 1,48,30,613/- MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT (A) ON ACCOUNT OF INTEREST PAID BY THE INDIAN BRANCHES OF THE ASSESSEE BANK TO ITS HE AD OFFICE AND OTHER OVERSEAS BRANCHES. 4. THE ASSESSEE, IN THE PRESENT CASE IS A COMMERCIA L BANK HAVING ITS HEAD OFFICE IN FRANCE. IT CARRIES ON THE NORMAL BA NKING ACTIVITIES INCLUDING FINANCING OF FOREIGN TRADE AND FOREIGN EX CHANGE TRANSACTIONS IN INDIA THROUGH ITS EIGHT BRANCHES SITUATED AT MUM BAI, NEW DELHI, KOLKATA, BANGALORE, PUNE, AHMEDABAD, CHENNAI AND HY DERABAD. DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2002-03, THE INDIAN BRANCHES OF THE ASSESSEE BANK HAVE PAID TOTAL INTEREST OF ` 1,48,30,613/- TO ITS HEAD OFFICE AND OVERSEAS BRANCHES AND THE SAME WAS CLAIMED AS A DEDUCTION WHILE DETERMINING THE PROFITS ATTRIBUTABL E TO INDIAN BRANCHES, WHICH WAS CHARGEABLE TO TAX IN INDIA. THE SAID INT EREST WAS TREATED BY THE A.O. AS INCOME OF THE ASSESSEES HEAD OFFICE / OVERSEAS BRANCHES CHARGEABLE TO TAX IN INDIA. THIS DECISION OF THE A .O. WAS CHALLENGED BY THE ASSESSEE IN THE APPEAL FILED BEFORE THE LD. CIT (A) AND THE CONTENTION RAISED BEFORE THE LD. CIT (A) IN THIS REGARD WAS TH AT THE HEAD OFFICE OF THE ASSESSEE BANK AS WELL AS ALL ITS BRANCHES BEING THE SAME PERSON AND ONE TAXABLE ENTITY AS PER THE INDIAN INCOME-TAX ACT , INTEREST PAID BY INDIAN BRACHES TO HEAD OFFICE AND OTHER OVERSEAS BR ANCHES WAS PAYMENT TO SELF, WHICH DID NOT GIVE RISE TO ANY INC OME AS PER THE ITAS 2022 & 2023/M/2008 ITAS 2048 & 2049/M/2008 BNP PARIBAS SA 3 INCOME-TAX ACT. IN SUPPORT OF THIS CONTENTION, REL IANCE WAS PLACED ON BEHALF OF THE ASSESSEE ON THE DECISION OF HONBLE S UPREME COURT IN THE CASE OF SIR KIKABHAI PREMCHAND VS. CIT (CENTRAL) 24 ITR 506 AS WELL AS THE DECISION OF KOLKATA SPECIAL BENCH OF THE ITAT I N THE CASE OF ABN AMRO BANK NV VS. ASST. DIRECTOR OF INCOME-TAX 98 TT J 295. THE CONTENTION OF THE ASSESSEE, HOWEVER, WAS NOT ACCEPT ED BY THE LD. CIT (A) AND RELYING ON THE DECISION OF MUMBAI BENCH OF THE ITAT IN THE CASE OF DRESDNER BANK AG VS. ADDL. CIT 108 ITD 375, HE HELD THAT THE INTEREST PAID BY THE INDIAN BRANCHES OF THE ASSESSEE BANK TO ITS HEAD OFFICE AND OVERSEAS BRANCHES WAS CHARGEABLE TO TAX IN INDIA. ACCORDINGLY, THE ADDITION MADE BY THE A.O. ON THIS ISSUE WAS CONFIRM ED BY THE LD. CIT (A). 5. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D PERUSED THE RELEVANT MATERIAL ON RECORD. AS AGREED BY THE LD. REPRESENTATIVES OF BOTH THE SIDES, THE ISSUE INVOLVED IN THIS APPEAL O F THE ASSESSEE NOW STANDS SQUARELY COVERED BY THE DECISION OF SPECIAL BENCH OF THE ITAT IN THE CASE OF SUMITOMO BANKING CORP. MUMBAI WHEREIN I T WAS HELD, AFTER ELABORATELY DISCUSSING THE LEGAL POSITION EMANATING FROM THE INTERPRETATION OF RELEVANT PROVISIONS OF INDIAN INC OME-TAX ACT AS WELL AS TREATY, THAT INTEREST PAID TO THE HEAD OFFICE OF TH E ASSESSEE BANK AS WELL AS ITS OVERSEAS BRANCHES BY THE INDIAN BRANCH CANNO T BE TAXED IN INDIA BEING PAYMENT TO SELF WHICH DOES NOT GIVE RISE TO I NCOME THAT IS TAXABLE IN INDIA AS PER THE DOMESTIC LAW OR EVEN AS PER THE RELEVANT TAX TREATY. RESPECTFULLY FOLLOWING THE SAID DECISION OF SPECIAL BENCH OF THE ITAT WHICH IS DIRECTLY APPLICABLE IN THE PRESENT CASE, W E DELETE THE ADDITION OF ` 1,48,30,613/- MADE BY THE A.O. AND CONFIRMED BY TH E LD. CIT (A) ON THIS ISSUE AND ALLOW THE APPEAL OF THE ASSESSEE. 6. IN GROUND NO.1 OF ITS APPEAL FOR A.Y. 2002-03, T HE REVENUE HAS CHALLENGED THE ACTION OF THE LD. CIT (A) IN DELETIN G THE ADDITION OF ` 3,64,795/- MADE BY THE A.O. ON ACCOUNT OF EXPENDITU RE INCURRED IN EARNING EXEMPT INCOME. ITAS 2022 & 2023/M/2008 ITAS 2048 & 2049/M/2008 BNP PARIBAS SA 4 7. DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2002-0 3 THE ASSESSEE HAD EARNED DIVIDEND INCOME OF ` 4,85,656/- FROM THE INVESTMENT MADE IN THE SHARES OF LEELA VENTURE LTD. AND THE SAME WA S CLAIMED TO BE EXEMPT U/S.10(33). THE CLAIM OF THE ASSESSEE THAT THE SAID INVESTMENT WAS MADE FROM ITS OWN FUNDS WAS NOT ACCEPTED BY THE A.O. AND ESTIMATING THE INTEREST EXPENSES INCURRED BY THE AS SESSEE IN RELATION TO EXEMPT DIVIDEND INCOME ON PRO-RATA BASIS AT ` 3,64,795/-, HE MADE A DISALLOWANCE TO THAT EXTENT BY INVOKING THE PROVISI ONS OF SEC.14A. ON APPEAL, THE LD. CIT (A) DELETED THE SAID DISALLOWAN CE MADE BY THE A.O. AFTER HAVING FOUND THAT THE INVESTMENT IN SHARES OF LEELA VENTURE LTD. WAS MADE BY THE ASSESSEE IN THE PREVIOUS YEAR RELEV ANT TO A.Y. 1999- 2000 AND IN THE APPELLATE ORDER PASSED FOR A.Y. 199 9-2000, A FINDING WAS GIVEN BY HIS PREDECESSOR THAT THE SAID INVESTM ENT WAS MADE BY THE ASSESSEE OUT OF ITS OWN FUNDS. 8. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES ON THIS ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT I S OBSERVED THAT THE INVESTMENT IN SHARES OF LEELA VENTURE LTD. WHICH FE TCHED THE EXEMPT DIVIDEND INCOME TO THE ASSESSEE, WAS MADE IN THE PR EVIOUS YEAR RELEVANT TO A.Y. 1999-2000 AND AS FOUND BY THE LD. CIT (A), THE SAID INVESTMENT WAS MADE BY THE ASSESSEE OUT OF ITS OWN FUNDS. THIS FINDING OF FACT RECORDED BY THE LD. CIT (A) WHILE DELETING THE DISALLOWANCE MADE BY THE A.O. U/S.14A HAS NOT BEEN DISPUTED OR CONTRO VERTED BY LD. D.R. AT THE TIME OF HEARING BEFORE US AND THIS BEING SO, WE FIND NO JUSTIFIABLE REASON TO INTERFERE WITH THE IMPUGNED ORDER OF THE LD. CIT (A) GIVING RELIEF TO THE ASSESSEE ON THIS ISSUE. THE SAME IS THEREFORE UPHELD AND GROUND NO.1 OF THE REVENUES APPEAL IS DISMISSED. 9. IN GROUND NO.2 OF THIS APPEAL FOR THE A.Y. 2002- 03, THE REVENUE HAS CHALLENGED THE ACTION OF THE LD. CIT (A) IN DEL ETING THE ADDITION OF ` 67,63,204/- MADE BY THE A.O. ON ACCOUNT OF GUARANTE E COMMISSION. 10. DURING THE FINANCIAL YEAR 2000-01, THE ASSESSEE RECEIVED COMMISSION ON GUARANTEES PROVIDED TO THE CLIENTS AM OUNTING TO ` ITAS 2022 & 2023/M/2008 ITAS 2048 & 2049/M/2008 BNP PARIBAS SA 5 4,25,41,914/-. THE SAID COMMISSION TO THE EXTENT A TTRIBUTABLE TO THE PERIOD ENDED 31ST MARCH, 2001 AMOUNTING TO ` 3,57,78,710/- WAS OFFERED BY THE ASSESSEE TO TAX IN A.Y. 2001-02 ON A CCRUAL BASIS AND THE BALANCE AMOUNT OF ` 67,63,204/- ATTRIBUTABLE TO THE FINANCIAL YEAR ENDED 31ST MARCH, 2002 WAS OFFERED IN A.Y. 2002-03. ACCORDING TO THE ASSESSEE, THE SYSTEM OF OFFERING GUARANTEE COMMISSI ON ON ACCRUAL BASIS WAS BEING CONSISTENTLY FOLLOWED BY IT. THE A.O., H OWEVER, DID NOT ACCEPT THE SAME AND BROUGHT TO TAX THE ENTIRE GUARANTEE CO MMISSION OF ` 4,25,41,914/- IN THE HANDS OF THE ASSESSEE FOR THE A.Y. 2001-02. HE ALSO REDUCED THE AMOUNT OF ` 67,63,204/- OFFERED BY THE ASSESSEE IN A.Y. 2002-03 FROM ITS INCOME FOR THAT YEAR. ON APP EAL, THE LD. CIT (A) FOUND THAT THIS ISSUE WAS INVOLVED IN A.Y. 2001-02 ALSO WHEREIN THE METHOD ADOPTED BY THE ASSESSEE OF DECLARING GUARAN TEE COMMISSION ON ACCRUAL BASIS WAS ACCEPTED BY THE HIS PREDECESSOR. HE, THEREFORE, DIRECTED THE A.O. NOT TO DISTURB THE SYSTEM OF ACCO UNTING REGULARLY FOLLOWED BY THE ASSESSEE AND ACCEPT THE INCOME AS D ECLARED BY THE ASSESSEE FOLLOWING THE SAME METHOD. 11. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED TH AT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. BANK OF TO KYO 71 TAXMAN 85 WHEREIN IT WAS HELD THAT INCOME FROM DEFERRED GUAR ANTEE COMMISSION DID NOT ACCRUE OR ARISE IN THE YEAR IN WHICH GUARAN TEE AGREEMENTS WERE ENTERED. IT WAS HELD THAT SUCH INCOME SHOULD BE S PREAD OVER THE PERIOD TO WHICH THE GUARANTEE COMMISSION RELATED AND SHOUL D BE ASSESSED PROPORTIONATELY. RESPECTFULLY FOLLOWING THE DECISI ON OF HONBLE MADRAS HIGH COURT IN THE CASE OF BANK OF TOKYO (SUPRA), WE UPHOLD THE IMPUGNED ORDER OF THE LD. CIT (A) DIRECTING THE A.O . TO ACCEPT THE METHOD FOLLOWED BY THE ASSESSEE. GROUND NO.2 OF TH E REVENUES APPEAL IS ACCORDINGLY DISMISSED. 12. NOW, WE SHALL TAKE THE CROSS APPEALS FOR A.Y. 2 003-04 BEING ITA NO.2048/M/2008 AND 2049/M/2008 WHICH ARE DIRECTED A GAINST THE ORDER OF THE LD. CIT (A)-33, MUMBAI DATED 31.12.200 7. ITAS 2022 & 2023/M/2008 ITAS 2048 & 2049/M/2008 BNP PARIBAS SA 6 13. AS REGARDS THE APPEAL OF THE ASSESSEE, IT IS OB SERVED THAT THE SOLITARY ISSUE INVOLVED THEREIN RELATING TO THE ADD ITION OF ` 1,81,78,299/- MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT (A) A CCOUNT OF INTEREST PAID BY THE INDIAN BRANCH TO HEAD OFFICE / OVERSEAS BRANCHES IS SIMILAR TO ONE INVOLVED IN THE APPEAL OF THE ASSESSEE FOR T HE A.Y. 2002-03 WHICH HAS BEEN DECIDED BY US IN PARA NO.5 OF THIS ORDER. FOLLOWING THE CONCLUSION DRAWN IN A.Y. 2002-03, WE DELETE THE ADD ITION MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT (A) ON THIS ISSUE AND ALLOW THE APPEAL OF THE ASSESSEE. 14. AS REGARDS THE APPEAL OF THE REVENUE FOR A.Y. 2 003-04, IT IS OBSERVED THAT THE SOLITARY ISSUE INVOLVED THEREIN R ELATING TO TAXABILITY OF GUARANTEE COMMISSION IS SIMILAR TO ONE INVOLVED IN GROUND NO.2 OF THE REVENUES APPEAL FOR A.Y. 2002-03 WHICH HAS BEEN DE CIDED BY US IN PARA NO.11 OF THIS ORDER. FOLLOWING OUR CONCLUSION DRAW N IN A.Y. 2002-03, WE UPHOLD THE IMPUGNED ORDER OF THE LD. CIT (A) ON THIS ISSUE AND DISMISS THE APPEAL OF THE REVENUE. 15. IN THE RESULT, APPEALS OF THE ASSESSEE ARE ALLO WED WHILE APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 2 0TH JUNE 2012. SD/- ( AMIT SHUKLA ) JUDICIAL MEMBER SD/- ( P.M. JAGTAP ) ACCOUNTANT MEMBER MUMBAI, DATE: 20TH JUNE 2012 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) 33, MUMBAI. 4) THE CIT / DIT INTERNATIONAL TAXATION __ CONCERNED M UMBAI. 5) THE D.R. L BENCH, MUMBAI. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN