Appeal details
Counselvise Citation
449319914 RSA 2005
Assessee PAN
Bench
Appeal Number
Duration Of Justice
9 year(s) 10 month(s) 22 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
08-05-2015
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
L
Next Hearing Date
18-03-2015
Assessment Year
2001-2002
Appeal Filed On
16-06-2005
Judgement Text
, , Y INCOME TAX APPELLATE TRIBUNAL,MUMBAI - L BENCH , , BEFORE S/SH. I P BANSAL, JUDICIAL M EMBER & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO.4050/MUM/2004 , / ASSESSMENT YEAR - 1998 - 99 MASHREQ BANK PSC, 1305, RAHEJA CENTRE, 13TH FLOOR, NARIMAN POINT, MUMBAI - 400021 PAN: AAACM4303M VS THE JOINT DIRECTOR OF INCOME - T AX (INTERNATIONAL TAXATION) - 3(1), SCINDIA HOUSE, 1ST FLOOR, BALLARD ESTATE, MUMBAI - 400038 ( / ASSESSEE ) ( / RESPONDENT ) /. ITA NO.4 49 3/MUM/2005 , / ASSESSMENT YEAR - 2001 - 02 THE JOINT DIRECTOR OF INCOME - TAX (INTERNATIONAL TAXATION) - 3(2), SCINDIA HOUSE, 1ST FLOOR, N.M.ROAD, MUMBAI - 400038 VS MASHREQ BANK PSC, 1305, RAHEJA CENTRE, 13TH FLOOR, NARIMAN POINT, MUMBAI - 400021 PAN: AAACM4303M ( / ASSESSEE ) ( / RESPONDENT ) /. ITA NO.4793/MUM/2005 , / ASSESSMENT YEAR - 2001 - 02 MASHREQ BANK PSC, 1305, RAHEJA CENTRE, 13TH FLOOR, NARIMAN POINT, MUMBAI - 400021 PAN: AAACM4303M VS THE ASST. DIRECTOR OF INCOME - TAX (INTERNATIONAL TAXATION) - 1(2), SCINDIA HOUSE, 1ST FLOOR, N.M. ROAD, BALLARD ESTATE, MUMBAI - 38 ( / ASSESSEE ) ( / RESPONDENT ) /ASSESSEE BY :SHRI MADHUR AGARWAL / REVENUE BY : SHRI VIVEK A. PERAMPURNA / DATE OF HEARING : 08 - 0 5 - 2015 / DATE OF PRONOUNCEMENT : 0 8 - 0 5 - 2015 , 1961 254 ) 1 ( ORDER U/S.254(1)OF THE INCOME - TAX ACT,1961(ACT) PER BENCH : CHALLENGING THE ORDER S OF CIT(A) - XXXIII MUMBAI ,THE A SSESSEE AND THE ASSES SING OFFICER (AO) H AVE RAISED VARIOUS G ROUNDS OF APPEAL FOR THE ABOVE MENTIONED ASSESSMENT YEARS(AY.S.) : ITA NO.4050/MUM/2004 - AY.1998 - 99 : 1. THE COMMISSIONER OF INCOME TAX (APPEALS) XXXIII, MUMBAI [CIT(A)] ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER [AO] OF RESTRICTING THE DEDUCTIO N FOR HEAD OFFICE EXPENSES BY APPLYING THE PROVISIONS OF SECTION 44C OF THE ACT, AS AGAINST THE APPELLANTS CLAIM THAT THE ENTIRE AMOUNT OF RS.4,63,99,221 ALLOCATED TO THE INDIAN BRANCHES SHOULD BE ALLOWED AS A DEDUCTION AS PER THE PROVISIONS OF ARTICLE 7(3 ) OF THE DTAA BETWEEN THE GOVERNMENT OF U.A.E. AND THE GOVERNMENT OF INDIA (HEREINAFTER REFERRED TO AS THE TAX TREATY). THE APPELLANTS SUBMIT THAT IN COMPUTING THE TAXABLE BUSINESS INCOME IN INDIA, THE TREATY ALLOWS A DEDUCTION FOR ALL EXPENSES WHEREVER I NCURRED AND REASONABLY ALLOCABLE TO THE PERMANENT ESTABLISHMENT, INCLUDING ITS SHARE OF EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES. AS THE TREATY ITA/4050/MUM/2004 MASHREQ BANK PSC 2 OVERRIDES THE DOMESTIC LAW, THE AMOUNT ALLOCATED BY THE HEAD OFFICE SHOULD BE ALLOWED AS A DEDUCTION IN FUL L. THE APPELLANTS PRAY THAT THE AO BE DIRECTED TO ALLOW THE ENTIRE AMOUNT OF HEAD OFFICE EXPENSES. 2. THE CIT(A) ERRED IN UPHOLDING THE AO'S ACTION OF NOT ALLOWING THE APPELLANTS CLAIM THAT THE TAX RATE APPLICABLE TO ITS BUSINESS INCOME IS 35% AND NOT 48 % BEING THE RATE APPLICABLE TO FOREIGN COMPANIES FOR THE YEAR UNDER APPEAL. THE APPELLANTS SUBMIT THAT IN VIEW OF ARTICLE 26 OF THE TAX TREATY I.E. THE NONDISCRIMINATION CLAUSE READ WITH SECTION 90(2) OF THE ACT, THE BUSINESS INCOME IS CHARGEABLE TO TAX @ 35% AS IS APPLICABLE TO DOMESTIC COMPANIES. THE APPELLANTS PRAY THAT THE AO BE DIRECTED TO TAX ITS BUSINESS INCOME @ 35% AS AGAINST 48%. THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN DISALLOWING RS.1,54,64,006 BEING THE LOSS ON FORWARD FOREIGN EXCHANGE CONTRACTS WHICH WERE UNMATURED ON THE LAST DAY OF THE PREVIOUS YEAR. THE APPELLANTS SUBMIT AS UNDER: (I) THE FORWARD CONTRACTS ARE ENTERED INTO IN THE NORMAL COURSE OF BANKING OPERATIONS AND ARE NOT ON CAPITAL ACCOUNT. (II) THESE CONTRACTS A RE GENERALLY FOR A PERIOD OF LESS THAN ONE YEAR AND THEREFORE VERY SHORT TERM IN NATURE. ANY ADJUSTMENT WOULD RESULT IN THE AMOUNT HAVING TO BE ALLOWED IN THE SUBSEQUENT YEAR. IN SHORT THERE IS NO REVENUE GAIN OR LOSS BY FOLLOWING THIS METHOD. (III) THE V ALUATION IS DONE IN ACCORDANCE WITH THE RESERVE BANK OF INDIA (RBI) GUIDELINES BASED ON THE RATES DECLARED BY THE FOREIGN EXCHANGE DEALERS ASSOCIATION OF INDIA (FEDAI). THIS METHOD IS FOLLOWED BY THE ENTIRE BANKING INDUSTRY AND HAS BEEN FOLLOWED BY THE APP ELLANT CONSISTENTLY AND DOES NOT RESULT IN THE PROFIT OR LOSS BEING OVER OR UNDERSTATED. THE METHOD OF ACCOUNTING REGULARLY FOLLOWED BY THE BANK IS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 145 OF THE INCOME TAX ACT, 1961. THE APPELLANTS PRAY THAT THE AO BE DIRECTED TO ALLOW LOSS ON REVALUATION OF FORWARD FOREIGN EXCHANGE CONTRACTS OF RS.1,54,64,006. B) WITHOUT PREJUDICE THE APPELLANTS SUBMIT THAT THE AO BE DIRECTED TO ALLOW THE SAME IN THE YEAR IN WHICH THE CONTRACTS MATURE. 4. THE CIT(A) ERRED IN UP HOLDING THE AO'S ACTION OF RESTRICTING THE EXEMPTION IN RESPECT OF INTEREST ON TAX FREE BONDS TO RS.3,17,117. THE APPELLANTS SUBMIT THAT THE ENTIRE INTEREST ON TAX FREE BONDS OF RS.27,81,617 IS EXEMPT UNDER SECTION 10(15)(IV)(H). THE APPELLANTS PRAY THAT THE AO BE SUITABLY DIRECTED IN THE MATTER. 5. IN THE EVENT THE DECISION OF THE CIT(A) TRIBUNAL IN THE EARLIER YEARS THAT THE BROKEN PERIOD INTEREST PAID ON PURCHASE OF SECURITIES IS ALLOWABLE AS A REVENUE EXPENDITURE IN THE RESPECTIVE YEARS IS REVERSED, THEN WITHOUT PREJUDICE THE AO BE DIRECTED TO ALLOW A DEDUCTION FOR THE BROKEN PERIOD INTEREST DISALLOWED BY HIM IN THE EARLIER YEARS IN RESPECT OF SECURITIES SOLD DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 1998 99. 6. WITHOUT PREJUDICE TO THE AP PELLANTS CONTENTION THAT BROKEN PERIOD INTEREST IS ALLOWABLE IN THE YEAR OF PURCHASE, THE CIT(A) OUGHT TO HAVE DIRECTED THE AO TO ALLOW A DEDUCTION FOR THE BROKEN PERIOD INTEREST DISALLOWED BY HIM IN THE EARLIER YEARS IN RESPECT OF SECURITIES SOLD DURING T HE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 1998 99. THE APPELLANTS CRAVE LEAVE TO ADD TO, AMEND, ALTER, VARY, OMIT OR SUBSTITUTE THE AFORESAID GROUNDS OF APPEAL OR ADD A NEW GROUND OR GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL AS THEY MAY BE ADVISED. ITA/4050/MUM/2004 MASHREQ BANK PSC 3 ITA NO. 47 93/MUM/2005, AY - 2001 - 02 1. THE COMMISSIONER OF INCOME TAX (APPEALS) XXXIII, MUMBAI (HEREINAFTER REFERRED TO AS THE CIT(A)) ERRED IN CONFIRMING THE ACTION OF THE ASSISTANT DIRECTOR OF INCOME TAX (INTERNATIONAL TAXA TION) 1(2), MUMBAI (HEREINAFTER REFERRED TO AS THE AO) IN RESTRICTING THE DEDUCTION OF HEAD OFFICE EXPENSES BY APPLYING THE PROVISIONS OF SECTION 44C OF THE ACT, AS AGAINST THE APPELLANTS CLAIM THAT THE ENTIRE AMOUNT OF RS.1 ,53,42,210 ALLOCATED TO THE INDI AN BRANCHES SHOULD BE ALLOWED AS A DEDUCTION AS PER THE PROVISIONS OF ARTICLE 7(3) OF THE DTAA BETWEEN THE GOVERNMENT OF UA.E. AND THE GOVERNMENT OF I NDIA. 2. THE CIT(A) OUGHT TO HAVE HELD THAT IN CASE THE HIGHER AUTHORITIES REVERSE THE DECISION OF THE CI T(A) IN THE ASSESSMENT YEAR 1999 2000 OF ALLOWING THE DEDUCTION FOR PAYMENT MADE ON ACCOUNT OF VOLUNTARY RETIREMENT SCHEME(VRS) IN THE YEAR OF PAYMENT, THE AO BE DIRECTED TO ALLOW DEDUCTION OF RS.81,84,564 IN THE ASSESSMENT YEAR 2001 02 ON ACCOUNT OF THE A MOUNT OF VRS AMORTISED IN THE BOOKS OF ACCOUNT. THE CIT(A) ERRED IN HOLDING THAT AN AMOUNT OFRS.8,20,85,157 EARNED BY OVERSEAS BRANCHES FOR MOBILISING DEPOSITS FOR THE STATE BANK OF INDIA UNDER THE INDIAN MILLENIUM DEPOSIT SCHEME IS TAXABLE IN INDIA. THE APPELLANTS CRAVE LEAVE TO ADD TO, AMEND, ALTER, VARY, OMIT OR SUBSTITUTE THE AFORESAID GROUNDS OF APPEAL OR ADD A NEW GROUND OR GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL AS THEY MAY BE ADVISED. ITA NO . 4493/MUM/2005, AY - 2001 - 02 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) HAS ERRED IN DIRECTING THE AO TO COMPUTE THE COMMISSION INCOME IN THE HANDS OF THE APPELLANT BANK RECEIVED IN INDIA UNDER ARTICLE 7(1) OF THE INDIA UAE TREATY AND ALLOW THE EXPE NDITURE AS CLAIMED BY THE APPELLANT'. 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) HAS ERRED IN TREATING THE BROKEN PERIOD INTEREST AS CAPITAL GAIN'. THE APPELLANT PRAYS THAT THE ORDER OF THE TRIBUNAL ON THE ABOVE GROUNDS SET ASI DE AND THAT OF THE AO RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR LATER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. DURING THE COURSE OF HEARING BEFORE US. THE AR STATED THAT GROUND NO.5 AND 6 WERE INFRUCTUOUS. CONSIDERI NG THE STATEMENT M ADE BY THE AR, WE DISMISS BOTH THE GROUNDS. 2. ASSESSEE - COMPANY, ENGAGED IN THE BUSINESS OF BANKING, FILED ITS RETURN OF INCOME ON 30.11.1998 DECLARING LOSS OF RS. 5.62 CRORES. LATERON IT FILED A REVISED RETURN ON 05.0 8.1999 REDUCING THE LOSS TO RS. 72.82 LAK HS.TH E AO FINALIS ED THE ASSESSMENT U/S. 143(3) OF THE ACT ON 19.01.2001 DETERMINING TH E INCOME OF THE ASSESSEE AT RS. 6,05,32,220/ - . 2.1. FIRST GROUND OF APPEAL IS ABOUT RESTRICTING THE DEDUCTION FOR HEAD OFFICE EXPENSES (HOE). DURING THE ASSESSMENT PROCEED INGS, THE AO FOUND THAT THE ASSESSEE HAD MADE A CLAIM OF RS. 4.63 CRORES UNDER THE HEAD HOE. BEFORE HIM, IT WAS ARGUED THAT THE LIMITS U/S 44C OF THE ACT DID NOT APPLY TO HOE, THAT EXPENSES SHOULD BE ALLOWED IN FULL TO THE EXTENT ATTRIBUTED IN ACCORDANCE W ITH ARTICLE 7 OF THE AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION WITH U.A.E., THAT THE AGREEMENT WAS EFFECTIVE FROM 18.11.1993, THAT AS PER THE PROVISIONS OF ARTICLE 7(3) DEDUCTION WAS ALLOWABLE FOR ALL EXPENSES IRRESPECTIVE OF THE FACT AS TO WHETHER SUCH E XPENSES WERE INCURRED IN THE STATE IN WHICH THE PERMANENT ESTABLISHMENT WAS SITUATED OR ELSEWHERE. HOWEVER, THE AO HELD THAT ITA/4050/MUM/2004 MASHREQ BANK PSC 4 PROVISIONS OF SECTION 44C OF THE ACT WERE APPLICABLE IN THE CASE UNDER CONSIDERATION AND ALLOWED 5% OF THE HOE, AMOUNTING TO RS. 31 .85 LAKHS. 2.2. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA). FOLLOWING THE ORDERS OF HIS PREDECESSOR FOR AY.S. 1995 - 96 TO 1997 - 98, THE FAA DISMISSED THE APPEAL FILED BY THE ASSESSEE. 2.3. BE FORE US,THE AR STATED THAT THE ORDER FOR THE EARLIER YEARS STAND REVERSED IN LIGHT OF THE DECISION GIVEN BY THE SPECIAL BENCH IN THE CASE OF M/S SUMITOMO MITSUI BANKING CORP. HE RELIED UPON THE CASE S OF AB U DHABI COMMERCIAL BANK(ITA/3462/M/2010,AY - 1995 - 96 & OTHER AY .S., DATED 20.07.2012), DALMA ENERGY LLC (ITA/1664/AHD/2008 - AY - 2004 - 05 DATED 23.04.2012). DEPARTMENTAL REPRESENTATIVE(DR)SUPPORTED THE ORDER OF THE FAA. 2.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT IN THE CASE OF ABU DHABI COMMERCIAL BANK(SUPRA) THE MATTER HAS BEEN DISCUSSED AS UNDER: 13. THE CASE OF MA SHREQBANK PSC (SUPRA), WHICH HAS BEEN RELIED UPON HEAVILY BY THE DEPARTMENT, FIRST OF ALL, WAS RENDERED PRIOR TO THE AMENDMENT BROUGHT BY THE PROTOCOL. HOW EVER IN THIS CASE IT HAS BEEN INTERPRETED THAT ARTICLE 25(1) OF INDO UAE TREATY SHOULD BE READ IN ARTICLE 7(3) FOR APPLICABILITY OF DOMESTIC LAW. AFTER DETAIL ANALYSIS AND DISCUSSION, THE RELEVANT OBSERVATIONS GIVEN IN THE SAID DECISION ARE AS UNDER : 2 1. IN VIEW OF THE ABOVE DISCUSSIONS, AND PARTICULARLY BEARING IN MIND THE PROVISIONS OF ARTICLE 25(1) OF THE INDIA UAE TAX TREATY, WE ARE OF THE CONSIDERED VIEW THAT THE LIMITATIONS UNDER THE DOMESTIC TAX LAWS ARE TO BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF COMPUTING PROFITS OF A PE UNDER ARTICLE 7(3) OF THE INDIA UAE TAX TREATY. THE PLEA OF THE ASSESSEE IS INCOMPATIBLE WITH OVERALL SCHEME OF THE TAX TREATIES, PARTICULARLY INDIA UAE TAX TREATY. ACCORDINGLY, THE CONCLUSION ARRIVED AT BY THE CIT(A) MEETS OUR APPROVAL. WE CONFIRM THE SAME AND DECLINE TO INTERFERE IN THE MATTER. THIS VIEW OF MASHREQBANK PSC (SUPRA), STANDS IMPLIEDLY OVERRULED BY THE LATEST DECISION OF ITAT SPECIAL BENCH IN THE CASE OF M/S SUMITOMO MITSUI BANKING CORP.(SUPRA), WHEREIN WHILE IN TERPRETING A SIMILAR PROVISION OF ARTICLE 23(1) OF INDO JAPAN DTAA, WHICH IS MATERIA L TO ARTICLE 25(1) OF INDO UAE TREATY, HAS OBSERVED AND HELD AS UNDER : 60. FIRST WE SHALL DEAL WITH THE ARGUMENTS OF SHRI GIRISH DAVE BASED ON THE RELEVANT PROVISIONS O F THE INDO - JAPANESE TREATY. HE HAS, INTER ALIA, RELIED ON ARTICLE 23 OF INDO - JAPANESE TREATY WHICH PROVIDES THAT THE LAWS IN FORCE IN EITHER OF THE CONTRACTING STATE SHALL CONTINUE TO GOVERN THE TAXATION OF INCOME IN RESPECTIVE CONTRACTING STATE EXCEPT WHE RE EXPRESS PROVISIONS TO THE CONTRARY ARE MADE IN THE CONVENTION. ACCORDING TO HIM, ARTICLE 11 READ WITH ARTICLE 7 OF THE TREATY CONTAINS SUCH EXPRESS PROVISION AND MAKE THE INTEREST PAYABLE BY THE PE IN INDIA TO THE GE ABROAD THE INCOME OF THE GE CHARGEAB LE TO TAX IN INDIA. BEFORE WE CONSIDER THIS ARGUMENT OF SHRI GIRISH DAVE IN THE LIGHT OF THE RELEVANT PROVISIONS OF THE ARTICLE 7 AND 11 OF THE INDO - JAPANESE TREATY, IT IS PERTINENT TO DISCUSS CERTAIN BASIC ASPECTS OF THE MATTER WHICH ARE RELEVANT IN THIS CONTEXT. 61. SECTION 90(2) OF THE INCOME - TAX ACT, 1961 PROVIDES THAT WHERE THE CENTRAL GOVERNMENT HAS ENTERED INTO AN AGREEMENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA OR SPECIFIC TERRITORY OUTSIDE INDIA, AS THE CASE MAY BE, SECTION (1) FOR GRANTI NG RELIEF OF TAX, OR AS THE CASE MAY BE, AVOIDANCE OF DOUBLE TAXATION, THEN, IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APPLIES, THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THAT ASSESSEE. THIS SPECIFIC PROVISION CONTAINED IN SECTION 90(2) MAKES IT ABUNDANTLY CLEAR THAT IN RELATION TO THE ASSESSEE LIKE THE ONE IN THE PRESENT CASE TO WHOM THE DOUBLE TAX AVOIDANCE TREATY ENTERED INTO BY ITA/4050/MUM/2004 MASHREQ BANK PSC 5 THE INDIAN GOVERNMENT APPLIES, THE PROVISIONS OF INCOME - TAX ACT SHALL APPLY TO T HE EXTENT THEY ARE MORE BENEFICIAL TO HIM. IT, THEREFORE, FOLLOWS THAT IF THE PROVISIONS OF THE DOMESTIC LAW ARE MORE BENEFICIAL TO THE ASSESSEE THAN THE PROVISIONS OF THE RELEVANT TAX TREATY, THE PROVISIONS OF THE DOMESTIC LAW SHALL OVERRIDE AND PREVAIL O VER THE PROVISIONS OF THE TREATY. ARTICLE 23 OF THE INDO - JAPANESE TREATY THEREFORE CANNOT BE INTERPRETED IN A WAY AS SOUGHT BY SHRI GIRISH DAVE BECAUSE IF SUCH INTERPRETATION IS ASSIGNED TO ARTICLE 23 AND THE INTEREST INCOME WHICH IS OTHERWISE NOT TAXABLE IN INDIA AS PER THE DOMESTIC LAW IS HELD TO BE TAXABLE RELYING ON THE PROVISIONS OF THE TREATY, THE SAME WILL RUN CONTRARY TO THE PROVISIONS OF SECTION 90(2). SUCH INTERPRETATION, THEREFORE, CANNOT BE ASSIGNED TO ARTICLE 23 AND THE ONLY INTERPRETATION WHIC H, IN OUR OPINION, CAN BE ASSIGNED TO THE SAID ARTICLE SO AS TO MAKE THE PROVISIONS THEREOF IN CONSONANCE WITH SECTION 90(2) OF THE DOMESTIC LAW IS THAT IF THERE IS AN EXPRESS PROVISION MADE IN THE CONVENTION GIVING BENEFIT TO THE ASSESSEE WHICH IS CONTRAR Y TO THE DOMESTIC LAW, THEN THE PROVISIONS OF TREATY CAN BE RELIED UPON WHICH SHALL OVERRIDE AND PREVAIL OVER THE PROVISIONS OF THE DOMESTIC LAW TO GIVE ANY BENEFIT EXPRESSLY GIVEN TO THE ASSESSEE UNDER THE TREATY. THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF AZADI BACHAO ANDOLAN (SUPRA) FULLY SUPPORTS THIS VIEW. 13.1 THE VIEW TAKEN BY THE SPECIAL BENCH IN A WAY NEGATES THE VIEW OF MASHREQ BANKS CASE. IF SUCH AN INTERPRETATION OF ARTICLE 25(1) IS TO BE GIVEN IN ARTICLE 7(3), THEN THERE WAS NO NEED OF BRINGING THE AMENDMENT BY WAY OF PROTOCOL FROM A PARTICULAR DATE. THE AMENDMENT ITSELF SHOWS THERE WAS NO SUCH INTENTION BY THE TWO CONTRACTING STATES AT THE TIME WHEN THEY ENTERED INTO THE AGREEMENT. THIS AMENDMENT BY WAY OF PROTOCOL AND ARTICLE 7(3) H AS BEEN DULY CONSIDERED BY THE ITAT AHMEDABAD BENCH IN THE CASE OF DALMA ENERGY LLC (SUPRA), WHEREIN THE APPLICABILITY OF SECTION 44C IN ARTICLE 7(3) FOR THE EARLIER ASSESSMENT YEARS HAS BEEN INTERPRETED IN THE FOLLOWING MANNER : 14. TO CONCLUDE THE LEG AL ASPECT OF THIS ISSUE, WE HAVE ALREADY REPRODUCED ARTICLE 7 (IN PARA 12.1 ABOVE) AND ON CAREFUL PERUSAL, WE HAVE NOTED THAT IN DETERMINING THE PROFITS OF A PE THE EXPENSES WHICH ARE INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE SAID PE, INCLUDING GENE RAL ADMINISTRATIVE EXPENSES IS TO BE ALLOWED. AT THIS STAGE OF ARGUMENT, WE HAVE CATEGORICALLY RAISED A QUESTION THAT IF EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES OF A PE IS TO BE ALLOWED HAVING BEEN INCURRED FOR THE PURPOSES OF THE BUSINESS OF A PE, T HEN WHAT IS THE UTILITY OF THE INTRODUCTION OF SECTION 44C OF THE IT ACT. LD. AR MR. MILIN MEHTA HAS ANSWERED THAT KEEPING IN MIND THE CONTROVERSY AN AMENDMENT TOOK PLACE IN THE ARTICLES AND VIDE A PROTOCOL AMENDING THE AGREEMENT BETWEEN THE GOVERNMENT OF THE REPUBLIC OF INDIA AND THE GOVERNMENT OF UNITED ARAB EMIRATES VIDE NOTIFICATION NO.282/2007, DATED 28/11/2007 WHICH IS EFFECTIVE FROM 1ST DAY OF APRIL, 2008, PARAGRAPH 3 OF ARTICLE 7 (BUSINESS PROFITS) HAS BEEN REPLACED BY THE FOLLOWING : - 3. IN DETERM INING THE PROFITS OF A PERMANENT ESTABLISHMENT, THERE SHALL BE ALLOWED AS DEDUCTIONS EXPENSES WHICH ARE INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE PERMANENT ESTABLISHMENT, INCLUDING EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES SO INCURRED, WHETHER I N THE STATE IN WHICH THE PERMANENT ESTABLISHMENT IS SITUATED OR ELSEWHERE, IN ACCORDANCE WITH THE PROVISIONS OF AND SUBJECT TO THE LIMITATIONS OF THE TAX LAWS OF THAT STATE. (EMPHASIS GIVEN) 14.1 IN VIEW OF THE AFORESAID AMENDMENT, NOW THE ADMITTED LEGAL POSITION IS THAT THE ADMISSIBILITY OF EXPENDITURE IS TO BE GOVERNED BY ARTICLE 7(3) OF THE TREATY UPTO THE DATE FROM WHICH THE NEW AMENDED PROVISIONS OF THE TREATY SHALL BE APPLICABLE I.E. W.E.F. 1.4.2008. IT CAN, INTER ALIA, BE SUMMED - UP THAT THE CONTRAC TING STATES AND TO AVOID ANY CONFLICT IN THE PROVISIONS OF THE TAX LAWS VIS - - VIS THE PROVISIONS OF TREATY, AS ALSO TO STREAMLINE THE APPLICABLE PROVISIONS OF LAW, IT WAS DECIDED TO INCORPORATE THAT, FOR THE PURPOSES OF DETERMINING THE PROFITS OF A PERMANE NT ESTABLISHMENT, THERE SHALL BE ALLOWED DEDUCTION OF EXPENSES INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE PERMANENT ESTABLISHMENT INCLUDING GENERAL ADMINISTRATIVE EXPENSES BUT IN ITA/4050/MUM/2004 MASHREQ BANK PSC 6 ACCORDANCE WITH THE PROVISIONS AND ALSO SUBJECT TO THE LIMITATIONS OF T HE TAX LAWS OF THAT STATE. THEREFORE, BY THIS AMENDMENT IN THE ARTICLE THE APPLICABILITY OF PROVISION OF SECTION 44C HAS BEEN ENFORCED, NEVERTHELESS WITH EFFECT FROM 1ST DAY OF APRIL, 2008. 14.THUS, IN VIEW OF O UR ABOVE FINDING, WE HOLD THAT,FIRSTLY, IN TH E ASSESSMENT YEAR INVOLVED, LIMITATION CLAUSE OF APPLICABILITY OF INCOME TAX ACT WILL NOT APPLY IN ARTICLE 7(3) AND CONSEQUENTLY PROVISIONS OF SECTIONS 44C WILL NOT BE APPLICABLE; SECONDLY, THE AMENDMENT BROUGHT BY WAY OF PROTOCOL BY WHICH ARTICLE 7(3) HAS BEEN AMENDED AND LIMITATION CLAUSE HAS BEEN BROUGHT IN, WILL APPLY FROM 1ST APRIL, 2008 AND WILL NOT HAVE ANY RETROSPECTIVE EFFECT; THIRDLY, THE JUDGMENT OF MASHREQBANK PSC (SUPRA), IS NO LONGER RELEVANT IN VIEW OF THE DECISION OF THE SPECIAL BENCH IN THE CASE OF M/S SUMITOMO MITSUI BANKING CORP.(SUPRA).AND LASTLY, FROM THE ABOVE CONCLUSIONS, IT IS HELD THAT COMPUTATION OF INCOME AND DISALLOWANCE OF EXPENSES RELATING TO HEAD OFFICE CANNOT BE MADE BY INVOKING THE PROVISIONS OF SECTION 44C OF IT ACT. THUS, I N VIEW OF THE ABOVE CONCLUSIONS, WE HOLD THAT INCOME OF THE PE OF THE ASSESSEE SHOULD BE COMPUTED AS BUSINESS INCOME AFTER ALLOWING ALL THE EXPENSES ATTRIBUTABLE TO ITS BUSINESS IN INDIA INCLUDING THE HEAD OFFICE EXPENSES. WE HAVE GONE THROUGH THE AMENDME NT TO THE TREATY BUT SAME IS APPLICABLE W.E.F. 01.04.2008. T HEREFORE, CONSIDERING THE FACTS OF THE CASE AND THE ABOVE REFERRED DECISION S DELIVERED BY THE S PECIAL B ENCH ,MUMBAI AND AHMEDABAD BENCHES( SUMITOMO MITSUI BANKING CORP , ABU DHABI COMMERCIAL BANK AND D ALMA ENERGY LLC,) WE ARE DECIDING GROUND NO.1 IN FAVOUR OF THE ASSESSEE. 3. GROUND NO.3 IS ABOUT DISALLOWANCE OF R S.1.54 CRORES, BEING THE LOSS ON FOREIGN EXCHANGE CONTRACT WHICH WERE UN - MATURED ON THE LAST DATE OF THE PREVIOUS YEAR. DUR ING THE ASSESSMENT PRO CEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD BOOKED LOSS OF RS. 1.54 CRORES ON FORWARD FOREIGN EXCHANGE CONTRAC T. DISCUSSING THE SA LIENT FEATURES OF THE FORWARD CONTRACT, HE HELD THAT IN FORWARD CONTRACTS THE LIABILITY WOULD ARISE ONLY ON THE DATE CONTRACT WOULD MATURE, THAT BEFORE IT THE LIABILITY WAS CONTINGENT IN NATURE, THAT THE LOSS CLAIMED BY THE ASSESSEE WAS ON A PURE ESTIMATE BASIS, THAT SAME WAS NOT ALLOWABLE AS PER THE PROVISIONS OF SECTION 37 OF THE ACT. FINALLY HE ADDED AN AMOUNT OF RS. 1.54 CROR ES TO THE INCOME OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSE FILED AN APPEAL BEFORE THE FAA. FOLLOWING ORDER OF HIS PREDECESSOR FOR THE AY 1997 - 98, THE FAA DISMISSED THE APPEAL FILED BY THE ASSESSEE. 3.1. BEFORE US, THE AUTHORISED REPRES ENTATIVE (AR) SUBMITTED THAT WHILE DECIDING THE APPEAL FOR AY 1997 - 98 (ITA/ 2154/MUM/2001 DATED 23.08.2007), THE TRIBUNAL HAD DECIDED THE I SSUE IN FAVOUR OF THE ASSESSEE. HE REFERRED TO THE CASES OF BANK OF BAHRAIN AND KUWAIT (132 TTJ 505) & CREDIT LYONNAIS(AY . 1998 - 99 TO 2000 - 01).D R RELIED UPON THE ORDER OF THE FAA. WE FIND THAT WHILE DECIDING THE APPEAL ,FILED BY THE ASSESSEE FOR THE AY 1997 - 98 , THE TRIBUNAL HAS HELD AS UNDER: 12. IN GROUND NO. 5, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE : 'THE CIT(A) ERR ED IN CONFIRMING THE ACTION OF THE ACIT OF DISALLOWING RS.10,14,045/ BEING THE LOSS ON FORWARD FOREIGN EXCHANGE CONTRACTS WHICH WERE UNMATURED ON THE LAST DAY OF TH E PREVIOUS Y E A R, THE AP PELLANTS SUBMIT THAT FORWARD EX CHANGE CONTRACTS ARE MAINLY ENTERED I NTO TO COVER THE R ISK ARISING DUE TO FLUCTUATION I N THE EXCHANGE RATE OF CURRENCIES. SUCH CONTRACTS ARE ENTERED INTO ON AN ONGOING BASIS DEPENDI NG UPON THE CURRENCY POSITION I N TH E BOOKS OF THE BANK. THE FORWARD EXCHANGE CONTRACTS ARE IN THE NATURE OF STOC K IN TRADE AND THE SAME ARE VALUED AT THE FORWARD EXCHANGE RATE NOTIFIED BY THE FOREIGN EXCHANGE DEALERS ASSOCIATION OF INDIA AS REQUIRED BY RB I. ITA/4050/MUM/2004 MASHREQ BANK PSC 7 THE FORWARD CONTRACTS ARE NORMALLY FOR A SHORT PERIOD. IN VIEW OF THE ABOVE SUBMISSION ANY LOSS ON REVALUATION WOULD BE PROPERLY ALLOWABLE AS A DEDUCTION IN ARRIVING AT THE BUSINESS INCOME. MOREOVER, SUCH CONTRACTS ARE ENTERED INTO THE ORDINARY COURSE OF BUSINESS ON A DAY TO DAY BASIS AND THE REVALUATION PROFIT/LOSS' REPRESENTS THE BANKS BUSINESS INCOME/LOSS. THE BANK HAS BEEN CONSISTENTLY FOLL OWING THIS METHOD IN THE PAST WHICH DOES NOT RESULT IN THE DISTORTION OF INCOME/LOSS BOOKED DURING THE ACCOUNTING PERIOD, AND IS, ALS O IN ACCORDANCE WITH THE GENERAL PRACTICE BEING FOLLOWED BY THE BANKING IN DUSTRY. IT IS SUBM ITTED THAT TH E ARGUMENTS PUT FORWARD BY THE AO ARE ERRONEOUS. THE APPEL LANTS PRAY THAT THE AO BE DIRECTED TO ALLOW LOSS ON REVALUATION OF FORWARD FOREIGN EX CHANGE CONTRACTS OF RS. 10,14,045/ .' 13. THE MATE RIAL FACTS ARE LIKE THIS. IN THE COURSE OF ASSESS MENT PROCEEDING, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD BOOKED A LOSS ON FORWAR D EXCHANGE CONTRACTS WHICH WERE UNMATURED AS ON THE BALANCE SHEET DATDTATE. THE LOSS TO CLAIMED AS A DEDUCTION WAS RS 10,14,045. THE LOSS SO COMPUTED IS BY THIS MET HOD. THE ASSESSEE BANK, LIKE MANY OTHER BANKING INSTITUTIONS, ENTERS INTO AN FORWARD AGREEMENTS TO BUY OR SELL FOREIGN CURRENCIES AT A, CE RTAIN PRICE ON A SPECIFIED DATE. THE UNMATURED CONTRACTS AS ON THE BALANCE SHEET DATES ARE THE CONTRACTS (N RESPECT OF WHICH THE DATE OF SALE OR PURCHASE IS A DATE LATER THAN SUCH A BALANCE SHEET DATE THE DIFFERENCE BETWEEN THE PREVAILING MARKET RATE, AND THE AGREED RATE, AS ON TILE DATE OF BALANCE SHEET DATE IS PROFIT/LOSS ON UNMATURED CONTRACT. FOR EXAMPLE, IF THE ASSES SEE BANK AGREES TO SELL US $ 10000 @ 42 ON 10T H MAY 1997 AND TH E MARKET RATE OF US $ AS ON 31.3. 1997 IS RS 45, THE LOSS ON THIS UNMATURED CONTRACT AS ON 31.3.1997 IS RS 30,000. IT IS THIS LOSS WHICH WAS CLAIMED AS A DEDUCTION BY THE ASSESSEE, THE DEDUCTION WAS DECLINED BY THE ASSESSING OFFICER ON THE GROUND THAT IT IS A CONTINGENT LOSS WHICH DEPENDS ON HOW THE MARKETS WILL MOVE ON A FUTURE DATE; THE ACTUAL LOSS OR PROFIT WILL DEPEND ON THE PREVAILING MARKET PRICE AS ON THE DATE WH EN TILE CONTACT IS TO MATUR E E.G. ON 10T H MAY 1997 IN THIS CASE, RELIANCE WAS ALSO PLACED UPON THE HON ' BLE HIGH COURT JUDGMENT IN THE CASE OF CIT VS MOTOR INDUSTRIES CO. LTD (229 ITR137). THE, ASSESSING OFFICER CONCLUDED THAT A LOSS, IF ANY, ON SUCH FORWARD CONTRACTS WILL .ONLY ACCR UE ON THE DATE ON WHICH THE CONTRACT IS SETTLED. REFERRING TO 'HON'BLE MADRAS HIGH COURT'S JUDGMENT IN THE CASE INDIAN OVERSEAS BANK VS CIT (183 ITR 200), THE ASSESSING OFFICER NOTED THAT PROFIT ON UNMATURED FORWARD CONTRACT COULD NOT BE TAXED AS INCOME, A ND THAT SUCH PROFITS WERE ONLY NOTIONAL PROFITS. THE ASSESSING OFFICER CONCLUDED THAT SIMILAR LOSS ON UNMATURED CONTRACTS IS ALSO A CONTINGENT LOSS AND NOT ELIGIBLE FOR DEDUCTION FROM BUSINESS INCOME. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A), BUT WITHOUT ANY SUCCESS. THE ASSESSEE IS NOT SATISFIED AND IS IN APPEAL BEFORE US. 14.WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSID ERED THE FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITIO N. 15 .. WE HAVE T AKE NOTE OF THE FACT THAT THE ASSESSING OFFICER HAS PRIMARILY CONTENDED THAT WHEN ANTICIPATED PROFITS ON UNMATURED CONTRACTS ARE HELD TO BE NON TAXABLE, AS IN THE CASE OF I NDIAN OVERSEAS BANK (SUPRA), THERE IS NO GOOD REASON AS TO WHY AN TICIPATED LOSSES ON UNMATURED CONTRACTS CAN BE TAKEN INTO ACCOUNT WHILE COMPUT ING BUSINESS INCOME. THERE IS, HOWEVER, AN INHERENT FALLACY IN THIS APPROACH INASMUC H AS ANTICIPATE D LOSSES AND ANTICIPATE D PROFITS ARE NOT TREATED IN THE SAME MANNER IN THE COMP UTATION OF BUSINESS PROFITS. T HE ACCOUNTANCY PRINCIPLE OF CONSERVATISM , WHICH HAS BEEN DULY RECOGNIZED BY THE COURTS, MANDATES THAT ANTICIPATED LOSSES ARE TO BE PROVIDED [OR IN THE COMPU TATION OF INCOME BUT IT DOES NO T PERMIT ANTICIPATED PROFITS TO BE TAKE N INTO ACCOUNT TILL THE PROMS ACTUALLY ARISE. THAT IS THE UNDERLYING REASONS' THAT IN THE CASE OF UNSOLD STOCK, WHEN MARKET RATE IS HIGHER THAN THE PURCHA SE PRICE, THE MARKET PRICE IS I GNORED IN COMPUTATION OF VALUE OF STOCK, AND, AS A' RESULT, ANTICIPATED PROFIT ON SALE OF SUCH STOCK IS IGNORED. HOWEVER, WHEN THE MARKET PRICE OF STOCK IS LOWER THAN THE PURCHASE PRICE, THE MARKET PRICE IS TAKEN INTO ACCOUNT, AND, ACCORDINGLY, ANTICIPATED LOSS IS TAKEN INTO ACCOUNT. THESE DUAL STANDARDS ITA/4050/MUM/2004 MASHREQ BANK PSC 8 IN RECOGNIZING ANTIC IPATED LOSSES AND ANTICIPATED PROFITS ARE ACCEPTED ACCOUNTING NORMS. IN THE CASE OF CHAINRUP SAMPATRAM VS CIT (24 ITR 481), HON'BLE SUPREME COURT TOOK NOTE OF THIS POSITION AND OBSERVED THAT 'WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IS NOT BROUGHT INTO ACCOUNT AS NO PRU DENT TRADER WOULD CARE TO SHOW I NCREASED PROFIT BEFORE ITS ACTUAL REALIS ATION . THIS IS THE THEORY UNDERLYING THE RULE THAT THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER, AND IT IS NOW GEN ERALLY ACCEPTED AS AN ESTABLISHED RULE OF COMMERCIAL PRACTICE AND ACCOUNTANCY'. NO DOUBT THESE OBSERVATIONS WERE MADE IN THE CONTEXT OF VALUATION OF STOCK BUT WHAT IS MATERIAL IS THE THEORY UNDERLYING THE PRINCIPLE OF VALUING CLOSING STOCK AT COST OR MARKE T PRICE WHICHEVER IS LOWER AND THE FACT THAT SUCH A THEORY HAS TILE ACCEPTANCE OF THE HON'BLE SUPREME COURT. JUST BECAUSE ANTI CIPATED PROFITS ARE NOT ASSESSE D TO TAX, IT WOULD NOT FOLLOW, AS A COROLLARY THERETO, THAT ANTICIPATED LOSSES CANNOT BE ALLOWED AS DEDUCTION IN COMPUTATION OF BUSINESS INCOME. IN THE LIGHT OF THESE DISCUSSIONS, WE ARE OF THE CONSIDERED VIEW THAT THE VERY BASIS OF THE ACTION OF THE ASSESSING OFFICER WAS VITIATED IN LAW AND ON FACTS. WE, THEREFORE, DEEM IT FIT AND PROPER TO DIRECT THE ASSESSING TO DELETE THE IMPUGNED DISALLOWANCE. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 16. GROUND NO.5 IS THUS ALLOWED. RESPECTFULLY, FOLLOWING THE ABOVE WE ARE DECIDING THE GROUND NO.3 IN FAVOUR OF THE ASSESSEE. 4. LAST GROUND OF APPEAL IS ABOUT RESTRI CTING THE EXEMPTION IN RESPECT OF INTEREST ON TAX FREE BONDS. DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD RECEIVED INTEREST OF RS. 27.81 LAKHS ON TAX FREE SECURITIES, THAT IT CLAIMED THAT ENTIRE INTEREST WAS EXEMPT U/S 10(15)(IV)( A) OF THE ACT. THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE INCOME DERIVED FROM TAX FREE SECURITIES SHOULD NOT BE EXEMPTED INSTEAD OF THE GROSS RECEIPTS AS CLAIMED IN THE RETURN. THE ASSESSEE ARGUED THAT GROSS INTEREST WAS EXEMPT AND NOT THE INCOME D ERIVED FROM IT. 4.1. D URING THE APPELLATE PROCEEDINGS,BEFORE THE FAA, THE ASSESSEE CONTENTED THAT IN THE AY 1997 - 98 IDENTICAL ISSUE WAS DEC IDED IN FAVOUR OF THE ASSESSEE. REFERRING THE PROVISIONS OF SECTION 14A OF THE ACT , THE FAA HELD THAT WHILE PASSING THE ORDER FOR EARLIER AY . THE THEN FAA HAD NOT CONSIDERED THE PROVISIONS OF SECTION 14A OF THE ACT, THAT MORE THAN 90% OF THE FUND S W ERE BORROWED BY THE ASSESSEE , THA T THE STAND TAKEN BY IT ABOUT INVESTING THE MONEY IN TAX FREE BONDS OUT OF I TS OWN FUNDS WAS NO T JUSTIFIED. FINALLY, THE FAA UPHELD THE ORDER OF THE AO. 4.2. BEFORE US, THE AR STATED THAT IN THE PRECEDING AY.IDENTICAL ISSUE WAS DECIDED IN ITS FAVOUR BY THE FAA,THAT WHILE DE CIDING THE APPEAL FILED BY THE D E PARTMENT FOR THAT AY . (ITA/1628/ MUM/ 2001 DAT ED 20 TH MAY 2004), THE TRIBUNAL HAD DECIDED THE ISSUE AGAINST THE AO AND IN FAVOUR OF THE ASSESSEE. DR LEFT THE ISSUE TO THE DISCRETION OF THE BENCH. WE FIND THAT ,WHILE DECIDING THE ISSUE OF LOSS ON FOREIGN EXCHANGE LOSS ON UN - MATURED CONTRACT, THE TRIBUNAL H AD DISMISSED THE APPEAL FILED BY THE AO FOR THE AY 1997 - 98 IN FOLLOWING MANNER : WE HAVE HEARD THE RIVAL SUBMISSIONS IN THE LIGHT OF MATERIAL PLACED BEFORE US AND PRECEDENTS RELIED UPON. WE FIND THAT THE ISSUE INVOLVED IN THE PRESENT APPEAL STANDS COVERED BY THE ORDER OF THE TRIBUNAL RENDERED IN THE CASE OF STATE BANK OF INDIA V. JT. CIT BEING ITA NO. 1292 & 1293/MUM/2001 DATED 6.6.2002. IN THIS CASE, THE TRIBUNAL HAS HELD THAT THE GROSS AMOUNT OF INTEREST PAYABLE TO THE ASSESSEE WOULD QUALIFY FOR EXEMPTIO N UNDER SUB SECTIONS (C) (F) AND (H) OF SECT ION 10(15)(IV). THE FACTS BEINGSAME, RESPECTFULLY FOLLOWING THE PREDECESSOR WE DECIDE THIS GROUND IN FAVOUR OF THE ASSESSEE . RESPECTFULLY, FOLLOWING THE ABOVE ORDER, WE DECIDE GROUND NO. 4 IN FAVOUR OF THE ASSESSE E. ITA/4050/MUM/2004 MASHREQ BANK PSC 9 ITA NO. 4793/MUM/2005, AY - 2001 - 02 5. T HE ASSESSEE AND THE AO HAVE FILED CROSS APPEAL FOR THE AY 2001 - 02. THE ASSESSEE DID NOT PRESS GROUND NO.2 AS RELIEF WAS ALREADY GRANTED TO IT.CONSIDERING THE FACT WE DISMISS GROUND NO.2 RAISED BY THE ASSESSEE FOR THE YEAR UNDER APPEAL. 6. THE FIRST GROUND OF APPEAL FILED BY THE ASSESSEE IS ABOUT HOE. FOLLOWING OUR ORDER FOR THE AY.1998 - 99, WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. 7. GROUND NO.3 IS ABOUT INCOME EA RNED BY THE ASSESSEE FOR MOBILIS ING DEPOSITS FOR SBI UNDER THE INDIAN MILLENNIUM DEPOSIT SCHEME (IMD S),AMOUNTING TO RS. 8.20 CRORES. DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD EARNED COMMISSION FROM SBI FOR MOBILIS ING IMD S, THAT STATE BANK OF INDIA (SBI ) HAD LAUNCHED IMD S IN ALL COUNT RIES WHERE THE LOCAL REGULATORY ALLOWED THEM TO IMPLEMENT THE PROGRAMME ,THAT T HE ACCEPTANCE OF IMD S COMMENCED ON 21.10.2000 WITH THE EARLIER CLOSING DATED 31.10.2000 AND FINAL CLOSING DATE OF 20.11.2000, THAT IMD S WAS A FIVE YEAR BANK DEPOSIT PRODUCT OF S BI REPRESENTING FOREIGN CURRENCY DENOMINATED DEPOSITS IN INDIA FOR NRIS/OVERSEAS C OMMERCIAL BODIES,THAT SBI APPOINTED SBI - CAPS AS THE L EAD ARRANGER FOR THE PROGRAMME, THAT THE ASSESSEE - COMPANY WAS APPOINTED AS ARRANGER BY SBI - CAPS, THAT THE ASSESSEE WAS EN TITLED FOR FEES AND SERVICE CHARGES AS A COLLECTING BANK AS PER THE RATES ALREADY FIXED, THAT THE ASSESSEE RECEIVED RS. 8.23 CRORES AS COMMISSION FROM SBI, THAT OUT OF IT RS. 8.20 CRORES WERE CLAIMED AS COMMISSION PERTAIN TO OVERSEAS BRANCHES OF ABU DHABI & DUBAI. THE AO HELD THAT THE COMMISSION INCOME WAS ARISING ON ACCOUNT OF THE AGREEMENT BETWEEN THE ASSESSEE AND SBI/SBI CAPS, THAT THE ASSESSEE - COMPANY WAS INCORPORATED IN UAE, THAT IT WAS NOT ENTITLED FOR TREATY BENEFIT IN TERMS OF ARTICLE 4 OF THE TREATY, THAT THE ASSESSEE WAS NOT RESIDENT OF UAE AND WAS NOT LIABLE TO PAY TAX. FINALLY, HE HELD THAT COMMISSION INCOME WAS TAXABLE IN INDIA IN THE ASSESSEES HANDS. 7.1. AFTER CONSIDERING THE SUBMISSION OF ASSESSEE AND THE ASSESSMENT ORDER, THE FAA HELD THAT THE ACTION OF THE AO DENYING THE TREATY BENEFIT TO THE ASSESSEE FOR THE REASON THAT IT HAD NOT PAID TAX IN UAE WAS NOT CORRECT, THAT ASSESSEE WAS RESIDENT OF UAE, THAT TREATY BENEFIT COULD NOT BE DENIED TO IT. HE REFERRED TO THE JUDGMENT OF AZADI BACHAO ANDOLA N (263 ITR 706) OF HONBLE SUPREME COURT AND HELD THAT IN LIGHT OF THE PROVISIONS OF ARTICLE 7(1) OF THE TREATY COMMISSION INCOME EARNED BY THE ASSESSEE WOULD BE TAXABLE IN INDIA, THAT IN DETERMINING THE PROFIT OF THE PE IT WOULD BE ALLOWED EXPENSES INCURR ED BY IT FOR CARRYING OUT ITS BUSINESS, THAT THE CONTENTION OF THE ASSESSEE THAT EXPENSES INCURRED FOR PROCUREMENT OF DEPOSITS WAS AN ALLOWABLE ITEM HAD TO BE ENDORSED, THAT OUT OF THE TOTAL COMMISSION RECEIPT MAJOR PORTION I.E. RS. 8.17 CRORES HAD BEEN PA SSED ON TO THE DEPOSITORS NAMELY LHELDSLEY CONSULTANTS LTD., CALIBAN ENTERPRISES LTD. AND REFLECTIONS CONSULTANCY LTD., THAT ALL THE THREE CONSULTANCY WERE INDEPENDENT LEGAL ENTITIES, THAT THEY HAD NO CONNECTION WITH THE ASSESSEE BANK , THAT LEGAL CHARGES AMOUNTING TO US $ 14759 HAD BEEN INCURRED BY THE ASSESSEE IN CONNECTION WITH IMD S MOB ILIS ATION, THAT THERE WAS NO INCOME REMAINING OUT OF THE TOTAL COMMISSION RECEIVED, THAT THE ASSESSEE HAD SUFFERED A LOSS, THAT THE AMOUNT IN QUESTION WOULD FALL FOR CONSI DERATION UNDER ARTICLE 7 OF THE TREATY BETWEEN INDIA AND UAE, THAT IN COMPUT - ING THE BUSINESS PROFIT THE EXPENDITURE INCURRED BY IT WOULD HAVE TO BE ALLOWED AS DEDUCTION. ITA/4050/MUM/2004 MASHREQ BANK PSC 10 7.2. BEFORE US, THE AR CONTENDED THAT SIMILAR ISSUE WAS DECIDED IN FAVOUR OF THE ASSES SEE IN THE CA SES OF ABU DHABI COMMERCIAL BANK (ITA/7560/MUM/2004 - AY - 2001 - 02 DATE D 10.07.13) AND CREDIT LYONNIAS(ITA/9596/MUM/2004 & ITA/214/MUM/2005 DATED 22.05.13). DR SUPPO R TED THE ORDER OF THE FAA. 7.3. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE M ATERIAL BEFORE US. WE FIND THAT IN CASE OF ABU DBHAI COM. BANK LTD. (SUPRA) THE MATTER HAS BEEN DEALT AS UNDER: 2. FIRST GROUND OF APPEAL PERTAINS TO DELETION OF ADDITION OF RS. 31.72 CRORES ON ACCOUNT OF ARRANGERS FEES PAID TO HEAD OFFICE / OVERSEAS BRAN CHES, WITHOUT DEDUCTING TAX AT SOURCE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO FOUND THAT ASSESSEE WAS APPOINTED A COLLECTING BANK BY THE STATE BANK OF INDIA (SBI) FOR INDIAN MILLENNIUM DEPOSITS (IMD) PROGRAMME, THAT BANK WAS TO BE PAID 0.25% COMMI SSION ON THE AMOUNT COLLECTED BY THEIR DESIGNATED BRANCHES, THAT SBI CAPITAL MARKETS LTD.(SBI CAP) ALSO APPOINTED THE ASSESSEE AS AN ARRANGER FOR MOBILIS ING DEPOSITS FROM THE ELIGIBLE DEPOSITORS FOR THE IMD PROGRAMME,THAT THE ASSESSEE WAS ENTITLED TO APP OINT SOME ARRANGERS UNDER THE ADVICE TO THE SBI CAP, THAT ASSESSEE HAD RECEIVED FEES AMOUNTING TO RS.5.28 CRORES ON ACCOUNT OF COMMISSION AS COLLECTING BANK AND RS. 31.72 CRORES AS COMMISSION ON ACCOUNT OF ARRANGERSFEES,THAT ASSESSEE HAD REMITTED A SUM OF RS. 31.72 CRORES TO ITS HEAD OFFICE.AO MADE AN ENQUIRY ABOUT PAYMENT OF RS. 31.72 CRORES.AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, AO HELD THAT SERVICES RENDERED BY WAY OF MARKETING AND COLLECTION BY THE ASSESSEE BANK AND ITS OVERSEAS BRANCHES HA D A BUSINESS CONNECTION IN INDIA,THAT THE PROVISIONS OF SECTION 9(1) WERE ATTRACTED TO THE TRANSACTION IN QUESTION,THAT ACTIVITIES CARRIED OUT BY THE ASSESSEE BANK WERE NOT COVERED BY THE EXPLANATION(A) TO SECTION 9(1),THAT THE FEES ARISEN FROM THE ACTIVIT Y WERE DIRECTLY ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT BY THE ASSESSEE IN INDIA, THAT PAYMENT MADE BY THE ASSESSEE DID NOT REPRESENT THE BUSINESS INCOME OF THE OVERSEAS BRANCHES, THAT THE SUM UNDER CONSIDERATION REPRESENTED THE INCOME OF THE BANK, THAT INCOME HAD ARISEN IN INDIA, THAT THE INDIAN BRANCH WAS TAXABLE UNDER THE PROVISIONS OF ARTICLE 5 AND 7 OF DOUBLE TAXATION AVOIDANCE AGREEMENT(DTAA),THAT THE ASSESSEE WAS REQUIRED TO DEDUCT TAX AT SOURCE ON THESE PAYMENTS AS ENVISAGED BY THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT.FINALLY,HE DISALLOWED THE CLAIM OF THE ASSESSEE AMOUNTING TO RS. 37.79 CRORES PAID UNDER THE HEAD ARRANGERS FEES, 2.1. ASSESSEE PREFERRED AN APPEAL BEFORE THE(FIRST APPELLATE AUTHORITY)FAA.AFTER CONSIDERING THE SUBMISSIONS OF TH E ASSESSEE AND THE ASSESSMENT ORDER HE HELD THAT COMMISSION/FEES OF RS.5. 28 CRORES FOR ACTING AS THE COLLECTING BANK FOR IMD PROGRAMME HAD BEEN OFFERED TO TAX IN INDIA, THAT ARRANGERSFEES OF RS. 31.72 CRORE WAS PAID TO THE H.O./OVERSEAS BRANCHES WAS NOT OFFERED FOR TAXATION, THAT OUT OF SAID AMOUNT RS.30.4 CRORES HAD BEEN PAID TO FARDAN TRADING EST FOR PROCURING THE DEPOSITS, THAT FARDAN TRADING EST WAS AN INDIAN ENTITY INCORPORATED FOR ABU DHABI,THAT ASSESSEE BANK HAD NO SHAREHOLDING IN FARDAN TRADING ES T,THAT RS.25.78 LACS WERE PAID TO CERTAIN CUSTOMERS FROM WHOM DEPOSITS WERE PROCURED BY HEAD OFFICE/OVERSEAS BRANCHES, THAT CERTAIN OTHER EXPENSES ON ACCOUNT OF STAFF COST HAD BEEN INCURRED BY THE H.O.,THAT THE EXPENDITURE INCURRED BY THE H.O. WAS REASONAB LE, THAT NO INCOME WAS LEFT OUT OF RS. 31.72 CRORES THAT HAD ACCRUED TO THE ASSESSEE,THAT IN ABSENCE OF SPECIFIC ARTICLE DEALING WITH FEES FOR TECHNICAL SERVICES IN THE TAX TREATY BETWEEN INDIA AND U.A.E. THE AFORESAID AMOUNT WOULD FALL IN UNDER ARTICLE 7, THAT SAID ARTICLE OF THE TREATY DEALT WITH BUSINESS PROFIT,THAT IN COMPUTING THE BUSINESS PROFIT DEDUCTION WOULD HAVE TO BE ALLOWED FOR EXPENSES INCURRED,THAT PROVISIONS OF SECTION 40(A)(I) WERE NOT APPLICABLE IN THE CASE UNDER CONSIDERATION,THAT THERE WAS NO INCOME CHARGEABLE TO TAX IN INDIA. FINALLY,HE DIRECTED THE AO TO DELETE THE ADDITION. 2.2. BEFORE US,DEPARTMENTAL REPRESENTATIVE (DR) RELIED UPON THE ORDERS OF THE AO.AUTHORISED REPRESENTATIVE(AR) SUBMITTED THAT SIMILAR ISSUE HAD ARISEN IN THE CASE OF M/S CREDIT LYONNAIS FOR AY 2001 02,THAT THE ISSUE WAS DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE WHILE DECIDING THE ITA NO. 9596/MUM/2004 AND ITA NO. 214/MUM/2005. HE REFERRED PARAGRAPH NOS. 9 TO 21 OF THE ORDER DATED 22.05.2013 OF M/S CREDIT LYONNA IS. 2.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT IN THE CASE OF CREDIT LYONNAIS (SUPRA) ISSUE OF ARRANGERS FEES WITH REGARD TO MOBILIZING THE DEPOSITS ITA/4050/MUM/2004 MASHREQ BANK PSC 11 UNDER IMD PROGRAMME HAS BEEN DISCUSSED AT LENGTH.WHILE DECIDI NG THE ISSUE,TRIBUNAL HAS ALSO CONSIDERED THE APPLICABILITY OF THE PROVISIONS OF SECTION 40(A)(I) AND 195 OF THE ACT.DECIDING OF ISSUE OF FEES PAID TO THE ARRANGERS,TRIBUNAL HAS HELD AS UNDER: WE, THEREFORE, SUM UP OUR CONCLUSION BY HOLDING THAT THE AMOU NT PAID BY THE ASSESSEE TO THE NON - RESIDENTS SUB - ARRANGERS IS NOT A FEES FOR MANAGERIAL OR TECHNICAL OR CONSULTANCY SERVICES. HENCE, THE SAME CANNOT BE BROUGHT WITHIN THE AMBIT OF FEES FOR TECHNICAL SERVICES AS PER SECTION 9(1)(VII) OF THE ACT. IF THIS P AYMENT IS NOT FEES FOR TECHNICAL SERVICES BUT ONLY COMMISSION, THE PROVISIONS OF SECTION 195 REQUIRING THE ASSESSEE TO MAKE DEDUCTION OF TAX AT SOURCE BEFORE REMITTING OR CREDITING THE AMOUNT TO THE ACCOUNTS OF SUB - ARRANGERS, CANNOT APPLY. IF NO DEDUCTION OF TAX AT SOURCE IS REQUIRED, OBVIOUSLY THE PROVISIONS OF SECTION 40(A)(I) DO NOT COME INTO PLAY. ONCE IT IS HELD THAT THE SAID COMMISSION/BROKERAGE IS NOT CHARGEABLE TO TAX IN THE HANDS OF NON - RESIDENT SUB - ARRANGERS UNDER THE PROVISIONS OF THE ACT, THERE REMAINS NO NEED TO EXAMINE THE TAXABILITY OR OTHERWISE OF THIS AMOUNT IN THEIR HANDS UNDER THE RESPECTIVE DOUBLE TAXATION AVOIDANCE AGREEMENTS. IN THAT VIEW OF THE MATTER, WE ARE OF THE CONSIDERED OPINION THAT THE LEARNED CIT(A) WAS JUSTIFIED IN REVERSING THE AOS ORDER INSOFAR AS THE APPLICABILITY OF SECTION 40(A)(I) IS CONCERNED. CONSEQUENTLY, THE GROUND RAISED BY THE REVENUE FAILS. RESPECTFULLY FOLLOWING THE ORDER OF COORDINATING BENCH AND CONSIDERING THE FACT THAT ISSUES INVOLVED IN BOTH THE CASES ARE SIMILAR,WE DECIDE GROUND NO.1 AGAINST THE AO. RESPECTFULLY, FOLLOWING THE ABOVE ORDERS OF CREDIT LYONNIA S AND ABU DHABI COMMERCIAL BANK, WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. ITA NO . 4493/MUM/2005, AY - 2001 - 02 8. THE SOLITARY GROUND OF APPEAL FILED B Y THE AO IS RELATED WITH THE GROUND NO.3 OF APPEAL FILED BY THE AS SESSEE BANK. AS STATED EARLIER, THE FAA HAD HELD THAT EXPENDITURE CLAIMED BY THE AS S ESSEE HAD TO BE ALLOWED. 8.1. BEFORE US, THE DR SUPPORTED THE ORDER OF THE AO, THE AR CONTENTED THAT IN THE C ASE OF LYONNIAS AND ABU DHABI COMMERCIAL BANK (SUPRA) ISSUE HAS ALREADY BEEN DECIDED IN FAVOUR OF THE ASSESSEE, THAT IF EXPENSES WERE ALLOWED ASSESSEE WOULD BE LEFT WITH NO INCOME. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. FOL LOWING THE ABOVE REFE RRED TWO ORDERS OF THE TRIBUNAL, WE DISMISS THE EFFECTIVE GROUND FILED BY THE AO . AS A RESULT, APPEA L S FILED BY THE ASSESSEE FOR AY. S. 1998 - 99 AND 2001 - 02 STAND PARTLY ALLOWED . A PPEAL FILED BY THE AO FOR THE AY. 2001 - 02 IS DISMISSED. . . 1998 - 99 2001 - 02 . . . 2001 - 02 . ORDER PR ONOUNCED IN THE OPEN COURT ON 8 T H M AY , 2015 . 8 SD/ - SD/ - ( /I P BANSAL ) ( / RAJENDRA) / J UDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, /DATE: 0 8.0 5 .2015 ITA/4050/MUM/2004 MASHREQ BANK PSC 12 / COPY OF THE ORDER FORWARDED TO : 1. / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR L BENCH, ITAT, MUMBAI / , Y , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , / ITAT, MUMBAI .
Mehul