M/s. The Bank of Tokyo-Mitsubishi UFJ Ltd., New Delhi V. ADIT, New Delhi

ITA 5364/DEL/2010

• Counselvise Citation: 536420114 RSA 2010
• Duration Of Justice: 3 year(s) 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 11-06-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 30-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D K GUPTA SH SANJEEV SHARMA
• Keywords: Business income; Depreciation; Transfer pricing; Double taxation relief; Earning of tax free income; Deemed to accrue or arise in india; Additional evidence; Permanent establishment; Advance ruling; Bad and doubtful debts; Valuation report
• Section: 234B; 14A; 115JB; 27; 37; 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI I.C. SUDHIR, JUDICIAL MEMBER ITA NOS. 5364 /DEL/2010 ASSESSMENT YEARS: 2007-08 THE BANK OF TOKYO- MITSUBISHI UFJ LTD., JEEVAN VIHAR BLDG., 3, PARLIAMENT STREET, NEW DELHI. PAN NO. AABCT3880D VS. ADIT, CIRCLE 1(1), INTERNATIONAL TAXATION, NEW DELHI. (APPELLANT) (RESPONDENT) & ITA NOS. 5104/DEL/2011 ASSESSMENT YEARS: 2008-09 THE BANK OF TOKYO- MITSUBISHI UFJ LTD., JEEVAN VIHAR BLDG., 3, PARLIAMENT STREET, NEW DELHI. PAN NO. AABCT3880D VS. ADIT, CIRCLE 1(1), INTERNATIONAL TAXATION, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY: SH. PERCY PARDIWALA, SR. ADV. WITH SH . NISHANT THAKKAR, SH. NAGESHWAR RAO RESPONDENT BY: SH. D.K. GUPTA, CIT(DR),SH. SANJEEV SHARMA, CIT(DR) & SH. VIVEK KUMAR, SR. DR O R D E R PER S.V. MEHROTRA, A.M. ITA NO. 5364/DEL/2010 : THESE APPEALS FILED BY THE ASSESSEE ARE DIRECTED A GAINST THE ORDER OF LD. DRP U/S 144C(5) OF THE I.T. ACT, 1961 DATED 24. 09.2010 FOR A.YS. 2007- 08 AND 2008-09. ITA NOS. 5364/D/2010 & 5104/D/2011 2 2. BRIEF FACTS OF THE CASE ARE THAT THE BANK OF TOK YO MITSUBISHI UFJ, LTD. (ASSESSEE/BANK), IS A COMPANY INCORPORATED IN JAPAN AND IS RESIDENT OF JAPAN WITHIN THE MEANING OF ARTICLE 4 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND JAPAN. IN THE RELEVANT ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE WAS ENGAGED IN WH OLESOME BANKING OPERATIONS IN INDIA, MAINLY CATERING TO THE REQUIRE MENT OF JAPAN BASED CORPORATE AND INDIVIDUAL CLIENTS (FOR E.G. JAPANESE COMPANIES AND JOINT VENTURES IN INDIA AND THE JAPANESE EXPATRIATES WORK ING IN THOSE COMPANIES AND DEPUTED IN INDIA). THE ASSESSEE OPERATED IN IN DIA UNDER LICENSE FROM THE RBI AND WAS GOVERNED BY THE BANKING REGULATION ACT, 1949. THE BRANCHES OF THE ASSESSEE IN INDIA CONSTITUTED A PER MANENT ESTABLISHMENT IN INDIA, WITHIN THE MEANING OF ARTICLE 5 OF THE DTA. THEREFORE, THE PROFITS EARNED BY SUCH PE OF THE ASSESSEE IN INDIA WERE COM PUTED IN ACCORDANCE WITH THE PROVISIONS OF ARTICLE 7 OF THE DTA BY ASSE SSEE. 3. THE ASSESSEE E-FILED ITS RETURN OF INCOME ON 31 ST OCTOBER, 2007 DECLARING TOTAL INCOME AT RS. NIL. THE AO PASSED D RAFT ORDER, DATED 23/12/2009, DETERMINING THE TOTAL INCOME AT RS. 118 ,28,68,119/- AND BOOK PROFITS AS PER MAT PROVISIONS AT RS. 860946889/-. SINCE THE TAX PAYABLE UNDER NORMAL PROVISIONS OF INCOME-TAX ACT WAS MORE THAN TAX PAYABLE UNDER MAT, AO COMPUTED THE TAX LIABILITY IN THE DRAFT ASS ESSMENT ORDER USING NORMAL PROVISIONS OF THE ACT. ITA NOS. 5364/D/2010 & 5104/D/2011 3 4. THE ASSESSEE FILED OBJECTIONS BEFORE LD. DISPUTE RESOLUTION PANEL II DATED 03/02/2010. LD. DRP GAVE DIRECTIONS U/S 144C (5) VIDE ORDER DATED 24 TH SEPTEMBER, 2010 WHICH WERE SUBSEQUENTLY RECTIFIED VIDE ORDER DATED 28/10/2010. CONSEQUENT TO THE DIRECTIONS GIVEN BY LD. DRP, THE AO PASSED THE ORDER U/S 144C(1) DETERMINING THE TOTAL INCOME AT RS. 1125604140/- AS UNDER: NORMAL COMPUTATION (INTEREST FROM ECB HAS BEEN CONSIDERED SEPARATELY) PARTICULARS AMOUNT (IN RS.) INCOME SHOWN IN THE COMPUTATION BEFORE ALLOWING EXPENSES U/S 44C 73,53,68,963 ADD: SALARY PAID TO EXPATRIATE EMPLOYEES 9,92,36,31 5 INTEREST EXPENSES DISALLOWED 13,34,97,526 INTEREST INCOME ON A/C OF INDIAN OPERATIONS 13,34,97,526 INTEREST EARNED BY PE FOR DEPOSITS KEPT WITH HO/OVERSEAS BRANCHES 2,76,59,232 TOTAL AFTER ABOVE ADDITIONS 1,12,92,59,562 TOTAL BUSINESS INCOME BEFORE DEDUCTION U/S 44C 1,12,92,59,562 DEDUCTION U/S 44C ALLOWABLE 5,64,62,978 NET TAXABLE BUSINESS INCOME 1,07,27,96,583 INCOME FROM OTHER SOURCES 5,36,08,557 TOTAL INCOME 1,12,56,04,140 TAX @ 41.82% 47,07,27,651 INTEREST FROM ECBS : (AFTER GROSSING UP) (TAXABLE AS PER ARTICLE 11 OF THE DTAA AT THE RATE OF 10%) CONSIDERED SEPARATELY, AS THESE ARE NOT PART OF THE BOOKS OF ACCOUNTS OF THE ASSESSEE USED FOR THE PURPOSES OF MAT COMPUTATION. 4.1 BEING AGGRIEVED WITH THE ORDER OF AO, THE ASSES SEE IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL: 1. DISALLOWANCE OF SALARY PAID OVERSEAS TO EXPATRIAT ES OF THE APPELLANT WORKING IN INDIA BY THE HEAD OFFICE AND T HE INDIAN TAXES PAID THEREON BY THE HEAD OFFICE: RS. 99,236,315. ITA NOS. 5364/D/2010 & 5104/D/2011 4 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE HONBLE DISPUTE RESOLUTION PANEL (DRP) E RRED IN CONFIRMING THE ADDITION, AS PROPOSED IN THE DRAFT A SSESSMENT ORDER, IN RESPECT OF A SUM OF RS. 99,236,315 PAID A S SALARIES BY THE HEAD OFFICE OVERSEAS, IN FOREIGN CURRENCY, TO T HE EXPATRIATES WORKING IN INDIA EXCLUSIVELY FOR THE PE RMANENT ESTABLISHMENT (PE) OF THE APPELLANT IN INDIA, ON WHICH TAXES HAVE BEEN DULY DEDUCTED/DEPOSITED IN INDIA, AND ACC ORDINGLY THE ORDER OF THE AO, BASED ON THE DRPS DIRECTIONS IS ERRONEOUS IN LAW AS WELL AS ON FACTS ON THE FOLLOWI NG COUNTS: A) THAT THEHONBLE DRP AND AO HAVE FAILED TO APPRECIATE THAT THE SALARY HAS BEEN PAID TO THE EXPATRIATES WHO ARE STATIONED IN INDIA AND ARE WORKING EXCLUSIVELY FOR BUSINESS OPERATIONS OF THE INDIAN PE OF THE APPELLANT AND IS THUS AN ALLOWABLE EXPENDITURE AS PER ARTICLE 7(3) OF DTAA; B) THAT THE HONBLE DRP AND AO HAVE ERRED IN OBSERVING THAT THE NATURE OF EXPENSE IS COVERED U/S 44C OF THE ACT READ WITH CLAUSE (B) OF EXPLANATION (IV) TO THE SECTION, EVEN THOUGH, THE SAID AMOUNT IS INCURRED EXCLUSIVELY AND FOR DIRECT BENEFIT OF INDI AN OPERATIONS OF THE APPELLANT; C) THAT THE AO HAS, WHILE COMPLYING WITH THE DIRECTION S OF THE HONBLE DRP, ERRED IN RELYING ON THEN ORDER OF THE CIT(A) FOR EARLIER YEARS WHEREIN THE CIT(A) HAS ERRED IN NOT FOLLOWING THE DECISION OF THE THIRD MEMBER, KOLKATA TRIBUNAL IN THE CASE OF ABN AMRO BANK NV VS. JCIT (96 TTJ 1041) BY INCORRECTLY ITA NOS. 5364/D/2010 & 5104/D/2011 5 STATING THAT THE SAID DECISION WAS RENDERED IN THE CONTEXT OF SECTION 40(A)(I) AND NOT U/S 44C OF THE ACT. 2. ADDITION ON ACCOUNT OF INTEREST PAID TO HEAD OFFICE AND OTHER OVERSEAS BRANCHES OF THE BANK AMOUNTING TO RS . 133,497,526 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP ERRED IN CONFIRMING THE ADDITION PR OPOSED BY THE AO IN THE DRAFT ASSESSMENT ORDER BY HOLDING THAT THE APPELLANT WAS REQUIRED TO DEDUCT TAX AT SOURCE U/S 195 OF THE ACT ON THE PAYMENT OF INTEREST TO OVERSEAS BRANCHES /HEAD OFFICE, AND ACCORDINGLY, THE ORDER PASSED BY THE AO ON THE BASIS OF DRPS DIRECTIONS, IS BAD IN LAW ON THE FOL LOWING COUNTS: A) THAT THE HONBLE DRP AND AO HAVE ERRED IN PLACING RELIANCE ON THE CBDT CIRCULAR NO. 740 DT. 17 TH JULY, 1996 IN ORDER TO DISALLOW THE INTEREST PAID TO OVER SEAS BRANCHES/HEAD OFFICE, WITHOUT COMPREHENDING THE TRU E IMPORT OF THE CIRCULAR. B) THAT THE HONBLE DRP AND AO HAVE ERRED IN NOT FOLLOWING THE DIRECT JUDGMENT OF KOLKATA SPECIAL BENCH IN CASE ABN AMRO BANK NV VS. ADIT [280 ITR (AT) 0117] AND DISALLOWING INTEREST OF RS. 133,497,526 AS DEDUCTION, BY INVOKING PROVISIONS OF SECTION 40(A)(I) OF THE ACT. 3. ADDITION ON ACCOUNT OF INCOME OF THE ASSESSEE PERTA INING TO RECEIPT OF INTEREST FROM INDIAN BRANCHES AMOUNTI NG TO RS. 133,497,526 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE HONBLE DRP ERRED IN CONFIRMING THE SEPARA TE ITA NOS. 5364/D/2010 & 5104/D/2011 6 ADDITION OF RS. 133,497,526, AS PROPOSED IN THE DRA FT ASSESSMENT ORDER, WITH RESPECT TO THE INTEREST PAID BY INDIAN BRANCHES OF THE APPELLANT TO HEAD OFFICE/OVERSEAS B RANCHES, AND ACCORDINGLY THE ORDER OF THE AO BASED ON DRPS INSTRUCTIONS IS INCORRECT, UNJUSTIFIED AND BAD-IN-L AW AS WELL AS ON FACTS, ON THE FOLLOWING COUNTS: A) THE AO HAS ERRED IN NOT EXAMINING THE GROUND INDEPENDENTLY AND HAS BLINDLY RELIED ON THE ORDER PASSED BY CIT(A) FOR AY 2001-02, 2003-04 AND 2004- 05, WHILE MAKING THEN DISALLOWANCE. B) THE HONBLE DRP AND AO HAVE ERRED IN MAKING ADDITION IN RESPECT OF THE RECEIPT OF INTEREST FROM INDIAN BRANCHES BY MAKING THE FOLLOWING OBSERVATIONS: THAT PROVISIONS OF SECTION 9(1)(V)(C) OF THE ACT ARE APPLICABLE. THAT THE CBDT CIRCULAR NO. 740 IS APPLICABLE TO THE APPELLANTS CASE. C) THE HONBLE DRP AND AO HAVE ERRED IN NOT APPRECIATING THAT THE RECEIPT OF THE INTEREST BY TH E INDIAN BRANCHES IS NOT TAXABLE UNDER THE PROVISIONS OF THE ACT, BEING RECEIPT FROM SELF. D) THE HONBLE DRP AND AO HAVE ERRED IN NOT APPRECIATING THE CONTENTION OF THE APPELLANT THAT I T HAS OPTED TO BE GOVERNED BY THE PROVISIONS OF THE DTAA (SO FAR AS THEY ARE MORE BENEFICIAL) AND HAS WRONGL Y APPLIED THE PROVISIONS OF THE ACT. E) THE HONBLE DRP AND AO HAVE ERRED IN NOT APPRECIATING THAT IN TERMS OF THE PROVISIONS OF ART ICLE ITA NOS. 5364/D/2010 & 5104/D/2011 7 11 OF THE DTAA, DEALING WITH THE TAXABILITY OF INTE REST, THE INTEREST RECEIVED BY THE APPELLANT FROM THE IND IAN BRANCHES IS NOT IN RESPECT OF A DEBT CLAIM AS CONTEMPLATED UNDER ARTICLE 11 OF THE DTAA. F) WITHOUT PREJUDICE TO GROUND NO. 2, THE HONBLE D RP AND AO HAVE ERRED IN NOT APPRECIATING THAT SEPARATE ADDITION OF RS. 133,497,526 RELATING TO INTEREST PA ID ON BORROWINGS FROM HO/OVERSEAS BRANCHES WOULD TANTAMOUNT TO DOUBLE TAXATION, WHICH IS AGAINST ALL CANONS OF TAXATION. 4. INTEREST AMOUNTING TO RS. 27,659,232 ACCRUED/RECEIV ED BY THE INDIAN PE FROM ITS HO/OVERSEAS BRANCHES. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP ERRED IN CONFIRMING THE ADDITI ON, AS PROPOSED IN THE DRAFT ASSESSMENT ORDER, FOR AN AMOU NT OF RS. 27,659,232 BEING THE INTEREST ACCRUED/RECEIVED BY T HE INDIAN PE OF THE APPELLANT ON FUNDS LYING WITH THE HEAD OFFICE/OVERSEAS BRANCHES OUTSIDE INDIA, AND ACCORDI NGLY THE ORDER OF THE AO BASED ON DRPS INSTRUCTIONS IS BAD IN LAW AS WELL AS ON FACTS, ON THE FOLLOWING COUNTS: A) THE HONBLE DRP AND AO HAVE ERRED IN NOT APPRECIATI NG THAT THE INTEREST RECEIVED BY THE INDIAN BRANCHES I S NOT CHARGEABLE TO TAX IN INDIA IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, BEING RECEIPTS FROM SELF. B) THE HONBLE DRP AND AO HAVE ERRED IN NOT APPRECIATI NG THAT IN TERMS OF THE PROVISIONS OF ARTICLE 11 OF TH E DTAA, DEALING WITH THE TAXABILITY OF INTEREST, THE INTERE ST RECEIVED BY THE INDIAN BRANCHES FROM THE HEAD ITA NOS. 5364/D/2010 & 5104/D/2011 8 OFFICE/OVERSEAS BRANCHES IS NOT IN RESPECT OF A DE BT- CLAIM AS CONTEMPLATED UNDER ARTICLE 11 OF THE DTAA . C) WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS OF THE CASE AND IN LAW, THE AO ERRED IN MAKING AN ADDITION OF R S. 27,659,232, TO THE RETURNED INCOME OF THE ASSESSEE, IGNORING THE FACT THAT SUCH AMOUNT IS ALREADY INCLU DED IN THE RETURNED INCOME, THUS MAKING A DOUBLE ADDITION IN RESPECT OF THE SAME ITEM. THE AO HAS ALSO ERRED IN NOT COMPLYING WITH THE REVISED DIRECTIONS OF THE HONBL E DRP IN THIS REGARD DATED 28.10.2010, WHICH ARE LEGA LLY BINDING ON THE AO UNDER THE PROVISIONS OF THE ACT. 5. NON-APPLICABILITY OF THE PROVISIONS OF SEC. 115JB O F THE ACT RELATING TO MINIMUM ALTERNATE TAX (MAT) THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE HONBLE DRP ERRED IN CONFIRMING THE ACTION OF THE AO OF INVOKING THE PROVISIONS OF 115JB OF THE ACT, AS PROPOSED IN THE DRAFT ASSESSMENT ORDER, AND ACCORDI NGLY THE ORDER OF THE AO BASED ON DRPS DIRECTIONS IS BAD IN LAW ON THE FOLLOWING COUNTS: A) THE HONBLE DRP & AO HAVE ERRED IN NOT APPRECIATING THE CONTENTION OF THE APPELLANT THAT OPERATIONS OF ITS INDIAN PE ARE TAXABLE IN ACCORDANCE WITH PROVISIONS OF ARTICLE 7(3) OF THE DTAA AND IN VIEW OF THE PROVISI ONS OF SEC. 90 OF THE ACT, THE PROVISIONS OF SECTION 115JB OF THE ACT CANNOT BE APPLIED. B) THE HONBLE DRP & AO HAVE ERRED IN DISTINGUISHING T HE RELEVANT BINDING JUDGMENTS REFERRED TO BY THE APPEL LANT, WHICH SUBSTANTIATES THE VIEW OF THE APPELLANT THAT PROVISIONS OF SECTION 115JB OF THE ACT CANNOT BE AP PLIED ITA NOS. 5364/D/2010 & 5104/D/2011 9 ON THE FACTS OF THE APPELLANTS CASE AND HAVE FURTH ER ERRED IN RELYING ON THE DECISION OF THE ADVANCE RUL INGS AUTHORITY (AAR), WHICH IS DISTINGUISHABLE ON FACTS AND IS NOT APPLICABLE AT ALL. C) WITHOUT PREJUDICE TO ABOVE, THE HONBLE DRP AND AO HAVE ERRED IN HOLDING THAT THE PROVISIONS OF SEC. 1 15JB OF THE ACT ARE APPLICABLE TO THE APPELLANT EVEN THOUGH , THE APPELLANT PREPARES ITS ACCOUNTS IN INDIA IN ACCORDA NCE WITH THE BANKING REGULATIONS ACT, 1949, AND IT IS N OT REQUIRED TO PREPARE ITS ACCOUNTS AS PER PARTS II & III OF SCHEDULE VI OF THE COMPANIES ACT, 1956, AND IS NOT REQUIRED TO PLACE ITS ACCOUNTS BEFORE AN ANNUAL GEN ERAL MEETING (AGM) AS PER SECTION 210 OF THE COMPANIES. D) THE HONBLE DRP AND AO HAVE ERRED IN NOT APPRECIATI NG THE LEGISLATIVE INTENT BEHIND THE INTRODUCTION OF T HE SAID PROVISIONS AND HOLDING THAT THE PROVISIONS OF SECTI ON 115JB OF THE ACT WERE APPLICABLE TO THE APPELLANTS CASE. 6. ADDITION ON ACCOUNT OF INTEREST RECEIVED ON EXTERNA L COMMERCIAL BORROWINGS (ECBS) GIVEN TO INDIAN BORROWERS THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP ERRED IN CONFIRMING THE ADDITI ON, AS PROPOSED IN THE DRAFT ASSESSMENT ORDER, IN RESPECT OF INTEREST RECEIVED BY THEN APPELLANT ON ECBS GIVEN TO INDIAN BORROWER PARTIES, AND ACCORDINGLY THE ORDER OF THE AO BASED ON DRPS DIRECTION IS BAD IN LAW AS WELL AS O N FACTS ON THE FOLLOWING COUNTS: A) THE HONBLE DRP & AO HAVE ERRED IN MAKING AN ADDITION ON ACCOUNT OF INTEREST RECEIVED ON ECBS, B Y NOT ITA NOS. 5364/D/2010 & 5104/D/2011 10 APPRECIATING THAT SINCE THE ECBS GIVEN ARE EFFECTIV ELY CONNECTED WITH THE PE OF THE APPELLANT, THE TAXABIL ITY OF SUCH INTEREST IS GOVERNED BY ARTICLE 7 OF THE DTAA IN TERMS OF ARTICLE 11(6) OF THE DTAA. B) THE HONBLE DRP & AO HAVE ERRED IN NOT APPRECIATING THAT UNDER THE PROVISIONS OF ARTICLE 7 OF THE DTAA, AN AMOUNT, COMMENSURATE WITH THE ROLE PLAYED BY THE PE , HAS BEEN ALREADY BEEN OFFERED TO TAX BY THE APPELLA NT, IN COMPUTATION OF ITS INCOME TAXABLE IN INDIA AS PER T HE PROVISIONS OF THE DTAA; AND, THEREFORE, NOTHING FUR THER COULD BE BROUGHT TO TAX IN INDIA. C) THE AO HAS, WHILE COMPLYING WITH THE DIRECTION OF T HE HONBLE DRP, HAS ERRED IN ENHANCING THE AMOUNT OF ACTUAL INTEREST RECEIVED BY THE APPELLANT, BY APPLY ING AN ADHOC RATE OF 20%, IN ORDER TO ARRIVE AT A FIGURE O F 1,391,607,202, WHICH IS WITHOUT ANY BASIS. D) THE AO HAS ERRED IN OBSERVING THAT THE INTEREST WOU LD CONTINUE TO BE TAXABLE UNDER ARTICLE 11 OF THE DTAA , EVEN THOUGH IT HAS BEEN ACKNOWLEDGED BY THE AO HIMS ELF THAT THE ECBS MAY BE PARTIALLY CONNECTED WITH THE P E. SUCH AN OBSERVATION IS CONTRARY TO THE EXPRESS PROV ISIONS OF ARTICLE 11 OF THE DTAA, WHICH CLEARLY PROVIDES T HAT IN THE EVENT DEBT-CLAIM IS CONNECTED WITH THE PE, THE TAXABILITY OF THE INTEREST SHIFTS FROM ARTICLE 11 T O ARTICLE 7 OF THE DTAA COMPLETELY, AND NOT PARTIALLY, AND ACCORDINGLY, THE FINDINGS OF THE AO ARE INCORRECT A ND BAD IN LAW. E) WITHOUT PREJUDICE TO GROUND NO. 6(A) TO (D) ABOVE, THE AO HAS ERRED IN LEVYING TAX @ 10% ON AMOUNT OF INTE REST ITA NOS. 5364/D/2010 & 5104/D/2011 11 ALLEGEDLY RECEIVED (GROSSED UP), BY IGNORING THE FA CT THAT BY GROSSING UP THE INTEREST IN THE FIRST PLACE, THE AO ACKNOWLEDGED THAT THE SAID INTEREST WAS SUBJECT TO TDS, AND THE INTEREST SHOWN TO HAVE BEEN RECEIVED BY THE APPELLANT WAS NET OF TDS, AND, THEREFORE, SINCE THE APPELLANT HAS RECEIVED ONLY NET INTEREST, NO RECOVE RY CAN BE MADE FROM THE APPELLANT AS PER THE PROVISIONS OF SEC. 205 OF THE ACT. F) WITHOUT PREJUDICE TO THE ABOVE, THE HONBLE DRP & A O HAVE ERRED IN NOT ALLOWING THE CREDIT FOR THE TDS, DEDUCTED BY THE INDIAN BORROWER PARTIES BEFORE MAKI NG THE PAYMENT OF INTEREST TO THE APPELLANT, AS PER TH E DETAILS FILED WITH THE AO. G) WITHOUT PREJUDICE TO THE ABOVE, THE AO HAS ERRED IN CHARGING INTEREST U/S 234B OF THE ACT IN RESPECT OF THE AFORESAID INTEREST ON ECB, EVEN THOUGH IT HAS BEEN HELD IN THE ASSESSMENT ORDER THAT SUCH INTEREST IS SUBJE CT TO TDS. 7. DEDUCTION U/S 44C OF THE ACT WITHOUT PREJUDICE TO GROUNDS 1 TO 6 ABOVE, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS ER RED IN NOT DETERMINING THE CORRECT AMOUNT OF DEDUCTION U/S 44C OF THE ACT, BY IGNORING THE ADDITION MADE TO THE TOTAL INCOME ON ACCOUNT OF INTEREST RECEIVED BY THE APPELLANT ON EC BS. 8. TREATMENT IN RESPECT OF DEFERRED BANK GUARANTEE COMMISSION A) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP & AO HAVE ERRED IN TREATING THE COMMISSION RECEIVED ON GUARANTEES AS TAXABLE ON ITA NOS. 5364/D/2010 & 5104/D/2011 12 RECEIPT BASIS IN THE YEAR IN WHICH THE COMMISSION I S RECEIVED. B) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP & AO HAVE FAILED TO APPRECIATE THAT THE APPELLANT FOLLOWS MERCANTILE METHOD OF ACCOUNTING ACCORDING TO WHICH, THE COMMISSION FALLING DUE FOR THE RELEVANT PREVIOUS YEAR ON ACCRU AL BASIS CAN ONLY BE TAXED. C) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP & AO HAVE ERRED IN NOT FOLLOWING THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE APPELLANTS OWN CASE FOR THE AY 1981-8 2. D) WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP AND AO HAVE ERRED IN NOT APPRECIATING THAT IF T HE GUARANTEE COMMISSION WERE TO BE TAXED ON RECEIPT BASIS, IT WOULD RESULT AN ADDITIONAL DEDUCTION OF R S. 3,926,300 SINCE THE GUARANTEE COMMISSION OFFERED TO TAX ON ACCRUAL BASIS WAS MORE THAN THE GUARANTEE COMMISSION RECEIVED DURING THE YEAR. 9. APPLICABLE RATE OF TAX A) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP& AO HAVE ERRED IN NOT ADJUDICATING THAT UNDER THE PROVISIONS OF ARTICLE 2 4 OF THE DTAA, THE APPLICABLE RATE OF TAX ON THE INCOME OF T HE APPELLANT ATTRIBUTABLE TO ITS PE IN INDIA CANNOT EX CEED THE APPLICABLE RATE OF TAX (AS PER THE FINANCE ACT FOR THE SUBJECT ASSESSMENT YEAR) IN THE CASE OF DOMESTIC ITA NOS. 5364/D/2010 & 5104/D/2011 13 COMPANIES AND CONSEQUENTIAL DIRECTIONS MAY KINDLY B E ISSUED IN THIS REGARD. 10. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS, BEING AGAINST THE PROVISIONS OF THE AC T. 5. THE FIRST ISSUE PERTAINS TO DISALLOWANCE OF SALA RY PAID OVERSEAS TO EXPATRIATE OF THE ASSESSEE WORKING IN INDIA BY THE HEAD OFFICE AND THE INDIAN TAX PAID THERE ON BY THE HEAD OFFICE AGGREGATING TO RS. 9,92,36,315/-. 6. BRIEF FACTS APROPOS THIS ISSUE ARE THAT FROM THE COMPUTATION OF INCOME FILED BY THE ASSESSEE, THE AO NOTICED THAT THE ASSE SSEE DURING THE YEAR UNDER CONSIDERATION, HAD CLAIMED A DEDUCTION OF RS. 9,92,36,315/- ON ACCOUNT OF SALARIES PAID IN JAPAN TO EXPATRIATES OV ER AND ABOVE THE SALARY PAID IN INDIAN RUPEES BY THE BRANCHES IN INDIA WHIC H WERE ROUTED THROUGH PROFIT AND LOSS ACCOUNT. HE NOTED THAT THIS EXPEND ITURE HAD NOT BEEN DEBITED TO PROFIT AND LOSS ACCOUNT OF THE BRANCH I.E. HAD N OT BEEN INCURRED IN INDIA, BUT HAD BEEN CLAIMED BY WAY OF A DEDUCTION IN THE C OMPUTATION OF INCOME. THE ASSESSEE HAD CLAIMED THIS DEDUCTION ON THE GROU ND THAT THE PAYMENT WAS DIRECTLY ATTRIBUTABLE TO THE BUSINESS OPERATION S OF THE ASSESSEE IN INDIA. THE ASSESSEE POINTED OUT THAT THESE EXPATRIATES WER E WORKING IN INDIA WHOLLY AND EXCLUSIVELY WITH THE ASSESSEE BANK. THE ASSESS EE POINTED OUT THAT THE EXPENSES WERE ALLOWABLE IN VIEW OF ARTICLE 7(3) OF THE INDO-JAPAN TREATY AS THESE EXPENSES HAD BEEN INCURRED IN CONNECTION WITH THE INDIAN BUSINESS OF THE ASSESSEE BANK. THE ASSESSEE FURTHER POINTED OU T THAT THE PROVISIONS OF ITA NOS. 5364/D/2010 & 5104/D/2011 14 SECTION 44C WERE NOT ATTRACTED TO THESE PAYMENTS. THE ASSESSEES SUBMISSIONS BEFORE AO WERE AS UNDER: THE HEAD OFFICE OF THE ASSESSEE SITUATED IN JAPAN HAS DEPUTED SEVERAL OF ITS EMPLOYEES TO WORK IN THE BRA NCHES SITUATED IN INDIA. A PORTION OF THEIR SALARIES ARE PAID BY THE HEAD OFFICE OF THE BANK IN FOREIGN CURRENCY (IN JAPANESE YEN) OUTSIDE INDIA. THE SALARIES SO PAID BY THE HEAD OFFICE IN JAPANESE YEN ARE CREDITED TO THE BAN K ACCOUNTS OF THE INDIVIDUAL EMPLOYEES MAINTAINED IN JAPAN. BALANCE OF THEIR SALARIES WAS PAID IN INDIA N RUPEES BY THE BRANCHES OF THE ASSESSEE SITUATED IN INDIA. THE ASSESSEE ALSO BEARS THE INDIAN TAX PAYABLE ON S UCH SALARIES, THEREFORE, THERE IS GROSSING UP OF TAX. THE CONSEQUENTIAL TAXES ARE THUS DEDUCTED AND DEPOSITED WITH THE INDIAN GOVERNMENT TREASURY. WHOLE OF THE SALAR Y PAID (COMPRISING OF BOTH THE SALARY PAID OUTSIDE IN DIA AS WELL AS THE AMOUNT PAID IN INDIA) TO SUCH EXPATRIAT E EMPLOYEES IS DULY TAXED IN INDIA IN THE HANDS OF SU CH EXPATRIATES. THE PROFIT AND LOSS ACCOUNT PREPARED BY THE ASSESSE E IN RESPECT OF ITS INDIAN BRANCHES FOR THE RELEVANT ASS ESSMENT YEAR WAS DEBITED, INTER-ALIA, WITH ONLY THAT PORTIO N OF THE SALARY WHICH WAS PAID IN INDIAN RUPEES BY THE BRANC HES IN INDIA. IN OTHER WORDS, THE SALARY PAID IN FOREI GN CURRENCY BY THE HEAD OFFICE WAS NOT ROUTED THROUGH THE PROFIT AND LOSS ACCOUNT OF THE INDIAN BRANCHES. THEREFORE, WHILE COMPUTING THE PROFITS ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT (PE) OF THE ASSESSEE IN I NDIA, IN THE RETURN OF INCOME FILED, A SEPARATE DEDUCTION IS ITA NOS. 5364/D/2010 & 5104/D/2011 15 CLAIMED IN RESPECT OF SALARIES PAID BY THE HEAD OFF ICE AND TAXES THEREON, AS THE SAID SUM REPRESENTED EXPENDITURE INCURRED FOR THE INDIAN OPERATIONS OF T HE ASSESSEE (BEING THE RUPEE EQUIVALENT OF THE TOTAL S ALARIES PAID BY THE ASSESSEE IN FOREIGN CURRENCY TO THE EXPATRIATES WORKING IN INDIA AND THE INCOME-TAX BOR NE AND PAID BY THE ASSESSEE THEREON). 7. THE AO WAS, HOWEVER, OF THE OPINION THAT THE IMP UGNED AMOUNT WAS COVERED UNDER THE PROVISIONS OF SEC. 44C FOR THE FO LLOWING REASONS: 3.4 ASSESSEES SUBMISSIONS HAVE BEEN CAREFULLY EXAMINED. A DEDUCTION U/S 37 CAN NORMALLY BE ALLOW ED ONLY IN RESPECT OF THE EXPENDITURE INCURRED BY THE ASSESSEE ITSELF. HOWEVER, AS PER THE PRINCIPLES OF TAXATION OF MULTINATIONAL ENTERPRISES, EXPENSES WHI CH MAY BE INCURRED BY SUCH MULTINATIONAL ENTERPRISE AS A WHOLE, FOR THE EXCLUSIVE AND DIRECT BENEFIT OF THE ASSESSEE BRANCH, COULD BE ALLOWABLE AS DEDUCTION, SUCH DEDUC TION, NEVERTHELESS, WOULD BE SUBJECT TO THE RESTRICTION I MPOSED BY THE INDIAN TAX ACT. THE NATURE OF EXPENSES TO B E INCURRED MAKE IT CLEAR THAT THE SAME ARE TO BE IN T HE NATURE OF ADMINISTRATIVE OR EXECUTIVE, WHICH FALL W ITHIN THE DEFINITION OF HEAD OFFICE EXPENSES AS PROVIDED IN SEC. 44C OF THE ACT. THE ASSESSEE HAS SUBMITTED THAT SE C. 44C DEALS WITH EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENDITURE INCURRED OUTSIDE INDIA. FURTHER, THE S ALARIES PAID TO THE EXPATRIATES, IS INCURRED EXCLUSIVELY FO R THE INDIAN OPERATIONS AND ARE DIRECTLY ALLOCABLE AS SUC H. THE ASSESSEES CONTENTIONS ARE NOT FOUND TO BE TENA BLE. THE DEFINITION OF HEAD OFFICE EXPENDITURE AS GIVEN IN SEC. ITA NOS. 5364/D/2010 & 5104/D/2011 16 44C, IN PARTICULAR. CLAUSE (B) OF EXPLANATION (IV) , AS RELIED UPON BY THE ASSESSEE, SHOWS THAT IT MEANS AL L EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENDITURE INCURRED OUTSIDE INDIA INCLUDING EXPENDITURE IN RES PECT OF SALARIES, ALLOWANCES RENT ETC. PAID OR ALLOWED TO A NY EMPLOYEE OR ANY OTHER PERSON EMPLOYED IN OR MANAGIN G THE AFFAIRS OF ANY OFFICE OUTSIDE INDIA, THUS, DEMO LISHING THE ARGUMENT ADVOCATED BY THE ASSESSEE, THAT SALARI ES WHEREVER PAYABLE, ARE NOT TO BE REGARDED AS HEAD OF FICE EXPENDITURE. IT IS, THEREFORE, VERY CLEAR THAT SEC . 44C IS APPLICABLE NOT ONLY IN RESPECT OF GENERAL ADMINISTR ATIVE EXPENDITURE INCURRED BY THE HEAD OFFICE FOR THE COMMONAND MUTUAL BENEFIT OF ALL BRANCHES, BUT ALSO IN RESPECT OF EXPENDITURE INCURRED IN ANY OFFICE OUTSI DE INDIA, WHICH MAY BE FOR THE EXCLUSIVE AND DIRECT BE NEFIT OF THE INDIAN BRANCH. THE SCOPE OF HEAD OFFICE EXPENDITURE, AS PROVIDED IN SEC. 44C IS VERY WIDE, AND ALL SUCH EXPENSES OF AN ADMINISTRATIVE NATURE INCURRED OUTSIDE INDIA WOULD COME WITHIN THE AMBIT OF THE DEFINITION OF HEAD OFFICE EXPENDITURE, SUBJECT TO T HE LIMIT OF 5% OF THE TOTAL INCOME AS PROVIDED BY SEC. 44C. THE IMPUGNED EXPENDITURE OF RS. 127,955,895/- HAS BEEN INCURRED BY THE HEAD OFFICE SITUATED OUTSIDE INDIA, AND HAS BEEN DEBITED TO THE ACCOUNTS OF SUCH HEAD OFFIC E. THE HEAD OFFICE HAS NOT RAISED ANY DEBIT NOTES ON T HE ASSESSEE. THERE HAS BEEN NO SETTLEMENT OF ACCOUNTS WITH THE HEAD OFFICE. THE HEAD OFFICE HAS NOT RAISED AN Y DEBIT NOTES ON THE ASSESSEE. THERE HAS BEEN NO SETTLEMEN T OF ACCOUNTS WITH THE HEAD OFFICE. FROM THESE FACTS, I T IS ITA NOS. 5364/D/2010 & 5104/D/2011 17 CLEAR THAT EVEN IF THESE EXPENSES ARE MADE IN RESPE CT OF INDIAN BRANCH, THE LIABILITY IN RESPECT OF SUCH EXP ENSES IS BORNE BY THE HEAD OFFICE AND THE SAME IS NOT PASSED ON TO THE ASSESSEE BANK. ALSO, THESE EXPENSES ARE INC URRED OUTSIDE INDIA AND CANNOT BE SUBJECTED TO VERIFICATI ON. 3.5 THE ASSESSEE HAS ALSO ARGUED THAT THE PROVISION S OF SECTION 44C ARE NOT ATTRACTED TO THESE SALARY PAYME NTS. SECTION 44C WAS INTRODUCED WITH A VIEW TO GETTING O VER DIFFICULTIES IN SCRUTINIZING AND VERIFYING CLAIMS I N RESPECT OF GENERAL ADMINISTRATIVE EXPENSES INCURRED BY THE FOREIGN HEAD OFFICE, IN SO FAR AS SUCH EXPENSES CAN BE RELATED TO THEIR BUSINESS OR PROFESSION IN INDIA, H AVING REGARD TO THE FACT THAT FOREIGN COMPANIES OPERATING THROUGH BRANCHES IN INDIA, SOMETIMES TRY TO REDUCE THE INCIDENCE OF TAX IN INDIA, BY INFLATING THEIR CLAIM S IN RESPECT OF HEAD OFFICE EXPENSES. THE OBJECTIVE BEH IND THE LEGISLATION IS ALSO CLEAR FROM A BARE PERUSAL O F THE EARLIER PORTION OF THE SECTION WHICH PROVIDES, INTE R-ALIA, THE MANNER IN WHICH THE DISALLOWABLE AMOUNT IS TO B E COMPUTED. THE EXPENDITURE TO BE DISALLOWED, IS THE DIFFERENCE BETWEEN THE EXPENDITURE IN THE NATURE OF HEAD OFFICE EXPENDITURE AND THE LEAST OF THE FOLLOWING T HREE COMPUTATIONS: (A) AN AMOUNT EQUAL TO 5% OF THE ADJU STED TOTAL INCOME; (B) AN AMOUNT EQUAL TO THE AVERAGE HE AD OFFICE EXPENDITURE (NOW OMITTED) AND (C) THE AMOUNT OF SO MUCH OF THE EXPENDITURE IN THE NATURE OF HEAD OF FICE EXPENDITURE IN QUESTION SHOULD BE INCURRED, NOT ONL Y IN CONNECTION WITH THE BUSINESS IN INDIA, BUT ALSO BUS INESS OUTSIDE INDIA. IN OTHER WORDS, A PART OF THE EXPEN DITURE, ITA NOS. 5364/D/2010 & 5104/D/2011 18 AT LEAST MUST NOT BE ATTRIBUTABLE TO THE BUSINESS OPERATIONS CARRIED ON IN INDIA, BUT ALSO BUSINESS O UTSIDE INDIA. IN OTHER WORDS, A PART OF THE EXPENDITURE, AT LEAST MUST NOT BE ATTRIBUTABLE TO THE BUSINESS OPERATIONS CARRIED ON IN INDIA. WHERE AN ASSESSEE DOESNOT HAV E ANY BUSINESS OVERSEAS, AND THE ENTIRE OPERATIONS ARE CA RRIED OUT BY IT IN INDIA ONLY, THE QUESTION OF ALLOCATING OF PART OF THE EXPENDITURE IN QUESTION TO THE BUSINESS CARR IED ON INDIAN CANNOT ARISE. 8. HE ALSO POINTED OUT THAT SIMILAR DISALLOWANCES H AD EARLIER BEEN MADE. HE, ACCORDINGLY, MADE AN ADDITION OF RS. 992,36,315 /- ON ACCOUNT OF SALARIES PAID IN JAPAN TO EXPATRIATES. 9. LD. SR. COUNSEL SHRI PERCY PARDIWALA SUBMITTED T HAT AO DISALLOWED THE SALARY TO EXPATRIATE EMPLOYEES FOR THE FOLLOWING RE ASONS: A) NO ENTRY IN RESPECT OF EXPENDITURE IN BOOKS OF A CCOUNT MAINTAINED BY PE; B) EXPENDITURE COVERED BY SEC. 44C; C) EXPENDITURE WAS NOT SUBJECT TO VERIFICATION; 9.1 LD. COUNSEL REFERRED TO PARA 5.1 OF LD. DRPS O RDER AND POINTED OUT THAT LD. DRP AGREED WITH THE FINDINGS OF AO AND DISTINGU ISHED THE DECISION OF ITAT IN THE CASE OF ABM AMRO BANK VS. JCIT ON THE G ROUND THAT THE BENCH HAD EXAMINED THE ISSUE OF ALLOWABILITY OF CLAIM OF DEDUCTION OF REMUNERATION WITH REFERENCE TO PROVISIONS OF SECTION 40(A)(I), W HEREAS, IN THE CASE UNDER CONSIDERATION, THE DISALLOWANCE OF SALARY HAD BEEN MADE U/S 44C OF THE INCOME TAX ACT. LD. COUNSEL REFERRED TO PAGE 295 O F PAPER BOOK, WHEREIN ITA NOS. 5364/D/2010 & 5104/D/2011 19 THE DETAILS OF EXPATRIATE EMPLOYEES WORKING FOR THE INDIAN BRANCHES DURING THE YEAR ARE CONTAINED TO DEMONSTRATE THAT THE EMPL OYEES HAD BEEN SENT ON DEPUTATION FROM THE HEAD OFFICE FOR RENDERING SERVI CES TO THE INDIAN BRANCHES ON WHOLE TIME BASIS. LD. COUNSEL REFERRED TO DETAI LED REPLY FILED BEFORE AO IN THIS REGARD CONTAINED AT PAGES 266 ONWARDS OF PA PER BOOK. IN REGARD TO THE OBJECTIONS REGARDING VERIFIABILITY OF EXPENDITU RE, LD. COUNSEL REFERRED TO PAGE 297 OF PAPER BOOK, WHEREIN FORM NO. 16 IN RESP ECT OF MR. KITA AEB WHOSE NAME APPEARED AT PAGE 295 OF PAPER BOOK, CONT AINING DETAILS OF EXPATRIATE EMPLOYEES IS CONTAINED, TO DEMONSTRATE T HAT FROM FORM NO. 16, THE SALARY PAID TO EXPATRIATE WAS VERIFIABLE. 9.2 LD. COUNSEL REFERRED TO SECTION 44C AND POINTED OUT THAT THE SAID SECTION HAS BEEN INCORPORATED IN THE STATUTE TO ALL OW DEDUCTION OF HEAD OFFICE EXPENDITURE ATTRIBUTABLE TO INDIAN PE IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS AND P ROFESSION. HE SUBMITTED THAT THE EXPENDITURE CONTEMPLATED U/S 44C SHOULD BE IN THE NATURE OF HEAD OFFICE EXPENDITURE AND THE AMOUNT SHOULD BE ATTRIB UTABLE TO THE BUSINESS OR PROFESSION OF THE ASSESSEE IN INDIA. HE REFERRED T O EXPLANATION 4 TO SECTION 44C DEFINING HEAD OFFICE EXPENDITURE AND POINTED OU T THAT HEAD OFFICE EXPENDITURE MEANS EXECUTIVE AND GENERAL ADMINISTRA TION EXPENDITURE INCURRED BY THE ASSESSEE OUTSIDE INDIA, BUT SINCE S ALARY TO EXPATRIATES IS DIRECTLY CHARGEABLE TO THE BUSINESS OPERATIONS IN I NDIA, THEREFORE, IT FALLS ITA NOS. 5364/D/2010 & 5104/D/2011 20 OUTSIDE THE AMBIT OF SECTION 44C. HE POINTED OUT T HAT THE SALARY TO EXPATRIATE WAS NOT FOR MANAGING AFFAIRS OF ANY OFFICE OUTSIDE INDIA. 9.3 LD. COUNSEL SUBMITTED THAT THIS ISSUE IS SQUARE LY COVERED BY THE DECISION IN THE CASE OF ABM AMRO BANK VS. JCIT, 97 ITD PAGE 1 AND POINTED OUT THAT THE ONLY ISSUE BEFORE LD. THIRD MEMBER WAS REGARDING APPLICABILITY OF SECTION 40(A)(I) AND NOT REGARDING SECTION 44C. IN THIS REGARD LD. COUNSEL REFERRED TO PAGE 13 ONWARDS OF THE JUDGMENT, WHEREI N TRIBUNAL HAS, INTER ALIA, OBSERVED AS UNDER: IT IS EVIDENT FROM THE ABOVE ORDER OF THE TRIBUNAL THAT THE CLAIM OF THE ASSESSEE IN REGARD TO THE PAYMENT OF REMUNERATION TO THE EXPATRIATE EMPLOYEES RENDERING WHOLE TIME SERVICES IN INDIA THROUGHOUT THE ACCOUNT ING YEAR HAS BEEN ACCEPTED IN PRINCIPLE AS ALLOWABLE DEDUCTION IN COMPUTING THE PROFITS OF THE PE. THIS IS, HOWEVER, WITH THE RIDER THAT SUCH PAYMENT IS NOT TA KEN INTO ACCOUNT IN WORKING OUT THE DEDUCTION UNDER S. 44C. WE ADOPT THE ABOVE DIRECTION IN REGARD TO THE REMUNERATION PAID TO THE EXPATRIATE EMPLOYEES FOR T HE WHOLE TIME SERVICES RENDERED IN INDIA, SUBJECT TO F URTHER RIDER PLACED UNDER PROVISIONS OF S. 40(A) OF THE IT ACT, 1961. WE DIRECT THE OIAO TO CONSIDER THE CLAIM OF T HE ASSESSEE FOR ASST. YRS. 1992-93, 1993-94 AND 1994-9 5 AS UNDER: IN PRINCIPLE, THE REMUNERATION PAID TO EXPATRIATE EMPLOYEES FOR THE SERVICES RENDERED IN INDIA IS TO BE ACCEPTED AS ALLOWABLE DEDUCTION IN COMPUTING THE PR OFITS ATTRIBUTABLE TO PE. SO, HOWEVER, THE AO IS REQUIRED TO ITA NOS. 5364/D/2010 & 5104/D/2011 21 VERIFY THAT THE ASSESSEE HAS NOT TAKEN SUCH REMUNER ATION INTO ACCOUNT IN WORKING OUT THE HEAD OFFICE EXPENSE S UNDER S. 44C. 9.4 LD. COUNSEL FURTHER REFERRED TO THE DECISION IN THE CASE OF BRITISH BANK OF MIDDLE EAST VS. JCIT,4 SOT 122, BOMBAY, WHEREIN ALSO SIMILAR VIEW HAS BEEN TAKEN. 9.5 LD. COUNSEL FURTHER RELIED ON THE DECISION IN 1 3 SOT 524 (DEL.) IN THE CASE OF ANZ GRINDLAYS BANK LTD. VS. DDIT, WHEREIN T RIBUNAL FOLLOWED THE EARLIER YEARS ORDERS, WHEREIN IT WAS, INTER-ALIA, H ELD THAT SINCE THE BENEFITS REAPED BY THE INDIAN BRANCH OR PERMANENT ESTABLISHM ENT IN INDIA HAVE BEEN ACCOUNTED FOR AS INDIAN INCOME, THEREFORE, THERE WA S NO REASON AS TO WHY THE DEDUCTION OF EXPENDITURE SHOULD NOT BE ALLOWED. 9.6 LD. COUNSEL FURTHER REFERRED TO THE DECISION IN THE CASE OF BANK OF AMERICA NT AND SA VS. DCIT 27 SOT 97 (MUM.), WHERE IN ALSO SIMILAR VIEW WAS TAKEN AND IT WAS, INTER-ALIA, HELD THAT THE PRO VISIONS OF SECTION 44C AND LIMITATIONS PROVIDED THEREIN ARE INAPPLICABLE IN RE SPECT OF EXPENSES INCURRED EXCLUSIVELY FOR INDIAN BRANCHES. LD. COUNSEL FURTH ER RELIED ON THE DECISION IN THE CASE OF BOMBAY HIGH COURT IN CIT V. EMIRATES COMMERCIAL BAN K LTD. [2003] 262 ITR 55 (MUM.), WHEREIN THE HONBLE BOMBAY HIGH COURT APPRO VED THE VIEW TAKEN BY THE TRIBUNAL. 10. LD. CIT(DR) SHRI D.K. GUPTA RELIED ON THE ORDER OF AO AND SUBMITTED THAT THESE EXPENSES WERE COVERED U/S 44C BEING INCU RRED OUTSIDE INDIA FOR THE ADMINISTRATIVE PURPOSES OF PE. HE FURTHER POIN TED OUT THAT NO DEBIT NOTES ITA NOS. 5364/D/2010 & 5104/D/2011 22 HAD BEEN RAISED BY ASSESSEE IN RESPECT OF BRANCHES. NO SETTLEMENT OF ACCOUNT WAS SHOWN. HE REFERRED TO LD. DRPS ORDER AND POINTED OUT THAT IT HAS BEEN OBSERVED THAT THESE WERE NOT SHOWN TO BE T HE LIABILITY OF BRANCH OFFICE. 10.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND H AVE PERUSED THE RECORD OF THE CASE. 11. THE FACTS ARE NOT DISPUTED. THE EXPATRIATES WE RE WORKING IN INDIA AND SALARY HAD BEEN SUBJECTED TO TAX FOR WHICH FORM NO. 16 WAS ALSO ISSUED TO THE EXPATRIATES. THEREFORE, THERE CANNOT BE ANY DI SPUTE REGARDING VERIFIABILITY OF THESE EXPENSES. THE EXPENSES HAD BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE INDIAN BRANCH AND, THEREFORE, N O PART OF THESE EXPENSES COULD BE ALLOCATED TO ANY OTHER BRANCH BY HEAD OFFI CE. WE FIND THAT THIS ISSUE IS NOW NO MORE RESINTEGRA AS HAS BEEN DEMONSTRATED BY LD. SR. COUNSEL FOR THE ASSESSEE WITH REFERENCE TO VARIOUS DECISIONS. HE HAS RIGHTLY POINTED OUT THAT THE DECISIONS IN THE CASE OF ABM A MRO IS SQUARELY APPLICABLE BECAUSE THERE WAS NO DISPUTE AMONGST THE MEMBERS IN REGARD TO NON APPLICABILITY OF PROVISIONS U/S 44C. THE ISSUE BEFORE THIRD MEMBER WAS NOT AT ALL IN REGARD TO ALLOWABILITY OF DEDUCTION U /S 44C AND ONLY FOLLOWING POINTS OF DIFFERENCES WERE BEFORE HIM FOR ADJUDICAT ION: (A) WHETHER OR NOT, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ASSESSEE IS ENTITLED TO DEDUCTION OF TAX COMPONENT OF SALARY OF EXPATRIATE EMPLOYEES, RELATING TO ASSTT. YRS. 1990-91 AND 1991 -92, IN ITA NOS. 5364/D/2010 & 5104/D/2011 23 THE ASST. YR. 1995-96, I.E., THE YEAR IN WHICH THE TAX HAS BEEN PAID BY THE ASSESSEE. (B) WHETHER OR NOT, ON THE FACTS AND IN THE CIRCUM STANCES OF THE CASE, THE ASSESSEE WAS ENTITLED TO DEDUCTION OF INTEREST LEVIED U/S 201(1A). (C) WHETHER OR NOT, ON THE PARTICULAR FACTS AND I N THE PARTICULAR CIRCUMSTANCES OF THIS CASE, THE ASSESSEE WAS ENTITLED TO DEDUCTION ON ACCOUNT OF OPERATIONAL LOS S OF RS. 9,57,58,904/-. 11.1 THUS, LD. DRP HAS NOT CORRECTLY APPRECIATED TH E FACTS OF THE CASE. 12. RESPECTFULLY FOLLOWING THE DECISIONS OF HONBL E BOMBAY HIGH COURT IN THE CASE OF EMIRATES COMMERCIAL BANK LTD. (SUPRA), THIS GROUND IS ALLOWED. 13. GROUND NO. 2 IS IN REGARD TO DISALLOWANCE OF IN TEREST PAID TO HEAD OFFICE AND OTHER OVERSEAS BRANCHES OF THE BANK AMOUNTING T O RS. 133497526/-. 14. GROUND NO. 3 DEALS WITH ADDITION ON ACCOUNT OF INCOME OF THE ASSESSEE PERTAINING TO RECEIPT OF INTEREST FROM INDIAN BRANC HES AMOUNTING TO RS. 133497526/-. 15. GROUND 4 IS IN REGARD TO ADDITION ON ACCOUNT O F INTEREST AMOUNTING TO RS. 27659232/- ACCRUED/RECEIVED TO THE INDIAN PE FR OM ITS HEAD OFFICE/OVERSEAS BRANCHES. 16. ALL THESE GROUNDS ARE IN REGARD TO INTEREST REC EIVED/ PAYMENT INTRA GROUP BEING BETWEEN HEAD OFFICE AND ASSESSEES PE I N INDIA FOR WHICH THE ARGUMENTS WERE ADVANCED COVERING ALL THE THREE GROU NDS. FIRST WE WILL DEAL WITH GROUND NOS. 2 & 3 AND, THEREAFTER, SEPARATELY DECIDE GROUND NO. 4. ITA NOS. 5364/D/2010 & 5104/D/2011 24 HOWEVER, SINCE ARGUMENTS FOR ALL THE THREE GROUNDS HAVE BEEN ADVANCED BY BOTH SIDES TOGETHER, WE WILL TAKE NOTE OF THEM ACCO RDINGLY. 17. BRIEF FACTS APROPOS GROUND NO. 2 ARE THAT AO NO TICED THAT ASSESSEE HAD PAID AN INTEREST OF RS. 133497526/- WITHOUT MAK ING ANY DEDUCTION OF TAX AT SOURCE. HE POINTED OUT THAT PE OF THE ASSESSEE BANK IS A SEPARATE ENTITY FOR THE PURPOSE OF TAXATION AND ON THIS GROUND ASSE SSEE HAD CLAIMED DEDUCTION OF THE INTEREST PAID TO HEAD OFFICE. HE FURTHER POINTED OUT THAT THE INTEREST PAID BY THE PE TO THE HEAD OFFICE WAS LIAB LE TO TAX IN INDIA AND, ACCORDINGLY, IT WAS SUBJECT TO THE PROVISIONS OF SE CTION 195 OF THE I.T. ACT. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS IN THI S REGARD, THE AO REFERRED TO CIRCULAR NO. 740 DATED 17/07/1996, WHICH READS A S UNDER: IT IS CLARIFIED THAT THE BRANCH OF A FOREIGN COMPANY/CONCERN IN INDIA IS A SEPARATE ENTITY FOR T HE PURPOSES OF TAXATION INTEREST PAID/PAYABLE BY SUCH BRANCH TO ITS HEAD OFFICE OR ANY BRANCH LOCATED ABR OAD WOULD BE LIABLE TO TAX IN INDIA AND WOULD BE GOVERN ED BY THE PROVISIONS OF SEC. 115A OF THE I.T. ACT, 1961, IF THE DOUBLE TAXATION AVOIDANCE AGREEMENT WITH THE COUNTR Y WHERE THE PARENT COMPANY IS ASSESSED TO TAX PROVIDE S FOR A LOWER RATE OF TAXATION, THE SAME WOULD BE APPLICA BLE. CONSEQUENTLY, TAX WOULD HAVE TO BE DEDUCTED ACCORDI NGLY ON THE INTEREST REMITTED AS PER THE PROVISIONS OF S ECTION 195 OF THE INCOME TAX ACT, 1961. 18. HE ALSO RELIED ON THE ORDER OF LD. CIT(A) FOR A .YS. 2003-04 AND 2004-05 FOR DENYING DEDUCTION OF RS. 133497526/- ON ACCOUNT OF PAYMENT OF INTEREST ITA NOS. 5364/D/2010 & 5104/D/2011 25 TO HEAD OFFICE/OVERSEAS BRANCHES ON ACCOUNT OF THE FAILURE ON PART OF THE ASSESSEE TO DEDUCT THE NECESSARY TAX AT SOURCE, AS PER THE PROVISIONS OF SECTION 195 OF THE ACT. HE FURTHER MADE AN ADDITIO N OF RS. 133497526/- BEING INTEREST RECEIVED BY HEAD OFFICE/OVERSEAS BRA NCHES FROM INDIAN BRANCHES BEING THE INCOME ACCRUING TO ASSESSEE IN I NDIA WHICH HAS BEEN ASSAILED BY ASSESSEE VIDE GROUND NO. 3 MADE AN ADDI TION OF RS. 27659232/- IN RESPECT OF INTEREST RECEIVED BY INDIAN PE OF ASS ESSEE ON DEPOSITS WHICH HAS BEEN ASSAILED BY ASSESSEE VIDE GROUND NO. 4. 19. LD. SR. COUNSEL FOR THE ASSESSEE REFERRED TO PA GE 355 OF PAPER BOOK, WHEREIN PARTICULARS IN RESPECT OF LENDING OR BORROW ING OF MONEY IS CONTAINED AND POINTED OUT THAT IT WAS IN PURSUANCE TO FINANCI NG AGREEMENT. LD. SR. COUNSEL SUBMITTED THAT HEAD OFFICE AND BRANCH ARE P ART OF SAME ENTERPRISE AND, THEREFORE, UNDER THE NORMAL PROVISIONS OF INCO ME TAX, BRANCH IS NOT ENTITLED FOR ANY DEDUCTION IN RESPECT OF INTEREST P AID TO HEAD OFFICE. HOWEVER, UNDER THE PROVISIONS OF ARTICLE 7(2) AND 7(3) OF TH E INDO JAPAN DTA READ WITH PARAGRAPH 8 OF THE PROTOCOL, THE ASSESSEE WAS ENTIT LED FOR DEDUCTION OF INTEREST PAID TO HEAD OFFICE. HE SUBMITTED THAT AS PER ARTICLE 7(2), WHEREIN ENTERPRISE OF ONE OF THE STATES CARRIES ON BUSINESS IN THE OTHER STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN, THERE S HALL IN EACH STATE BE ATTRIBUTED TO THAT PERMANENT ESTABLISHMENT THE PROF ITS WHICH IT MIGHT BE ACCEPTED TO MAKE IF IT WERE A DISTINCT AND SEPARATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIES UNDER THE SAME OR SIMILA R CONDITIONS AND DEALING ITA NOS. 5364/D/2010 & 5104/D/2011 26 WHOLLY INDEPENDENTLY WITH THE ENTERPRISE OF WHICH I T IS A PERMANENT ESTABLISHMENT. THUS, FOR THE PURPOSE OF ARTICLE 7( 2), THE PERMANENT ESTABLISHMENT IS TREATED AS DISTINCT AND SEPARATE E NTERPRISE WHICH IMPLIES THE DIRECT METHOD OF SEPARATE ACCOUNTING BY THE PE. HE FURTHER POINTED OUT THAT THE PROVISIONS OF ARTICLE 7(3) OF THE DTA MAKES IT AMPLY CLEAR THAT IN DETERMINING THE PROFITS OF THE PERMANENT ESTABLISHM ENT, THERE SHALL BE ALLOWED AS A DEDUCTION EXPENSES WHICH ARE INCURRED FOR THE PURPOSES OF THE PERMANENT ESTABLISHMENT INCLUDING EXECUTIVE AND GEN ERAL ADMINISTRATIVE EXPENSES SO INCURRED, WHETHER IN THE CONTRACTING ST ATE IN WHICH A PERMANENT ESTABLISHMENT IS SITUATED OR ELSEWHERE. LD. COUNSE L FURTHER SUBMITTED THAT PARAGRAPH 8 OF THE PROTOCOL NO DOUBT MAKES IT CLEAR THAT NO DEDUCTION SHALL BE ALLOWED FOR ANY PAYMENTS MADE OR AMOUNTS CHARGED BY A PE OF AN ENTERPRISE TO ITS HEAD OFFICE FOR THE ITEMS SPECIFI ED THEREIN, HOWEVER, EXCEPTION HAS BEEN CARVED OUT AND IT IS SPECIFIED T HAT ANY INTEREST PAYABLE BY A PERMANENT ESTABLISHMENT TO THE GROUP ESTABLISH MENT WHICH IS A BANKING INSTITUTION, SHOULD BE ALLOWED. HE, THEREFORE, SUB MITTED THAT DEDUCTION IN RESPECT OF INTEREST PAID BY PE TO THE HEAD OFFICE H AS TO BE DEDUCTED IN VIEW OF THE PROVISIONS CONTAINED IN UNDER DTA. 20. AS REGARDS THE TAXABILITY OF INTEREST RECEIVED BY HEAD OFFICE FROM PE, AS PER GROUND NO. 3, LD. COUNSEL SUBMITTED THAT SINCE THE HEAD OFFICE AND PE ARE NOT SEPARATE ENTITY, THEREFORE, INTEREST COULD NOT BE PAID TO SELF AND HENCE UNDER THE NORMAL PROVISIONS OF INCOME TAX IT WAS NOT TAXABLE SINCE THE ITA NOS. 5364/D/2010 & 5104/D/2011 27 TRANSACTION WAS BETWEEN THE SAME PERSON. THEREFORE , IT BEING NOT TAXABLE THERE WAS NO NEED TO GO TO TREATY. SIMILARLY, AS R EGARDS INTEREST RECEIVED BY ASSESSEES BRANCH (PE) FROM HEAD OFFICE AS ASSAILED VIDE GROUND NO. 4 BY ASSESSEE LD. COUNSEL SUBMITTED THAT SINCE HERE ALSO THE TRANSACTION IS BETWEEN SAME PERSON, THEREFORE, IT WAS NOT TAXABLE AND HENCE NO NEED TO GO TREATY. HE FURTHER POINTED OUT THAT UNDER TREATY P ROVISIONS ALSO THIS, AMOUNT IS NOT CHARGEABLE BECAUSE PROTOCOL DOES NOT PROVIDE FOR TAXING INTEREST FROM HEAD OFFICE AND ONLY ALLOWS FOR DEDUCTION IN THIS R EGARD. LD. COUNSEL CONTRASTED THESE PROVISIONS FROM THE PROVISIONS OF INDIA NEITHER LAND TREATY WHERE IT IS SPECIFICALLY TAXABLE. LD. COUNSEL RELI ED ON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF (I) ABM AMRO BAN K VS. CIT, IN SUPPORT OF HIS CONTENTION THAT PE IS TO BE TREATED AS SEPARATE ENTITY. HE FURTHER RELIED ON THE DECISION OF SPL. BENCH IN THE CASE OF (II) M/S SUOMOTO MITSUBISHI BANK CORPORATION VS. DEPUTY DIRECTOR OF INCOME-TAX (IT) & OTHRS. AND (III) AMERICAN EXPRESS BANK LTD. VS. DCIT. 21. LD. CIT(DR) SHRI D.K. GUPTA REFERRED TO SECTION 90(2) AND POINTED OUT THAT AS PER THIS SECTION WHERE THE CENTRAL GOVERNME NT HAS ENTERED INTO AN AGREEMENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSID E INDIA OR SPECIFIED TERRITORY OUTSIDE INDIA, AS THE CASE MAY BE, UNDER SUB-SECTION (1) FOR GRANTING RELIEF OF TAX, OR AS THE CASE MAY BE, AVOIDANCE OF DOUBLE TAXATION, THEN, IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APP LIES, THE PROVISIONS OF ITA NOS. 5364/D/2010 & 5104/D/2011 28 THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BE NEFICIAL TO THAT THE ASSESSEE. 22. LD. CIT(DR) SHRI D.K. GUPTA SUBMITTED THAT AS PER THIS PROVISION, THE ASSESSEE HAS OPTION EITHER TO BE ASSESSED UNDER THE DOMESTIC LAW OR AS PER THE PROVISIONS OF DTAA. LD. CIT(DR) FURTHER SUBMIT TED THAT THE QUESTION IS WHETHER AFTER EXERCISING HIS OPTION UNDER A PARTICU LAR SCHEME OF TAXATION CAN THE ASSESSEE GO BACK TO THE OTHER SCHEME OF TAX ATION, IF IT IS MORE BENEFICIAL. LD. CIT(DR) SUBMITTED THAT HYBRID COMP UTATION BY ADOPTING PICK & CHOOSE METHOD IS NOT PERMISSIBLE. ONCE THE ASSES SEE HAS ADOPTED THE DTA THEN THE ENTIRE COMPUTATION HAS TO BE MADE AS P ER DTA. IN THIS REGARD LD. CIT(DR) REFERRED TO THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF DRESDNER BANK AG VS. ACIT 2006-TII-20-ITAT-MUM.-INT L. HE REFERRED TO PARA 78 WHICH IS REPRODUCED AS UNDER: 78. UNDOUBTEDLY, IN A CASE WHERE THE GOVERNMENT OF INDIA HAS ENTERED INTO A TAX TREATY WITH A FOREIGN COUNTRY, THEN IN RELATION TO AN ASSESSEE ON WHOM SUCH TAX TR EATY APPLIES, THE PROVISIONS OF THE INCOME TAX ACT APPLY ONLY TO THE EXTENT THESE ARE MORE BENEFICIAL TO THE ASSE SSEE. HOWEVER, ONCE ASSESSEE HIMSELF ABANDONS HIS OPTION TO BE ASSESSED TO TAX IN ACCORDANCE WITH THE PROVISION S OF THE TAX TREATY, AS IS THE SITUATION BEFORE US, IT C ANNOT BE OPEN TO ASSESSEE TO GO BACK FOR THE TREATY PROTECTI ON ON ONE ASPECT OF THE TAX ASSESSMENT I.E. ON APPLICABIL ITY OF MINIMUM ALTERNATE TAX U/S 115JA OF THE ACT. EITHER AN ASSESSEE IS TO BE ASSESSED TO TAX ON THE BASIS OF T HE ITA NOS. 5364/D/2010 & 5104/D/2011 29 PROVISIONS OF THE TAX TREATY OR NOT. IN OUR CONSID ERED VIEW, THE ASSESSMENT OF INCOME CANNOT BE SPLIT INTO SEVERAL SEGMENTS AND THEN THE APPLICABILITY OF TREA TY PROVISIONS, VIS--VIS TAX LAW PROVISIONS, CANNOT BE SEPARATELY CONSIDERED FOR EACH SEGMENT. LIABILITY FOR MINIMUM ALTERNATE TAX U/S 115JA IS AN INTEGRAL PART OF ASSESSEES ASSESSMENT OF INCOME, AND, ONCE THE ASSE SSEE CHOOSES TO BE ASSESSED AS PER PROVISIONS OF THE ACT , IN PREFERENCE OVER THE PROVISIONS OF THE TAX TREATY, I T CANNOT BE OPEN TO THE ASSESSEE SEEK TREATY PROTECTION IN R ESPECT OF ONE OF THE ASPECTS OF THE ASSESSMENT OF THE INCO ME I.E. APPLICABILITY OF MINIMUM ALTERNATE TAX U/S 115JA. WE, THEREFORE, UPHOLD REVENUES CONTENTION TO THE EFFEC T THAT THE PROVISIONS OF THE APPLICABLE TAX TREATY CANNOT BE RELIED UPON BY THE ASSESSEE FOR THE LIMITED PURPOSE S OF CLAIM OF NON-APPLICABILITY OF SECTION 115JA ON THE FACTS OF THIS CASE. 23. LD. CIT(DR) FURTHER REFERRED TO THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF M/S LLOYD REGISTRAR VS. DCIT (2013)-TII -85-ITAT-MUM.-INTL. HE REFERRED TO PARA 15 PAGE 11 OF THIS ORDER WHICH IS REPRODUCED HEREUNDER: 15. SECTION 90(2) OF THE ACT PROVIDES THAT WHERE T HE CENTRAL GOVERNMENT HAS ENTERED INTO AN AGREEMENT WI TH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA OR SPEC IFIED TERRITORY OUTSIDE INDIA, AS THE CASE MAY BE UNDER S UB- SECTION (1) FOR GRANTING RELIEF OF TAX, OR AS THE C ASE MAY BE, AVOIDANCE OF DOUBLE TAXATION, THEN, IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APPLIES, THE PROVIS IONS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE ITA NOS. 5364/D/2010 & 5104/D/2011 30 BENEFICIAL TO THAT ASSESSEE. THE HONBLE SUPREME C OURT IN CIT VS. P.V.A.L. KULANDAGAN CHETTIAR (2004) 267 ITR 654 (SC) = (2004-TII-01-SC-INTL) HAS HELD THAT THE PROVISIONS OF SECTIONS 4 & 5 ARE SUBJECT TO THE CON TRARY PROVISION, IF ANY, IN DTAA. THE CRUX OF THE MATTER IS THAT THE PROVISION OF THE ACT OR THAT OF THE DTAA, WHICH EVER IS MORE BENEFICIAL TO THE ASSESSEE, SHALL APPLY. 16. IT IS OBSERVED FROM THE ASSESSMENT ORDER THAT T HE AO COMPUTED THE INCOME OF THE ASSESSEE UNDER THE DOMESTIC LAW AND IN THIS PROCESS HE MADE DISALLOWAN CE OF RS. 4.23 CRORE BY INVOKING THE PROVISIONS OF SEC TION 40(A)(I) OF THE ACT. THE LD. CIT(A) TOO FOLLOWED T HE SUIT BY CONSIDERING THE DOMESTIC LAW ALONE IN HOLDING TH AT THE PAYMENT OF RS. 4.23 CRORE BY THE PE TO THE HO IS A PAYMENT TO SELF AND HENCE CANNOT BE ALLOWED AS DEDUCTION IN THE HANDS OF PE. AS A RESULT THEREOF, THE PROVISIONS OF SECTION 40(A)(I) WERE HELD TO BE NOT APPLICABLE. SINCE THE ASSESSEE IS A NON-RESIDENT GOVERNED BY THE PROVISIONS OF THE DTAA, IT IS ENTIT LED T THE BENEFITS OF DTAA, IF THE QUANTUM OF INCOME OR T HE OVERALL TAX LIABILITY TURNS OUT TO BE LESS AS PER T HE DTAA VIS--VIS THE DOMESTIC LAW. IN THE ABSENCE OF ANY DISCUSSION ABOUT THE COMPUTATION OF THE BUSINESS PR OFITS OF THE PERMANENT ESTABLISHMENT AS PER THE DTAA, IT IS NOT POSSIBLE TO DETERMINE AS TO WHETHER OR NOT THE COMPUTATION UNDER THE DTAA IS MORE BENEFICIAL TO TH E ASSESSEE. IN OUR CONSIDERED OPINION THAT ENDS OF J USTICE WOULD ADEQUATELY MEET IF THE IMPUGNED ORDER IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF AO FOR ITA NOS. 5364/D/2010 & 5104/D/2011 31 COMPUTATION OF INCOME OF THE ASSESSEE AS PER THE DT AA AS WELL AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEING HEAD TO THE ASSESSEE. WE ORDER ACCORDINGLY. AFTER SUCH COMPUTATION, THE AO WILL COMPARE THE INCOME OF THE PERMANENT ESTABLISHMENT AS PER DOMESTIC LAW AND THE DTAA. THE LIABILITY TO TAX ON THE ASSESSEE IN RESP ECT OF THE INCOME OF THE PE WOULD BE FASTENED BY ONLY SUCH OF THE TWO COMPUTATIONS WHICH IS MORE FAVOURABLE TO TH E ASSESSEE AS PER THE MANDATE OF SEC. 90(2) OF THE AC T. 24. WITH REFERENCE TO THE ABOVE DECISIONS, LD. CIT( DR) SUBMITTED THAT ASSESSEE IS REQUIRED TO MAKE SEPARATE COMPUTATION U NDER DOMESTIC LAW AND DTA AND THEN COMPARE AS TO WHICH COMPUTATION IS MOR E BENEFICIAL TO ASSESSEE. 25. LD. CIT(DR) REFERRED TO THE CASE LAW PAPER BOOK FILED BY THE DEPARTMENT AND REFERRED TO THE FOLLOWING OBSERVATIO N CONTAINED AT PAGE 163 (INTERNAL PAGE 17) IN THE CASE OF ASSTT. CIT VS. CL OUGH ENGINEERING LTD. (SPL. BENCH) (2011) 9 ITR (TRIB.) 618 WHICH IS REPRODUCED HEREUNDER: WE MAY DEAL WITH THE QUESTION FROM THE STAND POIN T OF SECTION 90(2) OF THE ACT. THE PROVISION READS AS U NDER: (2) WHERE THE CENTRAL GOVERNMENT HAS ENTERED INTO AN AGREEMENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSID E INDIA OR SPECIFIED TERRITORY OUTSIDE INDIA, AS THE CASE MAY BE, UNDER SUB-SECTION (1) FOR GRANTING RELIEF OF TA X, OR AS THE CASE MAY BE, AVOIDANCE OF DOUBLE TAXATION, THEN , IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APP LIES, THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTEN T THEY ARE BENEFICIAL TO THAT ASSESSEE. ITA NOS. 5364/D/2010 & 5104/D/2011 32 THE GIST OF THE PROVISION IS THAT IN CASE WHERE THE PROVISIONS OF THE DOUBLE TAXATION AVOIDANCE AGREEME NT APPLY TO AN ASSESSEE, THE PROVISIONS OF THIS ACT SH ALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THA T ASSESSEE. ACCORDING TO US, IT WILL BECOME NECESSAR Y TO HAVE PROPER APPRECIATION OF THE WORDS MORE BENEFICIAL. ALTHOUGH THIS POINT HAS NOT BEEN ELAB ORATED UPON BY ANY OF THE CONTENDING PARTIES, IT IS CLEAR TO US THAT APPLICATION OF THE PROVISION CAN BE MADE AFTER ASCERTAINING (I) TAX PAYABLE BY THE ASSESSEE UNDE R THE DOUBLE TAXATION AVOIDANCE AGREEMENT, AND (II) TAX PAYABLE BY THE ASSESSEE UNDER THE ACT. IF TAX PAYA BLE UNDER THE ACT IS LESS THAN THE TAX PAYABLE UNDER TH E TREATY, IT CAN BE CONCLUDED THAT THE PROVISIONS OF THE ACT ARE MORE BENEFICIAL TO THE ASSESSEE. HOWEVER, IF T HE TAX PAYABLE BY THE ASSESSEE UNDER THE TREATY IS LESS TH AN THE TAX PAYABLE UNDER THE ACT, HE SHALL HAVE THE BENEFI T OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT. IF WE COMPUTE THE INCOME OF THE ASSESSEE UNDER THE HEAD OTHER SOURCES, THE NET INCOME BY WAY OF INTEREST RECEIVE D FROM THE INCOME-TAX DEPARTMENT SHALL AMOUNT TO RS. 61,04,944/-. THIS AMOUNT WILL BE TAXED AT THE RATE APPLICABLE TO A FOREIGN COMPANY, WHICH IS MORE THAN 15 PER CENT. THEREFORE, ON MAKING THE ASSESSMENT OF TA X UNDER THE TREATY AND UNDER THE ACT, IT WILL BE FOUN D THAT TAX PAYABLE UNDER THE ACT IS MORE THAN THE TAX PAYA BLE UNDER THE TREATY. ACCORDINGLY, THE AFORESAID PROVI SION WILL COME TO THE AID OF THE ASSESSEE TO COME TO AN AUTOMATIC CONCLUSION, WITHOUT EXERCISE OF ANY OPTIO N, ITA NOS. 5364/D/2010 & 5104/D/2011 33 THAT IT SHOULD GET THE BENEFIT UNDER THE DOUBLE TAX ATION AVOIDANCE AGREEMENT. NO OTHER CONSIDERATION IS MATERIAL FOR THIS PURPOSE AS ULTIMATELY WHAT IS TO BE SEEN IS WHETHER THE PROVISIONS OF THE ACT ARE MORE BENEF ICIAL TO THE ASSESSEE OR NOT. ACCORDINGLY, IT IS HELD TH AT THE ASSESSEE IS ENTITLED TO THE BENEFIT UNDER THE TREAT Y. 25.1 HE, THEREFORE, SUBMITTED THAT SPL. BENCH HAS A PPROVED THE VIEW TAKEN IN M/S LLOYD REGISTRAR (SUPRA). HE FURTHER RELIED ON THE DECISION IN THE CASE OF DEPUTY DIRECTOR OF INCOME TAX (MUM.) VS. M/S TOK YO ENGINEERING CORPORATION (2012)-TII-55-ITAT-MUM.-INTL AND REFERR ED TO PARA 11.2 AT PAGE 15 & 16 OF THE SAID ORDER, WHICH IS REPRODUCED HERE UNDER: 11.2 A BARE PERUSAL OF THE ABOVE PROVISION INDICAT ES THAT WHERE THE CENTRAL GOVERNMENT HAS ENTERED INTO DTAA WITH THE GOVERNMENT OF ANY OTHER COUNTRY FOR GRANTING OF RELIEF IN RESPECT OF INCOME ON WHICH TA X IS PAYABLE BOTH IN INDIA AS WELL AS THE OTHER COUNTRY OR FOR THE PURPOSES OF AVOIDANCE OF DOUBLE TAXATION OF INC OME UNDER THIS ACT OR UNDER THE CORRESPONDING LAW IN FO RCE IN THAT OTHER COUNTRY, THEN THE ASSESSEE TO WHOM SUCH AGREEMENT APPLIES SHALL BE ENTITLED TO BE GOVERNED BY THE PROVISIONS OF DTAA OR THE PROVISIONS OF THE ACT, WHICHEVER IS MORE BENEFICIAL TO THE ASSESSEE. A PL AIN LANGUAGE OF THIS PROVISION INDICATES, FIRSTLY, THAT THE DTAA IS ENTERED INTO BETWEEN TWO COUNTRIES FOR GRA NTING RELIEF OF TAX. SECONDLY, THE MANNER OF GRANTING RE LIEF IS ALSO ENSHRINED IN THE PROVISION ITSELF WHICH STATES THAT THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTE NT THEY ARE MORE BENEFICIAL TO THAT ASSESSEE. ORDINARILY, BUT FOR ITA NOS. 5364/D/2010 & 5104/D/2011 34 SUCH PROVISION, AN ASSESSEE TO WHICH THE DTAA APPLI ES SHALL BE SUBJECTED TO TAX IN INDIA AS PER THE PROVI SIONS OF THE ACT. IF, HOWEVER, THE PROVISIONS OF THE DTAA A RE MORE BENEFICIAL TO THE ASSESSEE, THEN SUCH PROVISIO NS, SHALL OVERRIDE THE CORRESPONDING PROVISIONS OF THE ACT. ON THE OTHER HAND, IF THE PROVISIONS OF THE ACT ARE MORE BENEFICIAL TO THE ASSESSEE, THESE ARE SUCH PROVISIO NS WHICH SHALL APPLY NOTWITHSTANDING LESS BENEFICIAL PROVISION IN THE DTAA. THE LOGIC BEHIND IT IS SIMP LE THAT THE DTAA IS INTENDED TO GRANT RELIEF OF TAX AND NOT CREATE ANY FRESH TAX LIABILITY, WHICH IS NOT PROVIDED UNDE R THE ACT. TO STATE SIMPLY, IF A PARTICULAR INCOME FALLS UNDER THE TAX NET AS PER THE ACT, THE SAME SHALL BE CHARG EABLE TO TAX IN THE HANDS OF THE ASSESSEE TO WHOM DTAA APPLI ES, UNLESS IT IS SHOWN THAT THE PROVISIONS OF DTAA PROV IDE FOR SOME RELIEF IN THIS REGARD. IF THERE IS A BENE FICIAL PROVISION UNDER THE DTAA, THEN SUCH PROVISION AS CONTAINED IN THE DTAA SHALL PREVAIL OVER THE PROVIS ION UNDER THE ACT. IT SHOWS THAT THE LEGISLATURE HAS G IVEN AN OPTION TO THE ASSESSEE TO BE GOVERNED BY THE PROVIS IONS EITHER OF THE ACT OR OF THE DTAA, WHICH IS MORE BEN EFICIAL TO IT. THE COROLLARY THAT FOLLOWS IS THAT ONE NEED S TO FIRSTLY EXAMINE AS TO WHETHER THE PARTICULAR SUM IS CHARGEABLE TO TAX UNDER THE ACT OR NOT. IF SUCH IN COME IS CHARGEABLE TO TAX IN INDIA UNDER THE ACT BUT THE PROVISIONS OF DTAA EXEMPT IT OR PROVIDE A BENEFICIA L TREATMENT, THEN THE ASSESSEE WILL HAVE THE OPTION T O BE RULED BY SUCH BENEFICIAL TREATMENT PROVIDED BY DTAA . THE ESSENCE IS THAT AN ASSESSEE, TO WHOM THE DTAA ITA NOS. 5364/D/2010 & 5104/D/2011 35 APPLIES, HAS BEEN GIVEN OPTION TO BE GOVERNED BY TH E ACT OR DTAA, WHICHEVER IS MORE BENEFICIAL TO IT. 25.2 THUS, IN SUM AND SUBSTANCE, LD. CIT(DR) SUBMIT TED THAT ASSESSEE CAN BE ASSESSED EITHER UNDER DTA OR DOMESTIC LAW, WHICH EVER IS MORE BENEFICIAL BUT ONCE THE OPTION IS EXERCISED TO BE ASSESSED UND ER A PARTICULAR SCHEME OF TAXATION THEN THE SAID OPTION CANNOT BE REVERTED BA CK FOR ADOPTING THE OTHER SCHEME. LD. CIT(DR) SUBMITTED THAT ASSESSEE HAD OP TED TO BE ASSESSED UNDER DOMESTIC LAW. IN THIS REGARD HE REFERRED TO PAGE 327 OF THE PAPER BOOK DATED 18.1.2012, WHEREIN THE COPY OF RETURN OF INCOME IS CONTAINED AND ALSO TO PAGES 333 AND 334, WHEREIN THE STATEMEN T OF COMPUTATION OF TAXABLE INCOME/LOSS IS CONTAINED AND POINTED OUT TH AT ASSESSEE ITSELF HAD COMPUTED INCOME UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION AT RS. 695920087/- WHICH WAS SET OFF AG AINST THE BROUGHT FORWARD BUSINESS LOSSES. LD. CIT(DR) ALSO REFERRED TO PAGE 336 OF PAPER BOOK, WHEREIN THE COMPUTATION OF TAXABLE INCOME AS PER ITAT U/S 115JB IS CONTAINED. HE, THEREFORE, SUBMITTED THAT ONCE THE ASSESSEE HAD OPTED FOR BEING ASSESSED UNDER DOMESTIC LAW THEN ASSESSEE COU LD NOT TAKE SHELTER OF THE PROVISIONS OF ARTICLE 7(3) OF DTA BETWEEN INDIA AND JAPAN FOR CLAIMING DEDUCTION. 26. LD. CIT(DR) REFERRED TO THE DECISION OF SPL. BE NCH IN THE CASE OF SUOMOTO MITSUBISHI BANKING CORPORATION (SUPRA) AND REFERRED TO PAGE 35 & 36 OF THE SAID JUDGMENT TO SUBMIT THAT THE PAYMENT TO SELF IS NOT ALLOWABLE BUT FOR THE PROVISIONS CONTAINED UNDER DTA UNDER AR TICLE 7(2) & 7(3) READ ITA NOS. 5364/D/2010 & 5104/D/2011 36 WITH PARAGRAPH NO. 8 OF THE PROTOCOL. LD. CIT(DR) SUBMITTED THAT SPL. BENCH IS SUB SILENTIO ON THE ISSUE WHETHER THE COMPUTATIO N WAS UNDER DOMESTIC LAW OR UNDER TREATY. HE SUBMITTED THAT SPL. BENCH DECI SION OF CLOUGH ENGINEERING (SUPRA) HAD NOT BEEN CONSIDERED BY SUOM OTO MITSUBISHI BANKING CORPORATION. LD. CIT(DR) FURTHER REFERRED TO THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF M/S SOCIETE GENERALE VS . DCIT (2013)-TII-27- ITAT-MUM.-INTL CONTAINED AT PAGE 23 OF CASE LAW PAP ER BOOK FILED BY DEPARTMENT, WHEREIN IT HAS BEEN OBSERVED AT PAGE 28 OF PAPER BOOK (INTERNAL PAGE 6) AS UNDER: 4. GROUND NO. 2 IS AGAINST THE TAX NEUTRALITY IN RESPECT OF INTEREST INCOME OF RS. 5,48,15,653/- REC EIVED BY THE ASSESSEE ON FUNDS PLACED WITH ITS HEAD OFFICE/OVERSEAS BRANCHES AND INTEREST OF RS. 1,43,9 29 PAID BY THE ASSESSEE IN RESPECT OF FUNDS PLACED BY IT WITH ITS HEAD OFFICE/OVERSEAS BRANCHES. 5. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND T HAT THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ABN AM RO BANK NV VS. ADIT (2005) 95 ITD 89 (KOL) (SB) = (200 5- TII-22-ITAT-KOL-SB-INTL) HAS HELD THAT THERE CANNOT BE TRANSACTIONS WITH SELF AND AS SUCH BRANCH OF THE ASSESSEE BANK CANNOT BE TREATED AS A SEPARATE ENTIT Y INSOFAR AS THE TRANSACTIONS BETWEEN THE HEAD OFFICE AND THE INDIAN BRANCH RESULTING INTO INTEREST INCOME OR INTEREST EXPENDITURE ARE CONCERNED. A LATER SPECIA L BENCH OF THE TRIBUNAL IN THE CASE OF SUMITOMO MITSU I ITA NOS. 5364/D/2010 & 5104/D/2011 37 BANKING CORPORATION VS. DDIT [(147 TTJ 649 (MUM.)] = (2012-TII-24-ITAT-MUM-SB-INTL) HAS ALSO HELD THAT THERE CAN BE NEITHER ANY INCOME IN RESPECT OF INTER EST EARNED BY THE ASSESSEE BRANCH FROM ITS HO/OVERSEAS BRANCHES NOR THERE CAN BE ANY DEDUCTION FOR INTERES T PAID BY THE INDIAN BRANCH TO THE HO/ OTHER OVERSEAS BRAN CHES ON THE BASIS OF PRINCIPLE OF MUTUALITY. WE WANT TO MAKE IT CLEAR THAT THE SPECIAL BENCH IN SUMITOMO (SUPRA) AL SO CONSIDERED THE DEDUCTIBILITY OF INTEREST EXPENDITUR E AND INTEREST INCOME UNDER THE RELEVANT DTAA. HOWEVER, THE LD. COUNSEL FOR THE ASSESSEE HAS NOT ADVERTED TO TH E RELEVANT CLAUSES OF THE RELEVANT TREATY AND HAS THU S RESTRICTED HIMSELF ONLY TO THE PRINCIPLE OF MUTUALI TY. RESPECTFULLY FOLLOWING THE PRINCIPLE OF MUTUALITY A RISING FROM THE ABOVE SPECIAL BENCH ORDERS, WE OVERTURN TH E IMPUGNED ORDER ON THIS ISSUE AND DIRECT THAT NEITHE R THE INTEREST INCOME SHOULD BE CHARGED TO TAX NOR THE IN TEREST EXPENDITURE BE ALLOWED AS DEDUCTION. THIS GROUND I S ACCORDINGLY ALLOWED. 27. HE, THEREFORE, SUBMITTED THAT UNDER DOMESTIC LA W SINCE CONCEPT OF MUTUALITY APPLIES SO NEITHER DEDUCTION NOR TAXATION OF THE SAME AMOUNT CAN BE MADE. HOWEVER, AS REGARDS THE TAXABILITY ASPECT , LD. CIT(DR) RELIED ON AOS ORDER AND POINTED OUT THAT AO APPLIED THE DEEM ING PROVISIONS CONTAINED U/S 9(1)(V) AND DID NOT APPLY THE CONCEPT OF MUTUALITY. 28. LD. CIT(DR), FURTHER ILLUSTRATING THIS ISSUE, W ITH REFERENCE TO POSITION UNDER TREATY, SUBMITTED THAT THERE IS NO DISPUTE TH AT IN VIEW OF ARTICLE 11(6) ARTICLE 7 APPLIES BECAUSE ASSESSEE WAS OPERATING TH ROUGH PE AND, ITA NOS. 5364/D/2010 & 5104/D/2011 38 THEREFORE, THE DEDUCTION OF INTEREST PAID TO HEAD O FFICE BY PE IS TO BE ALLOWED AS PER ARTICLE 7(2),7(3) READ WITH CLAUSE (C) OF PA RA 8 OF PROTOCOL. HE SUBMITTED THAT AS REGARDS THE TAXABILITY OF THE INT EREST RECEIVED BY ASSESSEE FROM PE AND THE INTEREST EARNED BY PE FROM THE DEPO SITS HELD WITH HEAD OFFICE, THE TAXABILITY HAS TO BE CONSIDERED AS PER ARTICLE 11(6). THE SUBMISSION OF LD. CIT(DR) IS THAT AS PER ARTICLE 11 INTEREST ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTH ER CONTRACTING STATE MAY BE TAXED IN THAT OTHER CONTRACTING STATE. THEREFORE, INTEREST RECEIVED BY ASSESSEE WAS TAXABLE AND ITS COMPUTATION ONLY IS TO BE DONE AS PER ARTICLE 7 ON ACCOUNT OF DEBT CLAIM BEING EFFECTIVELY CONNECTE D WITH PE. LD. CIT(DR) FURTHER SUBMITTED THAT TREATY NOWHERE SPECIFICALLY BARS THE TAXABILITY OF INTEREST. ON THE CONTRARY ART. 7(2) REQUIRES THE A SSESSEE TO INCLUDE ALL THE PROFITS ATTRIBUTABLE TO PE. HE SUBMITTED THAT THER E IS NO SEPARATE CHARGE BY IMPLICATION AS IT IS ALREADY INCLUDED UNDER ARTICLE 7(2). THERE IS NO SPECIFIC EXEMPTION FOR AMOUNTS RECEIVED FROM HO. THE ASSESS EE ITSELF INCLUDED THIS IN P&L ACCOUNT. HE SUBMITTED THAT A HOLISTIC VIE W IS TO BE TAKEN AND BY IMPLICATION THE TAXABILITY OF INTEREST HAS TO BE RE AD IN ARTICLE 7(3). IN ORDER TO FURTHER BUTTRESS HIS SUBMISSIONS LD. CIT(DR) REFERR ED TO ART. 7(3)(B) OF INDO NETHER LANDS TREATY WHICH READS AS UNDER: ARTICLE 7 BUSINESS PROFITS 1. THE PROFITS OF A N ENTERPRISE OF ONE OF THE STATES SHALL BE TAXABLE ONLY IN THAT STATE UNLESS T HE ENTERPRISE CARRIES ON BUSINESS IN THE OTHER STATE THROUGH A PERMANENT EST ABLISHMENT SITUATED THEREIN. IF THE ENTERPRISE CARRIES ON BUSINESS AS AFORESAID, THE PROFITS OF ITA NOS. 5364/D/2010 & 5104/D/2011 39 THE ENTERPRISE MAY BE TAXED IN THE OTHER STATE BUT ONLY SO MUCH OF THEM AS IS ATTRIBUTABLE TO THAT PERMANENT ESTABLISHMENT. 3(B) HOWEVER, NO SUCH DEDUCTION SHALL BE ALLOWED I N RESPECT OF AMOUNTS, IF ANY, PAID (OTHERWISE THAN TOWARDS REIMBURSEMENT OF ACTUAL EXPENSES) BY THE PERMANENT ESTABLISHMENT TO THE HEAD OFFICE O F THE ENTERPRISE OR ANY OF ITS OTHER OFFICES, BY WAY OF ROYALTIES, FEES OR OTHER SIMILAR PAYMENTS IN RETURN FOR THE USE OF PATENTS OR OTHER RIGHTS, OR B Y WAY OF COMMISSION, FOR SPECIFIC SERVICES PERFORMED OR FOR MANAGEMENT, OR, EXCEPT IN THE CASE OF A BANKING ENTERPRISE, BY WAY OF INTEREST ON MONEYS LENT TO THE PERMANENT ESTABLISHMENT. LIKEWISE, NO ACCOUNT SHALL BE TAKEN , IN THE DETERMINATION OF THE PROFITS OF A PERMANENT ESTABLISHMENT, FOR AM OUNTS CHARGED (OTHERWISE THAN TOWARDS REIMBURSEMENT OF ACTUAL EXP ENSES), BY THE PERMANENT ESTABLISHMENT TO THE HEAD OFFICE OF THE E NTERPRISE OR ANY OF ITS OTHER OFFICES, BY WAY OF ROYALTIES, FEES OR OTHER S IMILAR PAYMENTS IN RETURN FOR THE USE OF PATENTS OR OTHER RIGHTS, OR BY WAY O F COMMISSION FOR SPECIFIC SERVICES PERFORMED OR FOR MANAGEMENT, OR E XCEPT IN THE CASE OF A BANKING ENTERPRISE, BY WAY OF INTEREST ON MONEYS LE NT TO THE HEAD OFFICE OF THE ENTERPRISE, OR ANY OF ITS OTHER OFFICES. 29. LD. CIT(DR) FURTHER REFERRED TO PARA 8 OF INDO JAPANESE TREATY PROTOCOL WHICH READS AS UNDER: - 8. WITH REFERENCE TO PARAGRAPH 3 OF ARTICLE 7 OF THE CONVENTION, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF AMOUNTS PA ID OR CHARGED (OTHER THAN REIMBURSEMENT OF ACTUAL EXPENSES) BY A PERMANE NT ESTABLISHMENT OF AN ENTERPRISE TO THE HEAD OFFICE OF THE ENTERPRISE OR ANY OTHER OFFICES THEREOF, BY WAY OF : (A) ROYALTIES, FEES OR OTHER SIMILAR PAYMENTS IN R ETURN FOR THE USE OF PATENTS OR OTHER RIGHTS, OR FOR THE USE OF KNOW-HOW ; (B) COMMISSION OR OTHER CHARGES, FOR SPECIFIC SERV ICES PERFORMED OR FOR MANAGEMENT; AND ITA NOS. 5364/D/2010 & 5104/D/2011 40 (C) INTEREST ON MONEYS LENT TO THE PERMANENT ESTABL ISHMENT; EXCEPT WHERE THE ENTERPRISE IS A BANKING INSTITUTION. 30. WITH REFERENCE TO ABOVE, LD. CIT(DR) POINTED OU T THAT THE LAST PART FROM LIKEWISE TO OTHER OFFICES OF ART. 7(3)(B) OF INDO NETHER LAND TREATY IS MISSING IN INDO JAPANESE TREATY. THUS, TAXABILITY IS MISSING BUT THERE IS NO BAR ON TAXABILITY IN TREATY. SO THE ENTIRE INTERES T IS TAXABLE IN THE HANDS OF PE. 31. THE SECOND LIMB OF ARGUMENT OF LD. CIT(DR) WAS THAT IN VIEW OF DECISION OF SUMITOMO CORPORATION, THE INTEREST THAT WAS EARNED BY PE IS TO BE EXCLUDED THEN IT SHOULD BE NET INTEREST AND NOT GROSS INTEREST. IN THIS REGARD LD. CIT(DR) FURTHER REFERRED TO PARA 89 OF T HE SPL. BENCH IN THE CASE OF M/S SUMITOMO MITSUI BANKING CORPORATION AND POIN TED OUT THAT SB SPECIFICALLY CLARIFIED THAT THIS ISSUE WAS NOT BEFO RE SPL. BENCH. HE SUBMITTED THAT INTEREST RECEIVED SHOULD BE NETTED AGAINST PAY MENTS BY APPLYING THE MATCHING PRINCIPLE. NO ISSUE OF NETTING OF INTERES T RECEIVED FROM HEAD OFFICE BY PE AND VICE VERSA WAS BEFORE THE SPL. BENCH. 31.1 HE POINTED OUT THAT SINCE IN VIEW OF SUMITOMO MITSUI BANKING CORPORATION (SB) INTEREST RECEIVED BY PE IS NOT TAX ABLE, THEREFORE, INTEREST RECEIVED SHOULD BE NETTED AGAINST PAYMENTS MADE FOR EARNING INTEREST. IN THIS REGARD LD. CIT(DR) REFERRED TO THE DECISION OF ITAT, MUMBAI BENCH IN THE CASE OF OMAN INTERNATIONAL BANK SAOG (2013)-TII-64- ITAT-MUM.-INTL AND POINTED OUT THAT IT HAS BEEN HELD IN THIS CASE THAT THE INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME, SHALL ALSO BE THE NE T INCOME AFTER CONSIDERING ITA NOS. 5364/D/2010 & 5104/D/2011 41 THE EXPENDITURE DIRECTLY OR INDIRECTLY INCURRED IN RELATION OF EARNING THE SAID INCOME. HE, THEREFORE, SUBMITTED THAT DEDUCTION OF EXPENSES U/S 14A HAS TO BE CONSIDERED. LD. CIT(DR) SUBMITTED THAT HE IS RA ISING THIS ADDITIONAL GROUND RELYING ON THE DECISION IN THE CASE OF OMAN INTERNATIONAL (INFRA). IN THIS REGARD LD. CIT(DR) HAS REFERRED TO FOLLOWING O BSERVATIONS FROM THE DECISION IN THE CASE OF OMAN INTERNATIONAL BANK (SU PRA): 2.2 THE REVENUE HAS ALSO RAISED COMMON ADDITIONAL GROUND IN ALL THE APPEALS VIDE APPLICATION DATED 26.2.2013 AS UNDER: WHETHER PROVISIONS OF SECTION 14A OF THE I.T. ACT WILL BE APPLICABLE IN THE EVENT IT IS HELD THAT THE INTEREST RECEIVED BY THE ASSESSEE FROM ITS HEAD OFFICE IS NOT TAXABLE IN THE HANDS OF INDIAN BRANCH OFFICE? 4.1 THE REVENUE HAS RAISED ON ADDITIONAL GROUND REGARDING THE DISALLOWANCE U/S 14A WITH RESPECT TO THE INTEREST RECEIVED BY THE ASSESSEE FROM THE HO WHICH HAS BEEN HELD BY THE SPECIAL BENCH AS NOT TAXABLE IN THE HAND OF THE INDIAN BRANCH OF ASSESSE E. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. HAVING HE LD THAT THE INTEREST INCOME RECEIVED FROM THE HO IS NO T TAXABLE IN VIEW OF PRINCIPLE OF MUTUALITY, THE QUES TION ARISES WHETHER SUCH INCOME WHICH HAS TO BE EXCLUDED FROM THE TOTAL INCOME, SHALL BE THE GROSS RECEIPTS OR NET INCOME AFTER DEDUCTION OF THE EXPENDITURE INCUR RED IN RELATION TO EARNING OF SUCH INCOME. THE ASPECT OF ITA NOS. 5364/D/2010 & 5104/D/2011 42 TOTAL INCOME UNDER THE SCHEME OF INCOME TAX IS UNDERSTOOD AS THE EARNING OF THE ASSESSEE FROM ALL THE SOURCES AS CLASSIFIED UNDER DIFFERENT HEADS OF INCO ME REDUCED BY THE EXPENDITURE DIRECTLY AND INDIRECTLY INCURRED IN RELATION TO THE EARNING OF THE INCOME A ND FURTHER DEDUCTING ALL THE ALLOWABLE CLAIMS AND THE EXEMPTION/DEDUCTION WHILE COMPUTING THE TOTAL INCOME. THUS, THE TOTAL INCOME CHARGEABLE TO TAX MEANS THE NET INCOME COMPUTED FROM THE GROSS RECEIPTS AFTER THE DEDUCTION OF THE ALLOWABLE EXPENDITURE AND OTHER DEDUCTIONS. AS PER THE SCHEM E OF THE INCOME TAX, THE INCOME WHICH IS CHARGEABLE T O TAX IS COMPUTED AFTER THE DEDUCTION OF THE EXPENDIT URE WHICH HAS BEEN INCURRED FOR EARNING SUCH TAXABLE INCOME. THEREFORE, THE EXPENDITURE INCURRED FOR OT HER THAN THE INCOME CHARGEABLE TO TAX, IS NOT PERMITTED TO BE REDUCED FROM THE INCOME FOR COMPUTATION OF THE TOTAL INCOME. THIS ASPECT OF ALLOWING THE EXPENDIT URE INCURRED IN RELATION OF THE TAXABLE INCOME IS EMBEDDED IN THE PROVISIONS OF SEC. 14A TO ENSURE TH AT THE EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH IS NOT CHARGEABLE TO TAX SHALL NOT BE ALLOWED AS DEDUCTION AGAINST THE INCOME WHICH IS CHARGEABLE TO TAX. IN OTHER WORDS, THE INCOME, WHICH IS CHARGEAB LE TO TAX IS TAKEN AS NET INCOME AFTER DEDUCTION OF TH E ALLOWABLE EXPENDITURE AND SIMILARLY THE INCOME WHIC H IS NOT CHARGEABLE TO TAX IS ALSO TAKEN NET AND THE EXPENDITURE INCURRED IN RELATION TO SUCH INCOME IS REDUCED FROM IT. THUS, THE INCOME, WHICH DOES NOT ITA NOS. 5364/D/2010 & 5104/D/2011 43 FORM PART OF THE TOTAL INCOME, SHALL ALSO BE THE NE T INCOME AFTER CONSIDERING THE EXPENDITURE DIRECTLY O R INDIRECTLY INCURRED IN RELATION TO EARNING THE SAID INCOME. (EMPHASIS SUPPLIED BY US) 5.1 THE TERM INCOME ITSELF UNDER THE PROVISIONS OF THE I.T. ACT DENOTES THE NET INCOME AND NOT GROS S RECEIPT. THEREFORE, WHETHER IT IS THE INCOME CHARGEABLE TO TAX OR AN EXEMPT INCOME, THE EXPRESSI ON OF INCOME REMAINS THE SAME AS NET AFTER DEDUCTION O F THE ALLOWABLE EXPENDITURE AND CLAIMS. 8.2 IN THE CASE OF M/S SOCIETE GENERALE, THE TRIBUNAL HAS UPHELD THE APPLICABILITY OF SECTION 14 A IN RESPECT OF THE INTEREST WHICH WAS HELD TO BE EXE MPT ON PRINCIPLE OF MUTUALITY. THE TRIBUNAL HAS GIVEN THE FINDING IN PARA 44 OF THE ORDER AS UNDER: 44. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE HAVE HELD ABOVE THAT THE AMOUNT OF INTEREST AT 3.97 CRORE RECEIVED BY THE ASSESSEE ON FUNDS PLACED WITH HEAD OFFICE/ OVERSEAS BRANCHES IS EXEMPT FROM TAX ON THE PRINCIPLE OF MUTUALITY. SIMILAR VIEW HAS BEEN CONSISTENTLY TAKEN FOR THE EARLIER YEARS AS WELL. ONCE INTEREST INCOME IS EXEMPT FROM TAX, IT IS BUT NATURAL THAT THE EXPENSES INCURRED IN RELATION TO SUCH EXEMPT INCOME CANNOT BE ALLOWED AS DEDUCTION U/S 14A. SUB-SECTION (1) OF SECTION 14A UNAMBIGUOUSLY PROVIDES THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN ITA NOS. 5364/D/2010 & 5104/D/2011 44 RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. WHEN WE HOLD THAT THE INTEREST EARNED BY THE ASSESSEE FROM PLACEMENT OF FUNDS WITH ITS HEAD OFFICE/OTHER OVERSEAS BRANCHES IS EXEMPT FROM TAXATION, THE NATURAL AND LOGICAL CONCLUSION WHICH THEREFORE HAS TO FOLLOW IS THAT NO DEDUCTION SHOULD BE ALLOWED TOWARDS EXPENSES INCURRED IN RELATION TO SUCH EXEMPT INCOME. WE, THEREFORE, HOLD IN PRINCIPLE THAT THE PROVISIONS OF SECTION 14A ARE ATTRACTED ON THE INTEREST EARNED BY THE ASSESSEE FROM PLACEMENT OF FUNDS WITH ITS HEAD OFFICE/OVERSEAS BRANDIES WHICH HAS BEEN CLAIMED AND ALLOWED AS EXEMPT ON THE PRINCIPLE OF MUTUALITY. THE LD. AR UNSUCCESSFULLY TRIED TO ARGUE THAT THE FUNDS FOR SUCH PLACEMENT WITH HEAD OFFICE/OVERSEAS BRANCHES WERE MADE AVAILABLE FROM THE ASSESSEES OWN KITTY OF INTEREST FREE AVAILABLE FUNDS. THIS ARGUMENT RUNS CONTRARY TO THE SPECIFIC SUBMISSION MADE BY THE ASSESSEE BEFORE THE AO, WHICH HAS BEEN REPRODUCED ABOVE, BY WHICH THE ASSESSEE SUBMITTED THAT ITS PLACEMENT WITH THE HEAD OFFICE OVERSEAS BRANCHES ARE FUNDED BY WAY OF DEPOSITS IN THE FOREIGN CURRENCY MAINTAINED IN INDIA SUCH AS EEFC AND FCNR DEPOSITS. ONCE THE ASSESSEE IS SPECIFICALLY ADMITTING THE PLACEMENT OF FUNDS WITH HEAD OFFICE/OVERSEAS BRANCHES OUT OF INTEREST BEARING DEPOSITS, IT ITA NOS. 5364/D/2010 & 5104/D/2011 45 CANNOT BE ARGUED THAT THE SOURCE OF SUCH FUNDS WAS DIFFERENT. WE, THEREFORE, HOLD THAT THE SOURCE OF THE FUNDS PLACED BY THE ASSESSEE WITH ITS HEAD OFFICE/OVERSEAS BRANCHES IS THE DEPOSITS RECEIVED BY IT. SINCE INTEREST INCOME FROM PLACEMENT OF SUCH FUNDS IS EXEMPT FROM TAXATION, ANY INTEREST PAID BY THE ASSESSEE ON SUCH DEPOSITS AND OTHER EXPENSES CANNOT BE ALLOWED AS DEDUCTION U/S 14A. WE WANT TO MAKE IT CLEAR THAT THIS CONCLUSION IS BASED ON THE APPRECIATION OF THE PROVISIONS UNDER THE ACT. THE QUESTION OF ALLOWABILITY OR OTHERWISE OF SUCH EXPENSES UNDER THE GOVERNING TREATY WAS NOT ARGUED BY THE LD. AR AND HENCE THE SAME HAS NOT BEEN CONSIDERED. THUS, IT IS HELD IN PRINCIPLE THAT THE PROVISIONS O F SEC. 14A ARE APPLICABLE ON THE EXEMPT INTEREST INCOME EARNED FROM THE HEAD OFFICE/OVERSEAS BRANCHES. 9.2 IN THE CASE IN HAND, THE ADDITIONAL GROUND IS IN RELATION TO DISALLOWANCE U/S 14A IN RESPECT OF INTEREST INCOME HELD TO BE EXEMPT ON THE PRINCIPLE OF MUTUALITY. THEREFORE, THIS ADDITIONAL PLEA IS NOT A NEW SUBJECT MATTER BUT ONLY AN ADDITIONAL ASPECT OF THE SAME SUBJECT MATTER OF TAXABILITY OF INTEREST INCOME. EVEN OTHERWISE, THE ISSUE OF DISALLOWANCE U/S 14A IS CONSEQUENTIAL TO THE ISSUE OF TAXABILITY OF INTERES T RECEIVED FROM THE HO. ONCE THE INTEREST INCOME IS HELD TO BE EXEMPT FROM TAX ON THE PRINCIPLE OF ITA NOS. 5364/D/2010 & 5104/D/2011 46 MUTUALITY, THE ISSUE OF DISALLOWANCE U/S 14A CROPS-UP FROM THE VERY ISSUE OF TAXABILITY; THEREFORE, THERE IS A DIRECT NEXUS BETWEEN THE ISSUE OF TAXABILITY AND DISALLOWANCE U/S 14A. IF AN INCOME IS TAXABLE, THERE IS NO QUESTION OF DISALLOWANCE U/S 14A. ON THE CONTRARY, IF THE INCOME IS HELD TO BE EXEMPT, THEN THE QUESTION OF DISALLOWANCE U/S 14A ARISES FROM THE VERY SUBJECT MATTER OF INTEREST INCOME TREATED AS EXEMPT. THEREFORE, WE FIND THAT THE ASPECT OF DISALLOWANCE U/S 14A IS PORT AND PARCEL OF THE SUBJECT MATTER BEFORE THIS TRIBUNAL REGARDING THE TAXABILITY OF THE INTEREST INCOME RECEIVED FROM THE HO/OVERSEAS BRANCH AND CANNOT BE SAID THAT THIS IS AN ENTIRELY A NEW ISSUE/SUBJECT MATTER OR NEW SOURCE OF INCOME. 9.5 EVEN OTHERWISE, THE ISSUE OF TAXABILITY OF THE INTEREST RECEIVED FROM THE HO ITSELF INCLUDES THE ISSUE OF NET OR GROSS. THEREFORE, THE EXEMPT INCOME WHICH HAS TO BE EXCLUDED FROM THE TOTAL INCOME OF THE ASSESSEE SHALL BE THE NET INCOME AND VERY MUCH IN SEPARABLE PART OF THE MAIN SUBJECT MATTER OF TAXABILITY OF INTEREST INCOME. 10. AS REGARDS THE OBJECTION OF THE LD. AR THAT THE DEPARTMENTAL REPRESENTATIVE CANNOT GO BEYOND THE ASSESSMENT ORDER, WE ARE OF THE VIEW THAT THE ADDITIONAL GROUND RAISED BY THE REVENUE IS NOT BRINGING ALTOGETHER A DIFFERENT CASE THEREBY UNDOING WHAT HAS BEEN DONE BY THE AO AND ITA NOS. 5364/D/2010 & 5104/D/2011 47 ACCORDINGLY, IT WOULD NOT GO BEYOND THE ASSESSMENT ORDER BY RAISING A NEW ISSUE OR SUBJECT MATTER. BUT THE ISSUE IN THE ADDITIONAL GROUND IS ARISING AS A RESULT OF FINDING ON THE SUBJECT MATTER OF TAXABILITY OF INTEREST INCOME RECEIVED FROM HO. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF PRAKASH L. SHAH (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE CASE IN HAND. THEREFORE, WE DO NOT AGREE WITH THE CONTENTION OF THE LD. AR ON THIS POINT. 14. AS WE HAVE DISCUSSED ABOVE, THE ISSUE OF APPLICABILITY OF SECTION 14A HAS BEEN COVERED BY THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF M/S SOCIETE GENERALE (SUPRA). ACCORDINGLY BY FOLLOWING THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL, WE HOLD THAT THE PROVISIONS OF SEC. 14A ARE APPLICABLE ON THE EXEMPT INTEREST INCOME EARNED FROM THE HO/OVERSEAS BRANCHES. 32. LD. CIT (DR) SUBMITTED THAT IN VIEW OF ABOVE DE CISION THE DISALLOWANCE U/S 14A HAS TO BE MADE IF THE INTEREST EARNED BY TH E PE IS HELD TO BE NON- TAXABLE. HE, THEREFORE, SUBMITTED THAT MATTER MAY BE RESTORED BACK TO AO TO ASCERTAIN THE EXPENSES INCURRED FOR EARNING INTERES T INCOME. 33. LD. COUNSEL FOR THE ASSESSEE IN THE REJOINDER S UBMITTED THAT ALL THE ISSUES RAISED BY LD. CIT(DR) HAVE DULY BEEN CONSIDE RED IN THE CASE OF SUMITOMO MITSUI BANKING CORPORATION (SUPRA). LD. C OUNSEL SUBMITTED THAT THE COMPUTATION HAS BEEN MADE UNDER TREATY AND NOT UNDER DOMESTIC LAW. ITA NOS. 5364/D/2010 & 5104/D/2011 48 IN THIS REGARD REFERRED TO PAGE 333 OF PAPER BOOK, WHEREIN THE COMPUTATION OF TAXABLE INCOME UNDER NORMAL PROVISIONS OF INCOME TAX ACT IS CONTAINED AND REFERRED TO FOLLOWING NOTES TO THE COMPUTATION OF TAXABLE INCOME CONTAINED AT PAGES 341 AND 342 OF PAPER BOOK: 7. THE JAPANESE EXPATRIATES WHO ARE STATIONED IN INDIA AND ARE RENDERING SERVICES TO THE INDIAN BRAN CHES OF THE ASSESSEE, ARE BEING PAID PORTION OF THEIR SA LARIES BY THE HEAD OFFICE OF THE ASSESSEE OUTSIDE INDIA. THE HEAD OFFICE ALSO PAYS FOR THE TAXES ON SUCH PORTION OF THE SALARIES OF THE EXPATRIATES. THE SAID PORTION OF T HE SALARY AND TAXES THEREON AMOUNTING TO RS. 99,236,315/- HAS BEEN ACCOUNTED FOR IN THE BOOKS OF THE HEAD OFFICE AND ACCORDINGLY, THE SAME HAS NOT BEEN DEBITED IN THE B OOKS OF THE INDIAN BRANCHES OF THE ASSESSEE. THE EXPENS E DIRECTLY RELATES TO THE EXPATRIATE EMPLOYEES WHO AR E LOOKING AFTER THE BUSINESS OPERATIONS OF ASSESSEES BRANCHES IN INDIA AND IS THUS AN ALLOWABLE DEDUCTIO N FOR COMPUTING PROFIT ATTRIBUTABLE TO INDIAN BRANCHES (I .E. PE IN INDIA) IN ACCORDANCE WITH THE ARTICLE 7 OF THE CONVENTION BETWEEN THE GOVERNMENT OF JAPAN AND INDI A FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVEN TION OF FISCAL EVASION WITH RESPECT TO TAXES INCOME (DT AA) . ACCORDINGLY, DEDUCTION OF RS. 99,236,315/- ON ACCOU NT OF SALARIES OF THE JAPANESE EXPATRIATES (INCLUDING TAX ES THEREON), HAS BEEN CLAIMED FOR COMPUTING INCOME OF THE ASSESSEE TAXABLE IN INDIA. 9. DURING THE YEAR, THE INDIAN BRANCHES OF THE ASSESSEE HAVE RECEIVED A SUM OF RS. 27,659,232 AS ITA NOS. 5364/D/2010 & 5104/D/2011 49 INTEREST ON ACCOUNTS MAINTAINED WITH ITS HEAD OFFICE/OVERSEAS BRANCHES. THE ASSESSEE CLAIMS THAT SUCH INTEREST BEING RECEIPT FROM SELF AND NOT BEING SPEC IFICALLY TAXABLE UNDER ARTICLE 7 OF THE DTAA IS NOT LIABLE T O BE TAXED IN INDIA . 10. DURING THE YEAR, THE INDIAN BRANCHES OF THE ASSESSEE HAVE PAID INTEREST AMOUNTING TO RS. 133,49 7,526 TO ITS HEAD OFFICE/OVERSEAS BRANCHES ON BORROWINGS. THE SAID INTEREST IS AN ALLOWABLE DEDUCTION WHILE COMPUTING THE PROFITS ATTRIBUTABLE TO THE INDIAN OPERATIONS OF THE ASSESSEE UNDER ARTICLE 7(1) READ WITH ARTICLE 7(3) OF THE DTAA AND PARAGRAPH 8 TO THE NOT ES APPENDED TO DTAA . THE ASSESSEE IS NOT LIABLE TO DEDUCT TAX ON SUCH PAYMENTS AS HAS BEEN HELD BY THE HONBL E SPECIAL BENCH OF KOLKATA TRIBUNAL WHILE DEALING WIT H THE CASE OF ABN AMRO BANK NV AND IN THE CASE OF THE ASSESSEE (THEN KNOWN AS BANK OF TOKYO MITSUBISHI LT D.), REPORTED IN 280 ITR 117. 34. WITH REFERENCE TO THESE NOTES, LD. COUNSEL SUBM ITTED THAT IT IS WRONG TO PLEAD THAT COMPUTATION HAD BEEN MADE UNDER THE DOME STIC LAW. 35. LD. COUNSEL FURTHER REFERRED TO THE DECISION IN THE CASE OF IBM WORLD TRADE CORPORATION VS. DCIT (INTERNATIONAL TAXATION) (2012) 54-SOT-39 (BANG.) AND POINTED OUT THAT TRIBUNAL HAS CONSIDERE D THE ISSUE OF TAXATION SIMULTANEOUSLY BOTH UNDER DOMESTIC LAW AS WELL AS T REATY AND HAS UPHELD THE SAME, INTER-ALIA, OBSERVING AS UNDER: IN THE INSTANT CASE ON HAND, THE ASSESSEE HAS NOT INVOKED OR APPLIED THE PROVISIONS OF THE TREATY ITA NOS. 5364/D/2010 & 5104/D/2011 50 SELECTIVELY. THE ASSESSEE HAS COMPUTED THE TAX ON R OYALTY INCOME ARISING FROM TWO DIFFERENT CONTRACTS FALLING UNDER TWO DIFFERENT LIMBS OF SECTION 115A( 1) (B) AT TWO RATES: (I) AT THE RATE PRESCRIBED UNDER THE TREATY AND (I I) AT THE RATE PRESCRIBED UNDER THE 1.1. ACT. THE ASSESSEE HA S INVOKED THE BENEFIT OF THE TREATY ONLY IN RESPECT O F ROYALTY INCOME ARISING FROM THE AGREEMENTS ENTERED INTO ON OR BEFORE 1.6.2005. IN RESPECT OF AGREEMENTS ENT ERED INTO ON OR AFTER 1.6.2005, THE ASSESSEE HAS OFFERED ROYALTY INCOME @ 10% AS PER THE PROVISION OF SECTION 115JA. THE CONCERNED CONTRACTS ARE DIFFERENT: THE SOURCE O F INCOME IS DIFFERENT AND THE PROVISIONS UNDER WHICH )1 ROYALTY INCOME IS TAXABLE IS DIFFERENT AND THE ASSE SSEE WAS THEREFORE JUSTIFIED IN OFFERING THE ROYALTY INC OME ARISING UNDER TWO DIFFERENT CONTRACTS AT TWO RATES- ONE UNDER THE LT. ACT AND ONE UNDER THE TREATY. IN THE INSTANT CASE, IT IS NOT ONE OF SELECTIVE TRETQ!Y BENEFIT AS THE CASE BEFORE THE MUMBAI TRIBUNAL IN THE ABOVE REFERRED CA SE. THE ABOVE DECISION IS THEREFORE, DISTINGUISHABLE FR OM THE INSTANT CASE OF THE ASSESSEE. 36. WITH REFERENCE TO ABOVE DECISION, LD. COUNSEL S UBMITTED THAT IT WAS HELD THAT ASSESSEE WAS JUSTIFIED IN COMPUTING THE T AX AT A RATE BENEFICIAL TO IT WHICH IS IN ACCORDANCE WITH THE PROVISIONS OF SECTI ON 90(2) OF THE ACT. LD. COUNSEL FURTHER REFERRED TO THE DECISION IN THE CAS E OF ASSTT. DIRECTOR OF INCOME TAX VS. M/S CREDIT AGRICOLE INDOSUEZ RAMON H OUSE ITA NO. 6615/MUM./2012, WHEREIN TRIBUNAL IN PARA 21 TO 24 H AS OBSERVED AS UNDER: ITA NOS. 5364/D/2010 & 5104/D/2011 51 21. GROUND NO.6 IS AGAINST THE DIRECTION OF THE LEARNED CIT(A) THAT INTEREST AND COMMISSION RECEIVE D FROM HO/BRANCHES SHOULD BE CHARGED TO TAX. BRIEFLY STATED THE FACTS OF THIS GROUND ARE THAT THE ASSESS EE RECEIVED CERTAIN AMOUNT OF INTEREST AND COMMISSION FROM ITS HO AND OTHER OVERSEAS BRANCHES AND AT THE SAME TIME ALSO PAID INTEREST AND COMMISSION TO OTHE R OVERSEAS BRANCHES AND HO. THE ASSESSEE, IN ITS COMPUTATION OF TOTAL INCOME, REDUCED THE INTEREST/COMMISSION RECEIVED AT RS. 33.39 LAKH AND ADDED BACK THE INTEREST/COMMISSION PAID AT RS. 20.9 6 LAKH. THE ASSESSING OFFICER HELD THAT THE INTEREST / COMMISSION EARNED BY THE ASSESSEE FROM ITS HO / OVERSEAS BRANCHES SHOULD BE CHARGED TO TAX. THE LEARNED CIT(A) UPHELD IN PRINCIPLE THE ASSESSMENT ORDER ON THIS ISSUE. HE, HOWEVER DIRECTED THE AO TO RECTIFY CERTAIN INADVERTENT MISTAKES COMMITTED BY T HE LATER IN THIS REGARD. THE ASSESSEE IS IN APPEAL AGA INST THE DIRECTION THAT THE INTEREST / COMMISSION EARNED BY THE ASSESSEE FROM ITS HO / OVERSEAS BRANCHES SHOULD BE CHARGED TO TAX. 22. THE LEARNED DEPARTMENTAL REPRESENTATIVE VEHEMENTLY RELIED ON THE ORDER PASSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DRESDNER BANK AG V. ADDL.CIT [(2007) 108 ITD 375 (MUM.)} TO CONTEND THAT SUCH INTEREST / COMMISSION INCOME WAS LIABLE TO TAX. THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO SUPPORTED HIS CONTENTION BY RELYING ON THE ORDER PASSED BY THE TRIBUNAL IN ITA NOS. 5364/D/2010 & 5104/D/2011 52 ASSESSEE'S OWN CASE FOR ASSESSMENT YEARS 1983-84 TO 1985-86, A COPY OF SUCH ORDER DATED 9TH MARCH, 1998 IN ITA NOS.2089 TO 2091/BOM/91 WAS PLACED ON RECORD. IN THE OPPOSITION THE LEARNED AR RELIED ON THE FIVE MEMBERS SPECIAL BENCH ORDER IN THE CASE OF SUMITOMO MITSUI BANKING CORPN. V DDIT [(2012) 19 TAXMANN. COM 364 (MUM.) (SB)} TO CONTEND THAT SUCH INTEREST / COMMISSION RECEIVED FROM HO CANNOT BE CHARGED TO TAX. HE ALSO RELIED ON A SUBSEQUENT ORDE R PASSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF OMAN INTERNATIONAL BANK S.A. O. G. V. ACIT IN THIS ORDER DATED 29TH JUNE, 2012, THE TRIBUNAL, AFTER CONSIDERING THE FIVE MEMBER SPECIAL BENCH ORDER IN THE CASE OF SUMITOMO MITSUI BANKING CORPN. (SUPRA), HAS HELD THAT THE INTEREST RECEIVED FROM H O / OVERSEAS BRANCHES CANNOT BE CHARGED TO TAX. 23. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS APPARENT FRO M PARA NOS.55 AND 56 OF THE SPECIAL BENCH ORDER THAT UNDER THE PROVISIONS OF THE INCOME-TAX ACT, 1961 TH E TAXABLE ENTITY IS ONLY ONE I.E. OVERSEAS GE AND THE PE IN INDIA IS A PART OF THAT ENTITY. IT IS THE OVERSE AS GE WHICH HAS BEEN HELD TO BE CHARGEABLE TO TAX IN RESP ECT OF INCOME ATTRIBUTABLE TO THE PE IN INDIA. ONCE MUTUALITY IS FOUND BETWEEN OVERSEAS HO AND BRANCH IN INDIA, THERE CAN BE NO INTEREST INCOME BY THE IN DIAN BRANCH FROM ITS OVERSEAS HO OR BRANCHES UNDER THE PROVISIONS OF THE ACT. IT IS RELEVANT TO MENTION TH AT THE SPECIAL BENCH OF THE TRIBUNAL, WHILE LAYING DOWN TH IS ITA NOS. 5364/D/2010 & 5104/D/2011 53 PROPOSITION, HAS DULY CONSIDERED THE CASE OF DRESDN ER BANK A G IN ITS ORDER. THE LATER ORDER PASSED BY TH E MUMBAI BENCH OF THE TRIBUNAL IN OMAN INTERNATIONAL BANK S.A. O. G.- (SUPRA) HAS ALSO TAKEN SIMILAR VIE W. IN VIEW OF THE FACT THAT THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SUMITOMO MITSUI BANKING CORPN. HAS HELD THAT NO INTEREST / COMMISSION RECEIVED BY THE INDIAN PE FROM THE HO CAN BE CHARGED TO TAX, THERE CAN BE NO QUESTION OF FOLLOWI NG ANY CONTRARY VIEW EXPRESSED BY THE DIVISION BENCH O F THE TRIBUNAL PRIOR TO THE PASSING OF THE ORDER BY T HE SPECIAL BENCH. 24. HERE WE WILL LIKE TO RECORD THAT THE LEARNED AR HAS VERY FAIRLY ADMITTED THAT THE INTEREST PAID BY THE INDIAN PE TO ITS OVERSEAS HO / BRANCHES SHOULD ALSO NOT BE ALLOWED AS DEDUCTION SO AS TO BRING SYMMETRY BETWEEN INTEREST INCOME AND INTEREST INCURRED FROM OR TO HO. THE IMPUGNED ORDER IS, THEREFORE, SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF A.O. TO E XCLUDE THE AMOUNT OF INTEREST I COMMISSION RECEIVED BY THE INDIAN PE FROM ITS OVERSEAS HO I BRANCHES AND ALSO NOT TO GRANT DEDUCTION IN RESPECT OF INTEREST INCUR RED TOWARDS OVERSEAS HO/BRANCHES.' 36.1 HE, THEREFORE, SUBMITTED THAT ALL THE THREE GR OUNDS HAVE TO BE DECIDED AS PER THE DECISION OF SPECIAL BENCH IN THE CASE OF SUOMOTO MITSUBISHI BANKING CORPORATION (SUPRA). LD. COUNSEL FURTHER R EFERRED TO THE DECISION OF DELHI BENCHES IN THE CASE OF FORAMER S.A. VS. DCIT, 52 ITD 115, WHEREIN IT HAS BEEN OBSERVED AS UNDER: ITA NOS. 5364/D/2010 & 5104/D/2011 54 IT IS CLEAR FROM THE AFORESAID SUB-SECTION THAT A FOREIGN NATIONAL GOVERNED BY AVOIDANCE OF DOUBLE TAXATION TREATY IS ENTITLED TO ASK FOR APPLICATION OF PROVISION OF THIS ACT, TO THE EXTENT THEY ARE MORE BENEFICIAL TO THAT ASSESSEE. THE SUB-SECTION IS APPLICABLE ONLY TO THE CASES GOVERNED BY AVOIDANCE OF DOUBLE TAXATION TREATY. THERE IS THUS NO JUSTIFICA TION FOR HOLDING THAT FOREIGN NATIONALS HAVING SELECTED TO B E GOVERNED BY DOUBLE TAXATION TREATY CANNOT ASK FOR APPLICATION OF ANY PROVISION OF THE IT ACT EVEN WHE N SUCH PROVISION IS BENEFICIAL TO THEM. THE CHOICE O F SELECTION IS CLEARLY WITH THE FOREIGN NATIONALS AND NOT WITH REVENUE AUTHORITIES. THE INTENTION OF THE LEGISLATURE AND SPIRIT TO GRANT BENEFIT AND CHOICE TO THE FOREIGN NATIONAL IS MANIFESTLY CLEAR. IN VIEW OF A BOVE PROVISION AND OTHER REASONS RECORDED EARLIER, WE DI RECT THE AO TO ALLOW DEPRECIATION TO THE ASSESSEE AS PER PROVISIONS OF THE IT ACT. 37. WITH REFERENCE TO AFOREMENTIONED DECISIONS LD. COUNSEL SUBMITTED THAT THE ASSESSEE COMPANY WAS BEING TAXED AS PER THE PRO VISIONS OF TREATY AND, THEREFORE, THE PROVISIONS OF THE ACT WERE TO APPLY TO THE EXTENT THAT THEY WERE MORE BENEFICIAL TO THE ASSESSEE. 38. AS REGARDS THE PLEA OF LD. CIT(DR) REGARDING NE TTING OFF OF INTEREST INCOME, LD. SR. COUNSEL POINTED OUT THAT IF NO INCO ME ARISES, THERE IS NO QUESTION OF SECTION 14A. LD. SR. COUNSEL REFERRED TO PAGE 44 OF SUMITOMO CORPORATION DECISION AND SUBMITTED THAT IN PARA 59 IT IS SPECIFICALLY NOTED THAT NO INCOME ARISES WHICH IS CHARGEABLE TO TAX. LD. S R. COUNSEL SUBMITTED THAT ITA NOS. 5364/D/2010 & 5104/D/2011 55 A CASE OF NO INCOME BEING ARISEN IS TO BE DISTINGUI SHED FROM EXEMPTED INCOME. HE RELIED ON THE DECISION IN THE CASE OF C OMMISSIONER OF INCOME- TAX VS CALCUTTA DISCOUNT CO. PVT. LTD., 116 ITR 425 (KOL.)(430). LD. SR. COUNSEL FURTHER SUBMITTED THAT THERE IS NO LETTING BY ASSESSEE AND, THEREFORE, THERE IS NO DIRECT NEXUS ENTITLING NETTING OF INTER EST. LD. SR. COUNSEL FURTHER SUBMITTED THAT AO HAD NOT MADE ANY DISALLOWANCE U/S 14A AND MADE THE ADDITION OF GROSS AMOUNT. LD. SR. COUNSEL RELIED O N FOLLOWING DECISIONS: 198 ITR 375 IN THE CASE OF CIT VS DERCO COOLING COILS LTD [1992] 248 ITR 449 IN THE CASE OF COMMISSIONER OF INCOME-TAX. VS. DR. V.P. GOPINATHAN. S.P. BHARUCHA (SC) [2001] 38.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND H AVE PERUSED THE RECORD OF THE CASE. 39. THE DECISION OF SPL. BENCH IN THE CASE OF SUMOT OMO MITSUBISHI BANKING CORPORATION (SUPRA) WHICH IS A FIVE MEMBER BENCH DECISION HAS ELABORATELY CONSIDERED THE ISSUE REGARDING DEDUCTIO N OF INTEREST PAID BY PE TO HEAD OFFICE AND THE INTEREST INCOME PAYABLE BY T HE INDIAN PE OF A FOREIGN BANK TO ITS HO AND BRANCH OFFICES ABROAD FOR THE PU RPOSE OF COMPUTING THE INCOME OF HO LIABLE TO BE TAXED IN INDIA. THE ISSU E OF INTEREST RECEIVED FROM HO BY PE WAS NOT BEFORE SPECIAL BENCH. IT HAS BEEN HELD THAT IN VIEW OF THE PROVISIONS CONTAINED IN ARTICLE 7(2) AND 7(3) OF DT A BETWEEN INDIA AND JAPAN, THE INTEREST PAID BY PE TO HEAD OFFICE IS TO BE ALLOWED AS THE PE IS TO BE TREATED AS A DISTINCT AND SEPARATE ENTERPRISE. HOWEVER, AS FAR AS INTEREST ITA NOS. 5364/D/2010 & 5104/D/2011 56 RECEIVED BY HEAD OFFICE IS CONCERNED, IT HAS BEEN H ELD THAT THE SAME CANNOT BE TAXED IN THE HANDS OF NON RESIDENT BANKING COMPA NY ON THE GROUND OF MUTUALITY. THE DEPARTMENTS VIEW POINT IS THAT ASS ESSEE CAN EITHER BE ASSESSED UNDER THE DOMESTIC LAW OR UNDER THE TREATY . THE DEPARTMENTS STAND IS THAT THE ASSESSEE HAS TO COMPUTE ITS TAX L IABILITY SEPARATELY UNDER BOTH THE PROVISIONS AND WHICHEVER COURSE IS BENEFIC IAL TO IT, THE SAME CAN BE ADOPTED BY ASSESSEE. IN SUPPORT OF ITS CONTENTION LD. CIT(DR) HAS, INTER-ALIA, RELIED ON THE DECISION OF SPECIAL BENCH IN THE CASE OF CLOGUE ENGINEERING LTD. (SUPRA). THE CONTENTION OF LD. CIT(DR) IS THA T THIS SPL. BENCH HAS NOT BEEN CONSIDERED BY THE 5 MEMBER BENCH IN THE CASE O F SUMOTO MITSUBISHI BANKING CORPORATION (SUPRA). THEREFORE, THE FIRST ISSUE TO BE DECIDED IS WHETHER THE DECISION IN THE CASE OF SUMITOMO MITSUI BANKING CORPORATION (SUPRA) HOLDS THE FIELD ON THIS ISSUE IN THE BACKDR OP OF DECISION IN THE CASE OF CLOGUE ENGINEERING LTD. OR NOT. WE FIND THAT IN CL OGUE ENGINEERING LTD. TRIBUNAL HAS OBSERVED THAT PROPER APPRECIATION OF T HE WORDS MORE BENEFICIAL AS FOUND U/S 90(2) NEEDS TO BE APPRECIA TED FOR PROPER ADJUDICATION OF THE DISPUTE BEFORE IT. THE TRIBUNA L FURTHER OBSERVED, AS NOTED EARLIER IN THE ARGUMENTS ADVANCED BY LD. DR, THAT T HIS POINT HAD NOT BEEN ELABORATED UPON BY ANY OF THE CONTENDING PARTIES, B UT TRIBUNAL CAME TO THE CONCLUSION THAT APPLICATION OF THIS PROVISION CAN B E MADE AFTER ASCERTAINING THE TAX PAYABLE BY THE ASSESSEE UNDER THE DOUBLE TA XATION AVOIDANCE AGREEMENT AND THEN TAX PAYABLE BY THE ASSESSEE UNDE R THE ACT. THUS, IT IS ITA NOS. 5364/D/2010 & 5104/D/2011 57 EVIDENT THAT THIS ISSUE PER SE WAS NOT BEFORE THE SPL. BENCH AND, THEREFORE, THESE OBSERVATIONS ARE ONLY IN THE NATURE OF OBITER DICTA AND NOT RATIO DECENDI. BE THAT AS IT MAY, TRIBUNAL HAS PRIMARILY TAKEN THE SAME VIEW AS WAS TAKEN BY TRIBUNAL IN THE CASE OF DRESDNER BANK AG, WHEREIN ALSO TRIBUNAL HAD TAKEN A SIMILAR VIEW AS IS EVIDENT FRO M PARA 24 TO 27 OF ITS ORDER, WHICH IS REPRODUCED HEREUNDER: 24. IT IS IMPORTANT TO BEAR IN MIND THAT, IN TERM S OF THE PROVISIONS OF THE INDIAN INCOME TAX ACT WHILE T HE TAXABLE SUBJECT IS THE FOREIGN GE, IT IS TAXABLE ON LY IN RESPECT OF THE INCOME INCLUDING BUSINESS, PROFITS, WHICH ACCRUES OR ARISES TO THAT FOREIGN GE IN INDIA . THE INDIAN INCOME TAX ACT DOES NOT PROVIDE FOR ANY SPECIAL MECHANISM FOR TAXATION OF PE OF A FOREIGN ENTERPRISE, EXCEPT TAXATION ON PRESUMPTIVE BASIS FO R CERTAIN TYPES OF INCOMES SUCH AS UNDER SECTION 44BB , 44 BBA, 44 BBB, 44D ETC. ITS IRONICAL THAT WHILE T HE INDIAN INCOME TAX ACT DEALS WITH THE SCOPE OF INCOM E DEEMED TO ACCRUE OR ARISE IN INDIA AT GREAT LENGT H AND VISUALIZING POSSIBLY ALL SORT OF DEEMING FICTIO NS, THERE IS NOT MUCH ELABORATION ABOUT THE SCOPE OF INCOME WHICH 'ACCRUES OR ARISES' IN INDIA IN THE HANDS OF A TAX ENTITY WHICH HAS FISCAL DOMICILE ABROAD. SINCE THERE ARE NO SPECIFIC LEGISLATIVE PROVISIONS TO KEEP PACE WITH THIS ASPECT OF INCREAS ED CROSS BORDER COMMERCE, BY PROVIDING FOR MECHANISM TO COMPUTE PROFITS ACCRUING OR ARISING IN INDIA IN THE HANDS OF THE FOREIGN ENTITLES, THE PROFITS ATTRIBUT ABLE TO ITA NOS. 5364/D/2010 & 5104/D/2011 58 INDIAN PE OF FOREIGN ENTERPRISE ARE REQUIRED TO BE COMPUTED IN TERM; OF GENERAL PROVISIONS OF THE INCO ME TAX ACT, AND THE NORMAL ACCOUNTING PRINCIPLES. THEREFORE; ASCERTAINMENT OF A FOREIGN GE'S TAXABLE BUSINESS PROFITS IN INDIA INVOLVES AN ARTIFICIAL DI VISION OF THE OVERALL PROFITS OF THE GE- BETWEEN PROFITS EARNED IN INDIA AND PROFITS EARNED OUTSIDE INDIA. INDIAN INCOME TAX ACT CAN ONLY BE CONCERNED WITH TH E PROFITS EARNED IN INDIA, AND, THEREFORE, A METHOD I S TO BE FOUND TO ASCERTAIN PROFITS ACCRUING OR ARISING I N INDIA. THE ONLY WAY'1 IN OUR HUMBLE UNDERSTANDING, IT CAN BE SO DONE IS BY TREATING THE INDIAN PE AS A FICTIONALLY SEPARATE PROFIT CENTRE VIS-A-VIS THE GE RMAN GE. THE VERY CONCEPT OF COMPUTATION OF PE PROFITS I S CREATED AS A FICTION OF TAX LAW IN ORDER TO DEMARCA TE TAX JURISDICTION OVER THE OPERATIONS OF A COMPANY I N A COUNTRY OF WHICH IT IS NOT A TAX RESIDENT. UNLESS T HE PE IS TREATED AS A SEPARATE PROFIT CENTRE, IT IS NOT P OSSIBLE TO ASCERTAIN THE PROFITS OF THE PERMANENT ESTABLISHMENT WHICH, INL TURN, CONSTITUTE PROFITS ACCRUING OR ARISING TO THE FOREIGN GE IN INDIA. 25. AS A FIRST STEP TO THE COMPUTATION OF BUSINESS PROFITS OCCURRING OR ARISING IN INDIA TO THE GERMAN GE, THEREFORE, WE HAVE TO COMPUTE THE PROFITS OF TH E INDIAN BRANCH OR INDIA PE OF THE GERMAN COMPANY. 26. LEARNED COUNSEL DOES NOT DISPUTE THE ABOVE PROPOSITION THAT BUSINESS PROFITS OF THE INDIAN PE ARE TO BE COMPUTED BUT HE CONTENDS THAT IN TERM; OF THE PROVISIONS OF THE INDIAN INCOME TAX ACT, NO ONE CAN ITA NOS. 5364/D/2010 & 5104/D/2011 59 MAKE PROFITS BY ENTERING INTO TRANSACTIONS WITH ONESELF. IT IS CONTENDED THAT DEBITING OR CREDITING ONE'S ACCOUNT DOES NOT ALTER THIS LEGAL POSITION, AND THA T, THEREFORE, IRRESPECTIVE OF THE HEAD OFFICE ACCOUNT BEING DEBITED FOR INTEREST, IT CANNOT BE SAID THAT THE INDIAN BRANCH HAS EARNED ANY INCOME BY WAY OF INTEREST DEBITED TO THE HEAD OFFICE. LEARNED COUNSE L'S EMPHATIC SUBMISSION IS THAT AN INTER BRANCH TRANSACTION IS A TRANSACTION WITH ITSELF AND CANNOT LEAD TO ANY INCOME LIABLE TO BE TAXED OR LOSS LIABL E TO BE CARRIED FORWARD. ACCORDING TO THE LEARNED COUNSE L, THESE ARE SELF CANCELLING TRANSACTIONS, AND ARE, RESULTANTLY, PROFIT NEUTRAL. 27. IN OUR HUMBLE UNDERSTANDING, THE PROPOSITION TH AT INTRA ORGANIZATION TRANSACTIONS ARE TO BE IGNORED F OR COMPUTING THE BUSINESS PROFITS HOLDS GOOD ONLY WHEN PROFITS OF THE ORGANIZATION AS WHOLE ARE TO BE COMPUTED, OR WHEN THESE TRANSACTIONS ARE DOMESTIC TRANSACTIONS WITHIN ONE SINGLE ENTERPRISE AND WITHI N ONE TAX JURISDICTION. THESE INTRA ORGANISATION TRANSACTION, WHICH SHOULD MORE APTLY BE TERMED AS 'INTRA ORGANISATION DEALINGS', HAVE A SIGNIFICANT IMPACT ON THE DETERMINATION OF PROFITS OF THE ORGANISATIONAL UNITS - WHETHER TERMED AS PERMANENT ESTABLISHMENT OR BY WHATEVER OTHER DESCRIPTION. 40. WE FIND THAT THE SPL. BENCH IN THE CASE OF SUMI TOMO MITSUI BANKING CORPORATION (SUPRA) HAS SPECIFICALLY CONSIDERED THE DECISION IN THE CASE OF DRESDNER BANKING AG AND HAS OBSERVED AS UNDER: ITA NOS. 5364/D/2010 & 5104/D/2011 60 82. WE FIND THAT THIS ISSUE IS COVERED, IN FAVOUR O F THE ASSESSEE, BY DECISIONS OF THE COORDINATE BENCHES IN THE CASES OF ACIT VS. J.G. VACCUM FLASKS P. LTD. 83 ITD 242 (2002), AND MAHARASHTRA STATE ELECTRICITY BOARD VS. JCIT, 82 ITD 422 (2002) = (2003-TIOL-87-ITAT- MUM ) . LD. DR, HOWEVER, HAS VEHEMENTLY RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND JUSTIFIED T HE SAME. 83. WE SEE NO REASONS TO TAKE AND OTHER VIEW OF THE MATTER THAN THE VIEW SO TAKEN BY THE COORDINATE BEN CHES. AS FOR THE DECISION OF THE HONBLE MADRAS HIGH COUR T IN THE CASE OF BEARDSELL LIMITED (SUPRA) = (2003-TIOL- 370-HC-MAD-IT) , THE SAME HAS BEEN DULY CONSIDERED, AND DISTINGUISHED, BY THE COORDINATE BENCH IN THE C ASE OF J.G. VACCUM FLASKS P. LTD. (SUPRA). AS HELD BY THE COORDINATE BENCHES, PROVISIONS FOR BAD DEBTS SO MAD E BY THE ASSESSEE IS NOT FOR MEETING ANY LIABILITY BUT I N EFFECT TO PROVIDE FOR DIMINUTION IN THE COST OF THE ASSETS . WE ARE IN CONSIDERED AGREEMENT WITH THE CONCLUSIONS AR RIVED AT BY THE COORDINATE BENCH. IN ANY EVENT, THERE IS NO CONTRARY DECISION SO FAR AS THIS ASPECT OF THE MATT ER IS CONCERNED. 40.1 THUS, IMPLIEDLY THE DECISION OF SPL. BENCH IN THE CASE OF CLOGUE ENGINEERING HAS NOT BEEN APPROVED BY THE SPL. BENCH IN THE CASE OF SUMITOMO MITSUI BANKING CORPORATION (SUPRA). THE, S PL. BENCH IN SUMITOMO MITSUI BANKING CORPORATION HAS NOT CONSIDERED THIS ISSUE AS IS EVIDENT FROM THE FOLLOWING TWO GROUNDS WHICH WERE ANSWERED BY SP ECIAL BENCH: 1. WHETHER OR NOT ON THE FACTS AND IN THE CIRCUMS TANCES OF THE CASE, THE CIT(A) WAS JUSTIFIED IN HOLDING THAT INTEREST P AYABLE BY THE INDIAN ITA NOS. 5364/D/2010 & 5104/D/2011 61 PE OF THE FOREIGN BANK TO ITS HO AND OTHER OVERSEAS BRANCHES, IS NOT DEDUCTIBLE IN COMPUTING ITS TOTAL INCOME; 2. WHETHER OR NOT, ON THE FACTS AND IN THE CIRCUMS TANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT INTERE ST INCOME PAYABLE BY THE INDIAN PE OF A FOREIGN BANK TO ITS HO AND BRANC H OFFICES ABROAD CANNOT BE TAKEN INTO ACCOUNT FOR THE PURPOSE OF COM PUTING THE INCOME OF HO LIABLE TO BE TAXED IN INDIA. 41. A DISTINCTION HAS TO BE KEPT IN MIND BETWEEN BA NKING AND FINANCIAL INSTITUTIONS AND NON-BANKING AND FINANCIAL INSTITUT IONS. IF ENTITY IS NOT IN THE BUSINESS OF GIVING COMMERCIAL LOANS, NO NOTIONAL IN TEREST CHARGED IS ALLOWED AS A DEDUCTION TO THE INTRA ENTITY BORROWING. IF T HE ENTITY IS A BANK OR OTHER FINANCIAL INSTITUTION AND, THEREFORE, IN THE BUSINE SS OF GIVING COMMERCIAL LOANS, THE CURRENT INTEREST RATE APPLICABLE TO THE FUNDS LEND TO THE PE IS DEDUCTIBLE TO THE BORROWER (PE). HOWEVER, AS FAR A S ASSESSABILITY IN THE HANDS OF LENDER (HO) IS CONCERNED THE SAME HAS TO B E EXCLUDED ON THE GROUND OF MUTUALITY AS HELD BY SPECIAL BENCH IN THE CASE OF SUMITOMO CORPORATION (SUPRA). 42. AS FAR AS THE DETAILED SUBMISSIONS ADVANCED BY LD. CIT(DR) WITH REFERENCE TO SEPARATE COMPUTATIONS UNDER DTA AND DO MESTIC LAW ARE CONCERNED, WE FIND THAT SPL. BENCH IN THE CASE OF S UMITOMO MITSUI BANKING CORPORATION, WHILE REFERRING TO THE DECISION IN DRE SDNER BANKS CASE, HAS ITSELF OBSERVED THAT THE SAME ALSO IS ONE POINT OF VIEW BUT HAS OBSERVED THAT SINCE A JUDICIAL PRECEDENT LAID DOWN BY SPL. BENCH IS AVAILABLE, THEREFORE, THE SAME VIEW HAS TO BE TAKEN BY A DIVISION BENCH. WE, THEREFORE, RESPECTFULLY ITA NOS. 5364/D/2010 & 5104/D/2011 62 FOLLOWING THE DECISION OF SPL. BENCH ALLOW GROUND N OS. 2 &3 RAISED BY THE ASSESSEE. 42.1 AS FAR AS THE ADDITIONAL GROUND RAISED BY THE LD. CIT(DR) REGARDING THE DISALLOWANCE U/S 14A IS CONCERNED, WE FIND CONSIDER ABLE FORCE IN THE SAME IN VIEW OF THE DETAILED OBSERVATIONS REPRODUCED EARLIE R IN THE CASE OF OMAN INTERNATIONAL BANK (SUPRA). THEREFORE, FOR COMPUTA TION OF DISALLOWANCE U/S 14A THE MATTER IS RESTORED BACK TO THE FILE OF AO. 43. IN THE RESULT, THE ADDITIONAL GROUND RAISED BY LD. CIT(DR) IS ALLOWED FOR STATISTICAL PURPOSES. 44. NOW WE WILL TAKE UP GROUND NO. 4 IN REGARD TO I NTEREST RECEIVED BY PE FROM HO ON DEPOSITS KEPT BY PE WITH HO. LD. COUNSE L HAS RELIED ON THE DECISION OF SPECIAL BENCH IN THE CASE OF SUMITOMO C ORP. (SUPRA). HOWEVER, WE FIND THAT IN THE CASE OF SUMITOMO MITSUI BANKING CORPORATION ALSO ONE OF THE ARGUMENT ADVANCED BY LD. CIT(DR) SHRI GIRISH DA VE, AS NOTED BY TRIBUNAL IN PARA 13 OF SUMITOMO MITSUI BANKING CORP ORATION, WAS AS UNDER: 13. SHRI GIRISH DAVE SUBMITTED THAT THE ASSESSEE IS ADOPTING SPLIT APPROACH BY CLAIMING DEDUCTION FOR INTEREST UNDER TREATY AND BY CLAIMING EXEMPTION FOR THE SAME INTEREST IN THE HANDS OF RECIPIENTS UNDER LOCAL LAW. HE SUBMITTED THAT ARTICLES 7(2) AND 7(3 ) OF THE TREATY UNDER WHICH THE ASSESSEE IS CLAIMING DEDUCTION FOR SUCH INTEREST RECOGNIZE PE AND HEAD OFFICE AS TWO DISTINCT ENTITIES ESPECIALLY IN RESPE CT OF INTEREST IN SO FAR AS BANKING ENTITY IS CONCERNED. HE ITA NOS. 5364/D/2010 & 5104/D/2011 63 CONTENDED THAT FULL EFFECT HAS TO BE GIVEN TO SUCH TREATMENT FOR CONSIDERING THE DEDUCTIBILITY AS WELL AS TAXABILITY OF INTEREST . HE INVITED OUR ATTENTION TO PAGE NO. 133 OF HIS PAPER BOOK TO SHOW THE NEW CONVENTIO N AGREED BY BOTH THE GOVERNMENTS IN EXERCISE OF THE POWERS CONFERRED BY SEC. 90 OF THE I.T. ACT AND SUBMITTED THAT AS A RESULT OF SUCH AGREEMENT, THE S AID CONVENTION HAS BECOME A PART OF LOCAL LAW. HE ALSO INVITED OUR ATTENTION TO ARTICLE 23 OF THE SAID CONVENTION AT PAGE NO.143 OF HIS PAPER BOOK WHICH PROVIDES THAT THE LAWS IN FORCE IN EITHER OF THE CONTRACTING STATES SHALL CONTINUE TO GOVERN THE TAXATION OF INCOME IN THE CONTRACTING STATE EXCEPT WHERE EXPRESS PROVISIONS TO THE CONTRARY ARE MADE I N THE CONVENTION. HE CONTENDED THAT THIS ISSUE, THEREFORE, HAS TO BE DECIDED AS PER THE RELEVANT PROVISIONS MADE IN THE SAID CONVENTION GOVERNING TH E ISSUE AND NOT AS PER THE PROVISIONS OF LOCAL LAW. 45. THE CONTENTION OF LD. CIT(DR) WAS PRIMARILY BAS ED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SAL NARAYAN RA O AND ANOTHER VS. ESHWAR LAL BHAGWAN DAS & ANOTHER, 57 ITR PAGE 149, WHEREIN THE HONBLE SUPREME COURT REFERRING TO THE DECISION IN THE CASE OF M.K. VENKATA CHALLAN VS. BOMBAY DYING AND MANUFACTURING COMPANY LIMITED REFERRED TO THE OBSERVATIONS RELIED IN THAT CASE OF LORD ASQUITH OF BISHOPTONE IN EAST END DWELLINGS COMPANY LIMITED VS. FINSBURY BOROUGH COUN CIL, IF YOU ARE BIDDEN TO TREAT AN IMAGINARY STATE OF AFFAIRS AS REAL, YOU MUST SURELY, UNLESS PROHIBITED FROM DOING SO, ALSO IMAGINE AS REAL THE CONSEQUENCES AND ITA NOS. 5364/D/2010 & 5104/D/2011 64 INCIDENTS WHICH, IF THE PUTATIVE STATE OF AFFAIRS H AD IN FACT EXISTED, MUST INEVITABLY HAVE FLOWED FROM OR ACCOMPANIED IT. 45.1 THUS, PRIMARILY THE CONTENTION OF LD. CIT(DR) IS THAT WHEN AS PER ARTICLE 7(2) THE PE IS TAKEN AS A DISTINCT AND SEPARATE ENT ERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIES THEN IN VIEW OF THE DECI SION OF HONBLE SUPREME COURT IN THE CASE OF ESHWAR LAL BHAGWAN DAS (SUPRA) THE CONSEQUENCES FLOWING FROM CONSIDERING THE PE AS SEPARATE ENTITY AS REAL STATE MUST INEVITABLY FOLLOW AND, THEREFORE, THE INCOME ACCRUI NG TO THE NON-RESIDENT BANK IN CONSEQUENCES TO THE PAYMENT MADE BY PE HAS TO BE TAKEN INTO CONSIDERATION FOR DETERMINING THE INCOME ATTRIBUTAB LE TO PE BRANCH IN INDIA. 46. IT IS INTERESTING TO NOTE THAT IN THE CASE OF A CIT VS. M/S CREDIT AGRICOLE INDOSUEZ ITA NO. 6615/MUM./2003. LD. COUNSEL FOR T HE ASSESSEE HIMSELF HAD SUBMITTED THAT THE AMOUNT PAID BY PE TO ITS HO/ BRANCHES SHOULD NOT BE ALLOWED AS DEDUCTION SO AS TO BRING SYMMETRY BETWEE N INTEREST INCOME AND INTEREST ACCRUED FROM OR TO HO. THE NEXT LIMB OF S UBMISSION OF LD. CIT(DR) WHICH CAN BE CULLED OUT FROM HIS SUBMISSIONS ON THI S ASPECT IS THAT SPECIFIC DEEMING PROVISION U/S 9(1)(V) WILL OVERRIDE THE CON CEPT OF MUTUALITY. IN OUR OPINION THIS ARGUMENT ADVANCED BY LD. CIT(DR) DESER VES TO BE ACCEPTED BECAUSE CONCEPT OF MUTUALITY CANNOT OVERRIDE SPECIF IC PROVISION OF LAW. ONCE THE INTEREST RECEIVED BY PE IS DEEMED TO BE IN COME OF PE AND THERE IS NO BAR IN THE TREATY ON ITS TAXABILITY THEN IT CANN OT BE EXCLUDED FROM ITA NOS. 5364/D/2010 & 5104/D/2011 65 COMPUTATION OF INCOME EARNED BY PE. IN VIEW OF ABO VE DISCUSSION GROUND NO. 4 IS REJECTED. 47. BRIEF FACTS APROPOS GROUND NO. 5 WITH REFERENCE TO APPLICABILITY OF THE PROVISIONS OF SECTION 115JB TO ASSESSEE ARE THAT TH E ASSESSEE HAD ATTACHED A NOTE WITH THE RETURN OF INCOME THAT THE PROVISION S OF SECTION 115JB WERE NOT APPLICABLE TO IT. IT WAS CLAIMED THAT ASSESSEE WAS SUBJECT TO TAX IN INDIA ON THE INCOME EARNED BY ITS PE IN INDIA AND THAT, S UCH PROFITS EARNED BY THE PE IN INDIA WERE INCLUDED AND INCORPORATED IN GLOBA L ACCOUNTS PREPARED BY THE HEAD OFFICE IN JAPAN. IT WAS SUBMITTED THAT, N EITHER THE BANK WAS AN INDIAN COMPANY NOR IT WAS DECLARING AND DISTRIBUTIN G DIVIDEND OUT OF ITS INCOME IN INDIA. THE ASSESSEE ALSO RELIED ON THE L EGISLATIVE INTENT BEHIND THE INTRODUCTION OF SECTION 115JB. THE ASSESSEE ALSO S UBMITTED THAT THE PROFITS OF THE PE OF THE ASSESSEE I.E. INDIAN BRANCHES HAD TO BE COMPUTED UNDER ARTICLE 7 OF THE TREATY AND COMPUTATION OF BOOK PRO FITS U/S 115JB OF THE ACT HAD NO APPLICATION AT ALL. THE ASSESSEE ALSO RELIE D ON VARIOUS CASE LAWS HOLDING THAT THE TREATY OVERRIDES THE PROVISION OF THE INCOME TAX ACT. THE AO DID NOT ACCEPT THE ASSESSEES CONTENTION FOR THE FOLLOWING REASONS: A) ONCE THE ASSESSEE WAS HAVING PE IN INDIA THEN IT WOULD BE ASSESSED FOR DETERMINING THE PROFIT AS PER THE INCOME TAX AC T AND THE EXPENSES WERE TO BE ALLOWED AS PER INCOME TAX ACT; B) IF THE ASSESSES ARGUMENT THAT THE PROVISIONS OF THE INCOME TAX ACT RELATING TO DETERMINATION OF THE PROFIT WERE APPLIC ABLE AND RESTS PROVISIONS WERE NOT APPLICABLE, THEN IT WILL LEAD T O AN ANOMALOUS ITA NOS. 5364/D/2010 & 5104/D/2011 66 SITUATION AND EVEN THE LOSS INCURRED IN EARLIER YEA R WILL NOT BE ALLOWED TO BE CARRIED FORWARD AND SET OFF U/S 80 OF THE I.T . ACT; C) THE AO REFERRED TO SECTION 115JB(I) AND POINTED OUT THAT THE SAID SECTION IS APPLICABLE IN CASE OF COMPANIES AND THE DEFINITION OF COMPANY U/S 217 INCLUDES ANY BODY CORPORATE, INCORP ORATED BY OR UNDER THE LAWS OF A COMPANY OUTSIDE INDIA. THEREFO RE, COMPANY, AS USED IN SECTION 115JB, INCLUDES FOREIGN COMPANIES. D) THERE IS NO INDICATION IN THE MEMORANDUM EXPLAIN ING THE INTRODUCTION OF THE SAID SECTION THAT THE SAID SECTION SHALL NOT APPLY TO FOREIGN COMPANIES. IN THIS REGARD THE AO POINTED OUT THAT SECTION 115JB STARTS WITH THE PHRASE NOTWITHSTANDING ANYTHING. E) THE AO RELIED ON THE DECISION OF AUTHORITY OF AD VANCE RULING. THE AO ALSO REFERRED TO THE DECISION OF AUTHORITY FOR ADVA NCE RULING IN THE CASE OF NLKORESSOURCES LTD. VS. CIT; 234 ITR 828, W HERE THE ASSESSEE SOUGHT THE BENEFIT OF SECTION 42, WHICH AL LOWS SPECIAL DEDUCTION FOR THOSE ENGAGED IN THE BUSINESS OF PROS PECTING FOR MINERAL OIL. THE AUTHORITY FOR ADVANCE RULING (AAR) HELD T HAT FOR THE PURPOSES OF SECTION 115JA, THE QUESTION OF ANY ALLOWANCE U/S 42 WOULD HAVE NO RELEVANCE AAR ALSO REJECTED THE ARGUMENT OF ASSESSE E THAT SECTION 293A ENABLES THE CENTRAL GOVERNMENT TO GRANT EXEMPT ION FOR SUCH UNDERTAKINGS. F) THE AO REFERRED TO THE FINDINGS OF LD. CIT(A) IN THE CASE OF ASSESSEE FOR A.Y. 2003-04 AND 2004-05, WHEREIN IT WAS HELD T HAT THE PROVISIONS OF SECTION 115JB ARE APPLICABLE. 48. LD. DRP UPHELD THE AOS ACTION. 49. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE PROVISIONS OF SECTION 115JB WERE NOT APPLICABLE FOR THE FOLLOWING THREE R EASONS: ITA NOS. 5364/D/2010 & 5104/D/2011 67 1. THE ACCOUNTS HAD BEEN PREPARED IN ACCORDANCE WIT H BANKING REGULATION ACT; 2. SECTION 115JB APPLIES TO DOMESTIC COMPANIES ONLY ; 3. THE PROFITS HAD BEEN DETERMINED BY PE AS PER TH E PROVISIONS CONTAINED IN DOUBLE TAXATION AVOIDANCE AGREEMENT AND NOT AS P ER THE PROVISIONS OF INCOME TAX ACT. 50. LD. SR. COUNSEL REFERRED TO PAGE 342 OF PAPER B OOK, WHEREIN NOTES TO ACCOUNTS ARE CONTAINED AND POINTED OUT THAT NOTE 12 READS AS UNDER: 12. APPLICABILITY OF THE PROVISIONS OF SECTION 11 5JB OF THE ACT THE ASSESSEE IS A COMPANY INCORPORATED IN JAPAN AN D IS A RESIDENT OF JAPAN UNDER THE DTAA. IT CARRIES ON BUSINESS IN INDIA THROUGH BRANCHES. IN THEIR REPORT ON THE BALANCE SHEET AS AT 31 ST MARCH, 2007, AND THE PROFIT & LOSS ACCOUNT OF THE INDIAN BRANCHES FOR TH E YEAR ENDED 31 ST MARCH, 2007 (ANNEXED WITH THE RETURN), THE AUDITORS HAVE STATED THAT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 2 9 OF THE BANKING REGULATIONS ACT, 1949, READ WITH THE PROVISIONS OF SUB-SECTIONS (1),(2) AND (5) OF SECTION 211 AND SUB-SECTION (5) OF SEC. 227 OF THE COMPANIES ACT, 1956, THE BALANCE SHEET AND THE PROF IT & LOSS ACCOUNT, ARE NOT REQUIRED TO BE, AND ARE NOT DRAWN UP IN ACCORDANCE WITH SCHEDULE VI TO THE COMPANIES ACT, 1 956 . THE ACCOUNTS ARE THEREFORE, DRAWN UP IN CONFORMITY WITH FORMS A AND B OF THE THIRD SCHEDULE TO THE BANKING REGULATION S ACT, 1949. FOR THE PURPOSE OF COMPUTING THE BOOK PROFITS U/S 115JB OF THE ACT, IT IS REQUIRED THAT THE ASSESSEE PREPARES ITS PROFI T & LOSS ACCOUNT IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 1956. THE ASSESSEE IS NEITHER R EQUIRED TO DRAW UP ITS ACCOUNTS IN INDIAN IN ACCORDANCE WITH THE PR OVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 195 6 NOR IT IS ITA NOS. 5364/D/2010 & 5104/D/2011 68 REQUIRED TO PLACE THE ACCOUNTS BEFORE THE AGM AS PE R SEC. 210 OF THE COMPANIES ACT. IT DOES NOT DECLARE OR DISTRIBUTE A NY DIVIDENDS IN INDIA WITH REFERENCE TO ANY SUCH ACCOUNTS. THEREFO RE, PROVISIONS OF SECTION 115JB ARE NOT APPLICABLE IN THE CASE OF THE ASSESSEE. THE ASSESSEE PLACES RELIANCE ON THE FOLLOWING DECI SIONS: O MAHARASHTRA STATE ELECTRICITY BOARD VS. JOINT CIT 7 7 TTJ 33 (BOM.); O PROCESS PUMPS (P) LTD. VS. DCIT 94 TTJ 190 (BANG.) HOWEVER, WITHOUT PREJUDICE TO THE ASSESSEES CLAIM THAT PROVISIONS OF SEC. 115JB ARE NOT APPLICABLE TO ITS CASE, COMPUTAT ION OF BOOK PROFITS U/S 115JB OF THE ACT ARE ANNEXED HEREWITH ALONGWITH CERTIFICATE IN FORM NO. 29B. 50.1 LD. SR. COUNSEL FILED COPY OF ANNUAL REPORT FO R 2007, WHEREIN THE AUDITORS HAVE POINTED OUT THAT THE FINANCIAL STATEM ENTS OF BANK OF TOKYO MITSUBISHI UFJ, LTD. INDIAN BRANCHES WERE PREPARED U/S 29 OF THE BANKING REGULATION ACT, 1949 AND THESE ACCOUNTS WERE NOT AS PER PART II & III OF SCHEDULE VI TO COMPANIES ACT. 50.2 LD. SR. COUNSEL RELIED ON THE FOLLOWING DECISI ONS : (A) ITAT G BENCH, MUMBAI IN THE CASE OF KRUNK THAI BANK PLL VS. JCIT, VIDE ITA NO. 3390/MUM/2009; B) KERALA STATE ELECTRICITY BOARD VS . DCIT, VIDE ITA NOS. 1703, 1710 & 1716 OF 2009 & 127 OF 2010; C) M/S REL IANCE ENERGY LTD. VS. ACIT, VIDE ITA NO. 218/MUM./2005. 50.3 LD. SR. COUNSEL FURTHER SUBMITTED THAT EXPLANA TION 3 INSERTED BELOW SUB-SECTION (2) BY THE FINANCE ACT, 2012 W.E.F. 01/ 04/2013 READS AS UNDER: ITA NOS. 5364/D/2010 & 5104/D/2011 69 EXPLANATION 3. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY CLARIFIED THAT FOR THE PURPOSES OF THIS SECTION, THE ASSESSEE, BEI NG A COMPANY TO WHICH THE PROVISO TO SUB-SECTION (2) OF SECTION 211 OF TH E COMPANIES ACT, 1956 (1 OF 1956) IS APPLICABLE, HAS, FOR AN ASSESSMENT Y EAR COMMENCING ON OR BEFORE THE 1 ST DAY OF APRIL, 2012, AN OPTION TO PREPARE ITS PROFI T AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR EITHER IN ACCORDANCE WITH THE PROVISIONS OF PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT, 1956 OR IN ACCORDANCE WITH THE PROVISIONS OF T HE ACT GOVERNING SUCH COMPANY. 50.4 THIS HAS BEEN HELD TO BE PROSPECTIVE IN FOLLOW ING CASES: M/S STATE BANK OF HYDERABAD VS. DCIT, VIDE ITA NO. 578/HYD./2010 & 779/HYD./2010; ICICI LOMBART GENERAL INSURANCE CO. LTD. 27 TAXMANN 326 (MUM.) 50.5 HE FURTHER SUBMITTED THAT A FOREIGN COMPANY DO ES NOT HOLD AGM UNDER COMPANIES ACT AND ITS ACCOUNTS ARE NEVER LAID BEFOR E ANNUAL GENERAL MEETING. HE FURTHER REFERRED TO EXPLANATION 1 CLAU SE (D), (E) AND (VII) TO SUBMIT THAT THESE CLAUSES ARE INDICATIVE OF FACT TH AT SEC. 115JB IS APPLICABLE ONLY TO DOMESTIC COMPANIES. HE POINTED OUT THAT AD JUSTMENTS CONTEMPLATED U/S 115JB HAVE NO APPLICABILITY IN CASE OF FOREIGN COMPANY. 50.6 LD. SR. COUNSEL REFERRED TO THE HONBLE FINANC E MINISTERS SPEECH WHILE INTRODUCING FINANCE BILL, 1996 1997 AND POI NTED OUT THAT IT WAS OBSERVED IN CLAUSE 90 AS UNDER: 90. CORPORATE TAX RATES HAVE BEEN REDUCED AND SIMPLIFIED OVER THE PAST FEW YEARS AND THE RESULTS HAVE BEEN VERY ENCOURAGING WITH A SIGNIFICANT INCREASE I N CORPORATE TAXES AS A PERCENTAGE OF GDP. HOWEVER, ITA NOS. 5364/D/2010 & 5104/D/2011 70 THERE ARE TWO ISSUES WHICH NEED TO BE ADDRESSED. T HE FIRST IS THE PROMISE MADE IN THE PAST THAT THE CORP ORATE SURCHARGE WILL BE TEMPORARY. THE OTHER IS THE PHENOMENON OF ZERO TAX COMPANIES WHICH, ACCORDING T O MANY OBSERVERS, REFLECTS AN EXCESSIVE DEGREE OF LAX ITY IN THE TAX REGIME. I PROPOSE TO RESPOND TO THE TWO IS SUES AS FOLLOWS: (I) I AM REDUCING THE RATE OF SURCHARGE ON CORPORA TION TAX FROM15% TO 7.5% AND HOPE TO TAKE A SIMILAR STEP IN MY NEXT BUDGET. THE REDUCED TAX BURDEN WILL BENEFI T ALL COMPANIES BIG AND SMALL. (II) I PROPOSE TO INTRODUCE A MINIMUM ALTERNATE T AX (MAT) ON COMPANIES. IN A CASE WHERE THE TOTAL INCO ME OF THE COMPANY, AS COMPUTED UNDER THE I.T. ACT AFTE R AVAILING OF ALL ELIGIBLE DEDUCTIONS, IS LESS THAN 3 0% OF THE BOOK PROFIT, THE TOTAL INCOME OF SUCH A COMPANY SHALL BE DEEMED TO BE 30% OF THE BOOK PROFIT AND SH ALL BE CHARGED TO TAX ACCORDINGLY. THE EFFECTIVE RATE WORKS OUT TO 12% OF BOOK PROFIT CALCULATED UNDER THE COMPANIES ACT. COMPANIES ENGAGED IN THE POWER AND INFRASTRUCTURE SECTORS WILL, HOWEVER, BE EXEMPTED F ROM THE LEVY OF MAT. 50.7 HE FURTHER REFERRED TO THE FINANCE MINISTERS SPEECH WHILE INTRODUCING FINANCE BILL, 2000 WHICH READS AS UNDER: 156. THE VARIOUS EXEMPTIONS CURRENTLY AVAILABLE WH ILE CALCULATING MINIMUM ALTERNATE TAX (MAT) AND THE CRE DIT SYSTEM HAS UNDERMINED THE EFFICACY OF THE EXISTING PROVISION AND HAS ALSO LED TO LEGAL COMPLICATIONS. TO ADDRESS THESE ISSUES, I PROPOSE THAT THE MINIMUM ITA NOS. 5364/D/2010 & 5104/D/2011 71 ALTERNATE TAX BE NOW LEVIED AT THE REVISED RATE OF 7.5% OF THE BOOK PROFITS AS DETERMINED UNDER THE COMPANIES ACT INSTEAD OF THE EXISTING EFFECTIVE RATE OF 10.5%. HOWEVER, THIS WILL NOW BE UNIFORMLY APPLIED BARRI NG ONE EXCEPTION THAT I WILL MENTION LATER. THERE WIL L ALSO BE NO CREDIT FOR MINIMUM ALTERNATE TAX PAID. THIS SHOULD BRING ALL ZERO TAX COMPANIES WITHIN THE TAX- NET, WHICH IS ALSO THE BASIC PURPOSE OF THIS TAX. THE N EW SYSTEM HAS THE VIRTUE OF A LOWERED RATE OF TAX, A S IMPLE METHOD OF COMPUTATION, AND AN EQUITABLE SPREAD. 50.8 HE FURTHER REFERRED TO NOTES ON CLAUSES APPEND ED TO FINANCE BILL, 2002 AND POINTED OUT THAT CLAUSE 49, READS AS UNDER: CLAUSE 49 SEEKS TO AMEND SECTION 115JB OF THE INCOME-TAX ACT RELATING TO SPECIAL PROVISION FOR PAYMENT OF TAX BY CERTAIN COMPANIES. THE EXISTING PROVISIONS OF THE SAID SECTION PROVIDE FOR LEVY OF A MINIMUM TAX ON DOMESTIC COMPANIES OF AN AMOUNT EQUAL TO SEVEN AND ONE-HALF PER CENT OF THE BOOK PROFIT, IF THE TAX PAYABLE ON THE TOTAL INCOME CHARGEABLE TO TAX AS PER THE PROVISIONS OF THE INCO ME TAX ACT, 1961, IS LESS THAN SEVEN AND ONE-HALF PER CENT OF THE BOOK PROFIT. SUB-CLAUSE (A) SEEKS TO PROVIDE THAT WHERE THE TAX PAYABLE ON THE TOTAL INCOME CHARGEABLE TO TAX IS LE SS THAN SEVEN AND ONE-HALF PER CENT OF BOOK PROFIT, SU CH BOOK PROFIT SHALL BE DEEMED TO BE THE TOTAL INCOME OF THE ASSESSEE AND THE TAX PAYABLE BY THE ASSESSEE ON SUCH TOTAL INCOME SHALL BE THE AMOUNT OF INCOME-TAX AT THE RATE OF SEVEN AND ONE-HALF PER CENT. ITA NOS. 5364/D/2010 & 5104/D/2011 72 THIS AMENDMENT WILL TAKE EFFECT RETROSPECTIVELY FRO M 1 ST APRIL, 2001 AND WILL, ACCORDINGLY, APPLY IN RELATI ON TO THE ASSESSMENT YEARS 2001-02 AND SUBSEQUENT YEARS. 50.9 WITH REFERENCE TO ABOVE SPEECHES OF HONBLE FI NANCE MINISTER, LD. SR. COUNSEL SUBMITTED THAT IT IS EVIDENT THAT THE MAT P ROVISIONS WERE MEANT ONLY FOR DOMESTIC COMPANIES AND NOT FOREIGN COMPANIES. LD. SR. COUNSEL FURTHER SUBMITTED THAT UNDER TREATY ALL EXPENSES ARE TO BE ALLOWED BUT THAT IS NO SO FOR COMPUTING TOTAL INCOME AS PER MAT PROVISIONS. 60. LD. COUNSEL FURTHER POINTED OUT THAT IN THE RET URN ITSELF ASSESSEE HAD COMPUTED THE TOTAL INCOME AS PER MAT PROVISIONS WIT H A RIDER THAT THE PROVISIONS OF SECTION 115JB ARE NOT APPLICABLE. 61. LD. CIT(DR) SUBMITTED THAT EVEN IF TREATY IS AP PLICABLE 115JB PROVISIONS WILL APPLY. THERE CANNOT BE ANY DISCRIM INATION BETWEEN INDIAN COMPANY AND FOREIGN COMPANIES ON THIS COUNT. AS RE GARDS THE 1 ST CONTENTION OF ASSESSEE REGARDING ACCOUNTS BEING PRE PARED UNDER BANKING REGULATION ACT, LD. CIT(DR) SUBMITTED THAT SECTION 115JB STARTS WITH A NON- OBSTANTE CLAUSE. HE SUBMITTED THAT SECTION 115JB(2 ) GIVES ONLY MODE OF PREPARATION OF PROFIT AND LOSS ACCOUNT. IT ONLY RE QUIRES THAT THE ACCOUNTS ARE TO BE PREPARED AS PER SCHEDULE VI. LD. CIT(DR) SUB MITTED THAT LANGUAGE OF SECTION IS NOT AS PREPARED BUT AS PER SCHEDULE V I ONLY. ONLY THIS COMPLIANCE IS MANDATORY. HE SUBMITTED THAT INCOME TAX ACT IS NOT SUBORDINATE TO COMPANIES ACT. HE FURTHER SUBMITTED THAT SECTION 211 OF ITA NOS. 5364/D/2010 & 5104/D/2011 73 COMPANIES ACT ONLY PROVIDES MODE OF PREPARATION OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNT. THE MANNER OF PREPARATION IS TO BE FOLLOWED. IN THIS REGARD HE REFERRED TO THE DECISION IN THE CASE OF 2 57 ITR 51 (RAJASTHAN) CHHOGMAL CHIRANJI LAL VS COMMISSIONER OF INCOME-TAX . HE SUBMITTED THAT COMPANIES ACT DOES NOT PRESCRIBE FORM OF PROFIT AND LOSS ACCOUNT. HE REFERRED TO PAGE 103, WHEREIN THE PARTICULARS IN RE GARD TO PROFIT AND LOSS ACCOUNT AS PER BANKING REGULATION ACT ARE REQUIRED TO BE GIVEN AND POINTED OUT WITH REFERENCE TO SCHEDULE VI TO COMPANIES ACT CONTAINED AT PAGES 85 TO 98 OF PAPER BOOK THAT PROFIT AND LOSS ACCOUNT IS NOT VERY SPECIAL UNDER COMPANIES ACT. HE FURTHER REFERRED TO SECTION 29(3 ) OF BANKING REGULATION ACT CONTAINED AT PAGE 102 OF PAPER BOOK TO SUBMIT T HAT COMPANIES ACT REQUIREMENTS HAVE BEEN MADE APPLICABLE TO THE EXTEN T NOT INCONSISTENT WITH BANKING REGULATION ACT. HE SUBMITTED THAT EVEN BAN KING COMPANIES ARE REQUIRED TO PREPARE ACCOUNTS UNDER COMPANIES ACT AS ANY OTHER COMPANY. 61.1 LD. CIT(DR) REFERRED TO PAGE 333 OF PAPER BOOK , WHEREIN THE COMPUTATION OF TAXABLE INCOME UNDER NORMAL PROVISIO NS OF INCOME TAX ACT IS CONTAINED AND ALSO TO PAGE 336 WHEREIN COMPUTATI ON OF TAXABLE INCOME U/S 115JB(MAT) IS CONTAINED. HE, THEREFORE, SUBMI TTED THAT ASSESSEE ITSELF COMPUTED U/S 115JB. HE REFERRED TO PAGES 307 AND 3 08 OF PAPER BOOK AND POINTED OUT THAT ASSESSEE FILED THE RETURN OF INCOM E ACCORDINGLY. HE REFERRED TO PAGE 317 OF PAPER BOOK AND POINTED OUT THAT DEEMED TOTAL INCOME U/S 115JB WAS RETURNED. FURTHER, HE REFERRE D TO PAGE 327 AND ITA NOS. 5364/D/2010 & 5104/D/2011 74 POINTED OUT THAT ASSESSEE ITSELF STATED IN RETURN I N MAT SCHEDULE THAT PROFIT AND LOSS ACCOUNT WAS PREPARED AS PER SCHEDULE VI. THIS CLEARLY DEMONSTRATES THE CONDUCT AND UNDERSTANDING OF PROVI SIONS BY ASSESSEE. LD. CIT(DR) REFERRED TO THE SUBMISSIONS OF ASSESSEE THA T EXPLANATION 3 INSERTED TO SECTION 115JB(2)(B) IS PROSPECTIVE AND, THEREFOR E, BY IMPLICATION THE PROVISIONS OF SECTION 115JB(2) ARE NOT APPLICABLE. IN THIS REGARD LD. CIT(DR) SUBMITTED THAT PURPOSE OF AMENDMENT WAS AS UNDER: (A) ONLY FOR ALIGNING THE PROVISIONS; (B) TO AVOID HARDSHIP OF PREPARING ACCOUNTS AS PER SCHEDULE VI; (C) EXPLANATION 3 IS FOR REMOVAL OF DOUBTS AND, THE REFORE, RELEVANT FOR CASES PRIOR TO 2012. 61.2 HE, THUS, SUBMITTED THAT AMENDMENT IS ONLY CLA RIFICATORY IN NATURE. HE SUBMITTED THAT ASSESSEE EXERCISED OPTION OF PREPARI NG ACCOUNTS AS PER SCHEDULE VI. 61.3 AS REGARDS THE SUBMISSION OF LD. SR. COUNSEL R EGARDING NON- APPLICABILITY OF SECTION 115JB TO FOREIGN COMPANIES , LD. CIT(DR) SUBMITTED THAT SECTION 2(17)(II) INCLUDES IN THE DEFINITION O F COMPANY A FOREIGN COMPANY ALSO. HE FURTHER POINTED OUT THAT SECTION 2(23A) D EFINES FOREIGN COMPANY AS A COMPANY WHICH IS NOT DOMESTIC COMPANY. HE POINTED OUT THAT SECTION 2(22A) DEFINES A DOMESTIC COMPANY. HE SUBMITTED TH AT SECTION 115JB DOES NOT MAKE ANY DISTINCTION AND REFERS ONLY TO COMPANY . HE FURTHER SUBMITTED THAT WHENEVER SO REQUIRED, LEGISLATURE HAS MADE SPE CIFIC PROVISIONS APPLICABLE TO ONLY FOREIGN COMPANIES LIKE SUB-SECTI ON 44BB, 115A, 44DA, ITA NOS. 5364/D/2010 & 5104/D/2011 75 80HHBA. HE POINTED OUT THAT SINCE THE LAW IS UNAMB IGUOUS, THEREFORE, HONBLE FINANCE MINISTERS SPEECH AND MEMORANDUM EX PLAINING INTRODUCTION OF CLAUSE ARE NOT RELEVANT. 61.4 AS REGARDS ASSESSEES CONTENTION REGARDING NON -APPLICABILITY OF PROVISIONS OF SECTION 115JB TO TREATY, LD. CIT(DR) SUBMITTED THAT: (I) ASSESSEE OPTED TO BE TAXED UNDER DOMESTIC LAW; (II) ASSESSEE COMPUTED INCOME U/S 115JB; (III) RETURN FILED AND TAX PAID AS PER DOMESTIC LAW . TREATY IN ABOVE STEPS DOES NOT COME INTO PICTURE. 61.5 FURTHER, ARTICLE 7(3) UNDER TREATY TALKS OF ON LY BOOK PROFITS. IF FOREIGN COMPANY PAYING TAX BELOW BOOK PROFIT THE N IT WILL HAVE TO DETERMINE INCOME AS PER SECTION 115JB. HE SUBMITTED THAT SIN CE 115JB HAS OVERRIDING EFFECT, THEREFORE, IT WILL OVERRIDE SECTION 90 ALSO . 62. LD. DR REFERRED TO AARS RULING CONTAINED AT PA GE 47 OF THE DEPARTMENTS CASE LAW PAPER BOOK IN THE CASE OF SUH AS CHANDRA SEN & MOHINI BHUSSRY JJ. [1998] 234 ITR 0335, WHEREIN IT HAS BEEN HELD THAT SECTION 115JA IS APPLICABLE TO FOREIGN COMPANIES. HE POINTED OUT THAT AT INTERNAL PAGE 7 AAR OBSERVED THAT THERE IS NO DIFFI CULTY IN COMPUTING PROFIT/LOSS OF INDIAN BUSINESS. HE POINTED OUT THA T AUTHORITY RELIED ON IRC VS.ROSS MINISTER (1979) 52 TC 160 (HL). LD. DR FUR THER REFERRED TO PAGE 57, WHEREIN THE DECISION IN THE CASE OF NICE RESOURCES LTD. VS. CIT, 234 ITR ITA NOS. 5364/D/2010 & 5104/D/2011 76 828 BEFORE AUTHORITY FOR ADVANCE RULING IS CONTAINE D, WHEREIN AUTHORITY FOR AAR HAS GIVEN ITS OPINION ON FOLLOWING QUESTIONS: 1. WHETHER THE APPLICANT IS ENTITLED TO SPECIAL BENEFITS ALLOWED UNDER SPECIFIC SECTION 42 OF THE INCOME-TAX ACT, 1961 (REGARDING THE SPECIAL PROVISIONS FOR DEDUCTIO N IN CASE OF BUSINESS OF PROSPECTING, ETC., OF MINERAL O IL), BEFORE CALCULATING THE BOOK PROFIT AS PER SECTION 1 15JA? 62.1 IN THIS CASE THE ASSESSEES CONTENTION WAS THA T SINCE THE ACTIVITIES OF ASSESSEE COME WITHIN THE SCOPE OF SECTION 42 OF INC OME TAX ACT (SPECIAL PROVISION RELATING TO COMPANIES ENGAGED IN OIL EXPL ORATION), THEREFORE, SECTION 115JA CANNOT BE MADE APPLICABLE. THE CONTE NTION WAS THAT SECTION 115JA CANNOT OVERRIDE SPECIAL PROVISION. THIS ARGU MENT WAS REJECTED BY AUTHORITY FOR ADVANCE RULING. 62.2 HE POINTED OUT THAT AUTHORITY AFTER CONSIDERIN G THE PROVISIONS OF SECTION 42, 115JA AND SECTION 293A OPINED AS UNDER: SECTION 293A HAS NOTHING TO DO WITH COMPUTATION O F TOTAL INCOME. IT LAYS DOWN THAT THE CENTRAL GOVERN MENT MAY BY NOTIFICATION GRANT EXEMPTION OR REDUCTION IN RATE OF TAX OR OTHER MODIFICATIONS IN RESPECT OF INCOME- TAX IN FAVOUR OF CERTAIN CLASSES OF ASSESSES. WE WERE REF ERRED TO TWO NOTIFICATIONS ISSUED U/S 293A DT. MARCH 31, 1983 AND JULY 6, 1987. BOTH THE NOTIFICATIONS PERTAIN T O RATES OF TAX PAYABLE BY FOREIGN COMPANIES UNDER CERTAIN CIRCUMSTANCES. WE FAIL TO SEE THE RELEVANCE OF THE SE TWO NOTIFICATIONS FOR THE PURPOSE OF THE PRESENT CASE. NEITHER SECTION 293A NOR THE TWO NOTIFICATIONS ISSUED THERE UNDER ITA NOS. 5364/D/2010 & 5104/D/2011 77 CAN CUT DOWN THE SCOPE OR EFFECT OF SEC. 115JA WHIC H STANDS ON A DIFFERENT FOOTING ALTOGETHER. IT DOES NOT CONTAIN A MACHINERY FOR COMPUTATION OF BUSINESS INC OME OR TOTAL INCOME OF AN ASSESSEE. IT PROVIDES A ROUG H AND READY FORMULA. A MINIMUM AMOUNT OF TAX WILL HAVE T O BE PAID BY AN ASSESSEE ON THE BASIS OF ITS BOOK PROFIT S IF ITS TOTAL INCOME IS LESS THAN THIRTY PER CENT OF ITS BO OK PROFIT. THIS IS A LEGAL FICTION. IT WILL COME INTO PLAY ON LY WHEN THE TOTAL INCOME AS COMPUTED UNDER THIS ACT IS LESS THAN THIRTY PER CENT OF THE BOOK PROFIT OF AN ASSESSEE. TOTAL INCOME HAS TO BE COMPUTED IN THE MANNER LAID DOWN I N THE ACT. IF AN ASSESSEE HAS BUSINESS INCOME, IT WI LL HAVE TOBE COMPUTED IN THE MANNER LAID DOWN IN SECTIONS 3 0 TO 43D. ALL THE DEDUCTIONS AND ALLOWANCES PERMISSIBLE UNDER ANY OTHER PROVISION WILL ALSO HAVE TO BE GIVE N TO THE ASSESSEE FOR THE PURPOSE OF COMPUTATION OF HIS TOTAL INCOME IN REGULAR COURSE OF ASSESSMENT OF INCOME. IF THE TOTAL INCOME, THUS CALCULATED, FALLS SHORT OF THIRT Y PER CENT OF BOOK PROFIT,THE SPECIAL PROVISIONS OF SEC. 115JA COME INTO OPERATION. THERE IS NO SCOPE FOR ANY DEDUCTIO N OR ALLOWANCE UNDER ANY OTHER PROVISION OF THE ACT AT T HIS STAGE. THE SECTION IS TO APPLY NOTWITHSTANDING AN YTHING CONTAINED IN ANY OTHER PROVISIONS OF THIS ACT. BO OK PROFIT HAS BEEN DEFINED AND EXPLAINED IN SECTION 11 5JA. THIS PROVISIONBECAME NECESSARY BECAUSE A LARGE NUMB ER OF COMPANIES WERE NOT PAYING ANY TAX IN SPITE OF MA KING HUGE PROFITS BY TAKING ADVANTAGE OF THE VARIOUS PROVISIONS FOR DEDUCTION AND ALLOWANCES CONTAINED I N THE ACT. THE TOTAL INCOME THUS COMPUTED WAS WAY BELOW THE ITA NOS. 5364/D/2010 & 5104/D/2011 78 TAXABLE LIMIT. TO CIRCUMVENT THIS, SECTION 115JA W AS INTRODUCED IN THE STATUTE. THIRTY PER CENT OF THE BOOK PROFIT OF A COMPANY WILL HAVE TO BE TREATED AS ITS TOTAL INCOME IN A CASE WHERE THE TOTAL INCOME AS COMPUTED IN WITH THE OTHER PROVISIONS OF THE ACT WAS FOUND TO B E LESS THAN THIRTY PER CENT OF THE BOOK PROFIT OF THE COMP ANY. WHAT IS BOOK PROFIT HAS BEEN DEFINED AND EXPLAINED IN THAT SECTION. SECTION 115JA IS A SELF CONTAINED CO DE AND WILL APPLY NOTWITHSTANDING ANY OTHER PROVISIONS OF THE ACT. THERE IS NO SCOPE FOR ANY ALLOWANCES OR DEDUC TION UNDER ANY OTHER SECTION FROM WHAT IS DEEMED TO BE T OTAL INCOME OF AN ASSESSEE. THE QUESTIONS RAISED BY THE APPLICANT WHICH WE HAVE SET OUT EARLIER ARE NOT HAPPILY FRAMED. WE ANSWER ALL THE QUESTIONS BY SAYING THAT THE APPLICANT CANNOT CLAIM ANY SPECIAL BENEFIT U/S 42 IN THE CALCULATION OF ITS BO OK PROFIT BY RESORTING TO SECTION 115JA. DEDUCTION OF EXPEND ITURE U/S 42 IS ALLOWABLE ONLY WHEN BUSINESS ICNOME IS COMPUTED UNDER CHAPTER IVD OF THE INCOME-TAX ACT. SECTION 42 OF THE INCOME-TAX ACT CANNOT OVERRIDE TH E PROVISIONS OF SECTION 115JA. THE PROVISIONS OF SEC TION 115JA WILL CLEARLY APPLY IN THE CASE OF THE APPLICA NT COMPANY. 62.3 THUS, IN THE CASE OF FOREIGN COMPANY THE PROVI SIONS OF SECTION 115JA WERE APPLICABLE. 63. LD. DR FURTHER REFERRED TO PAGE 75 OF THE PAPER BOOK IN THE CASE OF TIMKEN COMPANY IN REFERENCE, 326 ITR 193 BEFORE AAR AND POINTED OUT THAT THE FOLLOWING QUESTIONS WERE RAISED BEFORE THE AAR: ITA NOS. 5364/D/2010 & 5104/D/2011 79 ON THE ABOVE FACTS STATED BY THE APPLICANT. THE FO LLOWING WING QUESTIONS ARE FORMULATED BY THE APPLICANT I SEEKING ADVANCE RULING (I) WHETHER THE PROVISIONS OF SECTION 115JB OF THE ACT RELATING TO PAYMENT OF MINIMUM ALTERNATIVE (MAT) ARE APPLICABLE ONLY TO DOMESTIC INDIAN COMPANIES? (II) IF THE ANSWER TO QUESTION NO 1 IS NEGATIVE, WH ETHER THE PROVISIONS OF SECTION 115JB OF THE ACT RELATING TO PAYMENT OF MAT ARE APPLICABLE TO ONLY SUCH FOREIGN COMPANIES THAT HAVE A PHYSICAL BUSINESS PRESENCE IN INDIA? (III) BASED ON THE ANSWER TO QUESTION (II) SINCE TH E APPLICANT IS A FOREIGN COMPANY WHO DOES NOT HAVE A, PHYSICAL PRESE NCE IN INDIA IN THE FORM OF AN OFFICE OR BRANCH AND ALSO IN THE LIG HT OF THE DECLARATION PROVIDED BY THE APPLICANT THAT IT DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA IN TERMS OF ARTICL E 5 THE INDIA-USA DOUBLE TAXATION AVOIDANCE AGREEMENT (ATTACHMENT VII I), WHETHER THE PROVISIONS OF SECTION115JB OF THE ACT ARE APPLI CABLE ON THE SALE OF SHARES OF A LISTED COMPANY, VIZ , TIMKEN INDIA L IMITED, T THE APPLICANT, WHICH HAS SUFFERED SECURITIES TRANSACTIO N TAX AND, ACCORDINGLY, TAX EXEMPT UNDER SECTION 10(38) OF THE ACT? (IV) IF THE PROVISIONS OF SECTION 115JB OF THE ACT ARE APPLICABLE TO THE APPLICANT. WHETHER THE PAYMENT MADE TO THE APPLICAN T ON SALE OF THE SHARES WOULD SUFFER ANY WITHHOLDING TAX UNDER SECTI ON 195 OF THE ACT AND IF YES WHETHER TAX AT 15 PER CENT OF THE NE T CAPITAL GAINS WOULD BE REQUIRED TO BE WITHHELD? 63.1 LD. DR POINTED OUT THAT AAR ANSWERED THE QUEST ION NO. 3 ONLY IN NEGATIVE BUT NOT DISSENTED FROM EARLIER DECISIONS. HE SUBMITTED THAT SINCE THE APPLICANT HAD NO PHYSICAL PRESENCE IN INDIA THE REFORE, IT WAS HELD THAT THE PROVISIONS OF SECTION 115JB WERE NOT APPLICABLE. L D. DR FURTHER REFERRED TO ITA NOS. 5364/D/2010 & 5104/D/2011 80 THE DECISION OF AAR IN THE CASE OF CASTLETON INVEST MENT LTD. 2012-TII-36- ARA-INTL, WHEREIN, INTER-ALIA, IT WAS HELD THAT 115 JB IS NOT APPLICABLE ONLY TO DOMESTIC COMPANY BUT ALSO TO FOREIGN COMPANIES. LD . DR SUBMITTED THAT THIS DECISION HAS BEEN FOLLOWED IN RST R BATLIBOI & CO. 25. QUESTION NO. 2 IS WHETHER THE APPLICANT WOULD BE LIABLE TO BE TAXED U/S 115JB OF THE ACT IN THE ABSENCE OF A PERMANENT ESTABLISHMENT IN INDIA OR IN THE ABSENCE OF A BUSINESS CONNECTION IN INDIA. THE APPLICANT ARGUES THAT SECTION 115JB WOULD APPLY ONLY TO DOMESTIC COMPANIE S AND NOT FOREIGN COMPANIES. THE RELEVANT NOTES ON CLAUS ES TO FINANCE BILL, 2000 IS RELIED ON IN SUPPORT. EARLIE R RULINGS OF THIS AUTHORITY IN THAT BEHALF ARE ALSO RELIED ON. THE REVENUE HAS NOT JOINED ISSUE ON THIS, MERELY STATING THAT T HE QUESTION HAS TO BE DECIDED ON MERITS. 26. ON A READING OF SEC. 115JB COUPLED WITH THE DE FINITION OF COMPANY IN THE ACT, IT MAY NOT BE DIFFICULT TO SAY THAT SEC. 115JB WILL BE APPLICABLE TO A COMPANY INCORPORATED OUTSIDE INDIA. SUB-SECTION (2) ALSO MAY NOT STAND IN THE W AY SINCE IT SEEKS PREPARATION OF ACCOUNTS IN ACCORDANCE WITH TH E PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO TH E COMPANIES ACT FOR THE PURPOSE OF THIS SECTION. IT MAY NOT DEPEND ON AN OBLIGATION OTHERWISE TO PREPARE SUCH AN ACCOUNT. 27. BUT, WE ARE NOT PURSUING THIS ASPECT FURTHER S INCE THE ASPECT WAS NOT PERUSED AND THE PARTIES PROCEEDED AS IF THE PROVISION MAY HAVE NO APPLICATION. HENCE, ACCEPTIN G THE PLEA OF THE APPLICANT, WE RULE THAT SECTION 115JB HAS NO APPLICATION IN THIS CASE. ITA NOS. 5364/D/2010 & 5104/D/2011 81 64. LD. CIT(DR) SUBMITTED THAT ALL THESE DECISIONS OF AUTHORITY FOR ADVANCE RULING HAVE PERSUASIVE FORCE THOUGH NOT BINDING. 64.1 LD. CIT(DR) REFERRED TO VARIOUS DECISIONS RELI ED UPON BY LD. COUNSEL FOR THE ASSESSEE AND SUBMITTED AS UNDER: 1. AS REGARDS KERALA STATE ELECTRICITY BOARD, LD. D R POINTED OUT THAT THE SAME IS BASED ON PECULIAR SET OF FACTS. HE REFERRE D TO PARA 46.6 AND POINTED OUT THAT THE HONBLE HIGH COURT OBSERVED AS UNDER: 46.6 COMPANIES ENGAGED IN THE BUSINESS OF GENERATI ON AND DISTRIBUTION OF POWER AND THOSE ENTERPRISES ENG AGED IN DEVELOPING, MAINTAINING AND OPERATING INFRASTRUC TURE FACILITIES UNDER SUB-SECTION (4A) OF SECTION 80-IA ARE EXEMPTED FROM THE LEVY OF MAT, SO THAT THE INCENTI VE GIVEN TO INFRASTRUCTURE DEVELOPMENT IS NOT AFFECTE D. 65. AS REGARDS THE RELIANCE PLACED ON THE DECISION OF STATE BANK OF HYDERABAD, LD. CIT(DR) POINTED OUT THAT IN PARA 13 TRIBUNAL HAS OBSERVED THAT THE AMENDMENT IS PROSPECTIVE IN NATURE. EXPLA NATION 3 HAS NOT BEEN CONSIDERED IN THIS DECISION AND TRIBUNAL FOLLOWED T HE DECISION IN THE CASE OF MAHARASHTRA STATE ELECTRICITY BOARD VS. JCIT, 82 IT D 422. 66. LD. CIT(DR) SUBMITTED THAT IN OUR CASE ASSESSEE HAS PREPARED ACCOUNTS IN ACCORDANCE WITH PART II OF SCHEDULE VI OF COMPANIES ACT. HE SUBMITTED THAT FACTS AND CONTEXT HAS TO BE SEEN BEC AUSE SLIGHTEST DIFFERENCE IN FACTS WILL CHANGE THE ENTIRE COMPLEXION. HE SUB MITTED THAT ASSESSEES CASE COMES WITHIN THE AMBIT OF COMPANIES ACT AND NO T ANY SPECIAL ACT. IN THIS REGARD LD. DR REFERRED TO PAGE 37 OF PAPER BOO K, WHEREIN THE DECISION OF ITA NOS. 5364/D/2010 & 5104/D/2011 82 TRIBUNAL IN THE CASE OF MAHARASHTRA STATE ELECTRICI TY BOARD IS CONTAINED AND POINTED OUT THAT IN PARA 15 TRIBUNAL HAS, INTER-ALI A, NOTED THAT AS PER SECTION 115JA(2) COMPANY IS REQUIRED TO PREPARE ITS PROFIT AND LOSS ACCOUNT IN ACCORDANCE WITH THE PROVISIONS OF PART II & III OF SCHEDULE VI TO THE COMPANIES ACT. HOWEVER, MSEB WAS REQUIRED TO PREPA RE ITS ACCOUNTS IN CONFORMITY WITH THE PROVISIONS OF SECTION 69 OF THE ELECTRICITY SUPPLY ACT. LD. CIT(DR) POINTED OUT THAT IN OUR CASE ASSESSEE HAS P REPARED ACCOUNTS IN ACCORDANCE WITH PART II OF SCHEDULE VI TO COMPANIES ACT AND, THEREFORE, THIS DECISION IS NOT APPLICABLE. LD. CIT(DR) REFERRED T O THE DECISION OF ITAT MUMBAI BENCHES IN THE CASE OF KRUNG THAI BANK PCL A ND POINTED OUT THAT IN THIS CASE REQUIREMENTS OF BANKING REGULATION ACT WERE NOT CONSIDERED. 67. LD. CIT(DR) FURTHER REFERRED TO THE DECISION OF ITAT, MUMBAI BENCHES IN THE CASE OF M/S RELIANCE ENERGY LTD. VS. ACIT, V IDE ITA NO. 218/MUM./2005 AND POINTED OUT THAT ACCOUNTS PREPARE D AS PER ELECTRICITY ACT ARE MATERIALLY DIFFERENT BUT IN THE PRESENT CASE TH E ACCOUNTS PREPARED BY ASSESSEE ARE NOT MATERIALLY DIFFERENT FROM THE REQU IREMENTS OF SCHEDULE VI. HE FURTHER POINTED OUT THAT HERE IS NOT A CASE OF I MPOSSIBILITIES SINCE ASSESSEE ITSELF PREPARED THE ACCOUNTS IN ACCORDANCE WITH SCHEDULE VI. AS REGARDS THE RELIANCE ON THE DECISION IN THE CASE OF ICICI LOMBARD GENERAL INSURANCE CO. LTD. VS. CIT, 54 SOT 538 LD. CIT(DR) POINTED OUT THAT IN THIS CASE INSURANCE ACT WAS CONSIDERED AND IT WAS HELD T HAT PRIOR TO 01/04/2003 PROVISIONS OF SECTION 115JB WERE NOT APPLICABLE IN CASE OF INSURANCE ITA NOS. 5364/D/2010 & 5104/D/2011 83 COMPANY AS THEY WERE NOT REQUIRED TO PREPARE ACCOUN TS AS PER PART II & III OF SCHEDULE VI OF COMPANIES ACT, WHEREIN TRIBUNAL HELD THAT THERE WAS IMPOSSIBILITY OF PREPARATION OF ACCOUNTS AS PER SCH EDULE VI PART II & III. IN THIS REGARD TRIBUNAL RELIED ON THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF CIT VS. OFFICIAL LIQUIDATOR PILLAI CENTRAL BANK LTD.,150 ITR 539 AND ALSO ON THE DECISION OF HONBLE SUPREME COURT IN TH E CASE OF CIT VS. B.C. SRINIVASA SETTY, 128 ITR 294. TRIBUNAL ALSO REFERR ED TO THE DECISION IN THE CASE OF QUALITY BISCUITS LTD. 284 ITR 434, WHEREIN IT HAS BEEN HELD THAT PROVISIONS OF SECTION 234B AND 234C ARE NOT APPLICA BLE IN RESPECT OF COMPUTATION OF DEDUCTION U/S 115J BECAUSE THE COMPU TATION OF PROFIT U/S 115J HAS TO BE MADE ON THE BASIS OF BOOK PROFIT AND SINCE ENTIRE EXERCISE OF COMPUTING THE INCOME U/S 115J CAN ONLY BE DONE AT T HE END OF THE FINANCIAL YEAR, AND THE PROVISIONS OF SECTION 207, 208, 209 A ND 210 CANNOT BE MADE APPLICABLE UNTIL AND UNLESS THE ACCOUNTS ARE AUDITE D AND THE BALANCE SHEET PREPARED. 68. LD. COUNSEL IN THE REJOINDER REFERRED TO THE DE CISION IN THE CASE OF KRUNG THAI BANK PCL AND POINTED OUT THAT IN THIS CA SE THE ISSUE BEFORE THE TRIBUNAL WAS WHETHER THE REOPENING OF THE ASSESSMEN T IN ASSESSEES CASE ON THE GROUND OF APPLICABILITY OF MAT PROVISIONS U/ S 115JB WAS IN ACCORDANCE WITH LAW OR NOT. TRIBUNAL IN PARA 7 HELD AS UNDER: 7. THE PLEA OF THE ASSESSEE IS INDEED WELL TAKE N, AND IT MEETS OUR APPROVAL. THE PROVISIONS OF SECTION 115 JB CAN ONLY COME INTO PLAY WHEN THE ASSESSEE IS REQUIRED TO PREPARE ITS PROFIT AND LOSS ACCOUNT ITA NOS. 5364/D/2010 & 5104/D/2011 84 IN ACCORDANCE WITH THE PROVISIONS OF PART II AND II I OF SCHEDULE VI TO THE COMPANIES ACT. THE STARTING POINT OF COMPUTATIO N OF MINIMUM ALTERNATE TAX UNDER SECTION 115 JB IS THE RESULT SH OWN BY SUCH A PROFIT AND LOSS ACCOUNT. IN THE CASE OF BANKING COM PANIES, HOWEVER, THE PROVISIONS OF SCHEDULE VI ARE NOT APPLICABLE IN VIEW OF EXEMPTION SET OUT UNDER PROVISO TO SECTLON 211 (2) OF THE COMPANIES ACT. THE FINAL ACCOUNTS OF THE BANKING COMPANIES AR E REQUIRED TO BE PREPARED IN ACCORDANCE WITH THE PROVISIONS OF THE B ANKING REGULATION ACT. THE PROVISIONS OF SECTION 115 JB CA NNOT THUS BE APPLIED TO THE CASE OF A BANKING COMPANY. 69. LD. COUNSEL REFERRED TO PAGE 327 AND POINTED OU T THAT IN THE RETURN OF INCOME THERE IS TYPOGRAPHICAL ERROR AS REGARDS THE PREPARATION OF PROFIT AND LOSS ACCOUNT AS PER SCHEDULE VI TO WHICH LD. CIT(DR ) VEHEMENTLY OPPOSED AT THIS STAGE. LD. COUNSEL REFERRED TO PAGE 336, W HEREIN COMPUTATION OF TAXABLE INCOME U/S 115JB(MAT) OF THE ACT IS CONTAIN ED AND POINTED OUT THAT WAS WITH REFERENCE TO NOTE 12 AND 13 GIVEN IN THE N OTES TO COMPUTATION OF INCOME IN ANNEXURE V. HE SUBMITTED THAT ASSESSEE H AD POINTED OUT THAT WITHOUT PREJUDICE TO ITS CLAIM REGARDING APPLICABIL ITY OF PROVISIONS OF SECTION 115JB, THE COMPUTATION WAS FILED BY ASSESSEE LD.COU NSEL REFERRED TO THE RETURNS OF INCOME FOR A.YS. 2006-07, 2008-09 AND 20 09-10 AND POINTED OUT THAT ASSESSEE HAD SPECIFICALLY WRITTEN 2 (NO.) IN REGARD TO PREPARATION OF PROFIT AND LOSS ACCOUNT AS PER PARTS II AND III OF SCHEDULE VI. HE FURTHER REFERRED TO PAGE 127 WHEREIN THE OBJECTIONS FILED B EFORE DRP ARE CONTAINED AND POINTED OUT THAT ASSESSEE STATED AS UNDER: ITA NOS. 5364/D/2010 & 5104/D/2011 85 IT WAS SUBMITTED TO THE AO THAT THE ASSESSEE CARR IES ON BANKING BUSINESS THROUGH ITS BRANCHES AND PREPARES ITS PROF IT AND LOSS ACCOUNT FOR INDIAN OPERATIONS IN ACCORDANCE WITH THE SECTIO N 29 OF THE BANKING REGULATION ACT, 1949 AND NOT AS PER PARTS II AND II I OF SCHEDULE VI TO THE COMPANIES ACT, 1956. 69.1 HE FURTHER REFERRED TO PAGE 282 AND 283TO POIN T OUT THAT THIS FACT WAS BROUGHT TO THE NOTICE OF AO ALSO. LD. COUNSEL FURT HER REFERRED TO PARA 9 OF AOS ORDER AND POINTED OUT THAT AO HAS NOTED THAT A SSESSEE HAD DISPUTED THE APPLICABILITY OF MAT PROVISIONS. HE, THEREFORE , SUBMITTED THAT IT IS WRONG TO SUBMIT THAT MERELY ON ACCOUNT OF COMPUTATION BEI NG MADE U/S 115JB, THE SAID PROVISIONS WERE APPLICABLE TO ASSESSEE. 70. LD. COUNSEL FURTHER SUBMITTED THAT COMPANY U/ S 115JB CONTEXTUALLY REFERS ONLY TO DOMESTIC COMPANY. IT CANNOT INCLUDE FOREIGN COMPANY. LD. COUNSEL RELIED ON 341 ITR 1 (131) VODAFONE INTERNAT IONAL HOLDINGS B.V. VS. UNION OF INDIA AND POINTED OUT THAT IT HAS BEEN HEL D THAT WORD PRESENCE TO BE CONSTRUED U/S 195 IN THE CONTEXT OF THE TRANSACT ION AND NOT IN A MANNER THAT BRINGS A NON-RESIDENT ASSESSEE UNDER JURISDICT ION OF INCOME TAX AUTHORITIES. 71. LD. COUNSEL RELIED ON THE DETAILED SUBMISSIONS CONTAINED AT PAGE 130 ONWARDS. 71.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND H AVE PERUSED THE RECORD OF THE CASE. THE FACTS ARE NOT DISPUTED. ITA NOS. 5364/D/2010 & 5104/D/2011 86 72. ADMITTEDLY THE ASSESSEE HAD PREPARED ITS ACCOUN TS AS PER THE REQUIREMENTS OF BANKING REGULATION ACT AND WHILE FI LING THE RETURN OF INCOME, THOUGH IT HAD COMPUTED THE BOOK PROFITS AS PER THE PROVISIONS OF SECTION 115JB ALSO, BUT HAD GIVEN A NOTE THAT THE PROVISION S OF SECTION 115JB WERE NOT APPLICABLE. IT IS ALSO NOT DISPUTED THAT PROFI T AND LOSS ACCOUNT OF ASSESSEE HAD NOT BEEN PREPARED AS PER PART II & III OF SCHEDULE VI TO THE COMPANIES ACT. 73. LD. COUNSEL HAS RELIED ON THE DECISION IN THE C ASE OF MAHARASHTRA STATE ELECTRICITY BOARD (SUPRA), M/S RELIANCE ENERG Y LIMITED (SUPRA), KERALA STATE ELECTRICITY BOARD (SUPRA), WHICH HAVE BEEN RE NDERED WITH REFERENCE TO ELECTRICITY (SUPPLY) ACT, 1948. THE DECISION IN TH E CASE OF ICICI LOMBARD GENERAL INSURANCE COMPANY LTD. HAS BEEN RENDERED WI TH REFERENCE TO ACCOUNTS PREPARED AS PER THE INSURANCE REGULATORY A ND DEVELOPMENT AUTHORITY (PREPARATION OF FINANCIAL STATEMENTS ON A UDITORS REPORT OF INSURANCE COMPANY) REGULATION, 2002. IN ALL THESE DECISIONS IT HAS BEEN HELD THAT SINCE THE ACCOUNTS WERE NOT PREPARED AS PER THE PRO VISIONS OF PART II OF SCHEDULE VI OF COMPANIES ACT AND THE ACCOUNTS WERE NOT LAID BEFORE THE ANNUAL GENERAL MEETING IN ACCORDANCE WITH THE PROVI SIONS OF SECTION 210 OF THE COMPANIES ACT AS PER THE REQUIREMENTS OF SUB-SE CTION (2) OF SECTION 115JB, THEREFORE, THE PROVISIONS OF SECTION 115JB W ERE NOT APPLICABLE. EXPLANATION 3 HAS BEEN INSERTED BY THE FINANCE ACT, 2012 W.E.F. 01/04/2013 ITA NOS. 5364/D/2010 & 5104/D/2011 87 AS PER WHICH NOW THE BOOK PROFITS CAN BE COMPUTED O N THE BASIS OF ACCOUNTS PREPARED UNDER THE GOVERNING ACT TO SUCH COMPANY. 73.1 LD. COUNSEL POINTED OUT THAT IN THE CASE OF ST ATE BANK OF HYDERABAD (SUPRA) IT HAS BEEN HELD THAT THIS AMENDMENT IS PRO SPECTIVE AND, THEREFORE, IT IS NOT APPLICABLE FOR THE PRESENT ASSESSMENT YEAR. 74. LD. CIT(DR) HOWEVER, POINTED OUT THAT TRIBUNAL HAS NOT CONSIDERED IN DETAIL THE IMPORT OF THIS AMENDMENT AND HAS SIMPLY ON THE BASIS OF DATE OF INSERTION HAS OBSERVED THAT IT IS PROSPECTIVE. HE HAS POINTED OUT THAT IN THE CASE OF STATE BANK OF HYDERABAD PRIMARILY THE DECIS ION IN THE CASE OF MAHARASHTRA STATE ELECTRICITY BOARD HAS BEEN FOLLOW ED AND EXPLANATION 3 HAS NOT BEEN CONSIDERED. IN OUR OPINION THIS EXPLA NATION CANNOT BE HELD TO BE RETROSPECTIVE IN OPERATION BECAUSE IT HAS BROUGH T IN A SUBSTANTIAL CHANGE IN THE COMPUTATION PROVISION. TILL THE INSERTION O F THIS AMENDMENT, VARIOUS DECISIONS CLEARLY HELD THAT IN CASE OF BANKING COMP ANIES, ELECTRICITY COMPANIES AND INSURANCE COMPANIES, SINCE THEY WERE GOVERNED BY SPECIAL ACTS AND THE PROFIT AND LOSS ACCOUNT WAS NOT PREPAR ED AS PER PART II OF SCHEDULE VI TO THE COMPANIES ACT, THEREFORE, THE CO MPUTATION PROVISIONS FAILED. ACCORDINGLY, IN VIEW OF THE DECISION OF HO NBLE SUPREME COURT IN THE CASE OF B.C. SRINIVASA SETTY (SUPRA), 128 ITR 294, THE LAW TILL THE INSERTION OF ITA NOS. 5364/D/2010 & 5104/D/2011 88 THIS EXPLANATION WAS THAT THE PROVISIONS OF SECTION 115JB WERE NOT APPLICABLE ON ACCOUNT OF IMPOSSIBILITY OF COMPUTATION AS THE A CCOUNTS WERE NOT PREPARED IN ACCORDANCE WITH PART II, SCHEDULE VI TO THE COMPANIES ACT. NOW BY INCORPORATING EXPLANATION 3, THE COMPANIES GOVER NED BY SPECIAL ACTS WHICH COME WITHIN THE AMBIT OF COMPANY U/S 2(17) AR E COVERED BY THE PROVISIONS OF SECTION 115JB. THEREFORE, THIS AMEND MENT BRINGS SUBSTANTIAL CHANGE IN THE TAXABILITY OF COMPANIES GOVERNED BY T HE SPECIAL ACTS AND, THEREFORE, CANNOT BE HELD TO BE RETROSPECTIVE. IN THIS REGARD WE ALSO FIND STRENGTH FROM THE RATIO LAID DOWN BY THE HONBLE SU PREME COURT IN ITS DECISION DATED 16.9.2014 IN THE CASE OF CIT VS. VAT IKA TOWNSHIP PVT. LTD. IN CIVIL APPEALS ARISING OUT OF SLP(C) NO. 1362 OF 200 9 AND OTHERS. THE FIVE JUDGES BENCH OF THE HONBLE SUPREME COURT STRIKES D OWN DIVISION BENCH RULING ON RETROSPECTIVE APPLICABILITY OF PROVISO TO SECTION 113 OF THE INCOME TAX ACT HOLDING THE PROVISO TO OPERATE PROSPECTIVEL Y. LAYING DOWN PERUSAL PRINCIPLES GOVERNING RETROSPECTIVITY, THE HONBLE S UPREME COURT HAS BEEN PLEASED TO RULE THAT UNLESS CONTRARY INTENTION APPE ARS, A LEGISLATION IS PRESUMED NOT TO BE INTENDED TO HAVE RETROSPECTIVE O PERATION, CURRENT LAW OUGHT TO GOVERN CURRENT ACTIVITIES, LAW PASSED TODA Y CANNOT APPLY TO PAST EVENTS. 75. LD. COUNSEL HAS ALSO RELIED ON THE DECISION IN THE CASE OF KRUNG THAI BANK PCL IN WHICH IT HAS BEEN HELD THAT SINCE IN TH E CASE OF BANKING ITA NOS. 5364/D/2010 & 5104/D/2011 89 COMPANIES SCHEDULE VI IS NOT APPLICABLE, THEREFORE, SECTION 115JB CANNOT BE APPLIED. 76. THE MAT PROVISIONS WERE BROUGHT IN STATUTE BY T HE INCOME TAX ACT BY FINANCE BILL, 1996 AND THE HONBLE FINANCE MINISTER WHILE INTRODUCING THIS PROVISION, INTER-ALIA, OBSERVED THAT COMPANY ENGAGE D IN THE POWER AND INFRASTRUCTURE SECTOR WILL REMAIN EXEMPT FROM THE L EVY OF MAT. THIS PROVISION WAS BROUGHT IN TO BRING WITHIN THE TAX NET THE ZERO TAX COMPANIES. IN FINANCE BILL, 2000, THE HONBLE FINANCE MINISTER, INTER-ALI A, PROPOSED THAT THE MAT BE LEVIED AT THE REVISED RATE OF 7.5% OF BOOK PROFITS AS DETERMINED UNDER THE COMPANIES ACT INSTEAD OF THE EXISTING EFFECTIVE RAT E OF 10.5%. THE FINANCE BILL, 2002 VIDE CLAUSE (49) AMENDED SECTION 115JB O BSERVING AS UNDER: CLAUSE 49 SEEKS TO AMEND SECTION .115JB OF THE. INC OME-TAX ACT RELATING TO SPECIAL PROVISION FOR PAYMENT OF TAX B Y CERTAIN COMPANIES. . THE EXISTING PROVISIONS OF THE SAID SECTION PRO VIDE FOR LEVY OF A MINIMUM, TAX ON DOMESTIC COMPANIES OF AN AMOUNT EQU AL TO SEVEN AND ONE-HALF PER CENT., OF THE BOOK PROFIT, IF THE TAX PAYABLE ON THE .TOTAL INCOME CHARGEABLE TO TAX AS PER THE PROVISIONS OF THE INCOME-TAX ACT, 1961, IS LESS THAN SEVEN AND ONE-HALF PER CENT OF T HE BOOK PROFIT.. . SUB-CLAUSE (A) SEEKS TO PROVIDE THAT WHERE THE TAX PAYABLE ON THE TOTAL INCOME CHARGEABLE TO TAX IS LESS THAN SEVEN AND ONE-HALF PER CENT. OF BOOK PROFIT, SUCH BOOK PROFIT SHALL BE DEEMED T O BE THE TOTAL INCOME OF THE ASSESSEE AND THE TAX PAYABLE BY THE ASSESSE T: ON SUCH TOTAL .INCOME SHALL BE THE. AMOUNT OF INCOME-TAX AT THE R ATE OF SEVEN AND ONE- HALF PER CENT. THIS AMENDMENT WILL TAKE EFFECT .RETROSPECTIVELY FR OM 1ST APRLL 2001, AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSM ENT YEARS 2001-2002 AND SUBSEQUENT YEARS. 76.1 THIS MAKES THE INTENTION OF LEGISLATURE VERY C LEAR THAT THE MAT PROVISIONS ARE APPLICABLE ONLY TO DOMESTIC COMPANIE S AND NOT TO THE FOREIGN COMPANIES. ITA NOS. 5364/D/2010 & 5104/D/2011 90 77. LD. DR HAS RELIED ON VARIOUS DECISIONS OF AUTHO RITY FOR ADVANCE RULING WHICH HAVE ELABORATELY BEEN CONSIDERED IN THE ARGUM ENTS ADVANCED BY HIM. THESE DECISIONS HAVE ONLY PERSUASIVE VALUE AND ARE NOT BINDING ON US. WE FIND THAT CONSISTENT VIEW OF VARIOUS COORDINATE BEN CHES IS THAT SECTION 115JB IS NOT APPLICABLE IN CASE OF BANKING COMPANIES. 78. EVEN IF FOR SAKE OF ARGUMENT LD. CIT(DR)S CONT ENTION IS ACCEPTED STILL IN VIEW OF THE PROVISIONS OF SECTION 90(2), THE ASS ESSEES CLAIM FOR LOWER IMPOST OF TAX WILL HAVE TO BE ACCEPTED BECAUSE THE PROVISIONS OF SECTION 115JB ARE SUBORDINATE TO SECTION 90(2) AND HAVE NO OVERRIDING EFFECT ON THE SAID SECTION. 78.1 IN VIEW OF THE ABOVE DISCUSSION, THIS GROUND I S ALLOWED BECAUSE IT HAS BEEN CLARIFIED BY LD. COUNSEL THAT THE TAXABLE INCO ME HAD BEEN COMPUTED AS PER THE PROVISIONS OF ARTICLE 7(3) OF THE DTAA. 79. GROUND NO. 6 IS IN REGARD TO ADDITION ON ACCOUN T OF INTEREST RECEIVED ON EXTERNAL COMMERCIAL BORROWINGS GIVEN TO INDIAN BORR OWERS. THE AO REQUIRED THE ASSESSEE TO FURNISH THE DETAILS OF INTEREST EAR NED FROM THE ECB (EXTERNAL COMMERCIAL BORROWINGS) AS PER SECTION 9(1)(V) OF TH E ACT. THE AO OBSERVED THAT AFTER REPEATED OPPORTUNITIES, THE ASSESSEE PRO VIDED A LIST TOTALING INTEREST OF RS. 1159672669/- AND ALSO STATED THAT INTEREST RECEIVED BY THE HEAD OFFICE/OVERSEAS BRANCHES FROM MAJORITY OF THE INDIAN BORROWERS ARE ENCLOSED AS ANNEXURE 1. IT IS SUBMITTED THAT THE B ANK IS IN PROCESS OF COLLATING INFORMATION WITH RESPECT TO OTHER BORROWE RS, WHICH SHALL BE ITA NOS. 5364/D/2010 & 5104/D/2011 91 FURNISHED WITH YOUR OFFICE SHORTLY. AS THE INFORM ATION WAS NOT FORTHCOMING, THE AO REQUIRED THE ASSESSEE TO FILE COPIES OF LOAN AGREEMENTS ALONG WITH PENDING DETAILS. SINCE ASSESSEE FAILED TO PROVIDE THE COMPLETE DETAILS, THE AO COMPUTED THE INTEREST OF THIS ACCOUNT AT RS. 139 1607202/- BEING 20% HIGHER THAN THE FIGURE SUBMITTED BY THE ASSESSEE. HE POINTED OUT THAT THIS INTEREST INCOME ACCRUES TO THE ASSESSEE FROM INDIA AND IS ARISING FROM INDIA AND IS TAXABLE IN INDIA ALSO AS PER SECTION 9(1)(V) OF THE ACT AND AS PER ARTICLE 11 OF THE DTAA. THE ASSESSEE POINTED OUT THAT THE FEE OFFERED TO TAX AS THE SYNDICATION FEE IS THE INCOME ATTRIBUTABLE TO THE PE AND THE SAME HAS BEEN OFFERED TO TAX IN INDIA. THE AO DID NOT ACCEPT THE ASSESSEES SUBMISSION AND POINTED OUT THAT THE COMPENSATION GIVEN TO THE PE FOR SERVICES RENDERED BY IT TO AN ASSOCIATE ENTERPRISE HAS TO BE AT ARMS LENGTH PRICE. HE POINTED OUT THAT THE SYNDICATION FEE WAS THE REMUNERATION T O THE BRANCH IN INDIA AND NO WAY THE INTEREST. THE INTEREST IS RECEIVED BY T HE HEAD OFFICE AND THE FOREIGN BRANCHES WHICH HAS NOT BEEN OFFERED TO TAX. THE AO TAXED THE ENTIRE INTEREST INCOME ON GROSS BASIS @ 10% OBSERVING AS U NDER: AS DISCUSSED ABOVE THE DEBT CLAIM SHOULD FORM PAR T OF LHE BALANCE SHEET OF THE PE; HOWEVER EVEN OTHERWISE. EVEN AS P ER THE ARGUMENTS OF THE ASSESSEE AT THE MAXIMUM ONLY A PART OF THE D EBT CLAIM OF THE ASSESSEE CAN BE CONSIDERED TO BE EFFECTIVELY CONNEC TED WITH THE PE I.E. THE PART INCOME AS IS DIRECTLY OR INDIRECTLY A TTRIBUTABLE TO THAT PERMANENT ESTABLISHMENT. REST OF THE AMOUNT OF INTE REST AMOUNT WILL STILL BE TAXABLE AS PER ARTICLE 11 OF THE DTAA AS T HE LOAN FORMS PART OF THE BALANCE SHEET OF THE BRANCHES ABROAD AND THE MONEY WHICH IS THE CORE OF THE TRANSACTION COME FROM BRANCHES ABRO AD AND THE RISKS ETC. ARE BORNE BY THEM. THE INCOME CHARGEABLE TO TAX AS PER ARTICLE 7 OF TH E DT AA WILL BE TAXED AS PER THE RATES APPLICABLE TO NET INCOME AS PER THE INCOME- ITA NOS. 5364/D/2010 & 5104/D/2011 92 TAX ACT 1961. THE DEDUCTION OF SPECIFIC EXPENSES CA N BE ALLOWED AND THE HEAD OFFICE EXPENSES U/S 44C OF THE ACT, IF ANY . IT IS STATED BY THE ASSESSEE THAT IT HAS NOT DEDUCTED THE TDS AS PER IN COME-TAX ACT 1961 ON PAYMENT OF INTEREST (IF ANY) FOR ACCEPTING DEPOSITS TAKING LOANS FOR GIVING ECBS TO PARTIES IN INDIA. THE CONC ESSIONAL RATE OF TAX IS PROVIDED UNDER ARTICLE 11 OF THE DTAA OF 10% OF THE GROSS. IT IS ESTIMATED THAT THE TAX PAYABLE ON THE (NET INCOM E AFTER ALLOWING ELIGIBLE DEDUCTIONS) INTEREST ATTRIBUTABLE TO THE P E IN INDIA WILL EQUAL TO 10% OF THE GROSS AMOUNT. ACCORDINGLY, THE ENTIRE INTEREST INCOME IS TAXED HE REBY AT THE RATE OF 10% OF GROSS BASIS. 80. LD. DRP CONFIRMED THE AOS ACTION, INTER-ALIA, OBSERVING THAT SYNDICATION FEES RECEIVED BY ASSESSEE WAS FOR PROCE SSING THE DOCUMENTS ONLY RELATED TO ECBS TO INDIAN BORROWERS. HOWEVER , INTEREST ON THESE ECBS HAD NOT BEEN OFFERED FOR TAXATION. 81. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE REQU ESTED FOR ADMISSION OF ADDITIONAL EVIDENCE UNDER RULE 29 OF THE INCOME TAX APPELLATE TRIBUNAL RULES WHICH IS IN THE FORM OF AGREEMENT WITH SUZUKI POWER TRAIN INDIA LIMITED AND WITH MARUTI SUZUKI AUTOMOBILE INDIA LIM ITED WITH THE ASSESSEE TO DEMONSTRATE THAT INTEREST ON EXTERNAL COMMERCIAL BORROWING IS NET OF TAX AND, THEREFORE, THE SAME COULD NOT BE TAXED ON GROS S BASIS. IN A.Y. 2008- 09, THE ASSESSEE HAS ALSO FILED THE LOAN AGREEMENT WITH INDIAN OVERSEAS BANK SINGAPORE, THE ASSESSEE HAS FILED AFFIDAVIT IN SUPPORT OF THESE APPLICATIONS. LD. CIT(DR) SUBMITTED THAT FIRSTLY A DMISSIBILITY OF ADDITIONAL GROUND HAS TO BE DECIDED. HE SUBMITTED THAT THE AD DITIONAL GROUND HAS BEEN RAISED IN NOVEMBER, 2012 THOUGH APPEAL WAS FILED ON 30/11/2010 I.E. AFTER TWO YEARS. HE SUBMITTED THAT THIS GROUND WAS NEITH ER RAISED BEFORE AO NOR ITA NOS. 5364/D/2010 & 5104/D/2011 93 DRP. HE REFERRED TO PAGE 23 OF ASSESSMENT ORDER TO DEMONSTRATE THAT EVEN REMOTELY THIS ISSUE WAS NOT BEFORE AO AND SAME WAS THE POSITION BEFORE LD. DRP. LD. CIT(DR) SUBMITTED THAT ASSESSEE HAS TO GI VE REASONS WHY THIS GROUND WAS NOT TAKEN EARLIER. HE SUBMITTED THAT FR ESH INVESTIGATION OF FACTS IS REQUIRED TO FIND OUT AS TO HOW THE LOAN WAS UTIL IZED OUTSIDE INDIA. LD. DR RELIED ON THE DECISION IN THE CASE OF DR. CHANDRAVA TI, 301 ITR 172; (II) BROOK BOND INDIA VS. CIT, 100 CTR 284(CAL.), WHEREIN IT H AS BEEN HELD THAT WHERE FRESH EXAMINATION OF FACTS IS REQUIRED THEN NO ADDI TIONAL GROUND CAN BE RAISED. HE ALSO REFERRED TO THE FOLLOWING DECISION S: 116 ITR 778, CIT VS. GANGAPPA CABLES LTD. 204 ITR 166 (AT), CIT VS. LT. BEGUM NOOR BANU ALLA DIN. 299 ITR 400 (KER.), P.R. NARAHARI RAO VS. CIT. 266 ITR 409 (KER.), OOPPOOTIL KURIEN & CO. (P) LTD . VS. CIT. 81.1 HE SUBMITTED THAT IF OBJECTION ON A PARTICULAR POINT HAS NOT BEEN RAISED BEFORE THE FIRST APPELLATE AUTHORITY THEN THE SAME CANNOT BE RAISED FOR THE FIRST TIME BEFORE THE TRIBUNAL. HE SUBMITTED THAT IT HAS TO BE EXAMINED WHETHER THE LOANS GIVEN BY THE HEAD OFFICE OR FOREI GN BRANCH OFFICES TO INDIAN BORROWERS WERE UTILIZED FOR THE PURPOSES OF BUSINES S CONDUCTED BY BORROWER (RESIDENT OUTSIDE INDIA). 82. LD. SR. COUNSEL SUBMITTED THAT THOUGH ADDITIONA L GROUND HAS BEEN RAISED BY THE ASSESSEE BUT IT IS ONLY WITH RESPECT TO WHAT INCOME IS CHARGEABLE UNDER THE ACT. LD. COUNSEL SUBMITTED TH AT INTEREST EARNED FROM ITA NOS. 5364/D/2010 & 5104/D/2011 94 ECB IS NOT CHARGEABLE TO TAX. HOWEVER, ASSESSEE HA S ONLY TAKEN A GROUND TO SUPPORT ITS MAIN GROUND. LD. COUNSEL ALSO REFER RED TO VARIOUS DECISIONS RELIED UPON BY LD. DR AND POINTED OUT THAT SINCE AO HAS TAXED THE AMOUNT ON GROSS BASIS WHICH SHOULD HAVE BEEN ON NET BASIS, THEREFORE, THESE LOAN AGREEMENTS HAVE TO BE CONSIDERED. 82.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND H AVE PERUSED THE RECORD OF THE CASE. THE INDIAN BRANCH OF ASSESSEE WAS PERFORMING THE FOLLOWING SERVICES WITH RESPECT TO ECB LOAN: I) MARKETING/SALES PROMOTION; II) PASSING ON THE LEAD TO THE OVERSEAS BRANCHES; III) INDIAN BRANCHES DID THE CREDIT EVALUATION OF T HE INDIAN CUSTOMERS AND USED TO SEND AN EVALUATION REPORT TO THE HEAD OFFIC E/OVERSEAS BRANCHES; IV) REVIEW OF TERMS AND CONDITIONS OF THE APPROVAL; 82.2 THE SYNDICATION FEE WAS RECEIVED BY INDIAN BRA NCH FOR THE AFOREMENTIONED SERVICES. BUT THAT PART OF INTEREST EARNED BY HEAD OFFICE/FOREIGN BRANCHES WHICH WAS ATTRIBUTABLE TO T HE PE IN INDIA WAS NOT RETURNED BY ASSESSEE. AT PAGE 203 OF THE PAPER BOO K, THE ASSESSEE HAS ADMITTED THAT THE INDIAN BRANCHES OF THE BANK PLAY AN ACTIVE ROLE IN THE DISBURSEMENT OF ECB LOAN AND ALSO REGULARLY MONITOR THE SAME. THEREFORE, THE ECB LOANS DISBURSED BY THE HEAD OFFICE/FOREIGN BRANCHES WERE EFFECTIVELY CONNECTED WITH THE INDIAN BRANCHES. TH EREFORE, INTEREST INCOME ITA NOS. 5364/D/2010 & 5104/D/2011 95 HAD TO BE APPROPRIATED TO THE PE IN INDIA AS IT HAD ACCRUED AND ARISEN IN INDIA. NOW THE QUESTION WOULD BE AS TO HOW MUCH IN TEREST IS ALLOCABLE TO THE PE IN INDIA. THE AO HAS TAXED 10% OF THE GROSS INT EREST. THE ASSESSEES CONTENTION IS THAT THE INTEREST PAID TO HEAD OFFICE /FOREIGN BRANCHES ARE NET OF TAX FOR WHICH THE LOAN AGREEMENTS HAVE TO BE EXAMIN ED WHICH HAS BEEN FILED BY WAY OF ADDITIONAL EVIDENCE. WE AGREE WITH LD. S R. COUNSEL THAT THESE AGREEMENTS, THOUGH FILED AS ADDITIONAL EVIDENCE, AR E NECESSARILY TO BE TAKEN INTO CONSIDERATION FOR ARRIVING AT THE CORRECT TAXA BILITY OF INTEREST. WE, THEREFORE, ADMIT THESE AGREEMENTS AND RESTORE THE M ATTER TO THE FILE OF AO FOR DENOVO CONSIDERATION. 83. IN THE RESULT, THIS GROUND IS ALLOWED FOR STATI STICAL PURPOSES. 84. GROUND NO. 7 IS WITH REGARD TO DEDUCTION U/S 44 C OF THE ACT WHICH DEDUCTION HAS NOT BEEN ALLOWED BY AO WHILE COMPUTIN G INTEREST INCOME FROM ECBS. AS WE HAVE RESTORED THE GROUND NO. 6 FOR D ETERMINING THE INTEREST INCOME ON ECBS RELATING TO PE IN INDIA, THEREFORE, THIS GROUND NECESSARILY HAS TO BE RESTORED TO THE FILE OF AO. 85. IN THE RESULT, THIS GROUND IS ALLOWED FOR STATI STICAL PURPOSES. 86. GROUND NO. 8 IS REGARDING TREATMENT IN RESPECT OF DEFERRED BANK GUARANTEE COMMISSION. THE AO NOTED THAT THE COMMIS SION RECEIVED ON GUARANTEES IN RESPECT OF THE PERIOD WHICH HAD NOT E XPIRED WAS NOT OFFERED AS INCOME ACCRUED FOR THE YEAR BUT HAD BEEN TREATED AS AN ADVANCE IN LINE WITH THE ACCOUNTING POLICY FOLLOWED BY THE BANK. HE OBS ERVED THAT AMOUNT OF ITA NOS. 5364/D/2010 & 5104/D/2011 96 COMMISSION RECEIVED IS AN INCOME WHICH ACCRUES AT T HE TIME THE BANK ISSUES THE GUARANTEE. THE PERIOD OF GUARANTEE HAS NOTHING TO DO WITH THE ASSESSEES RIGHT TO RECEIVE HAVING ARISEN. HE POIN TED OUT THAT THE COMMISSION RECEIVED WAS LIKE A FEE FOR ISSUING THE GUARANTEE AND WAS NOT A CONTINGENT RECEIPT OR ADVANCE AND IT WAS ALSO NOT R ETURNABLE AT THE END OF THE GUARANTEE PERIOD. THUS, THE AMOUNT OF COMMISSION R ECEIVED WAS INCOME, WHICH ACCRUED AT THE TIME THE BANK ISSUED THE GUARA NTEE. LD. DRP CONFIRMED THE AOS ACTION, INTER-ALIA, OBSERVING TH AT THE DECISION OF HONBLE KOLKATA HIGH COURT IN ASSESSEES OWN CASE WAS NOT A CCEPTED BY THE DEPARTMENT AND SLP HAD BEEN FILED BEFORE THE HONBL E SUPREME COURT. 86.1 HAVING HEARD BOTH THE PARTIES, WE FIND THAT TH IS ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBLE KOLKATA HIGH COU RT IN THE CASE OF CIT VS. BANK OF TOKYO LTD., 71 TAXMAN 55, WHEREIN UNDER SIM ILAR CIRCUMSTANCES, IT HAS BEEN HELD THAT FULL COMMISSION THOUGH PAYABLE A T THE OUTSET DID NOT CRYSTALLIZE INTO PERFECT RIGHT TO RECEIVE SO FAR AS UN-EXPIRED PERIOD WAS CONCERNED BECAUSE THE PAYABILITY OR RECEIVABILITY F ROM THE VIEW OF THE ASSESSEE BANK WAS COUNTER BALANCED BY THE REFUNDABI LITY DILUTING THE RIGHT TO RECEIVE INTO A CONTINGENT RIGHT AS REGARDS UN-EXPIR ED PERIOD OF THE GUARANTEE. THE ASSESSEE CLARIFIED THAT FEDAI GUIDELINES PLACES AN OBLIGATION ON THE ITA NOS. 5364/D/2010 & 5104/D/2011 97 ASSESSEE TO REFUND THE PROPORTIONATE COMMISSION FOR THE UN-EXPIRED PERIOD. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF H ONBLE KOLKATA HIGH COURT IN ASSESSEES OWN CASE, THIS GROUND IS ALLOWED. 87. GROUND NO. 9 IS REGARDING APPLICABILITY OF RATE OF TAX. THE ASSESSEES GRIEVANCE IS THAT LD. DRP AND AO DID NOT ADJUDICATE THIS UNDER THE PROVISIONS OF ARTICLE 24 OF THE DTAA. THE CONTENTION IS THAT THE APPLICABLE RATE OF TAX ON THE INCOME OF THE ASSESSEE ATTRIBUTABLE TO ITS PE I N INDIA CANNOT EXCEED THE APPLICABLE RATE OF TAX (AS PER THE FINANCE ACT FOR THE ASSESSMENT YEAR) IN THE CASE OF DOMESTIC COMPANIES. 87.1 HAVING HEARD BOTH THE PARTIES, WE FIND THAT TH IS ISSUE IS COVERED AGAINST THE ASSESSEE BY EXPLANATION 1 TO SECTION 90 (2), WHICH READS AS UNDER: EXPLANATION 1.-FOR THE REMOVAL OF DOUBTS, IT IS H EREBY DECLARED THAT THE CHARGE OF TAX IN RESPECT OF A FOREIGN COMPANY A T A RATE HIGHER THAN THE RATE AT WHICH A DOMESTIC COMPANY IS CHARGEABLE, SHALL NOT BE REGARDED AS LESS FAVOURABLE CHARGE OR LEVY OF TAX I N RESPECT OF SUCH FOREIGN COMPANY. 88. IN VIEW OF ABOVE EXPLANATION THIS GROUND IS REJ ECTED. 89. GROUND NO. 10 IS RELATING TO INITIATION OF PENA LTY U/S 271(1)(C), THE SAME BEING PREMATURE, IS DISMISSED. 90. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 5104/DEL/2011 91. GROUND NO. 1 IS REGARDING DISALLOWANCE OF SALAR Y PAID OVERSEAS TO EXPATRIATES OF THE APPELLANT WORKING IN INDIA BY TH E HEAD OFFICE AND THE ITA NOS. 5364/D/2010 & 5104/D/2011 98 INDIAN TAXES PAID THEREON BY THE HEAD OFFICE RS. 11 0,832,464/-. THIS ISSUES HAS BEEN DECIDED BY US IN A.Y. 2007-08 FOR THE REAS ONS STATED IN PARA 5 TO 12 OF THE SAID ORDER THIS GROUND IS ALLOWED. 92. GROUND NO. 2 & 3 ARE REGARDING ADDITION ON ACCO UNT OF INTEREST PAID TO HEAD OFFICE AND OTHER OVERSEAS BRANCHES OF THE BANK AMOUNTING TO RS. 238,222,371/- AND RELATING TO ADDITION ON ACCOUNT O F INCOME OF THE APPELLANT PERTAINING TO RECEIPT OF INTEREST FROM INDIAN BRANC HES AMOUNTING TO RS. 238,222,371/-. THESE TWO GROUNDS HAVE BEEN DECIDED IN A.Y. 2007-08 VIDE PARA NOS. 16 TO 42. THESE GROUNDS ARE ALLOWED FOR THE REASONS STATED THEREIN. 92.1 LD. CIT(DR) HAS RAISED AN ADDITIONAL GROUND IN COURSE OF ARGUMENT THAT IF INTEREST RECEIVED BY HO FROM BRANCH IS NOT CONSIDERED AS INCOME THEN EXPENDITURE CLAIMED BY ASSESSEE IN EARNING THAT INT EREST IS TO BE DISALLOWED UNDER SECTION 14A. ADDITIONAL GROUND HAS BEEN CONS IDERED IN PARA NO. 31 ONWARDS AND IN PARA 42.1 IT HAS BEEN HELD THAT THE MATTER IS TO BE RESTORED BACK TO THE FILE OF AO FOR COMPUTATION AND DISALLOW ANCE U/S 14A. THEREFORE, THE ADDITIONAL GROUND RAISED BY THE LD. CIT(DR) IS ALLOWED FOR STATISTICAL PURPOSES. 93. GROUND NO. 4 IS REGARDING INTEREST AMOUNTING TO RS. 30,975,098/- ACCRUED/RECEIVED BY THE INDIAN PE FROM ITS HO/OVERS EAS BRANCHES. THIS GROUND HAS BEEN CONSIDERED BY THE TRIBUNAL IN A.Y. 2007-08 IN PARA 44 TO 46. FOR THE REASONS STATED THEREIN PARA NOS. 44 TO 46 THIS GROUND IS REJECTED. 94. GROUND NO. 5 IS REGARDING NON-APPLICABILITY OF THE PROVISIONS OF SEC. 115JB OF THE ACT RELATING TO MINIMUM ALTERNATE TAX (MAT). THIS GROUND HAS BEEN CONSIDERED BY THE TRIBUNAL IN A.Y. 2007-08 FRO M PARA 47 TO 78.1 AND FOR THE REASONS STATED THEREIN THIS GROUND IS ALLOW ED. ITA NOS. 5364/D/2010 & 5104/D/2011 99 95. GROUND NO. 6 IS REGARDING ADDITION ON ACCOUNT O F INTEREST RECEIVED ON EXTERNAL COMMERCIAL BORROWINGS (ECBS) GIVEN TO IN DIAN BORROWERS. THIS GROUND HAS BEEN CONSIDERED BY THE TRIBUNAL IN A.Y. 2007-08 FROM PARAS 79 TO 83 AND FOR THE REASONS STATED THEREIN THIS GROUN D IS ALLOWED FOR STATISTICAL PURPOSES. 96. GROUND NO. 7 IS REGARDING DEDUCTION U/S 44C OF THE ACT. THIS GROUND HAS BEEN CONSIDERED BY THE TRIBUNAL IN A.Y. 2007-08 FROM PARS 84 TO 85 AND FOR THE REASONS STATED THEREIN THIS GROUND IS ALLOW ED FOR STATISTICAL PURPOSES. 97. GROUND NO. 8 IS REGARDING TREATMENT IN RESPECT OF DEFERRED BANK GUARANTEE COMMISSION. THIS GROUND HAS BEEN CONSIDE RED BY THE TRIBUNAL IN A.Y. 2007-08 FROM PARAS 86 TO 86.1 AND FOR THE R EASONS STATED THEREIN THIS GROUND IS ALLOWED. 98. GROUND NO. 9 IS REGARDING APPLICABLE RATE OF TA X. THIS GROUND HAS BEEN CONSIDERED BY THE TRIBUNAL IN A.Y. 2007-08 FROM PAR AS 87 TO 87.1 AND FOR THE REASONS STATED THEREIN THIS GROUND IS REJECTED. 99. GROUND NO. 10 IS REGARDING COMPUTATION OF INTER EST U/S 234B OF THE ACT. THIS GROUND READS AS UNDER: A) WITHOUT PREJUDICE TO THE GROUNDS 1 TO 9 ABOVE, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS ERRED IN NOT DET ERMINING THE CORRECT AMOUNT OF INTEREST U/S 234B OF THE ACT BY IGNORING THE CREDIT OF MAT FOR THE PURPOSE OF COMPUTATION OF INTEREST U/S 234B OF THE ACT. 99.1 IN THE CASE OF CIT VS. TULSYAN NEE LTD., 2010- (SC2)-GJX-0969-SC, THE ISSUE WAS WHETHER MAT CREDIT ADMISSIBLE IN TERM S OF SEC. 115JAA HAS TO ITA NOS. 5364/D/2010 & 5104/D/2011 100 BE SET OFF AGAINST THE TAX PAYABLE (ASSESSED TAX) B EFORE CALCULATING INTEREST U/S 234A, 234B & 234C OF THE INCOME TAX ACT, 1961. THE HONBLE SUPREME COURT HELD AS UNDER: FROM THE ABOVE, IT IS EVIDENT THAT ANY TAX PAID IN ADVANCE/PRE-ASSESSED TAX PAID CAN BE TAKEN INTO ACCOUNT IN COMPUTING THE TAX PAYABLE SUBJECT TO ONE CAVEAT, VIZ., THAT WHERE THE ASSESSEE ON THE BASIS OF SELF COMPUTATION UNILATERALLY CLAIMS SET OFF OR MAT CREDIT, THE ASSESSEE DOES SO AT ITS RISK AS IN CASE IT IS ULTIMATELY FOUND THAT THE AMOUNT OF TAX CREDIT AVAI LED WAS NOT LAWFULLY AVAILABLE, THE ASSESSEE WOULD BE EXPOSED TO LEVY OF INTEREST U/S 234B ON THE SHORTFA LL IN THE PAYMENT OF ADVANCE TAX. WE REITERATE THAT WE CANNOT ACCEPT THE CASE OF THE DEPARTMENT BECAUSE IT WOULD MEAN THAT EVEN IF THE ASSESSEE DOES NOT HAVE TO PAY ADVANCE TAX IN THE CURRENT YEAR, BECAUSE IT WOU LD MEAN THAT EVEN IF THE ASSESSEE DOES NOT HAVE TO PAY ADVANCE TAX IN THE CURRENT YEAR, BECAUSE OF HIS BROUGHT FORWARD MAT CREDIT BALANCE, HE WOULD NEVERTHELESS BE REQUIRED TO PAY ADVANCE TAX, AND IF HE FAILS, INTEREST U/S 234B WOULD BE CHARGEABLE. THE CONSEQUENCE OF ADOPTING THE CASE OF THE DEPARTMENT WOULD MEAN THAT MAT CREDIT WOULD LAPSE AFTER FIVE SUCCEEDING ASSESSMENT YEARS U/S 115JAA(3); THAT NO INTEREST WOULD BE PAYABLE ON SUCH CREDIT BY THE GOVERNMENT UNDER THE PROVISO TO SECTION 115JAA(2) AND THAT THE ASSESSEE WOULD BE LIABLE TO PAY INTERE ST UNDER SECTIONS 234B AND C ON THE SHORTFALL IN THE ITA NOS. 5364/D/2010 & 5104/D/2011 101 PAYMENT OF ADVANCE TAX DESPITE EXISTENCE OF MAT CREDIT STANDING TO THE ACCOUNT OF THE ASSESSEE. TH US, DESPITE MAT CREDIT STANDING TO THE ACCOUNT OF THE ASSESSEE, THE LIABILITY OF THE ASSESSEE GETS INCREA SED INSTEAD OF IT GETTING REDUCED. 99.2 FURTHER AS PER CLAUSE (V) TO EXPLANATION 1 TO SECTION 234B(1), FOR COMPUTING ASSESSED TAX ANY TAX CREDIT ALLOWED TO BE SET OFF IN ACCORDANCE WITH THE PROVISIONS OF SECTION 115JAA HAS TO BE RED UCED. THE AO IS DIRECTED TO DETERMINE THE INTEREST PAYABLE U/S 234B KEEPING IN VIEW THE AFOREMENTIONED POSITION OF LAW. 100. IN THE RESULT, THIS GROUND IS ALLOWED FOR STAT ISTICAL PURPOSES. 101. GROUND NO. 11 IS RELATING TO INITIATION OF PEN ALTY U/S 271(1)(C), THE SAME BEING PRE-MATURE IS DISMISSED. 102. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 103. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 19/09/2014 SD/- SD/- (I.C. SUDHIR) JUDICIAL MEMBER (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED: 19/09/2014 *KAVITA ITA NOS. 5364/D/2010 & 5104/D/2011 102 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER ASSISTANT REGISTRAR