SOCIETE GENERALE, MUMBAI V. JT. DIT (IT) RG.-2, MUMBAI

ITA 6355/MUM/2009

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8642 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 03-10-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 09-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: BRIJMOHAN POORNMAL AGARWAL
• Keywords: Business expenditure; Double taxation relief; Permanent establishment; Non-deduction of tax

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI L BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI R S SYAL , AM & SHRI VIJAY PAL RAO, J M ITA NO. 6355/MUM/2009 (ASST YEAR 2005-06) SOCIETE GENERALE MAKER CHAMBERS IV 4 TH FLOOR J BAJAI MARG, NARIMAN POINT\MUMBAI 21 VS THE JT DIRECTOR OF INCOME TAX(IT) RANGE 2, MUMBAI (APPELLANT) (RESPONDENT) PAN NO. AABCS7484C ASSESSEE BY SH BRIJMOHAN POORNMAL AGARWAL REVENUE BY MR MAHESH KUMAR DT.OF HEARING 3 RD OCT 2012 DT OF PRONOUNCEMENT 10 OCT 2012 PER VIJAY PAL RAO, JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 15.10.2009 OF THE COMMISSIONER OF INCOME TAX(APPEALS) FOR THE ASS ESSMENT YEAR 2005-06. 2 THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE G ROUNDS IN THIS APPEAL: I) IN DISALLOWING INTEREST PAID BY THE APPELLANT AM OUNTING TO ` 9,83,363/- TO ITS HEAD OFFICE/OVERSEAS BRANCHES U/S 40(A)(I) O F THE I T ACT SINCE THE APPELLANT DID NOT DEDUCT TAXES FROM THE SAME. II) IN TAXING THE INTEREST RECEIVED BY THE HEAD OFF ICE/OVERSEAS BRANCHES FROM THE APPELLANT AMOUNTING TO ` 9,83,363/- ON THE BASIS THAT THE INTEREST INCOME IS SOURCED IN INDIA AND ACCORDINGLY SHOULD BE TAXABLE IN INDIA. 3 GROUND NO.1 IS REGARDING DISALLOWANCE MADE U/S 40 (A)(I) OF THE IT ACT FOR INTEREST PAID BY THE ASSESSEE TO ITS HEAD OFFICE AN D OVERSEAS BRANCHES. 3.1 THE ASSESSEE HAS PAID INTEREST AMOUNTING TO ` 9,83,363/- TO HO AND OVERSEAS BRANCH. THE ASSESSING OFFICER NOTED THAT NO TDS WA S MADE BY THE ASSESSEE IN ITA NO.6355/MUM/2009 SOCIETE GENERALE 2 RESPECT OF THE SAID AMOUNT. THE ASSESSING OFFICER W AS OF THE VIEW THAT THERE WAS NO OVERRIDING PROVISION IN THE DTAA WHICH PROVIDES THA T SECTION 40(A)(I) OF THE ACT SHALL NOT BE APPLICABLE TO THE PAYMENT OF INTEREST, EVEN THOUGH THE SAME HAS BEEN CLAIMED IN THE ACCOUNT AS A BUSINESS EXPENSES. 3.2 ON APPEAL, THE COMMISSIONER OF INCOME TAX(APPEA LS) HAS CONCURRED WITH THE VIEW OF THE ASSESSING OFFICER AND ACCORDINGLY U PHELD THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 40(A)(I) OF THE ACT. 4 WE HAVE HEARD THE LD AR OF THE ASSESSEE AS WELL A S THE LD DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT THIS ISSUE IS NOW COVERED BY THE DECISION OF THE SPECIAL BENCH OF THIS TRIBUN AL IN THE CASE OF SUMITOMO MITSUI BANKING CORPORATION VS DY DIRECTOR OF INCOME TAX RE PORTED IN 16 ITR (TRIB)116(MUMBAI)(SB) WHEREIN THE SPECIAL BENCH OF THE TRIBUNAL HAS HELD AS UNDER: KEEPING IN VIEW ALL THE FACTS OF THE CASE AND THE LEGAL POSITION EMANATING FROM THE INTERPRETATION OF THE RELEVANT PROVISIONS O F THE DOMESTIC LAW AS WELL AS THAT OF THE TREATY AS DISCUSSED ABOVE, WE ARE OF THE VIEW THAT ALTHOUGH INTEREST PAID TO THE HEAD OFFICE OF THE ASSESSEE-BAN K BY ITS INDIAN BRANCH WHICH CONSTITUTES ITS PERMANENT ESTABLISHMENT IN IN DIA IS NOT DEDUCTIBLE AS EXPENDITURE UNDER THE DOMESTIC LAW BEING PAYMENT TO S ELF, THE SAME IS DEDUCTIBLE WHILE DETERMINING THE PROFIT ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT WHICH IS TAXABLE IN INDIA AS PER THE PROVISIONS OF ARTICLE 7(2) AND (3) OF THE INDO-JAPANESE TREATY READ WITH PARAGRAPH 8 OF THE PROTOCOL WHICH ARE MORE BENEFICIAL TO THE ASSESSEE. THE SAID INTERES T, HOWEVER, CANNOT BE TAXED IN INDIA IN THE HANDS OF THE ASSESSEE-BANK, A FOREIGN ENTERPRISE BEING PAYMENT TO SELF WHICH CANNOT GIVE RISE TO INCOME TH AT IS TAXABLE IN INDIA AS PER THE DOMESTIC LAW. EVEN OTHERWISE, THERE IS NO EXP RESS PROVISION CONTAINED IN THE RELEVANT TAX TREATY WHICH IS CONTRARY TO THE D OMESTIC LAW IN INDIA ON THIS ISSUE. THIS POSITION APPLICABLE IN THE CASE OF INT EREST PAID BY INDIAN BRANCH OF A FOREIGN BANK TO ITS HEAD OFFICE EQUALLY HOLDS GOO D FOR THE PAYMENT OF INTEREST MADE BY THE INDIAN BRANCH OF A FOREIGN BANK TO ITS BRANCH OFFICES ABROAD AS THE SAME STANDS ON THE SAME FOOTING AS T HE PAYMENT OF INTEREST MADE TO THE HEAD OFFICE. AT THE TIME OF HEARING BEF ORE US, THE LEARNED REPRESENTATIVES OF BOTH SIDES HAVE ALSO NOT MADE AN Y SEPARATE SUBMISSIONS ON THIS ASPECT OF THE MATTER SPECIFICALLY. HAVING HELD THAT THE INTEREST PAID BY THE INDIAN BRANCH OF THE ASSESSEE BANK TO ITS HEAD OFFICE AND OTHER BRANCHES OUTSIDE INDIA IS NOT CHARGEABLE TO TAX IN INDIA, I T FOLLOWS THAT THE PROVISIONS OF SECTION 195 WOULD NOT BE ATTRACTED AND THERE BEING N O FAILURE TO DEDUCT TAX AT SOURCE FROM THE SAID PAYMENT OF INTEREST MADE BY THE PERMANENT ITA NO.6355/MUM/2009 SOCIETE GENERALE 3 ESTABLISHMENT, THE QUESTION OF DISALLOWANCE OF THE SAID INTEREST BY INVOKING THE PROVISIONS OF SECTION 40(A)(I) DOES NOT ARISE. ACCORDINGLY WE ANSWER QUESTION NO. 1 REFERRED TO THIS SPECIAL BENCH IN THE NEGATIVE, I.E., IN FAVOUR OF THE ASSESSEE AND QUESTION 2 IN AFFIRMATIVE, I.E., A GAIN IN FAVOUR OF THE ASSESSEE. 4.1 SINCE THE BENEFIT OF DTAA IS AVAILABLE TO THE A SSESSEE; THEREFORE, THOUGH THE INTEREST CANNOT BE TAXED IN INDIA IN THE HANDS OF T HE ASSESSEE BEING A FOREIGN ENTERPRISE, BEING PAYMENT TO SELF, THE SAME IS DEDU CTIBLE WHILE DETERMINING THE PROFITS ATTRIBUTABLE TO PE WHICH IS TAXABLE IN INDI A AS PER ARTICLE 7(2)(3) OF DTAA. ACCORDINGLY, FOLLOWING THE DECISION OF THE SPECIAL BENCH OF THIS TRIBUNAL (SUPRA), WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AND AGA INST THE REVENUE. THE DISALLOWANCE MADE U/S 40(A)(IA) IS ACCORDINGLY DELE TED. 5 GROUND NO.2 IS REGARDING ASSESSMENT OF INTEREST I NCOME OF ` 9,83,363/- AS PER DTAA BY TREATING THE SAME AS INCOME OF THE HO/OVERS EAS BRANCH AS THE PROFIT ATTRIBUTABLE TO THE PE IN INDIA BEING THE INDIAN B RANCH. 5.1 AT THE OUTSET, THE LD DR HAS SUBMITTED THAT THI S ISSUE DOES NOT ARISE FROM THE IMPUGNED ORDER OF THE COMMISSIONER OF INCOME TAX(AP PEALS). HE HAS FURTHER SUBMITTED THAT THE ASSESSEE DID NOT RAISE THIS ISSU E BEFORE THE COMMISSIONER OF INCOME TAX(APPEALS) AND THERE IS NO FINDING OF THE COMMISSIONER OF INCOME TAX(APPEALS) ON THIS ISSUE. THEREFORE, THE LD DR H AS RAISED THE OBJECTION ON THE MAINTAINABILITY OF THE GROUND NO.2. 5.1 ON THE OTHER HAND, THE LD AR OF THE ASSESSEE HA S SUBMITTED THAT GROUND NO.2 OF THE ASSESSEE IS CONSEQUENTIAL AND THEREFORE, THE SAME IS DEPEND ON THE FINDING OF GROUND NO.1. ITA NO.6355/MUM/2009 SOCIETE GENERALE 4 6 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CONS IDERED THE RELEVANT MATERIAL ON RECORD. IN FACT, GROUND NO.1 IS A CONS EQUENTIAL ONE AND PART OF GROUND NO.2 AND THE APPLICABILITY OF THE PROVISIONS OF SEC . 195 AS WELL AS SEC. 40(A)(I) DEPENDS ON THE QUESTION WHETHER THE INTEREST PAID B Y THE ASSESSEE TO THE HO WOULD CONSTITUTE THE INCOME OF THE ASSESSEE BEING THE PRO FIT ATTRIBUTABLE TO THE PE. SINCE THE SPECIAL BENCH OF THIS TRIBUNAL HAS DECIDED THIS ISSUE THAT THE INTEREST PAYMENT OF THE BRANCH TO THE HO IS NOT CHARGEABLE TO TAX IN IN DIA AND CONSEQUENTLY THE PROVISIONS OF SEC. 195 WOULD NOT ATTRACT. ACCORDIN GLY, BOTH THE GROUNDS ARE INTER LINKED AND BASED ON THE SAME LEGAL PROPOSITION THAT THE INTEREST PAID BY THE INDIAN BRANCH OF THE ASSESSEE TO ITS HO AND OTHER BRANCHES OUTSIDE INDIA IS NOT CHARGEABLE TO TAX IN INDIA. ACCORDINGLY, WE ARE OF THE VIEW TH AT THE SECOND ISSUE IS ALSO COVERED BY THE DECISION OF THE SPECIAL BENCH (SUPRA) AND HE NCE, THE SAID AMOUNT OF ` 9,83,363/- IS NOT TAXABLE IN INDIA. 7 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE I S ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 10 TH , DAY OF OCT 2012. SD/- SD/- ( R S SYAL ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 10 TH , OCT 2012 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI