M/s. ANTWERP DIAMOND BANK NV, MUMBAI V. ADIT (IT)- 2(2), MUMBAI

ITA 3211/MUM/2007

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62699 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 23-07-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 25-04-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MAHESH KUMAR
• Assessee Lawyers: NITESH JOSHI
• Keywords: Double taxation relief; Opportunity of being heard; Permanent establishment; Non-deduction of tax

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI , ' #$ , .. &'( ) #$ #* BEFORE SHRI DINESH KUMAR AGARWAL, JM AND SHRI P.M. JAGTAP , AM #./ I.T.A. NO. 3211/MUM/2007 ( ' , -, ' , -, ' , -, ' , -, / / / / ASSESSMENT YEAR : 2003-04) ANTWERP DIAMOND BANK N.V., 2 ND FLOOR, ENGINEERING CENTRE, 9 MATHEW ROAD, OPERA HOUSE, MUMBAI 400 004. VS. THE ASSISTANT DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 2(2), MUMBAI. $. ) #./ PAN: AADCA2713 J ( ./ / // / APPELLANT ) .. ( 01./ / RESPONDENT ) ./ 2 3 #/ APPELLANT BY SHRI NITESH JOSHI 01./ 2 3 # / RESPONDENT BY : SHRI MAHESH KUMAR # 2 () / // / DATE OF HEARING : 23-7-2012 45- 2 () / DATE OF PRONOUNCEMENT : 25-7-2012 / O R D E R PER DINESH KUMAR AGARWAL, J.M.: THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER DTD. 31-01-2007 PASSED BY THE LD. CIT(A) XXXI, MUMBAI FOR THE A.Y. 2003-04. ITA 3211/M/2007 2 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSEE IS A BRANCH OF A FOREIGN BANK BEING ASSESSED ON THE INCOME ATTRIBUTA BLE TO THE INDIA OPERATIONS IN THE STATUS OF NON-RESIDENT. IT ENGAGED IN THE B USINESS OF BANKING ACTIVITIES IN INDIA. DURING THE COURSE OF ASSESSMENT PROCEEDING, IT WAS INTER ALIA OBSERVED BY THE A.O. THAT THE ASSESSEE HAS PAID AN AMOUNT OF RS. 1,22,80,824/- AS INTEREST TO H.O. ON SUBORDINATED DEBT AND TERM DEPO SITS. IT HAS BEEN CLAIMED AS EXPENSES OF THE PE AND SIMULTANEOUSLY IT HAS BEE N OFFERED FOR TAXATION OF THE H.O. AT A RATE OF 10%. THE ASSESSEE HAS ALSO DEDUC TED TAX AT SOURCE. THE ASSESSEE WAS REQUESTED TO EXPLAIN AS TO WHY IT SHOU LD NOT BE DISALLOWED. IN RESPONSE THE ASSESSEE FILED THE SUBMISSIONS VIDE LE TTER DTD. 28-3-2006 WHICH THE A.O. SUMMARIZED IN PARA 7.1 OF THE ASSESSMENT O RDER AS UNDER:- (A) THE ASSESSEE HAS A PE IN INDIA AND ACCORDINGLY IT I S LIABLE TO TAX IN INDIA AND THE ASSESSEE HAS OPTED TO BE GOVERNED BY THE PR OVISIONS OF TAX TREATY BETWEEN INDIA AND BELGIUM. (B) TAXABILITY OF INTEREST RECEIVED BY BRANCH IN MUMBAI BEING A PERMANENT ESTABLISHMENT IN INDIA OUGHT TO BE GOVERNED BY THE PROVISIONS OF THE TAX TREATY. (C) THE ASSESSEE HAS REFERRED PROVISIONS OF ARTICLE 7-3 (B) OF THE DTAA BETWEEN INDIA AND BELGIUM AND SUBMITTED THAT THE ASSESSEE S HOULD BE ALLOWED DEDUCTION TO INTEREST PAID TO H.O. AS PER THE SPECI FIC PROVISION IN THE TAX TREATY. (D) THE TREATY CANNOT HAVE THE EFFECT OF IMPOSING AN OB LIGATION ON AN ASSESSEE IN RESPECT OF INTEREST PAID BY ITS BRANCH IN INDIA TO THE H.O. (E) THE TREATY DOES NOT IMPOSE ANY OBLIGATION ON THE AS SESSEE TO DEDUCT TAX AT SOURCE IN RESPECT OF INTEREST PAID BY ITS BRANCH IN INDIA TO THE H.O. (F) THE FICTION CREATED BY ARTICLE 7(2) IS LIMITED ONLY FOR THE PURPOSE OF DETERMINATION OF THE PROFITS ATTRIBUTABLE TO THE PE AND FOR NO OTHER PURPOSE. ITA 3211/M/2007 3 (G) RELIANCE IS PLACED ON THE DECISION OF BOMBAY TRIBUN AL IN THE CASE OF DCIT VS. BOSTON CONSULTING GROUP PTE. LTD. ( 94 ITD 31). (H) SUCH INTEREST COULD BE ALLOWABLE AS A DEDUCTION IN COMPUTING THE INCOME OF PERMANENT ESTABLISHMENT, INTEREST SO PAID CANNOT BE CHARGED TO TAX IN INDIA EITHER UNDER ARTICLE 7 AS BUSINESS PROFITS OR ARTICLE 12 AS INTEREST. HOWEVER, THE A.O. FOLLOWING THE DECISION OF THE SPE CIAL BENCH OF ITAT IN ABN AMRO BANK ( 97 ITD 89) HAS ADDED AN AMOUNT OF RS. 1 ,22,80,824/- TO THE TOTAL INCOME OF THE ASSESSEE. HE FURTHER HELD THAT SIMULT ANEOUSLY NO INTEREST INCOME IS BEING TAXED AS INCOME OF H.O. AS THE SAME IS OFF ERED BY THE ASSESSEE AT LOWER RATE. ON APPEAL THE LD. CIT(A) WHILE UPHOLDING THE VIEWS OF THE A.O. CONFIRMED THE ADDITION MADE BY THE A.O. HE FURTHER HELD THAT SINCE THE A.O. HAS DISALLOWED THE H.O. INTEREST OF RS. 1,22,80,824/-, THEREFORE, THE AMOUNT OF RS. 36,59,143/- WHICH HAS BEEN ADDED TWICE, DIRECTED TH E A.O. TO DELETE THE DOUBLE ADDITION. 3. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A) T HE ASSESSEE IS IN APPEAL BEFORE US TAKING THE FOLLOWING GROUNDS OF APPEAL:- THE APPELLANT OBJECTS TO THE ORDER UNDER SECTION 2 50 OF THE INCOME TAX ACT,1961 (THE ACT) DATED 31 JANUARY 2007 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS) [THE LEARNED CIT(A)] FOR THE AFORESAID ASSESSMENT YEAR ON THE FOLLOWING AMONG OTHER GROUNDS:- 1. INTEREST PAID TO HEAD OFFICE: (A) THE LEARNED CIT(A) ERRED IN CONFIRMING THE ORDE R OF ADIT DISALLOWING THE INTEREST PAID TO HEAD OFFICE OF RS. 1,22,80,824/- W HILE COMPUTING THE INCOME FROM BUSINESS OF THE INDIA BRANCH. (B) HE ERRED IN RELYING ON THE DECISION OF KOLKATA TRIBUNAL, SPECIAL BENCH IN THE CASE OF ABN AMRO BANK. HE ERRED IN NOT CONSIDE RING CIRCULAR NO. 740 DATED 17 APRIL 1996 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES. ITA 3211/M/2007 4 (C) HE ERRED IN NOT APPRECIATING IN THE CORRECT PER SPECTIVE THE SUBMISSIONS MADE BY THE APPELLANT. (D) HE ERRED IN NOT APPRECIATING THAT THE APPELLANT AND THE HEAD OFFICE IN BELGIUM CONSTITUTE SEPARATE LEGAL ENTITY FOR THE PU RPOSE OF TAXATION IN INDIA AND THEREFORE, INTEREST PAID BY BRANCH TO HEA D OFFICE WAS FULLY ALLOWABLE AS A DEDUCTION. 4. THE ASSESSEE VIDE ITS LETTER DTD. 28-6-2011 HAS ALSO RAISED THE FOLLOWING ADDITIONAL GROUNDS OF APPEAL:- 1. INTEREST INCOME NOT TAXABLE IN THE HANDS OF THE HEA D OFFICE (A) THE APPELLANT SUBMITS THAT THE INTEREST OF RS. 12,280,824/- RECEIVED BY THE HEAD OFFICE FROM THE BRANCH ON SUBORDINATED DEB T AND TERM BORROWINGS IS NOT TAXABLE IN THE HANDS OF THE HEAD OFFICE. (B) RELIANCE IN THIS CONNECTION IS PLACED ON THE DE CISION OF THE CALCUTTA HIGH COURT IN THE CASE OF ABN AMRO BANK (ITA NO. 458 OF 2005) 2. THE ABOVE GROUND OF APPEAL IS WITHOUT PREJUDICE TO THE GROUNDS FILED BY THE APPELLANT VIDE LETTER REF. NO. 1/5605/782 DATED 23 APRIL 2007. 5. AT THE TIME OF HEARING BOTH THE PARTIES HAVE AGR EED THAT THE ISSUE RAISED IN APPEAL IS COVERED IN FAVOUR OF THE ASSESSEE BY T HE DECISION OF THE LARGER BENCH OF THE TRIBUNAL IN SUMITOMO MITSUI BANKING CO RPORATION VS. DY. DIRECTOR OF INCOME-TAX (IT), RANGE 2(1) MUMBAI (2012) 136 IT D 66 (MUM) [SB], THEREFORE, THE ISSUE MAY BE DECIDED ACCORDINGLY. T HE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITS THAT THE ISSUE RAISED IN T HE ADDITIONAL GROUNDS OF APPEAL IS BORN OUT FROM THE ASSESSMENT ORDER WHEREI N AT PAGE 16 OF THE ORDER IT HAS BEEN OBSERVED BY THE A.O. THAT ..SIMULTANEOU SLY NO INTEREST INCOME IS BEING TAXED AS INCOME OF H.O. AS OFFERED BY THE ASS ESSEE AT A LOWER RATE, THEREFORE, THE ISSUE RAISED IN THE ADDITIONAL GROUN DS OF APPEAL TAKEN BY THE ITA 3211/M/2007 5 ASSESSEE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL (SUPRA). HOWEVER, THE LD. D.R. SUBMITS THAT SINCE NO ADDITION WAS MADE BY THE A.O., THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE BE REJECTED. 6. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND M ERIT IN THE PLEA OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ADDITIONAL GROUND S OF APPEAL RAISED BY THE ASSESSEE DO ARISE FROM THE FINDING GIVEN ASSESSMENT ORDER (SUPRA), THEREFORE, FOLLOWING THE RATIO OF THE DECISION OF HONBLE SUPR EME COURT IN THE CASE OF NATIONAL THERMAL POWER CO. LTD. VS. COMMISSIONER OF INCOME-TAX (1998) 229 ITR 383 (SC), WE ADMIT THE ADDITIONAL GROUNDS RAISE D BY THE ASSESSEE. 7. IN SUMITOMO MITSUI BANKING CORPORATION VS. DY. D IRECTOR OF INCOME-TAX (IT) (SUPRA) IT HAS BEEN HELD (HEADNOTE PAGE 76):- KEEPING IN VIEW ALL THE FACTS OF THE CASE AND THE LEGAL POSITION EMANATING FROM THE INTERPRETATION OF THE RELEVANT PROVISIONS OF DO MESTIC LAW AS WELL AS THAT OF THE TREATY AS DISCUSSED ABOVE, IT IS HELD THAT ALTHOUGH INTEREST PAID TO THE HEAD OFFICE OF THE ASSESSEE BANK BY ITS INDIAN BRANCH WHICH CON STITUTES ITS PE IN INDIA IS NOT DEDUCTIBLE AS EXPENDITURE UNDER THE DOMESTIC LAW BE ING PAYMENT TO SELF, THE SAME IS DEDUCTIBLE WHILE DETERMINING THE PROFIT ATTRIBUT ABLE TO THE PE WHICH IS TAXABLE IN INDIA AS PER THE PROVISIONS OF ARTICLES 7(2) & 7(3) OF THE INDO-JAPANESE TREATY READ WITH PARAGRAPH 8 OF THE PROTOCOL WHICH ARE MORE BEN EFICIAL TO THE ASSESSEE. THE SAID INTEREST, HOWEVER, CANNOT BE TAXED IN INDIA IN THE HANDS OF ASSESSEE BANK, A FOREIGN ENTERPRISE BEING PAYMENT TO SELF WHICH CANN OT GIVE RISE TO INCOME THAT IS TAXABLE IN INDIA AS PER THE DOMESTIC LAW. EVEN OTHE RWISE, THERE IS NO EXPRESS PROVISION CONTAINED IN THE RELEVANT TAX TREATY WHIC H IS CONTRARY TO THE DOMESTIC LAW IN INDIA ON THIS ISSUE. THIS POSITION APPLICABL E IN THE CASE OF INTEREST PAID BY INDIAN BRANCH OF A FOREIGN BANK TO ITS HEAD OFFICE EQUALLY HOLDS GOOD FOR THE PAYMENT OF INTEREST MADE BY THE INDIAN BRANCH OF A FOREIGN BANK TO ITS BRANCH OFFICES ABROAD AS THE SAME STANDS ON THE SAME FOOTI NG AS THE PAYMENT OF INTEREST MADE TO THE HEAD OFFICE. BOTH THE SIDES HAVE ALSO N OT MADE ANY SEPARATE SUBMISSIONS ON THIS ASPECT OF THE MATTER SPECIFICAL LY. HAVING HELD THAT THE INTEREST PAID BY THE INDIAN BRANCH OF THE ASSESSEE BANK TO I TS HEAD OFFICE AND OTHER ITA 3211/M/2007 6 BRANCHES OUTSIDE INDIA IS NOT CHARGEABLE TO TAX IN INDIA, IT FOLLOWS THAT THE PROVISIONS OF SECTION 195 WOULD NOT BE ATTRACTED AN D THERE BEING NO FAILURE TO DEDUCT TAX AT SOURCE FROM THE SAID PAYMENT OF INTER EST MADE BY THE PE, THE QUESTION OF DISALLOWANCE OF THE SAID INTEREST BY IN VOKING THE PROVISIONS OF SECTION 40(A)(I) DOES NOT ARISE. ACCORDINGLY, QUESTION NO.1 REFERRED TO BEFORE THE INSTANT SPECIAL BENCH IS ANSWERED IN THE NEGATIVE I.E., IN FAVOUR OF THE ASSESSEE AND QUESTION NO.2 IN AFFIRMATIVE I.E., AGAIN IN FAVOUR OF THE ASSESSEE. [PARA 88] 8. IN ABSENCE OF ANY DISTINGUISHING FEATURE BROUGHT ON RECORD BY THE REVENUE, WE RESPECTFULLY FOLLOWING THE ABOVE DECISI ON OF THE LARGER BENCH OF THE TRIBUNAL, DELETE THE ADDITION OF RS. 1,22,80,824/- MADE BY THE A.O. AND SUSTAINED BY THE LD. CIT(A). THE GROUNDS TAKEN BY T HE ASSESSEE ARE, THEREFORE, ALLOWED. 9. WITH REGARD TO THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE FOR THE FIRST TIME BEFORE THE TRIBUNAL, WE KEEPING IN VIEW THE RA TIO OF THE DECISION IN CIT VS. TOLLARAM HASSOMAL (2008) 298 ITR 22 (MP) WHEREIN IT HAS BEEN HELD THAT (HEADNOTE) THAT THE TRIBUNAL HAVING PERMITTED THE ASSESSEE TO RAISE FOUR ADDITIONAL GROUNDS TREATING THEM TO BE LEGAL GROUND S IN APPEAL FOR THE FIRST TIME, SHOULD HAVE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) AND REMANDED THE CASE TO THE COMMISSIONER OF INCOME-TAX (APPEALS) FOR DECIDING THE APPEAL AFRESH ON ALL THE ISSUES INCLUDING ON THOSE FOUR GROUNDS RAISED BY THE ASSESSEE IN THE APPEAL BEFORE THE TRIBUNAL RATHER T HAN TO DECIDE THE ADDITIONAL GROUNDS ON THE MERITS FOR THE FIRST TIME BY ITSELF , REMAND THE SAID ADDITIONAL GROUNDS TO THE LD. CIT(A) TO DECIDE THE SAME AFRESH AND ACCORDING TO LAW INCLUDING THE DECISION OF THE LARGER BENCH OF THE T RIBUNAL (SUPRA) AFTER PROVIDING ITA 3211/M/2007 7 REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. THE ADDITIONAL GROUNDS TAKEN BY THE ASSESSEE ARE, THEREFORE, PARTLY ALLOWE D FOR STATISTICAL PURPOSE. 10. IN THE RESULT, ASSESSEES APPEAL STANDS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 6 (7 ' ,6( 2 $ ( 8 2 &( 9: ORDER PRONOUNCED IN THE OPEN COURT ON 25-7-2012. . 2 45- ) 7 25-7-2012 5 2 ' SD/- SD/- ( P.M. JAGTAP ) ( DINESH KUMAR AGARWAL ) ) #$ / ACCOUNTANT MEMBER ' #$ / JUDICIAL MEMBER MUMBAI ; DATED 25-7-2012. .'.#./ . R.K. , SR. PS 2 0'(BC C-( 2 0'(BC C-( 2 0'(BC C-( 2 0'(BC C-(/ COPY OF THE ORDER FORWARDED TO : 1. ./ / THE APPELLANT 2. 01./ / THE RESPONDENT. 3. D () / THE CIT(A)- XXXI MUMBAI 4. D / DIT INTERNATIONAL TAXATION) , MUMBAI. 5. C F' 0'(' , , / DR, ITAT, MUMBAI L 6. 'G, H / GUARD FILE. # # # # / BY ORDER, #1C( 0'( //TRUE COPY// I II I/ // /#9 & #9 & #9 & #9 & (DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI