DCIT (IT) - 1(1)(2), MUMBAI V. ANTWERP DIAMOND BANK NV, MUMBAI

ITA 6423/MUM/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5019 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2012-2013
• Appeal Filed On: 01-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V SREEKAR
• Assessee Lawyers: KETAN K VED
• Keywords: Double taxation relief; Earning of tax free income; Permanent establishment
• Section: 244A; 14A; 40(a)(ia); 195; 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES I , MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO. 6423/MUM/2016 ASSESSMENT YEAR : 2012-13 DCIT(IT) - 1(1)(2), MUMBAI VS. M/S. ANTWERP DIAMOND BANK NV, 510, 5 TH FLOOR, TRADE CENTRE, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI [PAN : AADCA 2713 J] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI V. SREEKAR, CIT - D R RESPONDENT BY : SHRI KETAN K. VED, AR DATE OF HEARING : 2 7 - 11 - 2018 DATE OF PRONOUNCEMENT : 31 - 0 1 - 201 9 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-55 , MUMBAI, DATED 04-07-2016. ITA NO. 6423/MUM/2016 : 2 : 2. THE ISSUE RAISED BY REVENUE IN GROUND NO. 1 IS A GAINST THE ORDER OF THE CIT(A), HOLDING THAT DATA PROCESSI NG COST PAID BY THE ASSESSEEBRANCH TO ITS HEAD OFFICE [HO] DOES NOT AMOUNT TO ROYALTY, WHEN SUCH PAYMENT IS BASED AND DETERMINED ON THE USAGE OF SPACE/CAPACITY AND OTHER KEYS TOWARDS USAGE OF ICT INFRASTRUCTURE AND FURTHER HOL DING THAT THE PAYMENT OF DATA PROCESSING COST IS REIMBURSEMEN T OF EXPENSES AND THE PROVISIONS OF TAX DEDUCTED AT SOUR CE (TDS) ARE NOT APPLICABLE AND CONSEQUENTLY NO DISALLOWANC E IS CALLED FOR UNDER THE PROVISIONS OF SECTION 40(A)(IA) OF T HE ACT. 2.1. THE FACTS IN BRIEF ARE THAT - ASSESSEE PAID DA TA PROCESSING COST OF RS. 88,26,181/- TO ITS HO, WHICH ACCORDING TO THE AO IS A COPY RIGHT PROTECTED INTELLECTUAL PR OPERTY, KNOWN AS ICT INFRASTRUCTURE, WHICH IS IT HARDWARE I MBEDDED WITH SOFTWARE AND ACCORDINGLY, THE AO CAME TO THE C ONCLUSION THAT THE IT IS A ROYALTY AS PER CLAUSE-(III), EXPLA NATION-2 TO SECTION 9(1)(VI) OF THE ACT. SINCE THE ASSESSEE HAS NOT DEDUCTED ANY TAX AT SOURCE, THE AO DISALLOWED THE SAME UNDER THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT AND ADDE D TO THE INCOME OF THE ASSESSEE. ITA NO. 6423/MUM/2016 : 3 : 2.2. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE PO INTED OUT THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF ASS ESSEE IN ASSESSEES OWN CASE BY THE DECISION OF THE CO-ORDIN ATE BENCH IN EARLIER YEARS I.E., AYS. 2004-05, 2006-07 & 2007 -08, WHEREIN THE CO-ORDINATE BENCH HAS HELD THAT ROYALT Y CANNOT BE HELD TO BE COVERED UNDER THE SCOPE OF ARTICLE 12 (3)(A) OF DTAA (DOUBLE TAXATION AVOIDANCE AGREEMENT) BETWEEN INDIA AND NETHERLANDS. LD. CIT(A) FOLLOWING THE ORDER OF ITAT IN THESE YEARS HELD THAT DATA PROCESSING COST DID NOT CONSTITUTE ROYALTY AND IS MERELY A REIMBURSEMENT OF EXPENSES NOT LIABLE FOR TDS AND THEREFORE, THE DEDUCTION HAS TO BE ALL OWED FOR REIMBURSEMENT OF COST OF DATA PROCESSING CHARGES. 2.2. THE LD DR ON THE OTHER HAND RELIED ON THE GROU NDS OF APPEAL AND ORDER OF AO. 2.3. SINCE THE FACTS IN THE INSTANT YEAR ARE IDENTI CAL TO ONES AS IN THE EARLIER YEARS AND ACCORDINGLY WE RESPECTF ULLY FOLLOWING THE DECISION OF THE CO-ORDINATE BENCHES H OLD THAT ASSESSEE IS ENTITLED FOR DEDUCTION OF DATA PROCESSI NG COST OF RS. 88,26,181/- AS THE SAME IS NOT ROYALTY BUT REIMBURSEMENT OF DATA PROCESSING CHARGES AND THERE FORE ITA NO. 6423/MUM/2016 : 4 : THERE IS NO REQUIREMENT OF DEDUCTION OF TAX AT SOUR CE FROM THE SAID REIMBURSEMENT. THIS GROUND OF REVENUE IS DISMI SSED. 3. AS FAR AS THE GROUND NO. 2 IS CONCERNED, THE FAC TS IN BRIEF ARE THAT ASSESSEE-BRANCH IN INDIA DURING THE YEAR HAS PAID INTEREST OF RS. 11,94,79,875/- TO ITS HO WHICH IS NOT TAXABLE IN THE HAND OF H.O. UNDER THE INCOME TAX AC T AND THEREFORE NOT OFFERED TO TAX AS INCOME OF THE H.O. THE AO DISALLOWED THE SAME ON THE GROUND THAT THE DECISION OF THE ITAT IN THE CASE OF MITSUI BANK [35 TTJ 426] AND IT AT, CALCUTTA IN THE CASE OF ABN AMRO BANK [97 ITD 89] A ND ALSO THAT THE DRP HAS DISALLOWED THE SAME IN AYS. 2006- 07 & 2007-08 THOUGH THE CREDIT OF TDS DEDUCTED OF RS. 1,21,04,206/- U/S. 195 OF THE ACT WAS ALLOWED WHIC H WAS DEDUCTED IN TERMS OF CIRCULAR NO. 740, DT. 17-04-19 96 @ 10% UNDER ARTICLE 11(2) OF TAX TREATY BETWEEN INDIA AND BELGIUM. 3.1. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE SU BMITTED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF ASS ESSEE IN ASSESSEES OWN CASE IN AYS. 2002-03 TO 2011-12 AND LD. AR SUBMITTED THAT CIT(A) WHILE DECIDING THE ISSUE, HAS ALSO FOLLOWED THE DECISION OF THE CO-ORDINATE BENCH IN A SSESSEES ITA NO. 6423/MUM/2016 : 5 : OWN CASE FOR THE AYS. 2003-04 TO 2007-08. THEREFORE , THE CIT(A) HAS PASSED WELL REASONED AND SPEAKING ORDER WHICH IS IN ACCORDANCE WITH THE RATIO AS LAID BY THE TRIBUNA L IN THE EARLIER YEAR AND SHOULD BE FOLLOWED IN THE INSTANT YEAR ALSO. 3.2. AFTER HEARING BOTH THE SIDES AND PERUSING THE MATERIAL ON RECORD, INCLUDING THE DECISIONS RELIED UPON, WE FIND THAT THE ISSUE HAS BEEN DECIDED BY THE CO-ORDINATE BEN CHES IN THE EARLIER YEARS FROM AYS. 2002-03 TO 2011-12, WHE REIN THE CO-ORDINATE BENCHES HAVE ALLOWED THE CLAIM FOR DEDU CTION OF INTEREST PAID BY THE BRANCH OFFICE TO ITS HO CONSID ERING THE FACT THAT THE ASSESSEE A BANKING COMPANY. THE CALC UTTA HIGH COURT HAS HELD IN THE CASE OF ABN AMRO BANK 198 TAX MAN 376 WHERE AN ASSESSEE IS AN BRANCH (PE) OF NON RESI DENT ENTITY I.E ITS HEAD OFFICE(G.E.) AND THE INTEREST PAID BY THE P.E. TO G.E. ALLOWABLE SINCE BRANCH (P.E.) IS SEPARATE AND DISTINCT FROM HEAD OFFICE(G.E.)FOR THE PURPOSE OF ASSESSMENT UNDER THE I.T.ACT AND ALSO HELD THAT INTEREST EARNED BY THE H EAD OFFICE (G.E.) FROM BRANCH OFFICE(P.E.) IS NOT CHARGEABLE T O TAX IN VIEW OF THE SPECIFIC PROVISIONS OF ARTICLE 11 OF DTAA BE TWEEN INDIA AND NETHERLAND. THEREFORE, RESPECTFULLY FOLLOWING THE ITA NO. 6423/MUM/2016 : 6 : DECISIONS OF THE CO-ORDINATE BENCHES, WE DISMISS TH E GROUND RAISED BY REVENUE. 4. THE ISSUE RAISED IN GROUND NO. 3 IS AGAINST DELE TION OF DISALLOWANCE U/S. 14A OF THE ACT. 4.1. THE FACTS IN BRIEF ARE THAT THE ASSESSEE DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS MADE DISALLOWANCE U/S. 14 A R.W. RULE 8D TO THE TUNE OF RS. 2,15,61,865/-, COMPRISIN G PROPORTIONATE DISALLOWANCE OF INTEREST OF RS. 1,34, 59,230/- UNDER RULE 8D(2)(II) AND RS. 81,02,635/- UNDER RULE 8D(2)(III). THE SAID DISALLOWANCE WAS MADE BY THE AO ON THE GRO UND THAT THE ASSESSMENT OF BOTH HO AND BRANCH IN INDIA ARE D ONE TOGETHER. ACCORDING TO THE AO, THE BRANCH HAS BORR OWED MONEY FROM THE HO, UTILIZED AND HAD PAID BACK THE I NTEREST ON SUCH DEBT AND THUS, THE BRANCH HAS CLAIMED EXPENSES IN CONNECTION WITH PAYMENT OF INTEREST TO THE HO AND T HE HO IS CLAIMING THE SAID INTEREST INCOME AS EXEMPT. THEREF ORE, THE DISALLOWANCE U/S. 14A R.W. RULE 8D HAS TO BE MADE O N THE BASIS OF PRINCIPLES OF MUTUALITY FOLLOWING THE SPECIAL BENCH DECISION IN THE CASE OF SUMITOMO CORPN. VS. DY.CIT [114 ITD ITA NO. 6423/MUM/2016 : 7 : 61]/[17 SOT 197] (DELHI) WHEN THE HO AND BRANCH OF FICE ARE FUNGIBLE ENTITIES. 4.2. LD. CIT(A) DELETED THE DISALLOWANCE ON THE GRO UND THAT IF THERE IS ANY EXEMPT INCOME EARNED BY THE BRANCH WHI CH IS EXEMPT UNDER THE INCOME TAX ACT, ONLY THEN THE PROV ISIONS OF SECTION 14A COULD BE APPLIED. ACCORDING TO THE CIT (A) THE ASSESSEE HAS NOT CLAIMED ANY EXEMPT INCOME UNDER TH E INCOME TAX ACT AS IS CLEAR FROM THE COMPUTATION OF TOTAL INCOME AND AS REGARDS THE INTEREST OF RS. 11,94,79, 875/-, INTEREST EARNED BY THE HO FROM THE BRANCH, THE HO H AS NOT INCURRED ANY EXPENDITURE IN INDIA TO EARN IT EVEN T HOUGH THE INTEREST EARNED BY IT IS HELD TO BE NOT CHARGEABLE TO TAX UNDER DTAA AND THEREFORE, THE PROVISIONS OF SECTION 14A O F THE ACT WOULD NOT APPLY. 4.3. LD. AR AT THE OUTSET POINTED OUT THAT THE ISSU E INVOLVED IN THIS CASE HAS BEEN DECIDED BY THE CO-ORDINATE BE NCH IN ASSESSEES OWN CASE IN ITA NOS. 7481/MUM/2014 & 7482/MUM/2014, DT. 28-02-2017 FOR THE AYS. 2010-11 & 2011-12 DECIDED THE ISSUE IN FAVOUR OF ASSESSEE BY OBSERVING AND HOLDING AS UNDER: ITA NO. 6423/MUM/2016 : 8 : 6. NEXT ISSUE RELATES TO DISALLOWANCE U/S. 14A FOR EARNING EXEMPT INCOME. WE HAVE CONSIDERED RIVAL CONTENTIONS AND F OUND FROM RECORD THAT THE ISSUE HAS BEEN DECIDED IN ASSESSEES FAVOU R BY THE MUMBAI ITAT, IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2 004-05, 2005- 06, 2007-08 AND 2009-10. THE INDIAN BRANCH HAS NOT RECEIVED/EARNED ANY INTEREST INCOME FROM ITS HEAD O FFICE OR OTHER FOREIGN BRANCHES AND HENCE THERE CAN BE NO QUESTION OF THE INTEREST EXPENSE IN QUESTION BEING INCURRED TO EARN ANY EXEM PT INCOME AND HENCE THE SAME CANNOT BE DISALLOWED U/S. 14A. THE P ROPOSITION THAT NO DISALLOWANCE CAN BE MADE U/S.14AOF THE INCOME-TA X ACT, 1961 IN CASE THERE IS NO EXEMPT INCOME IS NOW WELL SETTLED AND ONE CAN REFER TO THE FOLLOWING CASES WHEREIN THE SAID PR OPOSITION HAS BEEN UPHELD: CLT V/S. DELILE ENTERPRISES (ITA NO 110 OF 2009) (B ORN) CHEMINVEST LTD., V/S. CIT (2015) 378 ITR 33 (DELHI) ACIT VS. LAFARGE INDIA HOLDING (P) LTD., (2008)-(19 SOT 121) (MUM TRIB) CIT V/S SHIVAM MOTORS PVT LTD., (2015) 230 TAXMAN 63 (ALLAHABAD) CIT V/S. CORRTECH ENERGY PVT. LTD.. (233 TAXMAN 130 ) (GUJARAT) ACIT V/S. MR. M. BASKARAN (ITA NO.1717/MDS/2013) CIT V/S.LAKHANI MARKETING INC (2015) 226 TAXMAN 45 (P & H) HUNTSMAN INTERNATIONAL (INDIA) P. LTD., V /S DCIT (2016] 66 TAXMANN.COM 325 (MUM, TRIB) 6. CONTENTION OF ASSESSEE BEFORE US WAS THAT NO EXP ENDITURE HAS BEEN INCURRED OR CLAIMED BY THE INDIAN BRANCH IN RE SPECT OF INTEREST EARNED BY THE HEAD OFFICE (WHICH IS NOT TAXABLE). A CCORDINGLY, IT WAS PLEADED THAT PROVISIONS OF SECTION 14A ARE NOT APPL ICABLE TO THE SAID CASE. 7. WE FOUND SUBSTANTIAL MERIT IN THE CONTENTIO N OF LEARNED AR, HOWEVER, IN THE INTEREST OF JUSTICE, WE RESTORE THE MATTER BACK TO THE FILE OF THE AO TO FIND OUT IF ASSESSEE WAS IN RECEI PT OF ANY EXEMPT INCOME VIS-A-VIS INTEREST PAID TO HEAD OFFICE. IF T HE AO FOUND THAT ASSESSEE WAS NOT IN RECEIPT OF ANY EXEMPT INCOME, N O DISALLOWANCE IS TO BE MADE. ACCORDINGLY AO IS DIRECTED TO DECIDE AFRESH AFTER VERIFICATION. 8. LEARNED DR FAIRLY CONCEDED THAT SIMILAR GROUNDS HAVE BEEN TAKEN BY REVENUE IN THE ASSESSMENT YEAR 2011-012. ITA NO. 6423/MUM/2016 : 9 : 9. WE HAVE GONE THROUGH THE ORDERS OL THE AUTHORITI ES BELOW FOLLOWING THE REASONING GIVEN IN THE ASSESSMENT YEAR 2010-11. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) FOR THE A.Y 20 11-012. 10. IN THE RESULT, APPEALS FILED BY THE REVENUE ARE DISMISSED IN TERMS INDICATED HEREINABOVE. 4.4. SINCE THE FACTS OF THE PRESENT CASE BEFORE US ARE SIMILAR TO THE FACTS OF THE CASE AS DECIDED BY THE CO-ORDIN ATE BENCH IN THE AYS. 2010-11 & 2011-12 (SUPRA) IN ASSESSEES OW N CASE, WE , THEREFORE , RESPECTFULLY FOLLOWING THE DECISIO N OF THE CO- ORDINATE BENCH, UPHOLD THE ORDER OF CIT(A) AND THE GROUNDS RAISED BY REVENUE IS DISMISSED. 5. THE ISSUE RAISED IN GROUND NO. 4 IS AGAINST THE ORDER OF CIT(A) HOLDING THAT THE INTEREST INCOME ON INCOME T AX REFUND IS TO BE CHARGED ONLY UNDER ARTICLE 11(2) AND NOT U NDER ARTICLE 11(4) OF INDO BELGIUM DTAA, DESPITE THE INTEREST IN COME BEING EFFECTIVELY CONNECTED WITH PERMANENT ESTABLISHMENT (PE). 5.1. THE FACTS IN BRIEF ARE THAT ASSESSEE IN ITS RE TURN OF INCOME, CLAIMED THE RATE OF TAX @ 15%, WHICH IS APP LIED TO THE INTEREST EARNED ON INCOME TAX REFUND UNDER ARTICLE 11 OF DTAA BETWEEN INDIA AND NETHERLANDS BUT THE AO APPLI ED 40% + SURCHARGE AND COMPUTED THE TAX LIABILITY ACCORDIN GLY. THE ITA NO. 6423/MUM/2016 : 10 : CONTENTIONS OF ASSESSEE ARE THAT ASSESSEE IS TAX RE SIDENT OF BELGIUM AND THEREFORE ELIGIBLE TO CLAIM BENEFIT UND ER TAX TREATY TO THE EXTENT OF THE SAME IS BENEFICIAL AS P ER SECTION 90 OF THE ACT. ACCORDING TO ASSESSEE, INTEREST FROM IN COME TAX REFUND SHOULD NOT BE EFFECTIVELY CONNECTED TO PE AN D THEREFORE SHOULD BE TAXED AT THE RATE UNDER THE ACT OR UNDER TAX TREATY, WHICHEVER IS MORE BENEFICIAL. ACCORDINGLY, ASSESSEE SUBMITTED THAT INTEREST ON REFUND OF INCOME TAX SHOULD BE TAX ED @ 15% OF THE GROSS AMOUNT AS PER ARTICLE 11 OF THE TAX TR EATY. 5.2. THE LD. CIT(A) HELD ISSUE IN FAVOUR OF ASSESS EE BY HOLDING THAT UNDER ARTICLE 11(2) OF DTAA, GROSS AMO UNT OF INTEREST IN ALL OTHER CASES MAY BE TAXED @ 15% AND HENCE THE RATE OF 15% IS MORE BENEFICIAL THAN RATE OF 40% PRE SCRIBED IN THE FINANCE ACT, 2011 FOR ASSESSMENT YEAR. 2012-13. THEREFORE, IN VIEW OF THE PROVISIONS OF SECTION 90 OF THE ACT, IT IS HELD THAT RATE OF TAX APPLICABLE TO INTEREST ON INCOME TAX REFUND WOULD BE @15% PLUS SURCHARGE AND NOT 40% PL US SURCHARGE ACCORDINGLY. 5.2. LD. COUNSEL FOR THE ASSESSEE SUBMITTED TO THE BENCH THAT THE ISSUE IN THE PRESENT CASE IS SQUARELY COVE RED IN FAVOUR ITA NO. 6423/MUM/2016 : 11 : OF ASSESSEE, BY THE FOLLOWING DECISIONS OF CO-ORDIN ATE BENCHES, WHEREIN IT HAS BEEN HELD THAT INTEREST ON INCOME TA X RETURN IS CHARGEABLE TO TAX IN TERMS OF ARTICLE 11 OF DTAA BY RELYING ON THE FOLLOWING DECISIONS: I. MSM SATELLITE SINGAPORE PTE. LTD VS. DCIT (ITA NO. 1718/MUM/2015, DATED 21 JUNE 2017); II. ACIT VS. CLOUGH ENGINEERING LTD., [138 TTJ 385] (DELHI) (SB); 5.3. LD. DR ON THE OTHER HAND, RELIED ON THE GROUND S OF APPEAL AND THE ORDER OF AO. 5.4. HAVING HEARD THE RIVAL CONTENTIONS, MATERIAL O N RECORD AND THE DECISIONS RELIED UPON, WE FIND THAT THE ISS UE IN THE PRESENT CASE IS WHETHER THE INTEREST ON INCOME TAX REFUND OF RS. 21,24,618/- IS TO BE CHARGED @15% OR @40% HAS B EEN ADJUDICATED BY THE COORDINATE BENCHES TO BE TAXABLE AT 15% PLUS SURCHARGE. AFTER PERUSING THE FACTS OF THE CAS E OF ASSESSEE AND ARTICLE 11 OF DTAA, WE ARE OF THE CONSIDERED VI EW THAT INTEREST INCOME ON INCOME TAX REFUND HAS TO BE TAXE D AT THE RATE WHICH IS BENEFICIAL TO ASSESSEE AS THE ASSESSE E IS TAX AGENT OF BELGIUM. APPARENTLY THE BENEFICIAL RATE IS 15% UNDER ITA NO. 6423/MUM/2016 : 12 : ARTICLE 11(2) OF DTAA, WHICH IS LOWER THAN THE 40% PRESCRIBED IN THE FINANCE ACT, 2011 FROM AY. 2012-13 AND THERE FORE, IN VIEW OF THE PROVISIONS OF SECTION 90, THE RATE APPL ICABLE WOULD BE 15% + SURCHARGE. THE CASE OF ASSESSEE IS SQUARE LY COVERED BY THE DECISIONS AS CITED ABOVE, WHEREIN THE CO-ORD INATE BENCHES HAVE HELD THAT THE INTEREST ON IT REFUND RE CEIVED U/S. 244A HAS TO BE TAXED AT THE RATE WHICH IS BENEFICIA L TO ASSESSEE. RESPECTFULLY FOLLOWING THE SAID DECISION S OF THE CO- ORDINATE BENCHES, WE UPHOLD THE ORDER OF CIT(A). G ROUNDS OF REVENUE ARE DISMISSED. 6. IN THE RESULT, THE APPEAL OF REVENUE IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST DAY OF JANUARY, 2019 SD/- SD/- (SAKTIJIT DEY) (RAJESH KUMAR) /JUDICIAL MEMBER /ACCOUNTANT MEMBER /MUMBAI; /DATED : 31 ST JANUARY, 2019 TNMM ITA NO. 6423/MUM/2016 : 13 : / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A), MUMBAI 4. / CIT, MUMBAI 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE / BY ORDER, //TRUE COPY// / (DY./ASST. REGISTRAR) , / ITAT, MUMBAI