DOHA BANK QSC INDIA BRANCHES, MUMBAI V. DCIT (iT) 2(2)(2), MUMBAI

ITA 3210/MUM/2017

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 9137 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 03-05-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Permanent establishment; Rule 8D
• Section: 143(3); 14A; 144C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K, BENCH MUM BAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER IT(TP)A NO.3210/MUM/2017 ( ASSESSMENT YEAR: 2011-12 ) DOHA BANK QSC, INDIA BRANCHES (SUCCESSORS TO HSBC BANK OMAN S.A.O.G., INDIA BRANCHES) SAKHAR BHAVAN, GROUND FLOOR, PLOT NO-230 BLOCK NO III, BACKBAY RECLAMATION, NARIMAN POINT MUMBAI - 400 021 VS. DCIT(INTERNATIONAL TRANSACTION)-2(2)(2) 17 TH FLOOR, AIR INDIA BUILDING, NARIMAN POINT MUMBAI-400 021 PAN/GIR NO. A A FCD3506L APPELLANT ) .. RESPONDENT ) ASSESSEE BY SHRI NIRAJ SHETH, AR REVENUE BY SHRI ANAND MOHAN, CIT-DR DATE OF HEARING 30 /07 /2020 DATE OF PRO NOUNCEME NT 05 /08 /2020 / O R D E R PER G.MANJUNATHA (A.M) : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS)56, MUMBAI, DATED 31/01/2017 AND IT PERTAINS TO ASSESSMENT YEAR 2011-12. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- RE. RELIEF NO. 1 THE COMMISSIONER OF INCOME-TAX (APPEALS)-56, MUMBAI [HEREINAFTER REFERRED TO AS 'THE CIT(A)'] ERRED IN HOLDING THAT PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED T O AS 'THE ACT') ARE APPLICABLE WITH RESPECT TO INTEREST RECEIVED BY THE BRANCH OF THE IT(TP)A NO.3210/MUM/2017 DOHA BANK QSC 2 APPELLANTS FROM ITS HO HAVING FAILED TO APPRECIATE THAT INTEREST RECEIVED FROM HO IS NOT EXEMPT INCOME. 2. WITHOUT PREJUDICE TO (1) ABOVE, THE CIT(A) ERR ED IN NOT APPRECIATING THAT SINCE THE BANK HAD NOT INCURRED ANY EXPENDITUR E FOR THE PURPOSE OF EARNING THE INTEREST AMOUNT, PROVISIONS OF SECTION 14A ARE NOT APPLICABLE. 3. WITHOUT PREJUDICE TO GROUND NOS. 1 AND 2, THE CI T(A) ERRED IN UPHOLDING THE ACTION OF AO OF APPLYING THE PROVISIONS OF SECT ION 14A R.W. RULE 8D OF THE ACT NOT APPRECIATING THAT THE SAID PROVISIONS C AN BE INVOKED ONLY IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLA IM OF THE APPELLANTS IN RESPECT OF SUCH EXPENDITURE IN RELATION TO SUCH INC OME. RE. RELIEF NO. 2 4.THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE A O THAT TRANSFER PRICING PROVISIONS ARE APPLICABLE FOR TRANSACTIONS BETWEEN THE BRANCH AND ITS HO OVERSEAS BRANCHES HAVING FAILED TO APPRECIATE THAT INDIAN BRANCH AND THE HEAD OFFICE ARE ONE AND THE SAME PERSONS AND NOT SE PARATE INDEPENDENT ENTERPRISES. RE. RELIEF NO. 3 5. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO IN ACCEPTING THE ADJUSTMENT OF RS.26,65,783 MADE BY THE TPO ON I NTEREST PAID BY THE INDIAN BRANCH TO ITS HO HAVING FAILED TO APPRECIATE THE FACT THAT TRANSACTION ENTERED INTO BY THE APPELLANTS WITH ITS HO ARE AT ARM'S LENGTH. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS AN INDIAN BRANCH OF M/S. HSBC BANK OMAN S.A.O.G (EARLIER KNOW N AS OMAN INTERNATIONAL BANK S.A.O.G) REGISTERED IN OMAN. IT IS ENGAGED IN BANKING ACTIVITIES. THE ASSESEE IS OPERATING IN IND IA THROUGH ITS PE (PERMANENT ESTABLISHMENT) AND THUS, THE HEAD OFFICE (HO) BECOMES THE AE OF THE BRANCH OFFICES IN INDIA. IN THIS CASE, A DRAFT ASSESSMENT ORDER U/S 144C(1) R.W.S 143(3) OF THE AC T, 1961 WAS PASSED ON 25/03/2015. IN THE DRAFT ASSESSMENT ORDER , THE LD. AO HAS PROPOSED ADJUSTMENT OF RS.26,65,783/- TOWARDS A RMS LENGTH PRICE (ALP) OF INTEREST ON BORROWING FROM HEAD OFFI CE. IT IS SEEN FROM THE RECORDS THAT THE ASSESSEE HAS NEITHER, FILED AN Y OBJECTIONS BEFORE THE LD. DRP, NOR HAS INTIMATED THE LD. AO AB OUT THE IT(TP)A NO.3210/MUM/2017 DOHA BANK QSC 3 ACCEPTANCE OF VARIATION IN DRAFT ASSESSMENT ORDER, WITHIN THE PERIOD SPECIFIED IN SUB-SECTION (2) OF SECTION 144C OF THE I.T.ACT, 1961. THEREFORE, THE LD. AO HAS PASSED FINAL ASSESSMENT O RDER ON 29/05/2015 U/S 143(3) R.W.S. 144C(3) OF THE I.T.ACT , 1961 AND DETERMINED TOTAL INCOME AT RS. NIL AFTER MAKING ADDITIONS TOWARDS TP ADJUSTMENT AS SUGGESTED BY THE LD.TPO AND ADDITI ONS TOWARDS DISALLOWANCES U/S 14A R.W.RULE 8D OF I.T.RULES, 196 2 AMOUNTING TO RS.88,551/-. 4. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE A SSESEE PREFERRED AN APPEAL BEFORE THE LD.CIT(A). BEFORE THE LD.CIT(A ), THE ASSESEE HAS CHALLENGED ADDITIONS MADE BY THE LD. AO TOWARDS TP ADJUSTMENT OF RS.26,65,783/- MADE ON INTEREST PAID BY THE INDIAN BRANCH TO ITS HEAD OFFICE AND DISALLOWANCE OF EXPE NDITURE U/S 14A OF THE I.T.ACT, 1961. THE LD.CIT(A) FOR THE REASONS RE CORDED IN ITS APPELLATE ORDER DATED 31/01/2017, UPHELD ADDITIONS MADE BY THE LD. AO TOWARDS TP ADJUSTMENT ON INTEREST PAYMENT TO HEA D OFFICE AND ALSO, DISALLOWANCES U/S 14A R.W.RULE 8D OF I.T.RUL ES, 1962. AGGRIEVED BY THE LD.CIT (A) ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. 5. AT THE TIME OF HEARING, THE LD. AR FOR THE ASS ESSEE SUBMITTED THAT GROUND NO.1 TAKEN BY THE ASSESEE CHALLENGING A PPLICABILITY OF PROVISIONS OF SECTION 14A OF THE I.T.ACT, 1961 TOWA RDS INTEREST RECEIVED BY THE BRANCH OFFICE FROM ITS HEAD OFFICE IS NOT EXEMPT INCOME, CONSEQUENTLY, PROVISIONS OF SECTION 14A HAS NO APPLICATION IS DECIDED AGAINST THE ASSESSEE BY THE ITAT FOR EAR LIER YEARS AND HENCE, HE DO NOT WANT TO PRESS THE GROUND. THEREFOR E, THE GROUND TAKEN BY THE ASSESSEE CHALLENGING APPLICABILITY OF PROVISIONS OF IT(TP)A NO.3210/MUM/2017 DOHA BANK QSC 4 SECTION 14A ON INTEREST RECEIVED FROM HEAD OFFICE I S DECIDED AGAINST THE ASSESSEE BY FOLLOWING THE ORDER OF THE ITAT IN ASSESEE OWN CASE FOR AY 2004-05 & 2005-06. FURTHER, THE LD. AR FOR T HE ASSESSEE, AT THE TIME OF HEARING SUBMITTED THAT HE DO NOT WISH T O PRESS GROUND NO.4 & 5 CHALLENGING UPWARD ADJUSTMENT MADE BY THE TPO, AN INTEREST PAID BY THE INDIAN BRANCH TO ITS HEAD OFFI CE AND THEREFORE, GROUND NO.4 AND 5 OF THE ASSESSEE ARE DISMISSED AS NOT PRESSED. 6. THE NEXT AND FINAL ISSUE THAT CAME UP FOR OUR CONSIDERATION FROM GROUND NO.2 & 3 OF ASSESSEE APPEAL IS DISALLOWANCES U/S 14A OF THE ACT, R.W.RULE 8D(2) OF I.T. RULES, 1962. THE LD. AO HAS DISALLOWED AN AMOUNT OF RS.88,551/- TOWARDS INTEREST EXPENDITU RE UNDER RULE 8D(2)(II) AND OTHER EXPENSES @ 0.5% OF AVERAGE VALUE OF INVESTMENTS UNDER RULE 8D(2)(III) OF I.T.RULES, 196 2. 7. THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE LD.CIT(A) HAS ERRED IN NOT APPRECIATING THAT SINCE, THE BANK HAD NOT INCURRED ANY EXPENDITURE FOR THE PURPOSE OF EARNING INTEREST AMO UNT, PROVISIONS OF SECTION 14A ARE NOT APPLICABLE. THE LD. AR, FURTHER SUBMITTED THAT IF AT ALL PROVISIONS OF SECTION 14A IS APPLICABLE, EVE N OTHERWISE, THERE COULD NOT BE ANY DISALLOWANCES UNDER RULE 8D(2)(II ) TOWARDS INTEREST EXPENDITURE, BECAUSE THE ASSESSEE HAS SUFF ICIENT OWN FUNDS, WHICH IS IN EXCESS OF INVESTMENTS CONSIDERED BY THE LD. AO FOR DISALLOWANCE OF INTEREST EXPENDITURE. THE LD. A R, FURTHER SUBMITTED THAT AS REGARDS DISALLOWANCES OF OTHER EX PENSES UNDER RULE 8D(2)(III) OF I.T.RULES, 1962, A REASONABLE AM OUNT OF 1% TO 2% OF TOTAL EXEMPT INCOME MAY BE DISALLOWED. HE, FURTH ER, SUBMITTED THAT IN ANY CASE TOTAL DISALLOWANCES WORKED OUT BY THE LD. AO SHALL NOT EXCEED EXEMPT INCOME EARNED BY THE ASSESSEE AND IN THIS IT(TP)A NO.3210/MUM/2017 DOHA BANK QSC 5 REGARD, HE RELIED UPON VARIOUS JUDICIAL PRECEDENTS. THE LD. AR FOR THE ASSESSEE HAS ALSO CHALLENGED THE DISALLOWANCES WORKED OUT BY THE LD. AO, ON THE GROUND THAT THE LD. AO HAS INVOK ED PROVISIONS OF SECTION 14A WITHOUT RECORDING ANY SATISFACTION AS R EQUIRED UNDER SECTION 14A(2) AND HENCE, IN ABSENCE OF ANY SATISFA CTION, THE DISALLOWANCES WORKED OUT BY THE LD. AO CANNOT SURVI VE IN THE EYES OF LAW. 8. THE LD. DR, ON THE OTHER HAND STRONGLY SUPPORTI NG ORDER OF THE LD.CIT(A) SUBMITTED THAT FROM AY 2008-09 ONWARDS, A PPLICATION OF PROVISIONS OF SECTION 14A IS MANDATORY, IN THE CASE , WHERE THE ASSESSEE EARNED EXEMPT INCOME AND HENCE, THERE IS N O MERIT IN ARGUMENTS OF THE ASSESSEE THAT ADHOC DISALLOWANCES OF 1% TO 2% OF TOTAL EXEMPT INCOME MAY BE DISALLOWED AND IS OPP OSED TO THE SETTLED POSITION OF LAW. 9. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MAT ERIAL AVAILABLE ON RECORD AND GONE THROUGH ORDERS OF THE AUTHORITIE S BELOW. AS REGARDS, SATISFACTION ISSUE, WE FIND THAT THE QUEST ION OF RECORDING SATISFACTION COMES INTO PLAY ONLY, WHEN THE ASSESS EE HAS MADE SUO-MOTO DISALLOWANCE U/S 14A, BUT SUCH DISALLOWANC ES HAS NOT BEEN ACCEPTED BY THE LD. AO. IN SUCH EVENTUALITY, T HE LD. AO HAS TO RECORD CLEAR SATISFACTION AS REQUIRED U/S 14A(2) OF THE ACT, HAVING REGARD TO BOOKS OF ACCOUNTS OF THE ASSESSEE THAT SU O-MOTO DISALLOWANCES COMPUTED BY THE ASSESSEE IS INCORRECT . IN CASE, THERE IS NO SUO-MOTO DISALLOWANCES FROM THE ASSESSEE, THE N THE REQUIREMENT OF RECORDING SATISFACTION AS REQUIRED U NDER LAW DOES NOT ARISE AND THE LD. AO CAN INVOKE PROVISIONS OF SECTI ON 14A OF THE ACT, WITH REFERENCE TO RULE 8D OF I.T. RULES, 1962 TO CO MPUTE IT(TP)A NO.3210/MUM/2017 DOHA BANK QSC 6 DISALLOWANCES OF EXPENDITURE IN RELATION TO EXEMPT INCOME. THIS LEGAL POSITION IS SUPPORTED BY THE RATIO LAID DOWN BY HON BLE SUPREME COURT IN CASE OF MAXOPP INVESTMENTS LTD VS. CIT(201 8) 402 ITR 640(SC). IN THIS CASE, IT IS VERY CLEAR FROM THE AS SESSMENT ORDER THAT THERE ARE NO SUO- MOTO DISALLOWANCES FROM THE ASSES EE AND WHEN, THIS WAS BROUGHT TO THE NOTICE OF THE LD. AR FOR TH E ASSESSEE, THE ASSESSEE STATED THAT THERE IS NO APPLICATION OF SEC TION 14A OF THE ACT, FOR INTEREST INCOME EARNED FROM HEAD OFFICE, B UT NOT EXPLAINED HOW PROVISIONS OF RULE 8D ARE NOT APPLICABLE. THE L D. AO, ON THE BASIS OF INFORMATION FURNISHED BY THE ASSESSE HAS N OTED THAT THE EXPLANATION FURNISHED BY THE ASSESSEE IS NOT ACCEPT ABLE. FROM THE ABOVE, IT IS VERY CLEAR THAT THE FINDINGS RECORDED BY THE LD. AO IS SUFFICIENT AND A CLEAR INDICATION OF HIS COMPLIANCE OF THE PROCEDURE PRESCRIBED U/S 14A(2) AND HENCE, WE ARE OF THE CONS IDERED VIEW THAT THERE IS NO MERIT IN ARGUMENT TAKENS BY THE LD. AR FOR THE ASSESSEE REGARDING SATISFACTION AS REQUIRED U/S 14A(2) OF TH E I.T.ACT, 1961. HENCE, AN ARGUMENT OF LD. AR FOR THE ASSESSEE IS RE JECTED. 10. COMING BACK TO DISALLOWANCES QUANTIFIED BY THE LD. AO U/S 14A OF THE I.T.ACT, 1961. AS REGARDS INTEREST DISALLOWA NCES, IT IS A SETTLED POSITION OF LAW THAT ONLY NET INTEREST EXPENDITURE NEEDS TO BE CONSIDERED FOR COMPUTING DISALLOWANCES U/S 14A. THI S PRINCIPLE IS SUPPORTED BY THE DECISION OF HONBLE BOMBAY HIGH CO URT, IN THE CASE OF CIT VS JUBILIANT ENTERPRISES PVT.LTD IN ITA NO.1 512/2014. THEREFORE, WE DIRECT THE LD. AO TO CONSIDER NET INT EREST EXPENDITURE FOR THE PURPOSE OF WORKING OUT DISALLOWANCES OF INT EREST UNDER RULE 8D(2)(II) OF I.T.RULES, 1962. AS REGARDS OTHER EXPE NDITURE, ALTHOUGH THE ASSESEE HAS REQUESTED FOR DISALLOWANCES OF 1% T O 2% OF EXEMPT INCOME, BUT FROM AY 2008-09 ONWARDS DISALLOWANCES C ONTEMPLATED IT(TP)A NO.3210/MUM/2017 DOHA BANK QSC 7 U/S 14A SHALL BE COMPUTED IN ACCORDANCE WITH RULE 8 D, WHERE THE PROCEDURE HAS BEEN LAID DOWN FOR DETERMINATION OF D ISALLOWANCES OF EXPENDITURE AND THIS PRINCIPLE IS SUPPORTED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS GODREJ AND BOYCE MANUFACTURING CO.LTD. (2010) 328 ITR 81(BOMBAY). TH EREFORE, WE ARE OF THE CONSIDERED VIEW THAT THERE IS NO MERIT I N ARGUMENTS TAKEN BY THE ASSESEE AND HENCE, WE ARE INCLINED TO UPHOLD THE COMPUTATION OF OTHER EXPENSES AS PER RULE 8D(2)(III ) OF I.T.RULES, 1962. HOWEVER, WE FURTHER NOTED THAT ALTHOUGH, THE ASSESSEE EXEMPT INCOME IS AT RS.9,051/-, BUT THE LD. AO HAS DETERMINED THE DISALLOWANCES OF RS.88,551/-, WHICH IS MORE THAN AM OUNT OF EXEMPT INCOME, WHICH CANNOT BE THE CASE. IT IS A SETTLED P RINCIPLE OF LAW THAT DISALLOWANCES OF EXPENDITURE U/S 14A SHALL NOT SHAL LOW ENTIRE EXEMPT INCOME OF THE ASSESSEE. IN OTHER WORDS, THE DISALLO WANCES COMPUTED U/S 14A CANNOT EXCEED EXEMPT INCOME EARNED FOR THE YEAR UNDER CONSIDERATION AS HELD BY THE HONBLE DEL HI HIGH COURT, IN THE CASE OF JCIT VS JOINT INVESTMENTS PVT.LTD (2015 ) 372 ITR 694 AND CHEMINVEST LTD. VS CIT (378 ITR 33 (DEL). THERE FORE, CONSIDERING THE FACTS AND CIRCUMSTANCES OF THIS CAS E AND BY FOLLOWING THE CASE LAWS DISCUSSED HEREIN ABOVE, WE DIRECT THE LD. AO TO RESTRICT DISALLOWANCES OF EXPENDITURE COMPUTE D U/S 14A OF THE ACT, TO THE EXTENT OF EXEMPT INCOME OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. 11. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS: 05 / 08/2020 IT(TP)A NO.3210/MUM/2017 DOHA BANK QSC 8 SD/- ( SAKTIJIT DEY ) SD/- ( G. MANJUNATHA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED: 05/08/2020 THIRUMALESH SR.PS COPY OF THE ORDER FORWARDED TO : BY ORDER, (ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//