ABU-DHABI COMMERICAL BANK LTD, MUMBAI V. ADIT (IT) 2(2), MUMBAI

ITA 4926/MUM/2009

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3708 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 8 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 09-10-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 27-08-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Transfer pricing; Double taxation relief; Earning of tax free income; Permanent establishment; Non-deduction of tax; Wrong claim; Difference of opinion; Avoidance of tax; Notional interest
• Section: 5(2); 14A; 90

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL K BE NCH, MUMBAI BEFORE SHRI RAJENDRA, ACCOUNTANT MEMBER AND SHRI C.N. PRASAD, JUDICIAL MEMBER / I .TA NOS.4926 TO 4928/MUM/2009 ( / ASSESSMENT YEARS: 2004-05 TO 2006-07 ABU DHABI COMMERCIAL BANK LTD., 75B REHMAT MANZIL, VEER NARIMAN ROAD, MUMBAI-400 020 / VS. THE DCIT (INTERNATIONAL TAXATION)-1(1), SCINDIA HOUSE, NAROTTAM MORARJEE MARG, BALLARD ESTATE MUMBAI-400 038 / I .TA NO. 3760/MUM/2012 ( / ASSESSMENT YEAR: 2006-07 THE DCIT (INTERNATIONAL TAXATION)-1(1), SCINDIA HOUSE, NAROTTAM MORARJEE MARG, BALLARD ESTATE MUMBAI-400 038 / VS. ABU DHABI COMMERCIAL BANK LTD., 75B REHMAT MANZIL, VEER NARIMAN ROAD, MUMBAI-400 020 C.O. NO. 121/MUM/2013 (ARISING OUT OF I .TA NO. 3760/MUM/2012 ( / ASSESSMENT YEAR: 2006-07 ABU DHABI COMMERCIAL BANK LTD., 75B REHMAT MANZIL, VEER NARIMAN ROAD, MUMBAI-400 020 / VS. THE DCIT (INTERNATIONAL TAXATION)-1(1), SCINDIA HOUSE, NAROTTAM MORARJEE MARG, BALLARD ESTATE MUMBAI-400 038 ./ ./ PAN/GIR NO. AAACA 4216B ( / APPELLANT ) .. ( / RESPONDENT ) / ASSESSEE BY: SHRI DHANESH BAFNA / REVENUE BY: MS. CHANDNI SHAH M/S. ABU DHABI COMMERCIAL BANK 2 / DATE OF HEARING :13.04.2016 ! / DATE OF PRONOUNCEMENT :29.04.2016 '# / O R D E R PER C.N. PRASAD, JM: ITA NOS. 4926 TO 4928/M/09 ARE FILED BY THE ASSESSE E AGAINST THE ORDER OF THE LD. CIT(A)-XXXI, MUMBAI DATED 15.0 6.2009 PERTAINING TO ASSESSMENT YEARS 2004-05 TO 2006-07. ITA NO. 3760/M/12 IS FILED BY THE REVENUE AND THE CROSS OBJ ECTION IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD. CIT(A)-10 , MUMBAI FOR ASSESSMENT YEAR 2006-07. ALL THE APPEALS BY THE ASS ESSEE & REVENUE & CROSS OBJECTION BY THE ASSESSEE WERE HEARD TOGETH ER AND DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. ITA NO. 4926/M/2009-A.Y. 2004-05 2. THE FIRST GROUND RAISED BY THE ASSESSEE IS IN RESPECT OF TRANSFER PRICING (I) IN RESTRICTION THE DEDUCTION FOR HEAD OFFICE EXPENSES BY APPLYING THE PROVISIONS OF SEC. 44C OF THE ACT AS AGAINST THE ASSESSEES CLAIM THAT THE ENTIRE EXPENSES ALLOC ATED TO THE INDIAN BRANCHES SHOULD BE ALLOWED AS DEDUCTION AS PER THE PROVISION OF ARTICLE 7(3) OF THE CONVENTION BETWEEN THE GOVERNME NT OF U.A.E. AND THE GOVERNMENT OF INDIA AND (2) UPHOLDING THE ASSE SSING OFFICERS ACTION OF NOT ALLOWING THE CLAIM OF THE ASSESSEE TH AT THE TAX RATE APPLICABLE TO ITS BUSINESS INCOME IS 35% AND NOT 40 % BEING THE RATE APPLICABLE TO FOREIGN COMPANIES FOR THE YEAR UNDER APPEAL. M/S. ABU DHABI COMMERCIAL BANK 3 3. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSE SSEE SUBMITS THAT THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 1995-96 TO 2004-05. THE LD. C OUNSEL SUBMITS THAT THE DECISION OF THE TRIBUNAL FOR ASSESSMENT YE ARS 1995-96 TO 2000-01 IS REPORTED IN (150 TTJ 85) AND FOR THE ASS ESSMENT YEARS 2001-02 & 2002-03 IS REPORTED IN (60 SOT 71) AND F OR THE ASSESSMENT YEARS 2003-04 AND 2004-05 HE SUBMITS THA T THE CO- ORDINATE BENCH DECIDED THIS ISSUE IN ITA NOS. 6530 OF 2006 AND 3463/M/2010 DATED 3.8. 2012. COPIES OF THE DECISIO NS ARE PLACED ON RECORD. 4. THE LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY S UPPORTS THE ORDERS OF THE LOWER AUTHORITIES. IN THE ALTERNATIV E, THE LD. DR SUBMITS THAT THE PROVISIONS OF SEC. 41(1) WILL APPLY AS THE SE EXPENSES ARE ONLY PAYABLE AND THEY ARE NOT ROOTED THROUGH BALANCE-SHE ET. IN REPLY, THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE EXPEN SES WERE PAID BY HEAD OFFICE AND THEY ARE EXEMPT AS PER TREATY, THER EFORE PROVISIONS OF SEC. 41(1) ARE NOT APPLICABLE. 5. HEARD BOTH SIDES AND PERUSED THE ORDERS OF THE L OWER AUTHORITIES. ON GOING THROUGH THE ORDERS OF THE CO -ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.YRS 1995-96 TO 2000- 01, WE FIND THAT THE ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE HOLDING THAT INCOME OF THE PE OF THE ASSESSEE SHOULD BE COM PUTED AS BUSINESS INCOME AFTER ALLOWING ALL THE EXPENSES ATTRIBUTABLE TO ITS BUSINESS IN INDIA INCLUDING THE HEAD OFFICE EXPENSES. THIS DEC ISION IS REPORTED IN ABU-DHABI COMMERCIAL BANK LTD. VS ADIT (INTERNATION AL TAXATION) (138 ITD 83). RESPECTFULLY FOLLOWING THE SAID DECI SION, WE ALLOW THE M/S. ABU DHABI COMMERCIAL BANK 4 GROUND RAISED BY THE ASSESSEE. WE DO NOT FIND MUCH SUBSTANCE IN THE ALTERNATIVE CONTENTION RAISED BY THE REVENUE IN SO FAR AS THE APPLICABILITY OF PROVISIONS OF SEC. 41(1) OF THE AC T. THUS, WE DISMISS THE ALTERNATIVE CONTENTION OF THE REVENUE. 6. SO FAR AS GROUND NO. 2 I.E. IN RESPECT OF UPHOLD ING THE ASSESSING OFFICERS ACTION OF NOT ALLOWING THE CLAIM OF THE A SSESSEE THAT THE TAX RATE APPLICABLE TO ITS BUSINESS INCOME IS 35% AND N OT 40% IS CONCERNED, THE LD. COUNSEL SUBMITS THAT THIS GROUND IS DECIDED AGAINST THE ASSESSEE IN ASSESEES OWN CASE FOR ASSE SSMENT YEARS 2001-02 AND 2004-05 REPORTED IN (60 SOT 71). COPIE S OF ORDERS ARE PLACED ON RECORD. RESPECTFULLY FOLLOWING THE SAID ORDERS, WE DISMISS THIS GROUND OF APPEAL. 7. THE NEXT ISSUE IN THE APPEAL OF THE ASSESSEE IS THAT THE LD. CIT(A) ERRED IN HOLDING THAT THE PROVISIONS OF SEC. 14A R.W. RULE 8D ARE APPLICABLE IN COMPUTING THE AMOUNT OF EXPENDITU RE ALLEGED TO HAVE BEEN INCURRED IN RELATION TO EXEMPT INCOME TH EREBY DISALLOWING INTEREST AND EXPENSES AMOUNTING TO RS. 2,28,01,012/ - AND RS. 14,98,250/- RESPECTIVELY. 7.1. THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE ASSESSING OFFICER DISALLOWED INTEREST AT RS. 2,28,01,012/-. IN OTHER WORDS, THE ASSESSING OFFICER OUT OF GROSS EXEMPT INCOME OF RS. 3,01,12,220 DEDUCTED EXPENDITURE OF RS. 2,71,08,030/- AND ARRIV ED AT EXEMPT INCOME AT RS. 30,04,990/-. THE LD. COUNSEL SUBMITS THAT THE LD. CIT(A) HOWEVER APPLIED RULE 8D AND DETERMINED THE E XPENDITURE ATTRIBUTABLE FOR EARNING EXEMPT INCOME AT RS. 2,42, 99,262/-. HE M/S. ABU DHABI COMMERCIAL BANK 5 FURTHER SUBMITS THAT FOR THE ASSESSMENT YEAR 2004-0 5, THE PROVISIONS OF RULE 8D HAVE NO APPLICATION IN VIEW OF THE DECIS ION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & B OYCE CO. LTD., VS CIT (328 ITR 81). THE LD. COUNSEL FURTHER SUBMITS THAT THERE IS NO NEXUS BETWEEN THE BORROWED FUNDS AND INVESTMENTS AN D THESE INVESTMENTS WERE OLD AND WERE MADE DURING THE YEARS 1997 AND 2000. THE LD. COUNSEL FURTHER SUBMITS THAT SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE CO-ORDINAT E BENCH FOR THE ASSESSMENT YEAR 2003-04 IN ITA NO. 581 OF 2007 DATE D 3.8.2012 BY DELETING THE DISALLOWANCE. 8. THE LD. DEPARTMENTAL REPRESENTATIVE PLACED RELIA NCE ON THE DECISION OF THE LOWER AUTHORITIES. 9. HEARD BOTH SIDES AND PERUSED THE ORDERS OF THE L OWER AUTHORITIES. IN VIEW OF THE DECISION OF THE HONBL E JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE CO. LTD., (SUP RA) RULE 8D HAS NO APPLICATION FOR THE ASSESSMENT YEAR 2004-05. HOWEV ER, REASONABLE DISALLOWANCE SHOULD BE MADE TOWARDS EXPENDITURE ATT RIBUTABLE FOR EARNING EXEMPT INCOME. IT IS THE SUBMISSION OF THE LD. COUNSEL THAT IN THE CASE OF DDIT VS DEVELOPMENT BANK OF SINGAPOR E (33 TAXMAN.COM 300), 2% OF DIVIDEND INCOME IS HELD TO B E REASONABLE FOR EARNING EXEMPT INCOME. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE HOLD THAT 2% OF DIVIDEND INCOME WILL B E REASONABLE EXPENDITURE FOR EARNING EXEMPT INCOME. THIS GROUND OF THE ASSESSEE IS PARTLY ALLOWED. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. M/S. ABU DHABI COMMERCIAL BANK 6 ITA NO. 4927/M/2009- A.Y. 2005-06 11. THE FIRST GROUND RELATES TO THE DEDUCTION FOR H EAD OFFICE EXPENSES BY APPLYING THE PROVISIONS OF SEC. 44C OF THE ACT AS AGAINST THE ASSESSEES CLAIM THAT THE ENTIRE EXPENSES ALLOC ATED TO THE INDIAN BRANCHES SHOULD BE ALLOWED AS DEDUCTION AS PER THE PROVISION OF ARTICLE 7(3) OF THE CONVENTION BETWEEN THE GOVERNME NT OF U.A.E. AND THE GOVERNMENT OF INDIA 12. THIS ISSUE IS IDENTICAL WITH THE ISSUE IN GROUND N O. 1 IN ITA NO. 4926/M/09 FOR ASSESSMENT YEAR 2004-05, THOUGH QUAN TUM MAY DIFFER. THEREFORE, ON SIMILAR LINES AND FOR SIMIL AR REASONS, THE GROUND RAISED BY THE ASSESSEE IN ITA NO. 4927/M/09 FOR ASS ESSMENT YEAR 2005-2006 IS DISMISSED. 13. THE NEXT ISSUE IN THE APPEAL OF THE ASSESSEE IS THE LD. CIT(A) ERRED IN HOLDING THAT THE PROVISIONS OF SEC. 14A R. W. RULE 8D ARE APPLICABLE IN COMPUTING THE AMOUNT OF EXPENDITURE ALLEGED TO HAVE BEEN INCURRED IN RELATION TO EXEMPT INCOME THEREBY DISALLOWING INTEREST AND EXPENSES AMOUNTING TO RS. 1,17,68,939/ - AND RS. 8,33,625/- RESPECTIVELY. 14. THIS ISSUE IS IDENTICAL WITH THE ISSUE IN GROU ND NO. 3 OF ITA NO. 4926/M/09 FOR ASSESSMENT YEAR 2004-05. IN THAT YEA R WE HAVE ESTIMATED THE EXPENDITURE ATTRIBUTABLE FOR EARNING EXEMPT INCOME AT 2% OF THE SAID INCOME. THEREFORE, ON SIMILAR LINES AND FOR SIMILAR REASONS, THE GROUND RAISED BY THE ASSESSEE IN ITA N O. 4927/M/09 FOR ASSESSMENT YEAR 2005-2006 IS PARTLY ALLOWED. M/S. ABU DHABI COMMERCIAL BANK 7 15. GROUND NO. 3 & 4 IS THAT THE LD. CIT(A) ERRED I N UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN APPLYING PROVIS IONS OF SEC. 40(A)(I) TO INTEREST PAID BY THE ASSESSEE TO ITS HEAD OFFICE /OVERSEAS BRANCH. 16. THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT T HE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE SPECIAL BE NCH DECISION IN THE CASE OF SUMITOMO MITSUI BANKING CORPORATION VS DDI T (136 ITD 66). ON THE OTHER HAND, THE LD. DEPARTMENTAL RE PRESENTATIVE PLACED HIS RELIANCE ON THE DECISION OF CO-ORDINATE BENCH IN THE CASE OF OMAN INTERNATIONAL BANK SAOG REPORTED IN 35 CCH 20 7 (MUM). THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT OMAN INTE RNATIONAL BANK IS IN THE CONTEST OF THE PROVISIONS OF SEC. 14A AND NO T U/S. 40(A)(I) OF THE ACT AND THEREFORE THE DECISION IS FACTUALLY DISTIN GUISHABLE. ON A READING OF THE ORDER OF THE SPECIAL BENCH, WE FIND THAT THE SPECIAL BENCH DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE H OLDING THAT INTEREST PAID BY THE INDIAN BRANCH OF THE ASSESSEE BANK TO ITS HEAD OFFICE AND OTHER BRANCHES OUTSIDE INDIA IS NOT CHAR GEABLE TO TAX IN INDIA, THEREFORE PROVISIONS OF SEC. 195 COULD NOT B E ATTRACTED AND THERE BEING NO FAILURE TO DEDUCE TAX AT SOURCE FRO M PAYMENT OF INTEREST MADE BY PE. IT WAS HELD THAT THE QUESTION OF DISALLOWANCE OF THE SAID INTEREST BY INVOKING PROVISIONS OF SEC. 40 (A)(I) DOES NOT ARISE. WHILE HOLDING SO, THE SPECIAL BENCH OF THE TRIBUNAL HELD AS UNDER: 63. WE HAVE CAREFULLY GONE THROUGH THE ABOVE PROVISIONS OF THE TREATY ALONG WITH OTHER PROVISION S WHICH ARE RELEVANT IN THIS CONTEXT AS WELL AS COMMENTARIES AV AILABLE ON THIS POINT WHICH ARE FOUND TO BE HELPFUL IN INTERPRETING THE RELEVANT PROVISIONS OF THE TREATY. AS PER ARTICLE 11(1), IF THE INTEREST IS M/S. ABU DHABI COMMERCIAL BANK 8 ARISING IN A CONTRACTING STATE AND PAID TO A RESIDE NT OF OTHER CONTRACTING STATE, THEN IT IS TAXABLE IN THAT OTHER CONTRACTING STATE. THE SAID INTEREST INCOME, HOWEVER, MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH IT ARISES AS PER ARTICLE 11 (2) ACCORDING TO THE LAWS OF THAT CONTRACTING STATE PRO VIDED THAT IF THE RECIPIENT OF SUCH INTEREST IS THE BENEFICIAL OW NER OF THE INTEREST, THE TAX SO CHARGED SHALL NOT EXCEED 10% O F THE GROSS AMOUNT OF INTEREST. IN THE PRESENT CASE, THERE IS N O DISPUTE THAT THE HEAD OFFICE OF THE ASSESSEE BANK IN JAPAN IS TH E BENEFICIAL OWNER OF THE INTEREST AND THAT IS HOW THE SAID INTE REST HAS BEEN TAXED BY THE AO IN THE HANDS OF THE ASSESSEE AT A F IXED TAX RATE OF 10%. IT IS, HOWEVER, TO BE NOTED THAT SUCH INTEREST CAN BE TAXED IN INDIA IN THE HANDS OF GE AT A MAXIMUM RATE OF 10% A S PER ARTICLE 11(2) ACCORDING TO THE LAWS OF INDIA. AS ALREADY HE LD BY US, INTEREST PAYABLE BY THE PE IN INDIA TO THE GE OF WH ICH IT IS A PART IS A PAYMENT TO SELF AND THE SAME, THEREFORE, DOES NOT GIVE RISE TO INCOME IN INDIA THAT IS TAXABLE AS PER THE DOMESTIC LAW. 64. AS STATED IN THE PRELIMINARY REMARKS ON OECD COMMENTARY ON ARTICLE 11 CONCERNING THE TAXATION OF INTEREST, THE FORMULA RESERVING THE EXCLUSIVE TAXATION OF INTERES T TO ONE STATE, WHETHER THE STATE OF THE BENEFICIARY'S RESIDENCE OR THE STATE OF SOURCE, COULD NOT BE SURE OF RECEIVING GENERAL APPR OVAL. IT IS STATED THAT A COMPROMISE SOLUTION, THEREFORE, HAS B EEN ADOPTED BY PROVIDING THAT INTEREST MAY BE TAXED IN THE STAT E OF A RESIDENCE, BUT LEAVES TO 'THE STATE OF SOURCE THE R IGHT TO IMPOSE A TAX IF ITS LAWS SO PROVIDE, IT BEING AN IMPLICIT IN THIS RIGHT THAT THE STATE OF SOURCE IS FREE TO GIVE UP ALL TAXATION ON INTEREST PAID TO NON RESIDENT. THE STATE OF SOURCE THUS HAS TO EXERC ISE ITS RIGHT TO BRING TO TAX INTEREST INCOME ARISING IN THAT STATE TO THE NON RESIDENT OR TO THE RESIDENT OF THE OTHER STATE BY M AKING SPECIFIC PROVISION TO THAT EFFECT IN THE DOMESTIC LAW. IN TH E PRESENT CONTEXT, THERE IS NO SUCH PROVISION MADE IN THE IND IAN INCOME-TAX ACT, 1961 TO BRING TO TAX IN INDIA INTEREST PAYABLE BY THE INDIAN PE TO THE FOREIGN GE OF WHICH IT IS A PART, WHICH O THERWISE IS NOT TAXABLE BEING PAYMENT TO SELF. 65. SHRI GIRISH DAVE HAS CONTENDED BEFORE US THAT T HE DEEMING FICTION CREATED IN ARTICLE 7(2) OF THE TREATY TREAT ING THE PE IN INDIA AS SEPARATE AND INDEPENDENT ENTITY SHOULD BE EXTENDED TO ARTICLE 11 TO THE TREATY. ACCORDING TO HIM, IF THE PE IN INDIA AND THE HEAD OFFICE ABROAD ARE TREATED AS TWO SEPARATE ENTITIES, THERE M/S. ABU DHABI COMMERCIAL BANK 9 WILL BE NO DIFFICULTY IN BRINGING TO TAX INTEREST P AID BY INDIAN PE AS INCOME OF THE GE IN INDIA AS PER ARTICLE 11(2). BEFORE WE DEAL WITH THIS ARGUMENT RELATING TO THE EXTENSION OF DEE MING FICTION CREATED IN ARTICLE 7(2) AND APPLICATION THEREOF TO ARTICLE 11 ALSO AS SOUGHT BY SHRI GIRISH DAVE, WE CONSIDER IT PROPE R TO FIRST DEAL WITH ARTICLE 11 (6) OF THE INDO-JAPANESE TREATY WHI CH HAS BEEN REFERRED TO BY BOTH THE SIDES IN DIFFERENT CONTEXT AND IN DIFFERENT MANNER SEEKING INTERPRETATION THEREOF IN SUPPORT OF THEIR RESPECTIVE CASE. THE SAID ARTICLE 11(6) READS AS U NDER: THE PROVISIONS OF PARAGRAPHS 1,2 AND 3 SHALL NOT A PPLY IF THE BENEFICIAL OWNER OF THE INTEREST, BEING A RESID ENT OF A CONTRACTING STATE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE IN WHICH THE INTEREST ARISES, THR OUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN OR PE2RFOR MS IN THAT OTHER CONTRACTING STATE INDEPENDENT PERSONAL S ERVICES FROM A FIXED BASE SITUATED THEREIN AND THE DEBT-CLAI M IN RESPECT OF WHICH THE INTEREST IS PAID IS EFFECTIVEL Y CONNECTED WITH SUCH PERMANENT ESTABLISHMENT OR FIXED BASE. I N SUCH CASE, THE PROVISIONS OF ARTICLE 7 OR ARTICLE 14, AS THE CASE MAY BE, SHALL APPLY. 66. IT IS TO BE NOTED THAT THE PROVISIONS OF ARTICL E 11(6) OF THE INDO-JAPANESE CONVENTION ARE PARI-MATERIA TO THA T OF ARTICLE 11(4) OF THE OECD MODEL CONVENTION. THE PURPOSE AND SCOPE OF ARTICLE 11 (4) OF THE OECD MODEL CONVENTION HAS BEE N EXPLAINED IN PARA 24 AND 25.1 OF THE OECD COMMENTARY ON MODEL TAX CONVENTION ON INCOME AND ON CAPITAL (CONDENSED VERS ION) ISSUED IN JULY 2010 AS UNDER: '24. CERTAIN STATES CONSIDER THAT DIVIDENDS, INTERE ST AND ROYALTIES ARISING FROM SOURCES IN THEIR TERRITO RY AND PAYABLE TO INDIVIDUALS OR LEGAL PERSONS WHO ARE RES IDENTS OF OTHER STATES FALL OUTSIDE THE SCOPE OF THE ARRAN GEMENT MADE TO PREVENT THEM FROM BEING TAXED BOTH IN THE S TATE OF SOURCE AND IN THE STATE OF THE BENEFICIARY'S RESIDE NCE WHEN THE BENEFICIARY HAS A PERMANENT ESTABLISHMENT IN TH E FORMER STATE. PARAGRAPH 4 IS NOT BASED ON SUCH A CONCEPTION WHICH IS SOMETIMES REFERRED TO AS 'THE F ORCE OF ATTRACTION OF THE PERMANENT ESTABLISHMENT'. IT DOES NOT M/S. ABU DHABI COMMERCIAL BANK 10 STIPULATE THAT INTEREST ARISING TO A RESIDENT OF A CONTRACTING STATE FROM A SOURCE SITUATED IN THE OTH ER STATE MUST, BY A KIND OF LEGAL PRESUMPTION, OR FICTION EV EN, BE RELATED TO A PERMANENT ESTABLISHMENT WHICH THAT RES IDENT MAY HAVE IN THE LATTER STATE, SO THAT THE SAID STAT E WOULD NOT BE OBLIGED TO LIMIT ITS TAXATION IN SUCH A CASE . THE PARAGRAPH MERELY PROVIDES THAT IN THE STATE OF SOUR CE THE INTEREST IS TAXABLE AS PART OF THE PROFITS OF THE P ERMANENT ESTABLISHMENT THERE OWNED BY THE BENEFICIARY WHICH IS A RESIDENT IN THE OTHER STATE, IF IT IS PAID IN RESPE CT DEBT- CLAIMS FORMING PART OF THE ASSETS OF THE PERMANENT ESTABLISHMENT OR OTHERWISE EFFECTIVELY CONNECTED WI TH THAT ESTABLISHMENT. IN THAT CASE, PARAGRAPH 4 RELIEVES T HE STATE OF SOURCE OF THE INTEREST FROM ANY LIMITATION UNDER THE ARTICLE. THE FOREGOING EXPLANATIONS ACCORD WITH THO SE IN THE COMMENTARY ON ARTICLE 7. 25.1 A DEBT-CLAIM IN RESPECT OF WHICH INTEREST IS PA ID WILL BE EFFECTIVELY CONNECTED WITH A PERMANENT ESTABLISH MENT, AND WILL THEREFORE FORM PART OF ITS BUSINESS ASSETS, IF THE 'ECONOMIC' OWNERSHIP OF THE DEBT-CLAIM IS ALLOCATED TO THAT PER MANENT ESTABLISHMENT UNDER THE PRINCIPLES DEVELOPED IN THE COMMITTEE'S REPORT ENTITLED ATTRIBUTION OF PROFITS TO PERMANENT ESTABLISHMENTS (SEE IN PARTICULAR PARAGRAPHS 72-92 OF PART I OF THE REPORT) FOR THE PURPOSES OF THE APPLICATION OF PARAGRAPH 2 OF ARTICLE 7. IN THE CONTEXT OF THAT PARAGRAPH, THE 'E CONOMIC' OWNERSHIP OF A DEBT-CLAIM MEANS THE EQUIVALENT OF O WNERSHIP FOR INCOME TAX PURPOSES BY A SEPARATE ENTERPRISE, WITH THE ATTENDANT BENEFITS AND BURDENS (E.G. THE RIGHT TO THE INTERES T ATTRIBUTABLE TO THE OWNERSHIP OF THE DEBT-CLAIM AND THE POTENTIAL EX POSURE TO GAINS OR LOSSES FROM THE APPRECIATION OR DEPRECIATI ON OF THE DEBT- CLAIM). 67. KEEPING IN VIEW THE PURPOSE AND SCOPE OF ARTICL E 11(4) OF THE OECD MODEL CONVENTION, THE PROVISIONS OF WHI CH ARE PARI MATERIA TO THE PROVISIONS OF ARTICLE 11(6) OF THE I NDO- JAPANESE TREATY, WE ARE OF THE VIEW THAT THE SAME IS NOT APP LICABLE TO THE FACTS OF THE PRESENT CASE INASMUCH AS THE SITUATION AS CONTEMPLATED TO MAKE IT APPLICABLE DOES NOT EXIST I N THE PRESENT CASE. IN THE PRESENT CASE, THE AMOUNT IS ADVANCED B Y THE HEAD OFFICE OF THE ASSESSEE BANK TO ITS PE IN INDIA AND THE SAME REPRESENTS LIABILITY OF THE PE IN INDIA AS REFLECTE D IN THE BALANCE M/S. ABU DHABI COMMERCIAL BANK 11 SHEET OF THAT PE. INTEREST PAID BY THE PE ON SUCH L IABILITY, THEREFORE, CANNOT BEREGARDED AS INTEREST PAID IN RE SPECT OF DEBT CLAIMS FORMING PART OF THE ASSETS OF THE PERMANENT ESTABLISHMENT. IT ALSO CANNOT BE SAID THAT THE ECON OMIC OWNERSHIP OF THE DEBT CLAIM IS ALLOCATED TO THAT PE RMANENT ESTABLISHMENT SO AS TO SAY THAT IT IS EFFECTIVELY C ONNECTED WITH THE PERMANENT ESTABLISHMENT. IT IS NO DOUBT TRUE THAT A RTICLE 7 MAKES INROADS IN ARTICLE 11 AS A RESULT OF THE PROV ISIONS CONTAINED IN ARTICLE 11 (6) AS CONTENDED BY SHRI GI RISH DAVE. HOWEVER, THE SITUATION CONTEMPLATED IN ARTICLE 11 ( 6) SHOULD BE FOUND TO BE IN EXISTENCE IN A CASE TO BRING THE INT EREST TO ARTICLE 7 IN ORDER TO TREAT THE SAID INCOME 5 BUSINESS PROFIT ATTRIBUTABLE TO THE PE INDIRECTLY BY FORCE OF ATTRACTION. IN THE PR ESENT CASE, SUCH SITUATION DOES NOT EXIST AND ARTICLE 11(6), THEREFO RE, IN OUR OPINION, HAS NO APPLICATION. 68. NOW WE SHALL DEAL WITH THE CONTENTION OF SHRI G IRISH DAVE SEEKING EXTENSION OF THE DEEMING FICTION CREAT ED IN ARTICLE 7(2) TO TREAT THE PERMANENT ESTABLISHMENT IN INDIA OF THE ASSESSEE BANK AS A SEPARATE AND INDEPENDENT ENTITY FOR THE PURPOSE OF APPLICATION OF ARTICLE 11 ESPECIALLY PAR AGRAPH 2 THEREOF. IT IS RELEVANT HERE TO REFER TO THE PROVIS ION OF ARTICLE 7(2) WHICH IS REPRODUCED HEREUNDER: 'SUBJECT TO THE PROVISIONS OF PARAGRAPH 3, WHERE AN ENTERPRISE OF A CONTRACTING STATE CARRIES ON BUSINE SS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN, THERE SHALL IN EACH CONTRACTING STATE BE ATTRIBUTED TO THAT PERMANENT ESTABLISHMENT THE PROFITS WHICH IT MIGHT BE EXPECTE D TO MAKE IF IT WERE A DISTINCT AND SEPARATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIES UNDER THE SAME OR SIMILAR CONDITIONS AND DEALING WHOLLY INDEPENDENTLY WITH TH E ENTERPRISE OF WHICH IT IS A PERMANENT ESTABLISHMENT . ' 69. THE PROVISIONS OF ARTICLE 7(2) ARE SUBJECT TO T HE PROVISIONS OF ARTICLE 7(3) AND IF THE SAME ARE READ TOGETHER IN HARMONIOUS MANNER, WE ARE OF THE VIEW THAT IT BECOM ES CLEAR THAT THE PROFITS ATTRIBUTED TO THE PE ARE THE PROFI TS WHICH IT MIGHT BE EXPECTED TO MAKE IF IT WERE A DISTINCT AND SEPAR ATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIES UNDER THE SAME OR M/S. ABU DHABI COMMERCIAL BANK 12 SIMILAR CONDITION AND DEALING WHOLLY INDEPENDENTLY WITH THE ENTERPRISE OF WHICH ITS PE. THE SAID FICTION, IN OU R OPINION, THEREFORE, IS APPLICABLE ONLY FOR THE PURPOSE OF DE TERMINING THE PROFITS ATTRIBUTABLE TO THE PE AND THIS LIMITED APP LICATION CONTEMPLATED IN THE TREATY CANNOT BE EXTENDED AND A PPLIED TO COMPUTE THE INCOME OF THE GE. IT IS NO DOUBT TRUE T HAT IF THE ACCOUNTS OF TWO ENTITLES ARE PREPARED SYMMETRICALLY AND THE METHODS OF ATTRIBUTING PROFITS OR EXPENSES APPLIED ARE THE SAME, SUCH ACCOUNTS ARE MORE ACCEPTABLE TO THE TAX AUTHOR ITIES HAVING JURISDICTION OVER BOTH THESE ENTITIES BECAUSE THE S AME WILL RESULT IN THE DEDUCTION ALLOWED IN THE HANDS OF ONE ENTITY AS INCOME IN THE HANDS OF OTHER ENTITY. THE RELATIONSHIP BETWEEN A PE AND THE GE OF WHICH THE SAID PE IS PART, HOWEVER, IS ENTIRE LY DIFFERENT AND THE EFFECTS OF ARTICLE 7 SHOULD BE CONSIDERED KEEPI NG IN VIEW THIS PECULIAR RELATIONSHIP BETWEEN THE PE AND GE. 70. THE PURPOSE AND FUNCTION OF ARTICLE 7 IS TO DET ERMINE WHETHER THE SOURCE STATE MAY TAX THE PROFIT OF AN E NTERPRISE CARRIED ON BY A RESIDENT OF OTHER CONTRACTING STATE THROUGH A PE IN THE SOURCE STATE AND IF SO, HOW MUCH OF THE PROF ITS THE SOURCE STATE MAY TAX. THE RESIDENT STATE HAS TO DETERMINE THE PROFITS ATTRIBUTABLE TO THE PE CONSIDERING IT AS A SEPARATE ENTITY MAINLY FOR THE PURPOSE OF GRANTING DOUBLE TAXATION RELIEF ACCORDING TO THE RELEVANT TREATY AND NOT FOR THE PURPOSE OF DETE RMINING THE TOTAL TAXABLE INCOME OF THE ENTERPRISE CARRIED ON B Y SUCH RESIDENT. ARTICLE 7 PROVIDES FOR TAXATION OF THE PR OFITS ATTRIBUTABLE TO THE PE IN THE PE STATE WHICH IS SOURCE STATE AND FOR DETERMINING SUCH PROFITS ATTRIBUTABLE TO THE PE, IT IS TREATED AS INDEPENDENT ENTITY. THERE IS THUS A DEPARTURE FROM PREPARATION OF THE ACCOUNTS OF PE AND GE SYMMETRICALLY TO THE E XTENT THAT INDEPENDENT FICTION IS APPLIED ONLY TO THE PE TREAT ING THE PE AND THE ENTERPRISE OF WHICH IT IS A PART AS TWO SEPARAT E ENTITIES ONLY FOR THE PURPOSE OF DETERMINING THE PROFITS ATTRIBUT ABLE TO THE PE AND NOT FOR THE PURPOSE OF DETERMINING THE TOTAL PR OFITS OF THE ENTERPRISE AS A WHOLE. 71. WHILE EXPLAINING THE PECULIAR RELATIONSHIP BETW EEN A PE AND THE ENTERPRISE OF WHICH IT IS A PART, A COMP ARISON IS OFTEN MADE TO A YOLK AND ITS EGG. THE PE IS CONSIDERED AS YOLK AND THE ENTERPRISE AS A WHOLE IS CONSIDERED AS THE EGG. THI S COMPARISON IS MADE TO SHOW THAT WHATEVER IS IN THE YOLK IS NECESS ARILY IN THE EGG ITSELF AND THERE IS NO NEED TO ACCOUNT FOR THE EGG SEPARATELY. M/S. ABU DHABI COMMERCIAL BANK 13 ON THE OTHER HAND, NOT EVERYTHING THAT IS IN THE EG G IS PART OF THE YOLK AND IT IS, THEREFORE, NOT NECESSARY TO ACCOUNT FOR THE YOLK SEPARATELY IN CASES WHERE THE RESIDENT STATE AVOID TOTAL TAXATION USING THE CREDIT METHOD OR THE TAX EXEMPTION METHOD . THIS POSITION CAN FURTHER BE EXPLAINED BY GIVING AN EXAM PLE AS FOLLOWS: SUPPOSE THERE IS A PE IN ONE STATE WHICH IS A PART OF A GE HAVING HO IN ANOTHER STATE.DURING THE RELEVANT YEAR, LOAN HAS BEEN ADVANCED BY HO TO PE ON WHICH INTERES T OF RS.3 CRORES HAS BEEN PROVIDED BY THE PE. THE TOTAL PROFIT OF THE HO EXCLUDING THE SAID INTEREST SAY IS RS.95 CRO RES. THE PROFITS ATTRIBUTABLE TO THE PE WITHOUT TAKING INTO CONSIDERATION THE SAID INTEREST IS RS.5 CRORES. IN SUCH A CASE, THE TOTAL PROFIT OF THE GE REPRESENTING CONSO LIDATED FIGURES OF HO AND PE WILL BE RS.100 CRORES AS THE I NTEREST PAYABLE BY PE AND RECEIVABLE BY HO WILL GET SQUARED OF. IN SO FAR AS TAXATION IS CONCERNED, THE PROFIT ATTRIBU TABLE TO PE WILL BE RS.2 CRORES ON WHICH THE PE STATE WILL I MPOSE TAX AS BUSINESS PROFIT. THE REMAINING AMOUNT OF RS. 98 CRORES WILL BE TAXED IN THE HANDS OF GE STATE I.E. RESIDENT STATE. SUPPOSE WE TAKE ANOTHER SITUATION WHERE THE ONLY DIFFERENCE IS THAT HO HAS ADVANCED THE SUM TO A THI RD PARTY IN THE OTHER STATE I.E. PE STATE ON WHICH IT HAS RE CEIVED INTEREST OF RS.3 CRORES, WHILE THE PE HAS TAKEN A L OAN FROM THIRD PARTY ON WHICH INTEREST OF RS.3 CRORES HAS BE EN PAID. IN SUCH A CASE, THE PROFIT ATTRIBUTABLE TO THE PE W ILL REMAIN THE SAME AT RS.2 CRORES ON WHICH THE PE STATE WILL IMPOSE TAX. THE PROFIT OF GE WHICH REPRESENTS THE CONSOLID ATED FIGURE OF HO AND PE WILL ALSO REMAIN UNCHANGED AT R S.100 CRORES AS THE INTEREST RECEIVED FROM THIRD PARTY OF RS.3 CRORES WILL BE CREDITED TO THE CONSOLIDATED PROFIT & LOSS ACCOUNT AND THE INTEREST PAID BY PE TO THIRD PARTY AMOUNTING TO RS.3 CRORES WILL BE DEBITED IN THE CONSOLIDATED PROFIT & LOSS ACCOUNT. THE TOTAL PROFI T OF THE GE THUS WILL REMAIN THE SAME EVEN IN THIS SITUATION AT 100 CRORES OUT OF WHICH RS. 2 CRORE WILL BE TAXED IN PE STATE BEING PROFIT ATTRIBUTABLE TO PE AND THE BALANCE AMO UNT OF RS.98 CRORE WILL BE TAXED IN GE STATE I.E. RESIDENT STATE. HOWEVER, IT WILL HAVE TO PAY IN ADDITION TO THE TAX PAYABLE ON THE PROFIT ATTRIBUTABLE TO THE PE OF RS.2 CRORES , TAX ON INTEREST OF RS.3 CRORES RECEIVED FROM THIRD PARTY O F THE M/S. ABU DHABI COMMERCIAL BANK 14 OTHER STATE IN THAT STATE I.E. PE STATE AS PER ARTI CLE 11 (2) OF THE TREATY. THE GE, HOWEVER, WILL BE ABLE TO CLAIM CREDIT FOR SUCH TAX PAID IN ITS COUNTRY AS PER ARTICLE 23B OF THE RELEVANT TREATY. THE GE THUS AT ENTERPRISE LEVEL WI LL NEITHER GAIN NOR LOSE ANYTHING AS FAR AS ITS TAX LIABILITY IS CONCERNED. THE PE STATE, HOWEVER, WILL LOSE IN THE FIRST SITUATION TAX ON INTEREST PAYABLE BY THE PE TO THE HEAD OFFICE BECAUSE THE SAME BEING PAYMENT TO SELF IS NO T TAXABLE UNDER THE DOMESTIC LAW. 72. AS ALREADY DISCUSSED BY US WITH REFERENCE TO OE CD COMMENTARY, ARTICLE 11 (2) GIVES AN OPTION TO THE S OURCE STATE TO TAX INTEREST ARISING IN THAT STATE TO THE PERSON RE SIDENT OF ANOTHER STATE IF HE IS THE BENEFICIAL OWNER OF SUCH INTERES T, AT THE RATE NOT EXCEEDING 10% ACCORDING TO THE LAWS OF THAT STATE. THIS OPTION THUS HAS TO BE EXERCISED BY THE SOURCE STATE BY MAK ING SUITABLE PROVISIONS IN THE DOMESTIC LAW PROVIDING EXPRESSLY FOR TAXING THE INTEREST PAYABLE BY PE IN THAT STATE TO THE GE IN A NOTHER STATE. THIS POSITION HAS BEEN RECOGNIZED IN THE COMMENTARY ON 'MODEL CONVENTION ON INCOME AND ON CAPITAL' (CONDENSED VER SION) PUBLISHED BY OECD IN JULY, 2010 IN PARA NO. 29 WHIC H STATES THAT SOME STATES CONSIDER THAT THE SEPARATE AND INDEPEND ENT ENTERPRISE FICTION THAT IS MANDATED BY ARTICLE 7 (2 ) SHOULD NOT BE RESTRICTED TO THE APPLICATION OF ARTICLE 7, 23A AND 23B BUT SHOULD ALSO EXTEND TO THE INTERPRETATION AND APPLICATION O F OTHER ARTICLE OF THE CONVENTION, SO AS TO ENSURE THAT PERMANENT E STABLISHMENTS ARE, SO FAR AS POSSIBLE, TREATED IN THE SAME WAY AS SUBSIDIARIES. THESE STATES ALSO CONSIDER THAT NOTIONAL CHARGES FO R DEALINGS WHICH, PURSUANT TO ARTICLE 7(2), ARE DEDUCTED IN CO MPUTING THE PROFITS OF THE PE SHOULD BE TREATED, FOR THE PURPOS ES OF OTHER ARTICLE OF THE CONVENTION, IN THE SAME WAY AS PAYME NTS THAT WOULD BE MADE BY SUBSIDIARY TO ITS PARENT COMPANY. IT IS SUGGESTED IN THE COMMENTARY THAT THESE STATES MAY T HEREFORE WISH TO INCLUDE IN THEIR TAX TREATIES PROVISIONS AC CORDING TO WHICH CHARGES FOR INTERNAL DEALINGS SHOULD BE RECOGNIZED FOR THE PURPOSES OF ARTICLE 11. IT IS, HOWEVER, CAUTIONED T HAT THE TAX WILL BE LEVIED IN ACCORDANCE WITH SUCH PROVISIONS OF THE TREATY ONLY TO THE EXTENT PROVIDED FOR UNDER DOMESTIC LAW. WE HAVE ALREADY NOTED THAT NO SUCH PROVISIONS ARE MADE EITHER IN TH E INDO- JAPANESE TREATY OR EVEN IN THE DOMESTIC LAW I.E. IN COME-TAX ACT, 1961 TO EXPRESSLY PROVIDE FOR TAXATION OF INTEREST PAYABLE BY THE M/S. ABU DHABI COMMERCIAL BANK 15 PE IN INDIA TO THE GE OF WHICH IT IS A PART WHICH C ONSTITUTES A PAYMENT TO SELF. 73. THE OECD COMMENTARY 'MODEL TAX CONVENTION ON INCOME AND ON CAPITAL (CONDENSED VERSION)' RELEASED IN JULY, 2010 HAS ALSO CONSIDERED IN PARAGRAPH NO. 28 THE EFFECT OF THE SEPARATE AND INDEPENDENT ENTERPRISE FICTION THAT IS MANDATED BY ARTICLE 7(2). IT IS STATED IN THIS CONTEXT THAT THE SAID FICTION IS RESTRICTED TO THE DETERMINATION OF PROFITS THAT ARE ATTRIBUTABLE TO A PERMANENT ESTABLISHMENT AND IT DOES NOT EXTEND TO CREATE NOTIONAL INTEREST INCOME FOR THE ENTERPRISE WHICH A CONTRACTING STATE COULD TAX AS SUCH UNDER ITS DOMESTIC LAW BY A RGUING THAT SUCH INCOME IS COVERED BY ANOTHER ARTICLE OF THE CO NVENTION. IT IS ALSO RARIFIED THAT THE SEPARATE AND INDEPENDENT ENT ERPRISE FICTION DOES NOT EXTEND TO ARTICLE 11 AND FOR THE PURPOSE O F THAT ARTICLE, ONE PART OF AN ENTERPRISE CANNOT BE CONSIDERED TO H AVE MADE AN INTEREST PAYMENT TO ANOTHER PART OF THE SAME ENTERP RISE. 74. IN THE ASSESSMENT ORDER, THE AO HAS RELIED ON T HE PROVISIONS OF SECTION 9(1)(V)(C) OF THE INCOME-TAX A CT TO' HOLD THAT INTEREST PAYABLE BY PE IN INDIA BEING INCOME D EEMED TO ACCRUE OR ARISE IN INDIA IS CHARGEABLE TO TAX IN IN DIA. IN OUR OPINION, SUCH INTEREST PAYABLE BY THE PE TO GE BEIN G PAYMENT TO SELF DOES NOT GIVE RISE TO ANY INCOME THAT IS CHARG EABLE TO TAX IN INDIA AS HELD, INTER ALIA, BY THE HON'BLE SUPREME C OURT IN THE CASE OF KIKABHAI PREMCHAND (SIR) (SUPRA) AND THE QUESTIO N OF BRINGING THE SAID INCOME TO TAX BY RELYING ON THE P ROVISIONS OF SECTION 9(1)(V)(C) THEREFORE, DOES NOT ARISE. 75. THE AO HAS ALSO RELIED ON THE BOARD CIRCULAR NO . 740 ISSUED ON 17-04-1996 CLARIFYING THAT THE BRANCH OF TH E FOREIGN COMPANY OR CONCERN IN INDIA IS A SEPARATE ENTITY FO R THE PURPOSE OF TAXATION AND INTEREST PAID OR PAYABLE BY SUCH BA NK ABROAD WILL BE LIABLE TO TAX IN INDIA AND WOULD BE GOVERNED BY THE PROVISIONS OF SECTION L1SA. THE PROVISIONS OF SECTION 11SA REA D AS UNDER: 'L15A(L) WHERE THE TOTAL INCOME OF- (A) A NON-RESIDENT (NOT BEING A COMPANY) OR OF A FO REIGN COMPANY, INCLUDES ANY INCOME BY WAY OF- M/S. ABU DHABI COMMERCIAL BANK 16 (I) DIVIDENDS (OTHER THAN DIVIDENDS REFERRED TO IN SECTION 115-0; OR (II) INTEREST RECEIVED FROM GOVERNMENT OR AN INDIAN CONCERN ON MONIES BORROWED OR DEBT INCURRED BY GOVERNMENT OR T HE INDIAN CONCERN IN FOREIGN CURRENCY; OR (III) INCOME RECEIVED IN RESPECT OF UNITS, PURCHASE D IN FOREIGN CURRENCY, OF A MUTUAL FUND SPECIFIED UNDER CLAUSE ( 23D) OF SECTION 10 OR OF THE UNIT TRUST OF INDIA, THE INCOME-TAX PAYABLE SHALL BE AGGREGATE OF - IT IS CLEARLY MANIFEST FROM THE ABOVE PROVISIONS TH AT SECTION L15A IS APPLICABLE INTER ALIA, IN RESPECT OF INCOME RECEIVED BY A NON RESIDENT (NOT BEING A COMPANY) OR A FOREIGN COM PANY FROM GOVERNMENT OR AN INDIAN CONCERN ON MONEYS BORROWED OR DEBT INCURRED BY GOVERNMENT OR THE INDIAN CONCERN IN FOR EIGN CURRENCY. THE SAID PROVISION, HOWEVER, HAS NO APPLI CATION TO THE FACTS OF THE PRESENT CASE. IN ANY CASE, IF THE INTE REST INCOME IN QUESTION IS NOT CHARGEABLE TO TAX UNDER THE PROVISI ONS OF THE DOMESTIC LAW AS ALREADY HELD BY US, THE SAME CANNOT BE BROUGHT TO TAX BY WAY OF A BOARD CIRCULAR. 76 . AS REGARDS THE DECISION OF HON'BLE CALCUTTA HIGH COURT IN THE CASE OF ABN AMRO BANK NV (SUPRA) RELIED UPON BY THE LEARNED REPRESENTATIVES OF THE ASSESSEES, SHRI DAVE AND SHRI SRIVASTAVA HAVE MAINLY RAISED TWO FOLD CONTENTIONS. ACCORDING TO THEM, THE SAID DECISION BEING THE DECISION OF NON J URISDICTIONAL HIGH COURT, IS NOT BINDING ON THIS SPECIAL BENCH. SECONDLY, THEY HAVE MADE AN ATTEMPT TO DEMONSTRATE THAT THE SAID DECISION IS PER INCURIM KEEPING IN VIEW THAT M ANY RELEVANT AND VITAL ASPECTS ARE NOT CONSIDERED WHILE HOLDING THAT INTEREST RECEIVABLE BY A FOREIGN BANK FROM ITS INDIAN BRANCH WAS NOT TAXABLE IN THE HANDS OF FOREIGN BANK IN INDIA. SHRI DAVE HAS ALSO MADE AN ATTEMPT TO INVITE OUR ATTENTION TO THE VARI OUS FINDINGS AND OBSERVATIONS RECORDED BY THE HON'BLE CALCUTTA H IGH COURT IN ITS JUDGMENT DELIVERED IN THE CASE OF ABN AMRO BANK NV (SUPRA) WHICH ACCORDING TO HIM, ARE SELF CONTRADICTORY AND INCONSISTENT. THE LEARNED COUNSELS FOR THE ASSESSEE, SHRI PARDIWA LA AND SHRI DASTUR, ON THE OTHER HAND, HAVE CONTENDED THAT THE DECISION OF M/S. ABU DHABI COMMERCIAL BANK 17 HON'BLE CALCUTTA HIGH COURT BEING THE ONLY DECISION OF THE HIGH COURT DIRECTLY AVAILABLE ON THE POINT, SHOULD BE FO LLOWED BY THE SPECIAL BENCH EVEN THOUGH THE SAME IS THE DECISION OF THE NON JURISDICTIONAL HIGH COURT. WITHOUT GOING INTO ALL THESE ARGUMENTS RAISED BY TH E LEARNED REPRESENTATIVES OF BOTH THE IDES, WE CONSI DER IT SUFFICIENT TO OBSERVE THAT THE ISSUES RAISED BEFORE US HAVE BEEN CONSIDERED AND DECIDED BY US ON MERITS INDEPEN DENTLY AFTER TAKING INTO CONSIDERATION THE VARIOUS SUBMISS IONS MADE BY BOTH THE SIDES AND THE RELEVANT MATERIAL PL ACED ON RECORD. THIS ISSUE, THEREFORE, IS NOT BEING DECIDED BY US BY SIMPLY FOLLOWING THE DECISION OF HON'BLE CALCUTTA H IGH COURT IN THE CASE OF ABN AMRO BANK NV (SUPRA). NEVERTHELESS, WE CAN CERTAINLY SAY THAT THE SAID DE CISION OF HON'BLE CALCUTTA HIGH COURT TAKING A SIMILAR VIEW I N THE MATTER SUPPORTS OUR VIEW. 77. IN THE CASE OF HYUNDAI HEAVY INDUSTRIES CO. LTD . (SUPRA) RELIED UPON BY SHRI DAVE, THE HON'BLE SUPREME COURT NO DOUBT HAS HELD THAT THE PERMANENT ESTABLISHMENT OF A FORE IGN ENTERPRISE IN INDIA IS A SEPARATE PROFIT CENTRE. IT ALSO CANNOT BE DISPUTED THAT THE LEGAL JURISDICTION AND FISCAL JUR ISDICTION ARE TWO DIFFERENT CONCEPTS AND WHEN A FOREIGN ENTERPRISE CA RRIES ON BUSINESS THROUGH A PERMANENT ESTABLISHMENT IN INDIA , IT BRINGS ITSELF WITHIN THE FISCAL JURISDICTION OF INDIA TO S UCH AN EXTENT THAT INDIA CAN TAX THE PROFITS DERIVED BY THE FOREIGN EN TERPRISE FROM INDIA DIRECTLY OR INDIRECTLY THROUGH PERMANENT ESTA BLISHMENT. IN THE PRESENT CASE, WE, HOWEVER, ARE CONCERNED WITH T HE INTEREST PAYABLE BY THE INDIAN PE TO THE FOREIGN GE AND THE BASIC QUESTION IS WHETHER SUCH INTEREST PAYABLE BY THE PE TO THE G E OF WHICH IT IS A PART CAN GIVE RISE TO ANY INCOME CHARGEABLE TO TA X IN INDIA IN THE HANDS OF GE. AS ALREADY HELD BY US, THERE ARE N O EXPRESS PROVISIONS IN THE INDO-JAPANESE TAX TREATY TO BRING THE SAID INCOME TO TAX IN INDIA IN THE HANDS OF GE AND IN AN Y CASE, THE SAID INTEREST PAYABLE BY THE PE TO THE GE OF WHICH THE P E IS A PART IS A PAYMENT TO SELF WHICH CANNOT GIVE RISE TO ANY INCOM E CHARGEABLE TO TAX IN INDIA AS PER THE DOMESTIC LAW. THE DECISI ON OF HON'BLE SUPREME COURT IN THE CASE OF HYUNDAI HEAVY INDUSTRI ES CO. LTD. (SUPRA), IN OUROPINION, THUS IS NOT OF ANY HELP TO THE REVENUE IN THE PRESENT CONTEXT AND THE RELIANCE OF SHRI GIRISH DAVE THEREON IS CLEARLY MISPLACED. M/S. ABU DHABI COMMERCIAL BANK 18 78. SHRI GIRISH DAVE HAS ALSO SUBMITTED THAT THE IN DO- JAPANESE TREATY HAVING BEEN ENTERED INTO BY THE GOV ERNMENT OF INDIA IN EXERCISE OF THE POWERS CONFERRED BY SECTIO N 90 OF THE INCOME-TAX ACT, 1961, THE SAME HAS BECOME A PART OF DOMESTIC LAW AND AS PER ARTICLE 23 OF THE SAID TREATY, THE I SSUE RELATING TO TAXABILITY OF THE JAPANESE BANK IN INDIA HAS TO BE DECIDED AS PER THE PROVISIONS OF THE TREATY EVEN THOUGH THE SAME I S CONTRARY TO THE PROVISIONS OF THE DOMESTIC LAW. WE HAVE ALREADY DISCUSSED AND CONSIDERED THE EFFECT OF ARTICLE 23 OF THE INDO -JAPANESE TREATY. AS HELD BY US, THE SAID PROVISION OF THE TR EATY CANNOT BE RELIED UPON TO BRING TO TAX CERTAIN INCOME IN THE H ANDS OF FOREIGN ENTERPRISE IN INDIA WHICH OTHERWISE IS NOT TAXABLE AS PER THE DOMESTIC LAW. IN THIS REGARD, WE HAVE REFERRED TO T HE PROVISIONS OF SECTION 90(2) OF THE INDIAN INCOME-TAX ACT WHICH PRO VIDE THAT THE PROVISIONS OF THE DOMESTIC LAW OVERRIDE AND PREVAIL OVER THE PROVISIONS OF TREATY IF THE SAME ARE BENEFICIAL TO THE ASSESSEE. WE HAVE ALSO RELIED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF AZADI BACHAO ANDOLAN (SUPRA) WHEREIN IT WAS HELD THAT TREATY CANNOT IMPOSE TAX WHICH IS OTHERWISE NOT PRO VIDED IN THE DOMESTIC LAW. 79.AS REGARDS THE REFERENCE MADE BY SHRI GIRISH DAV E TO THE BALANCE SHEET OF INDIAN BRANCHES OF THE ASSESSE E BANK WHEREIN CAPITAL AND LOANS GIVEN BY THE HEAD OFFICE ARE REFLECTED SEPARATELY TO SHOW THAT HEAD OFFICE IS A DISTINCT A ND SEPARATE ENTITY FROM THE INDIAN BRANCHES, WE HAVE ALREADY CO NSIDERED AND HIGHLIGHTED THE PECULIAR RELATIONSHIP BETWEEN THE H EAD OFFICE OF THE ASSESSEE BANK BEING A FOREIGN GE AND ITS INDIAN BRANCHES BEING PE IN INDIA. WE HAVE ALSO HIGHLIGHTED HOW AS A RESULT OF THIS PECULIAR RELATIONSHIP, THERE IS A DEPARTURE FR OM SYMMETRIC APPROACH GENERALLY FOLLOWED BY TWO ENTITIES IN PREP ARING THEIR ACCOUNTS. AS A RESULT OF THISPECULIAR RELATIONSHIP, THE INDIAN BRANCH OF A FOREIGN BANK WHICH REPRESENTS ITS PE IN INDIA, IN OUR OPINION, CANNOT BE TREATED AT PAR WITH A SUBSIDIARY OF A FOREIGN COMPANY IN INDIA AND THIS POSITION HAS BEEN RECOGNI ZED EVEN BY THE OECD IN ITS 'REPORT ON THE ATTRIBUTION OF PROFI TS TO PERMANENT ESTABLISHMENTS PARTS I(GENERAL CONSIDERATIONS), IL (BANKS) AND III (GLOBAL TRADING) PUBLISHED IN DECEMBER 2006. AS MEN TIONED IN THE SAID REPORT, THERE ARE A NUMBER OF ASPECTS TO T HE RECOGNITION (OR NOT) OF DEALINGS BETWEEN A PE AND THE REST OF T HE ENTERPRISE OF WHICH IT IS A PART. ONE OF SUCH ASPECTS IS THAT A P E IS NOT THE SAME M/S. ABU DHABI COMMERCIAL BANK 19 AS A SUBSIDIARY AND IS NOT IN FACT LEGALLY OR ECONO MICALLY SEPARATE FROM THE REST OF THE ENTERPRISE OF WHICH IT IS A PA RT. IN THE CONTEXT OF A PE AND ITS HEAD OFFICE, AS CONTRASTED WITH A P ARENT COMPANY AND ITS SUBSIDIARY, IT IS THE ENTERPRISE AS A WHOLE WHICH LEGALLY BEARS THE RISK. 80. AS REGARDS THE DECISION OF FEDERAL COURT OF APP EAL (FCA), CANADA IN THE CASE OF CUDD PRESSSURE (SUPRA) RELIED UPON BY SHRI GIRISH DAVE, IT IS OBSERVED THAT THE ISSUE INVOLVED IN THE SAID CASE WAS WHETHER A US RESIDENT CORPORATION COU LD, IN THE COMPUTATION OF THE PROFITS ATTRIBUTABLE TO ITS CANA DIAN PE, DEDUCT 'NOTIONAL RENT' CHARGED BY IT IN RELATION TO THE CANADIAN PE'S USE OF SPECIALIZED EQUIPMENT IN THE PERFORMANC E OF THE LUCRATIVE CONTRACT IN CANADA. IT WAS DECIDED BY THE LOWER COURT THAT THE NOTIONAL RENT WAS NOT DEDUCTIBLE IN COMPUT ING THE CANADIAN PE'S TAXABLE BUSINESS INCOME FROM CANADIAN SOURCES ON THE BASIS OF FACTUAL FINDING THAT AN ARM'S LENGT H SEPARATE AND DISTINCT ENTITY IN THE SITUATION OF CUDD'S CANADIAN PE WOULD NOT HAVE RENTED THE SPECIALIZED EQUIPMENT, BUT WOULD HA VE PURCHASED IT INSTEAD. IT WAS HELD RELYING ON THE RE LEVANT PROVISIONS OF DOMESTIC LAW THAT THE TAXPAYER COULD ONLY HAVE CLAIMED DEPRECIATION FOR THE USE OF THE SPECIALIZED EQUIPMENT AGAINST THE INCOME OF ITS CANADIAN PE. THE FEDERAL COURT OF APPEAL DID NOT FIND ANY ERROR IN THE FINDING OF FAC T RECORDED BY THE LOWER COURT AND KEEPINQ IN VIEW THE SAID FINDIN G, ROBERSTON J.A., WHO WROTE THE LEADING JUDGEMENT, UPHELDTHE DE CISION OF THE LOWER COURT. THE OTHER JUDGE MCDONALD, J.A. ALSO RE ACHED THE SAME CONCLUSION BUT DISCUSSED THE ISSUE OF DEDUCTIB ILITY OF NOTIONAL EXPENSES IN MORE DETAILS. IT WAS HELD BY H IM IN THIS CONTEXT THAT DEDUCTION OF NOTIONAL RENT WAS NOT ALL OWABLE AS DEDUCTION ALSO FOR THE REASON THAT THE AMOUNT OF SU CH NOTIONAL RENT WAS NEVER INCLUDED AS INCOME IN THE HANDS OF H EAD OFFICE. IT WAS HELD BY HIM THAT TO ALLOW DEDUCTION IN THIS CIR CUMSTANCE WOULD MEAN THAT THE TAX WAS BEING AVOIDED ON RENTAL INCOME BOTH IN CANADA AND IN UNITED STATES. THE FACTS INVO LVED IN THE CASE OF CUDD PRESSURE (SUPRA) THUS WERE ENTIRELY DI FFERENT FROM THE FACTS OF THE PRESENT CASE. MOREOVER, THE PRESEN T CASE IS NOT A CASE WHERE THERE IS AVOIDANCE OF TAX BY THE ASSESSE E IN BOTH THE COUNTRIES AS ALREADY DISCUSSED AND EXPLAINED BY US. THE OBSERVATIONS AND COMMENTS MADE IN THE MINORITY VIEW AND RELIED UPON BY SHRI DAVE IN THE CASE OF CUDD PRESSURE (SUP RA), IN OUR M/S. ABU DHABI COMMERCIAL BANK 20 OPINION, THEREFORE, CANNOT RENDER ANY SUPPORT TO TH E REVENUE'S STAND ON THE ISSUE UNDER CONSIDERATION IN THE PRESE NT CASE. 81. IN THE CASE OF ABN AMRO BANK (SUPRA) DECIDED BY HON'BLE SINDH HIGH COURT OF PAKISTAN AND CITED BY S HRI GIRISH DAVE, THE ISSUE INVOLVED WAS WHETHER THE TRIBUNAL W AS CORRECT TO CONFIRM THE TAXATION OF INTEREST INCOME RECEIVED BY THE BRANCH IN PAKISTAN OF A FOREIGN BANK FROM ITS HEAD OFFICE AND BRANCHES LOCATED OUTSIDE PAKISTAN DISREGARDING THE PRINCIPLE OF MUTUALITY AND THE SAME WAS DECIDED BY THE COURT ON THE BASIS OF DOMESTIC LAW OF PAKISTAN WHICH CONTAINED A SPECIFIC PROVISIO N IN SECTION 10S(S)(A) AS UNDER: 'TAXATION OF A PERMANENT ESTABLISHMENT IN PAKISTAN OF A NON-RESIDENT PERSON. - (1) THE FOLLOWING PRINCIP LES SHALL APPLY IN DETERMINING THE INCOME OF A PERMANEN T ESTABLISHMENT IN PAKISTAN OF A NON-RESIDENT PERSON CHARGEABLE TO TAX UNDER THE HEAD 'INCOME FROM BUSIN ESS', NAMELY :- (A) THE PROFIT OF THE PERMANENT ESTABLISHMENT SHALL BE COMPUTED ON THE BASIS THAT IT IS A DISTINCT AND SEP ARATE PERSON ENGAGED IN THE SAME OR SIMILAR CONDITIONS AND DEALI NG WHOLLY INDEPENDENTLY WITH THE NON-RESIDENT PERSON OF WHICH IT IS A PERMANENT ESTABLISHMENT.' THE PE OF A NON-RESIDENT IN PAKISTAN THUS IS TREATE D AS A DISTINCT AND SEPARATE PERSON UNDER THE DOMESTIC LAW BY MAKING EXPRESS PROVISION AND KEEPING IN VIEW THE SAID PROV ISION MADE IN THE DOMESTIC LAW, IT WAS HELD BY THE HON'BLE SINDH COURT THAT THE DOCTRINE OF MUTUALITY DOES NOT AND CANNOT APPLY TO A SITUATION TO WHICH SECTION 10S(1)(A) APPLIES. AS ALREADY DISCUSS ED BY US, THERE IS NO SUCH PROVISION CONTAINED IN THE INDIAN INCOME TAX ACT AND IN THE ABSENCE THEREOF, THE INTEREST PAYABLE BY THE INDIAN PE TO ITS FOREIGN GE OF WHICH IT IS A PART CAN NOT BE SAI D TO HAVE GIVEN RISE TO INCOME WHICH IS CHARGEABLE TO TAX IN INDIA AS PER THE DOMESTIC LAW BEING PAYMENT TO SELF AS PER THE PRINC IPLE OF MUTUALITY. 82. IN THE CASE OF DRESDNER BANK AG VS. ADDL. CIT ( SUPRA) CITED BY SHRI GIRISH DAVE, THE ISSUE BEFORE THE DIV ISION BENCH OF M/S. ABU DHABI COMMERCIAL BANK 21 THIS TRIBUNAL WAS WHETHER, UNDER THE INDIAN INCOME-T AX ACT, 1961, THE PROFITS ARISING OUT OF DEALINGS OF THE FO REIGN COMPANIES INDIAN BRANCH OFFICE, WITH ITS HEAD OFFICE AND WITH OTHER FOREIGN BRANCHES, IS TAXABLE IN INDIA OR NOT. IN THIS REGAR D, THE DOCTRINE OF MUTUALITY WAS PRESSED INTO SERVICE ON BEHALF OF THE ASSESSEE IN SUPPORT OF ITS CASE THAT SUCH INTERNAL DEALINGS BET WEEN THE INDIAN BRANCH OFFICE OF A FOREIGN BANK AND ITS HEAD OFFICE AND OTHER FOREIGN BRANCHES BEING THE TRANSACTIONS WITH SELF, NO INCOME COULD BE SAID TO HAVE ARISEN THAT IS CHARGEABLE TO TAX IN INDIA. THE SAME, HOWEVER, WAS NOT ACCEPTED BY THE DIVISION BENCH FOR THE REASONS ELABORATELY GIVEN IN ITS ORDER BEFPRE F INALLY CONCLUDING THE ISSUE IN PARAGRAPH NO. 71 OF THE ORD ER AS UNDER: 'FOR ALL THESE REASONS, WE ARE NOT PERSUADED BY THE LEARNED COUNSEL'S ARGUMENTS THAT SINCE NO ONE CAN B E EXPECTED TO MAKE PROFITS OUT OF TRANSACTIONS WITH H IMSELF, INTRA ORGANIZATION TRANSACTIONS ARE TO BE IGNORED F OR THE PURPOSE OF COMPUTING PROFITS ACCRUING OR ARISING, T O AN INDIAN PE OF A FOREIGN COMPANY, UNDER SECTION 5(2)( B) OF THE ACT. IN OUR UNDERSTANDING, FOR THE PURPOSES OF COMPUTING PROFITS OF A PE, THE INTRA ORGANIZATION TRANSACTIONS ARE TO BE TAKEN INTO ACCOUNT AS LONG A S THESE TRANSACTIONS ARE REAL AND BONA FIDE TRANSACTIONS. I T IS NOT THE ASSESSEE'S CASE THAT THE INTEREST INCOME FROM T HE HEAD OFFICE IS WITHOUT ANY CONSIDERATION OR WITHOUT SUFF ICIENT CONSIDERATION. IN OTHER WORDS, FACT OF OR CORRECTNE SS OF INTEREST EARNINGS FROM HEAD OFFICE ARE NOT IN DISPU TE. THEREFORE, IN OUR CONSIDERED VIEW, THE INTEREST EAR NINGS FROM THE HEAD OFFICE ARE TO BE TAKEN INTO ACCOUNT F OR THE PURPOSES OF COMPUTING PROFITS ARISING IN OR ACCRUIN G IN INDIA. WE, THEREFORE, REJECT THE CONTENTIONS OF THE ASSESSEE.' IN THE CASE OF DRESDNER BANK AG (SUPRA), A REFERENC E WAS MADE TO THE DECISION OF CALCUTTA SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ABN AMRO BANK NV (SUPRA) WH ICH WAS IN FAVOUR OF THE ASSESSEE AND THE SAME WAS CONS IDERED BY THE DIVISION BENCH IN PARAGRAPH NO. 72 OF ITS OR DER AS UNDER: 'AS WE PART WITH THIS ISSUE IN APPEAL BEFORE US, WE ADD THAT WE ARE ALIVE TO THE FACT THAT OUR DECISION HEREINABOVE CAN POSSIBILITY RESULT IN AN INCONGRUIT Y M/S. ABU DHABI COMMERCIAL BANK 22 INASMUCH AS WHILE A FOREIGN BANK OPERATING IN INDIA WILL BE TAXABLE IN INDIA IN RESPECT OF THE INTEREST IT E ARNS FROM ITS HEAD OFFICE AND BRANCHES ABROAD, NO DEDUCTION W ILL BE AVAILABLE, IN THE LIGHT OF SPECIAL BENCH DECISION I N ABN AMRO BANK N.V.'S CASE (SUPRA) TO THE FOREIGN BANKS IN RESPECT OF INTEREST INCURRED TO HEAD OFFICE AND BRA NCHES ABROAD. IN FACT, IT WAS FOR THIS REASON THAT WE DID SEEK COMMENTS OF THE PARTIES ON AS TO WHY THIS APPEAL SH OULD NOT BE REFERRED TO A LARGER BENCH AND LET THE LAW B E SETTLED IN A HOLISTIC MANNER BY TAKING INTO ACCOUNT ALL ASP ECTS OF THE INTRA ORGANIZATION DEALINGS, AND UNFETTERED BY THE EARLIER DECISIONS OF THIS TRIBUNAL. LEARNED COUNSEL 'S EMPHATIC OPPOSITION TO THIS SUGGESTION WAS ON THE G ROUND THAT THE ASSESSEE BANK HAS ALREADY WOUND UP ITS OPE RATIONS IN INDIA AND IT DOES NOT WANT TO DELAY FINALIZATION OF ITS TAX LIABILITY AS THE CONSTITUTION OF LARGER BENCH WILL RESULT IN, THAT THE CASE BEFORE US ONLY DEALS WITH AN INCOME S ITUATION UNDER THE ACT WHILE ABN AMRO BANK N.V.'S CASEDEALS WITH AN EXPENSE SITUATION UNDER THE TAX TREATY, AND, THA T, THE ISSUE DECIDED BY THE TRIBUNAL IN ABN AMRO BANK N.V. 'S CASE (SUPRA) DOES NOT ARISE IN THIS APPEAL AT ALL. LEARNED DEPARTMENTAL REPRESENTATIVE ALSO, EQUALLY EMPHATICA LLY, SUBMITTED THAT THE ISSUE BEFORE US DOES NOT NEED TO BE REFERRED TO A LARGER BENCH. IT WAS ALSO SUBMITTED T HAT THERE HAVE BEEN NO JUDICIAL PRECEDENTS, EITHER FROM TRIBU NAL OR EVEN THE HIGHER JUDICIAL FORUMS, ON THE SCOPE OF 'I NCOME ACCRUING OR ARISING IN INDIA' UNDER SECTION 5(2)(B) AND, THEREFORE, THERE IS NO QUESTION OF ANY FETTERS OF T HE EARLIER DECISIONS. IT WAS IN THIS BACKDROP THAT THE MATTER WAS DECIDED BY US ON MERITS. THIS DECISION, THEREFORE, SHOULD ONLY BE TREATED AS AN AUTHORITY FOR THE ISSUE ACTUA LLY DECIDED BY US. SUBJECT TO THESE OBSERVATIONS AND FO R THE REASONS SET OUT ABOVE, THE PLEA OF THE ASSESSEE IS REJECTED.' 83. IN THE CASE OF AMERICAN EXPRESS BANK LTD. (SUPR A) CITED BY SHRI PARDIWALA, THE ISSUE THAT AROSE BEFORE THE DIVISION BENCH OF THIS TRIBUNAL WAS WHETHER THE INTEREST RECEIVED BY THE ASSESSEE FROM ITS NON RESIDENT BRANCHES COULD BE TAXED IN IN DIA AND ON THIS ISSUE, RELIANCE WAS PLACED ON BEHALF OF THE ASSESSE E ON THE DECISION OF KOLKATTA SPECIAL BENCH OF ITAT IN THE C ASE OF ABN AMRO BANK NV(SUPRA) WHILE THE REVENUE RELIED ON THE DECISION OF DIVISION BENCH IN THE CASE OF DREDSNER BANK LTD (SU PRA). THE M/S. ABU DHABI COMMERCIAL BANK 23 DIVISION BENCH IN ITS ORDER PASSED IN THE CASE OF A MERICAN EXPRESS BANK LTD. TOOK NOTE OF THE RATIO LAID DOWN BY THE SPECIAL BENCH IN THE CASE OF ABN AMRO BANK (SUPRA) AS WELL AS BY THE DECISION OF THE COORDINATE BENCH IN THE CASE OF DRE DSNER BANK (SUPRA) AND FOUND CONFLICT THEREIN. THE DIVISION BE NCH, THEREFORE, PREFERRED TO FOLLOW THE DECISION OF SPECIAL BENCH I N THE CASE OF ABN AMRO BANK (SUPRA) FOR THE FOLLOWING REASONS GIV EN IN PARAGRAPH NO. 35 OF ITS ORDER: 'THE COMPARATIVE STUDY OF BOTH THE JUDGMENTS SHOWS THAT THERE IS CONFLICT BETWEEN THE RATIO LAID DOWN BY TH E DECISION OF SPECIAL BENCH IN THE CASE OF ABN AMRO BANK (SUPRA) AND THE DECISION OF DIVISION BENCH IN THE CASE OF DESDNER B ANK (SUPRA). IT IS NOT IN OUR DOMAIN TO MAKE ANY COMMENTON THE DECI SION OF THE DIVISION BENCH. HOWEVER, THERE IS NO DISPUTE TO THE LEGAL POSITION THAT IN THE CASE OF CONFLICT BETWEEN THE DECISIONS OF SPECIAL BENCH AND DIVISION BENCH, IT IS THE DECISION OF SPECIAL B ENCH WHICH WOULD PREVAIL. IN THE PRESENT CASE, ADMITTEDLY, THE RE IS NO TREATY BETWEEN INDIA AND USA IN THE YEAR UNDER CONSIDERATI ON. ACCORDINGLY, IN VIEW OF THE SPECIAL BENCH, IT IS TH E LOCAL LAW I.E. THE PROVISIONS OF INCOME TAX ACT, 1961 WHICH WOULD BE APPLICABLE. THEREFORE, FOLLOWING THE DECISION OF SP ECIAL BENCH, IT IS HELD THAT INCOME RECEIVED/RECEIVABLE BY THE INDI AN BRANCH FROM HEAD OFFICE IS NOT CHARGEABLE TO TAX. THE ORDE R OF LEARNED C!T(A) IS THEREFORE, UPHELD ON THIS ISSUE.' WHILE WE FULLY AGREE AND ENDORSE THE VIEW TAKEN BY THE BENCH IN THE CASE OF AMERICAN EXPRESS BANK LTD. (SU PRA) TO THE EXTENT THAT DECISION OF SPECIAL BENCH WOULD PREVAIL OVER THAT OF THE DIVISION BENCH AND THE DIVISION BENCH HAS TO FO LLOW THE DECISION OF SPECIAL BENCH AS A MATTER OF JUDICIAL D ISCIPLINE AND PROPRIETY, IT IS TO BE NOTED THAT THE DIVISION BENC H IN THE CASE OF DREDSNER BANK (SUPRA) HAS TAKEN PAINS TO PRESENT TH E OTHER VIEW ON THIS COMPLEX ISSUE AND THAT TOO IN THE PECULIAR CIRCUMSTANCES OF THAT CASE AS DISCUSSED IN PARAGRAPH NO. 72 OF IT S ORDER WHICH HAS BEEN REPRODUCED HEREIN ABOVE. NEVERTHELESS, WE ARE OF THE VIEW THAT THE JUDICIAL DISCIPLINE AND JUDICIAL PROP RIETY ARE OF PARAMOUNT IMPORTANCE AND THE SAME CANNOT BE DISPENS ED WITH WHILE DISCHARGING THE JUDICIAL DUTY, WHATSOEVER PEC ULIAR THE CIRCUMSTANCES ARE OR HOWSOEVER COMPLEX THE ISSUE IS . M/S. ABU DHABI COMMERCIAL BANK 24 84. SHRI SRIVASTAVA, SPECIAL COUNSEL FOR THE REVENU E, HAS STRONGLY RELIED ON THE PROVISIONS OF SECTION 4 READ WITH SECTION 5(2) OF THE INCOME-TAX ACT IN SUPPORT OF THE REVENUE 'S CASE THAT THE INTEREST PAYABLE BY PE IN INDIA BEING THE INCOM E ARISING IN INDIA TO THE FOREIGN GE WHICH IS A NON RESIDENT IS CHARGEABLE TO TAX IN INDIA. WE HAVE ALREADY CONSIDERED THIS ASPEC T OF THE MATTER. AS NOTED BY US, THE GE ALONE IS THE TAXABLE ENTITY IN INDIA AND THE INDIAN PE WHICH IS A PART OF THAT GEIS NOT A SEPARATE AND DISTINCT TAXABLE ENTITY IN INDIA AS PER THE DOMESTI C LAW. THE GE AND THE PE WHICH IS A PART OF THAT GE THUS IS ONE A ND THE SAME ENTITY FOR THE PURPOSE OF TAXATION IN INDIA AND AS HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF KIKABHAI PREMC HAND (SIR) (SUPRA), THE INTEREST PAYABLE BY PE TO GE CANNOT GI VE RISE TO ANY INCOME WHICH IS TAXABLE IN INDIA SINCE ONE CANNOT M AKE PROFIT OUT OF HIMSELF. AS RIGHTLY CONTENDED BY SHRI DASTUR , THE BASIC PRINCIPLE WHICH IS TO BE KEPT IN MIND IN THIS CONTE XT IS THAT NOBODY CAN MAKE PROFIT FROM HIMSELF AND THE INCOME ACCRUES OR ARISES ONLY WHEN THERE IS A DEAL WITH SOME THIRD PE RSON AND NOT FROM THE DEAL WITH HIMSELF. 85. AS REGARDS THE ARGUMENTS RAISED BY SHRI SRIVAST AVA RELYING ON THE PROVISIONS OF ARTICLE 11 (2) OF THE TREATY, IT IS OBSERVED THAT THE SAME IS MAINLY A REITERATION OF W HAT HAS BEEN ARGUED BY SHRI GIRISH DAVE AND WE HAVE ALREADY DEAL T WITH THE SUBMISSIONS MADE BY SHRI GIRISH DAVE ELABORATELY BE FORE FINALLY REJECTING THE SAME. AS REGARDS THE CONTENTION RAISE D BY SHRI SRIVASTAVA RELYING, INTER ALIA, ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF HYUNDAI HEAVY INDUSTRIES COMPA NY LTD. (SUPRA) THAT THE DOMESTIC LAW ALSO RECOGNIZES TWO E NTITY APPROACH IN THE CASE OF PE, WE ARE OF THE OPINION T HAT THE SAME CANNOT BE DISPUTED. HOWEVER, THIS TWO ENTITY APPROA CH IS RECOGNIZED ONLY TO THE EXTENT OF DETERMINING THE PR OFIT ATTRIBUTABLE TO THE PE IN INDIA AND THAT TOO MAINLY RELYING ON THE RELEVANT PROVISIONS OF THE TREATY. AS ALREADY HELD BY US, THIS SEPARATE ENTITY APPROACH ADOPTED IN THE CASE OF PE BY WAY OF A DEEMING FICTION IS APPLICABLE ONLY FOR THE PURPOSE OF DETERMINING THE PROFIT ATTRIBUTABLE TO THE PE IN INDIA AND THE SAME CANNOT BE EXTENDED AND APPLIED FOR THE PURPOSE OF DETERMINING INCOME OF FOREIGN GE TAXABLE IN INDIA. SHRI SRIVASTAVA HAS SU BMITTED THAT INTEREST RECEIVED BY THE INDIAN BRANCH FROM THE OVE RSEAS BRANCH OF THE SAME BANK IS CHARGEABLE TO TAX IN INDIA INSP ITE OF THE FACT THAT THE SAME IS ALSO A PAYMENT TO SELF. HE, HOWEVE R, HASNOT M/S. ABU DHABI COMMERCIAL BANK 25 THROWN ANY LIGHT AS TO HOW AND ON WHAT BASIS SUCH I NCOME IS CHARGEABLE TO TAX IN INDIA. IF AT ALL SUCH INCOME H AS BEEN OFFERED TO TAX BY THE ASSESSEE ON MISTAKEN BASIS, IT CANNOT FOLLOW THAT PAYMENT MADE TO SELF DOES GIVE RISE TO INCOME WHICH IS CHARGEABLE TO TAX UNLESS THE ISSUE IS EXAMINED AND DECIDED IN THE LIGHT OF RELEVANT PROVISIONS OF THE LAW AND THE REL EVANT TAX TREATY WHICHEVER IS APPLICABLE. 86. ACCORDING TO SHRI SRIVASTAVA, WHENEVER THERE IS APPORTIONMENT OF INCOME, THE CONCEPT OF SEPARATE EN TITIES OR EXISTENCE OF TWO ENTITIES IS VERY MUCH EMBEDDED. WE FIND IT DIFFICULT TO ACCEPT THIS CONTENTION OF SHRI SRIVAST AVA. IN OUR OPINION, QUESTION OF APPORTIONMENT OF INCOME DOES N OT ALWAYS ARISE ONLY IN THE CASE OF TWO ENTITIES WHICH ARE SE PARATELY CHARGEABLE TO TAX. MOREOVER, THE RELATION BETWEEN G E AND PE, AS ALREADY DISCUSSED BY US, IS SO PECULIAR THAT THE GE AND PE WHICH IS A PART OF THAT GE ARE ONE AND THE SAME ENTITY FOR T HE PURPOSE OF TAXATION AND THE PE IS TREATED AS SEPARATE ENTITY O NLY FOR THE PURPOSE OF DETERMINING THE PROFIT ATTRIBUTABLE TO I T IN INDIA AS PER THE DEEMING FICTION CREATED IN THE RELEVANT ART ICLE OF THE TREATY. AS REGARDS THE CONTENTION RAISED BY SHRI SR IVASTAVA RELYING ON ARTICLE 11 (6) OF THE INDO-JAPANESE TREA TY AND THE PRINCIPLE OF FORCE OF ATTRACTION, WE HAVE ALREADY D ISCUSSED THIS ASPECT WHILE DEALING WITH THE ARGUMENT OF SHRI GIRI SH DAVE. AS HELD BY US, ARTICLE 11(6) OF THE INDO-JAPANESE TREA TY IS NOT APPLICABLE IN THE PRESENT CONTEXT FOR THE VARIOUS R EASONS GIVEN BY US. SHRI SRIVASTAVA HAS ALSO CONTENDED THAT THE ENT IRE INTEREST INCOME ARISING IN INDIA IS TAXABLE IN THE HANDS OF GE IN INDIA IRRESPECTIVE OF WHETHER THE FUNDS FETCHING THE SAID INTEREST ARE ADVANCED BY GE IN INDIA DIRECTLY OR THROUGH INDIAN PE. IN THE PRESENT CASE, THE FUNDS, HOWEVER, ARE NOT ADVANCED BY THE GE TO A THIRD PARTY AND THE SAME HAVING BEEN ADVANCED DIREC TLY TO THE PE, IT IS A TRANSACTION BETWEEN THE TWO PARTS OF TH E SAME ENTITY AND THE INTEREST PAID BY PE TO GE BEING PAYMENT TO SELF, NO INCOME CAN BE SAID TO HAVE ARISEN OR ACCRUED WHICH IS CHARGEABLE TO TAX 'IN INDIA. 87. SHRI SRIVASTAVA HAS SUBMITTED BEFORE US THAT AR TICLE 7(2) OF THE TREATY LAYS DOWN THE PROCEDURE FOR APPO RTIONMENT OF INCOME BETWEEN HEAD OFFICE AND INDIAN BRANCH. ACCOR DING TO HIM, AS PER THE SAID SCHEME OF APPORTIONMENT, WHAT CAN BE ALLOWED AS DEDUCTION IS THE ACTUAL COST OF FUNDS TO THE HEAD M/S. ABU DHABI COMMERCIAL BANK 26 OFFICE. HE HAS CONTENDED THAT IF THERE IS NO SUCH C OST INCURRED AT HO LEVEL, INTEREST PAID BY THE BRANCH TO THE HO WIL L BE ONLY A NOTIONAL EXPENDITURE WHICH CANNOT BE APPORTIONED AS PER ARTICLE 7(2) OF THE TREATY. WE ARE UNABLE TO ACCEPT THIS CO NTENTION OF SHRI SRIVASTAVA KEEPING IN VIEW THE SPECIFIC PROVISIONS CONTAINED IN ARTICLE 7(2) OF THE TREATY. AS PER THE SAID PROVISI ONS, THE PROFITS ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT ARE THE PROFITS WHICH THE PE MIGHT BE EXPECTED TO MAKE IF IT WERE A DISTINCT AND SEPARATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIES UNDER THE SAME OR SIMILAR CONDITIONS AND DEALING WH OLLY INDEPENDENTLY WITH THE ENTERPRISE OF WHICH IT IS A PERMANENT ESTABLISHMENT. THE PROFITS ATTRIBUTABLE TO THE PE T HUS ARE REQUIRED TO BE DETERMINED TREATING THE SAME AS A DI STINCT AND SEPARATE ENTERPRISE WHICH, INTER ALIA, DEALS WHOLLY INDEPENDENTLY WITH THE ENTERPRISE OF WHICH IT IS A PERMANENT ESTA BLISHMENT. AS PER THIS DEEMING FICTION, THE PROFITS ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT THUS ARE REQUIRED TO BE DET ERMINED AS IF IT IS DEALING WHOLLY INDEPENDENTLY WITH THE ENTE RPRISE OF WHICH IT IS A PART AND WHAT WOULD BE ALLOWABLE AS DEDUCTI ON IN SUCH CASE IS THE COST OF FUNDS TO THE PE BORROWED FROM G E AND NOT THE COST OF FUNDS TO GE WHICH IS TOTALLY IRRELEVANT. 88. KEEPING IN VIEW ALL THE FACTS OF THE CASE AND T HE LEGAL POSITION EMANATING FROM THE INTERPRETATION OF THE R ELEVANT PROVISIONS OF DOMESTIC LAW AS WELL AS THAT OF THE T REATY AS DISCUSSED ABOVE, WE ARE OF THE VIEW THAT ALTHOUGH I NTEREST PAID TO THE HEAD OFFICE OF THE ASSESSEE BANK BY ITS INDIAN BRANCH WHICH CONSTITUTES ITS PE IN INDIA IS NOT DEDUCTIBLE AS EX PENDITURE UNDER THE DOMESTIC LAW BEING PAYMENT TO SELF, THE SAME IS DEDUCTIBLE WHILE DETERMINING THE PROFIT ATTRIBUTABLE TO THE PE WHICH IS TAXABLE IN INDIA AS PER THE PROVISIONS OF ARTICLE 7 (2) & 7(3) OF THE INDO-JAPANESE TREATY READ WITH PARAGRAPH 8 OF THE P ROTOCOL WHICH ARE MORE BENEFICIAL TO THE ASSESSEE. THE SAID INTEREST, HOWEVER, CANNOT BE TAXED IN INDIA IN THE HANDS OF A SSESSEE BANK, A FOREIGN ENTERPRISE BEING PAYMENT TO SELF WHICH CA NNOT GIVE RISE TO INCOME THAT IS TAXABLE IN INDIA AS PER THE DOMES TIC LAW. EVEN OTHERWISE, THERE IS NO EXPRESS PROVISION CONTAINED IN THE RELEVANT TAX TREATY WHICH IS CONTRARY TO THE DOMESTIC LAW IN INDIA ON THIS ISSUE. THIS POSITION APPLICABLE IN THE CASE OF INTE REST 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 SA ME STANDS ON M/S. ABU DHABI COMMERCIAL BANK 27 THE SAME FOOTING AS THE PAYMENT OF INTEREST MADE TO THE HEAD OFFICE. AT THE TIME OF HEARING BEFORE US, THE LEARN ED REPRESENTATIVES OF BOTH THE SIDES HAVE ALSO NOT MAD E ANY SEPARATE SUBMISSIONS ON THIS ASPECT OF THE MATTER S PECIFICALLY. HAVING HELD THAT THE INTEREST PAID BY THE INDIAN BR ANCH OF THE ASSESSEE BANK TO ITS HEAD OFFICE AND OTHER BRANCHES OUTSIDE INDIA IS NOT CHARGEABLE TO TAX IN INDIA, IT FOLLOWS THAT THE PROVISIONS OF SECTION 195 WOULD NOT BE ATTRACTED AND 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 IN TEREST BY INVOKING THE PROVISIONS OF SECTION 40(A)(I) DOES NO T ARISE. ACCORDINGLY WE ANSWER QUESTION NO. REFERRED TO THIS SPECIAL BENCH IN THE NEGATIVE I.E. IN FAVOUR OF THE ASSESSE E AND QUESTION NO.2 IN AFFIRMATIVE I.E. AGAIN IN FAVOUR OF THE ASS ESSEE. RESPECTFULLY FOLLOWING THE SPECIAL BENCH DECISION, WE ALLOW GROUND NO. 3 & 4 RAISED BY THE ASSESSEE. ITA NO. 4928/M/2009 A.Y. 2006-07 17. THE FIRST GROUND RELATES TO THE DEDUCTION FOR H EAD OFFICE EXPENSES BY APPLYING THE PROVISIONS OF SEC. 44C OF THE ACT AS AGAINST THE ASSESSEES CLAIM THAT THE ENTIRE EXPENSES ALLOC ATED TO THE INDIAN BRANCHES SHOULD BE ALLOWED AS DEDUCTION AS PER THE PROVISION OF ARTICLE 7(3) OF THE CONVENTION BETWEEN THE GOVERNME NT OF U.A.E. AND THE GOVERNMENT OF INDIA. 18. THIS ISSUE IS IDENTICAL WITH THE ISSUE IN GROUND NO . 1 IN ITA NO. 4926/M/09 FOR ASSESSMENT YEAR 2004-05, THOUGH QUANT UM MAY DIFFER. THEREFORE, ON SIMILAR LINES AND FOR SIMILA R REASONS, THE GROUND RAISED BY THE ASSESSEE IN ITA NO. 4927/M/09 FOR ASS ESSMENT YEAR 2005-2006 IS DISMISSED. M/S. ABU DHABI COMMERCIAL BANK 28 19. THE NEXT ISSUE IN THE APPEAL OF THE ASSESSEE IS THAT THE LD. CIT(A) ERRED IN HOLDING THE PROVISIONS OF SEC. 14A R.W. RULE 8D ARE APPLICABLE IN COMPUTING THE AMOUNT OF EXPENDITURE ALLEGED TO HAVE BEEN INCURRED IN RELATION TO EXEMPT INCOME THEREBY DISALLOWING INTEREST AND EXPENSES AMOUNTING TO RS. 19,75,401/- AND RS. 1,29,000/- RESPECTIVELY. 20. THIS ISSUE IS IDENTICAL WITH THE ISSUE IN GROU ND NO. 3 IN ITA NO. 4926/M/09 FOR ASSESSMENT YEAR 2004-05 . IN THAT YE AR WE HAVE ESTIMATED THE EXPENDITURE ATTRIBUTABLE FOR EARNING EXEMPT INCOME AT 2% OF THE SAID INCOME. THEREFORE, ON SIMILAR LINES , SIMILAR REASONS, THE GROUND RAISED BY THE ASSESSEE IN ITA NO. 4928/M /09 FOR ASSESSMENT YEAR 2006-2007 IS PARTLY ALLOWED. 21. GROUND NO. 3 RAISED BY THE ASSESSEE IS THAT THE LD. CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER I N APPLYING PROVISIONS OF SEC. 40(A)(I) TO INTEREST PAID BY THE ASSESSEE TO ITS HEAD OFFICE/OVERSEAS BRANCH. 22. THIS ISSUE IS IDENTICAL WITH THE ISSUE IN GRO UND NOS. 3 & 4 IN ITA NO. 4927/M/09 FOR ASSESSMENT YEAR 2005-06. THE REFORE, ON SIMILAR LINES AND FOR SIMILAR REASONS, THE GROUND R AISED BY THE ASSESSEE IN ITA NO. 4928/M/09 FOR ASSESSMENT YEAR 2 006-2007 IS ALLOWED. 23. GROUND NO. 4 IS IN RESPECT OF UPHOLDING THE A SSESSING OFFICERS ACTION OF NOT ALLOWING THE CLAIM OF THE ASSESSEE TH AT THE TAX RATE APPLICABLE TO ITS BUSINESS INCOME IS 35% AND NOT 40 %. M/S. ABU DHABI COMMERCIAL BANK 29 24. THIS ISSUE IS IDENTICAL WITH THE ISSUE IN GROUN D NO. 2 IN ITA NO. 4926/M/09 FOR ASSESSMENT YEAR 2004-05. THEREFORE, ON SIMILAR LINES AND FOR SIMILAR REASONS, THE GROUND RAISED BY THE A SSESSEE IN ITA NO. 4928/M/09 FOR ASSESSMENT YEAR 2006-2007 IS DISMISSE D. ITA NO.3760/M/2012 A.Y. 2006-07 C.O. NO. 121/M/2013 25. THIS APPEAL IS FILED BY THE REVENUE AND THE CRO SS OBJECTION IS FILED BY THE ASSESSEE . THE REVENUE IN ITS APPEAL IS CHALLENGING THE ORDER OF THE LD.CIT(A) IN DELETING THE PENALTY LEVI ED U/S. 271(1)(C) OF THE ACT FOR THE ASSESSMENT YEAR 2006-07. 26. THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITS THA T THE ASSESSING OFFICER LEVIED PENALTY ON THE DISALLOWANC E OF HEAD OFFICE EXPENSES AND ON THE ADDITION MADE TOWARDS INTEREST PAID TO HEAD OFFICE. THE LD. DEPARTMENTAL REPRESENTATIVE REFER RING TO THE PENALTY ORDER SUBMITS THAT IN THE RETURN OF INCOME, ASSESSE E CLAIMED HEAD OFFICE EXPENSES DISREGARDING THE PROVISIONS OF SEC. 44C AND HE STATES THAT HEAD OFFICE EXPENSES ARE ONLY TO THE EXTENT OF 5% OF THE ADJUSTED TOTAL INCOME CAN BE CLAIMED. HE SUBMITS THAT SUCH EXPENSES WERE CLAIMED IN THE EARLIER YEARS ALSO AND THE ITAT DECI DED THE ISSUE AGAINST THE ASSESSEE AND THE MATTER IS IN APPEAL BE FORE THE HONBLE HIGH COURT. IT IS THE CONTENTION OF THE LD. DEPARTM ENTAL REPRESENTATIVE THAT IN THE COMPUTATION OF INCOME O F THE BRANCH AS PER THE DOMESTIC LAWS, THE INTEREST WOULD HAVE BEEN ALLOWABLE AS DEDUCTION FROM COMPUTATION OF INCOME BUT THE SAME I S NOT ALLOWABLE U/S. 40(A)(I) BECAUSE ASSESSEE FAILED TO DEDUCT TAX ON PAYMENT OF INTEREST TO OVERSEAS BRANCH OF THE HEAD OFFICE . THE LD. DEPARTMENTAL M/S. ABU DHABI COMMERCIAL BANK 30 REPRESENTATIVE VEHEMENTLY SUPPORTING THE ORDER OF T HE ASSESSING OFFICER SUBMITS THAT ASSESSEE HAS MADE WRONG CLAIMS THEREBY FURNISHING INACCURATE PARTICULARS OF INCOME. HE FU RTHER SUBMITS THAT THE INCOME FROM HEAD OFFICE HAS NOT BEEN REPORTED B Y THE ASSESSEE, THEREFORE THERE IS CONCEALMENT OF INCOME. HE VEHEM ENTLY SUPPORTS THE ORDER OF THE ASSESSING OFFICER IN LEVYING PENA LTY. 27. THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE AO ERRED IN PASSING THE ORDER UNDER SECTION 271(1)(C) IN A MECH ANICAL MANNER WITHOUT REFERRING TO THE SUBMISSIONS MADE BY THE AP PELLANTS AS TO WHY NO PENALTY WAS LEVIABLE ON ACCOUNT OF FACTS SUC H AS FULL DISCLOSURE MADE, DIFFERENCE IN INTERPRETATION, THE RULINGS OF THE COURTS RELIED UPON BY THE ASSESSEE IN SUPPORT OF THEIR CO NTENTIONS ETC. HE SUBMITTED THAT THERE WAS NO CONCEALMENT OF INCOME A ND FURNISHING OF INACCURATE PARTICULARS, NOTWITHSTANDING THE FACT TH AT THERE WAS A DISCLOSURE OF THE SAME DURING THE COURSE OF THE ASS ESSMENT / PENALTY PROCEEDINGS. HE FURTHER SUBMITTED THAT ASSESSEE HAD FURNISHED A STATEMENT OF TRUE INCOME AND TAX LIABILITY IN THE R ETURN OF INCOME. THE AO OUGHT TO HAVE APPRECIATED THAT IN THE ASSESSEE'S CASE PENALTY HAS BEEN LEVIED ON DISALLOWANCES ON ACCOUNT OF DIFFEREN CE IN INTERPRETATION OF VARIOUS PROVISIONS OF LAW AND NOT ON ACCOUNT OF CONCEALMENT OR FURNISHING OF INACCURATE PARTICULARS OF INCOME. HE FURTHER SUBMITS THAT THE ASSESSEE HAS NOT MADE A DELIBERATE ATTEMPT TO DEFRAUD THE REVENUE. HE SUBMITS THAT THE ASSESS ING OFFICER IN LEVYING PENALTY, IGNORED THE DECISION OF THE HON'BL E SUPREME COURT IN THE CASE OF RELIANCE PETROPRODUCTS PVT. LTD. WHEREI N IT HAS BEEN HELD THAT MERE MAKING OF THE CLAIM, WHICH IS NOT SUSTAIN ABLE IN LAW, BY ITSELF, WILL NOT AMOUNT TO FURNISHING INACCURATE PA RTICULARS OF INCOME. HE FURTHER SUBMITS THAT IN LEVYING PENALTY OF RS. 1 ,75,12,353/- BEING M/S. ABU DHABI COMMERCIAL BANK 31 THE ALLEGED TAX SOUGHT TO BE EVADED IN RESPECT OF T HE HEAD OFFICE (HO) EXPENSES WITHOUT APPRECIATING THAT FULL DISCLOSURE WAS MADE GIVING REASONS FOR CLAIMING THE ENTIRE EXPENDITURE AT THE TIME OF THE ASSESSMENT PROCEEDINGS AS WELL AS AT THE TIME OF PE NALTY PROCEEDINGS. THE LD. COUNSEL SUBMITS THAT THE DISALLOWANCE HAS A RISEN ON ACCOUNT OF DIFFERENCE IN THE STAND OF THE DEPARTMENT AND TH E ASSESSEE AND NOT ON ACCOUNT OF CONCEALMENT / FURNISHING OF INACCURAT E PARTICULARS OF INCOME. 28. HEARD BOTH SIDES AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. THE ASSESSING OFFICER LEVIED PENALTY FOR THE REASON THAT THE ASSESSEE HAS CLAIMED HEAD OFFICE EXPENSES AND A LSO THE CLAIM MADE BY THE ASSESSEE THAT INTEREST PAID TO HEAD OFF ICE IS NOT TAXABLE. IN ANY CASE, IT IS THE CONTENTION OF THE ASSESSEE T HAT TDS WAS MADE ON THE INTEREST PAID TO HEAD OFFICE THEREFORE THERE IS NO ESCAPEMENT OF TAX. ON READING OF THE ORDERS OF THE ASSESSING OFF ICER AS WELL AS THE FIRST APPELLATE AUTHORITY, WE FIND THAT ASSESSEE HA S MADE CLAIM IN THE RETURN OF INCOME AND IT IS A FULL DISCLOSURE OF THE ASSESSEE IN RESPECT OF THE EXPENSES AS WELL AS THE CLAIM TOWARDS INTERE ST PAID TO HEAD OFFICE. WE DO NOT SEE CONCEALMENT OF INCOME OR FUR NISHING OF INACCURATE PARTICULARS IN RESPECT OF THESE TWO DISALLOWANCES/ADDITIONS MADE BY THE ASSESSING OFFIC ER. IT IS ONLY A DIFFERENCE OF OPINION AS TO WHETHER THESE CLAIMS CA N BE ALLOWABLE OR NOT AND THE ISSUES ARE DEBATABLE. IT IS THE FINDIN G OF THE LD. CIT(A) THAT THE ASSESSEE HAS MADE FULL DISCLOSURE OF ALL T HE FACTS REGARDING CLAIM TOWARDS HEAD OFFICE EXPENSES. IT IS ALSO THE FINDING OF THE LD. CIT(A) THAT IN THE NOTE FILED ALONGWITH THE COMPUTA TION OF INCOME, ASSESSEE HAS REFERRED TO THE RELEVANT ARTICLE OF TH E TREATY WITH UAE AND THE COMPLETE DETAILS OF EXPENSES ARE GIVEN IN T HE ANNEXURE. IT IS M/S. ABU DHABI COMMERCIAL BANK 32 ALSO THE FINDING OF THE LD. CIT(A) THAT THE CONTENT ION OF THE ASSESSING OFFICER THAT THE ISSUE HAS ALREADY BEEN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE IS ON DIFFERENT ASPECT OF SEC. 44C VIZ., COMPUTATION OF ADJUSTED TOTAL INCOME AND THE TRIBUN AL HAS NOT DECIDED THE ISSUE WHETHER THE CLAIM WERE HEAD OFFIC E EXPENSES ON ACCOUNT OF GENERAL ADMINISTRATIVE EXPENSES IS TO BE ALLOWED WITHOUT ANY RESTRICTION CONTAINED IN SEC. 44C OF THE ACT. N ONE OF THE FINDINGS OF THE LD. CIT(A) WAS REBUTTED BY THE REVENUE. IN THE CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT THERE IS NEITHER CONCEALMENT OF INCOME NOR FURNISHING OF INACCURATE PARTICULARS OF INCOME BY THE ASSESSEE SO AS TO LEVY PENALTY U/S. 271(1)(C) OF TH E ACT. THUS, WE AFFIRM THE ORDER OF THE LD. CIT(A) BY DELETING THE PENALTY. THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE CROSS OBJ ECTION FILED BY THE ASSESSEE IS DISMISSED AS INFRUCTUOUS. 29. IN THE RESULT, THE APPEALS FILED BY THE ASSESSE E IN ITA NOS. 4926 TO 4928/M/09 ARE PARTLY ALLOWED AND THE APPEAL FILE D BY THE REVENUE IS DISMISSED AND THE CROSS OBJECTION FILED BY THE A SSESSEE IS ALSO DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH APRIL, 2016. SD/- SD/- (RAJENDRA) (C.N. PRASAD ) ' / ACCOUNTANT MEMBER $ % ' /JUDICIAL MEMBER & ' MUMBAI; (' DATED : 29 TH APRIL, 2016 . % . ./ RJ , SR. PS M/S. ABU DHABI COMMERCIAL BANK 33 !'# $#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ) ( ) / THE CIT(A)- 4. ) / CIT 5. *+ , %%-. , -.! , & ' / DR, ITAT, MUMBAI 6. , /0 1 / GUARD FILE. % / BY ORDER, * % //TRUE COPY// & / %' ( (DY./ASSTT. REGISTRAR) , & ' / ITAT, MUMBAI