DDIT (I.T) 1(1), MUMBAI V. M/s. ABU DHABI COMMERCIAL BANK LTD., MUMBAI

ITA 7560/MUM/2004

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4252 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 8 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-07-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 18-12-2012
• Assessment Year: 2001-2002
• Appeal Filed On: 20-10-2004
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDER KUMAR
• Assessee Lawyers: F V IRANI
• Keywords: Business income; Double taxation relief; Earning of tax free income; Proportionate interest; Permanent establishment; Bad and doubtful debts
• Section: 115JB; 10; 90; 2; 11

Judgement Text

1 , INCOME TAX APPELLATE TRIBUNAL,MUMBAI - L BENCH. . , !' !' !' !' / #$%& #$%& #$%& #$%& , $ $ $ $ '( '( '( '( BEFORE S/SH.D.MANMOHAN,VICE-PRESIDENT & RAJENDR A,ACCOUNTANT MEMBER ./ ITA NO.7560/MUM/2004 , ) ) ) ) / ASSESSMENT YEAR-2001-02 DDIT(IT)-1(1) 1 ST FLOOR, SCINDIA HOUSE, BALLARD ESTATE, MUMBAI-400038 VS. M/S ABU DHABI COMMERCIAL BANK LTD. , 75, VEER NARIMAN ROAD MUMBAI 400020 PAN: AAACA4216B ( *+ / APPELLANT ) ( ,-*+ / RESPONDENT ) C.O. NO. 227/MUM/2005 M/S ABU DHABI COMMERCIAL BANK LTD. , 75, VEER NARIMAN ROAD MUMBAI 400020 VS. DDIT(IT)-1(1) 1 ST FLOOR, SCINDIA HOUSE, BALLARD ESTATE, MUMBAI-400038 PAN: AAACA4216B ( *+ / APPELLANT ) ( ,-*+ / RESPONDENT ) ./ ITA NO. 4756/MUM/2006 , ) ) ) ) / ASSESSMENT YEAR-2002-03 M/S ABU DHABI COMMERCIAL BANK LTD. , 75, VEER NARIMAN ROAD MUMBAI 400020 VS. DDIT(IT)-1(1) 1 ST FLOOR, SCINDIA HOUSE, BALLARD ESTATE, MUMBAI-400038 PAN: AAACA4216B ( *+ / APPELLANT ) ( ,-*+ / RESPONDENT ) ./ ITA NO. 4968/MUM/2006 , ) ) ) ) / ASSESSMENT YEAR-2002-03 DDIT(IT)-1(1) 1 ST FLOOR, SCINDIA HOUSE, BALLARD ESTATE, MUMBAI-400038 VS. M/S ABU DHABI COMMERCIAL BANK LTD. , 75, VEER NARIMAN ROAD MUMBAI 400020 PAN: AAACA4216B ( *+ / APPELLANT ) ( ,-*+ / RESPONDENT ) *+ *+ *+ *+ . . . . $ $$ $ / APPELLANT BY : MR. NARENDER K UMAR ,-*+ / . $ / RESPONDENT BY : MR. F.V. IRANI / // / 0 0 0 0 / DATE OF HEARING : 02/07/2013 2) / 0 / DATE OF PRONOUNCEMENT :10/07/2013 , 1961 / // / 254(1) $ $$ $ %030 %030 %030 %030 '$4 '$4 '$4 '$4 2 ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, A.M. CROSS APPEALS AND CROSS OBJECTIONS HAVE BEEN FILED BY THE ASSESSEE AND THE ASSESSING OFFICER (AO),CHALLENGING THE ORDERS OF THE CIT(A)-XXXI-MUMB AI,FOR THE AY 2001-02 AND 2002-03. ITA/7560/M/04-AY-2001-02: GROUNDS OF APPEAL FILED BY THE AO READ AS UNDER: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.3 1,72,18,980/- ON ACCOUNT OF ARRANG ERS FEES WHICH WAS PAID TO HEAD OFFICE / OVERSEAS BRANCHES WITHOUT DEDUCTING TAX AT SOURCE UNDER PROV ISIONS OF SECTION 195 R.W.S. 40(A)(I) OF THE I.T. A CT. 2.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT S INCE THERE IS NO NEXUS PROVED BETWEEN TAX FREE INCOME AN D INTEREST BEARING FUNDS, NO DISALLOWANCE CAN BE MADE FROM THE GROSS INCOME CLAIMED AS EXEMPT ULS.10 OF THE I.T. ACT. THE APPELLANT PRAYS THAT THE ORDER OF THE LD. CJT(A ) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GR OUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. CO/ 227/M/05 ; (1)IN THE EVENT THE HIGHER AUTHORITIES UPHOLD THE ACTION OF THE AO OF TAXING THE SUM OF RS.31,72,18,9 80 FOR MOBILISING DEPOSITS FOR THE SBT UNDER THE INDIA N MILLENNIUM DEPOSIT (IMD), THEN WITHOUT PREJUDICE, THE AO BE DIRECTED TO ALLOW THE AMOUNT PAID TO AN I NDEPENDENT PARTY FOR ACTING AS AN AGENT FOR MOBILIZING THE DEPOSITS AND TO CUSTOMERS AS INCENTI VE FOR PLACING THE DEPOSITS AS WELL AS RELATED COST S IN DOING THE ACTIVITY OUTSIDE INDIA AGGREGATING IN ALL THE US $ 69,87,112 AS A DEDUCTION. THE RESPONDENTS PRAY THAT THE AO BE DIRECTED ACCORD INGLY. (2)IN THE EVENT IT IS HELD BY ANY HIGHER AUTHORITIE S THAT THE TREATY PROVISIONS ARE NOT APPLICABLE TO THE BANK, THE APPELLANTS SUBMIT THAT THE SUM OF RS.31,7 2,18,980 CANNOT BE TERMED AS FEES FOR TECHNICAL SERVICES UNDER THE INCOME-TAX ACT AS IT IS NOT A PA YMENT FOR RENDERING MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES. THE RESPONDENTS CRAVE LEAVE TO ADD TO ALTER, AMEND, VARY, OMIT OR SUBSTITUTE THE AFORESAID GROUNDS OF CROSS OBJECTION OR ADD A NEW GROUND OR GROUNDS OF C ROSS OBJECTION AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF CROSS OBJECTION AS THEY MAY BE ADVISED. ITA/7560/M/04-AY.2001-02 RETURN OF INCOME,SHOWING A LOSS OF RS. 7.48 CRORES WAS FILED BY THE = ON 31.10.01.ASSESSMENT WAS FINALISED BY THE AO,ON 25.03.2004,DETERMINING T HE INCOME OF THE ASSESSEE AT RS.56.71 CRORES. 2. FIRST GROUND OF APPEAL PERTAINS TO DELETION OF ADDI TION OF RS. 31.72 CRORES ON ACCOUNT OF ARRANGERS FEES PAID TO HEAD OFFICE / OVERSEAS BRAN CHES, WITHOUT DEDUCTING TAX AT SOURCE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO FOU ND THAT ASSESSEE WAS APPOINTED A COLLECTING BANK BY THE STATE BANK OF INDIA (SBI) FOR INDIAN MI LLENNIUM DEPOSITS (IMD) PROGRAMME, THAT BANK WAS TO BE PAID 0.25% COMMISSION ON THE AMOUNT COLLECTED BY THEIR DESIGNATED BRANCHES, THAT SBI CAPITAL MARKETS LTD.(SBI CAP) ALSO APPOINT ED THE ASSESSEE AS AN ARRANGER FOR MOBILIS - ING DEPOSITS FROM THE ELIGIBLE DEPOSITORS FOR THE I MD PROGRAMME,THAT THE ASSESSEE WAS ENTITLED TO APPOINT SOME ARRANGERS UNDER THE ADVICE TO THE S BI CAP, THAT ASSESSEE HAD RECEIVED FEES AMOUNTING TO RS.5.28 CRORES ON ACCOUNT OF COMMISSIO N AS COLLECTING BANK AND RS. 31.72 CRORES AS COMMISSION ON ACCOUNT OF ARRANGERSFEES,THAT ASS ESSEE HAD REMITTED A SUM OF RS. 31.72 CRORES TO ITS HEAD OFFICE.AO MADE AN ENQUIRY ABOUT PAYMENT OF RS. 31.72 CRORES.AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, AO HELD THAT SERVICES RENDERED BY WAY OF MARKETING AND COLLECTION 3 BY THE ASSESSEE BANK AND ITS OVERSEAS BRANCHES HAD A BUSINESS CONNECTION IN INDIA,THAT THE PROVISIONS OF SECTION 9(1) WERE ATTRACTED TO THE TR ANSACTION IN QUESTION,THAT ACTIVITIES CARRIED OUT BY THE ASSESSEE BANK WERE NOT COVERED BY THE EXPLAN ATION(A) TO SECTION 9(1),THAT THE FEES ARISEN FROM THE ACTIVITY WERE DIRECTLY ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT BY THE ASSESSEE IN INDIA, THAT PAYMENT MADE BY THE =DID NOT REPRESENT THE BUS INESS INCOME OF THE OVERSEAS BRANCHES, THAT THE SUM UNDER CONSIDERATION REPRESENTED THE INCOME OF THE BANK, THAT INCOME HAD ARISEN IN INDIA, THAT THE INDIAN BRANCH WAS TAXABLE UNDER THE PROVIS IONS OF ARTICLE 5 AND 7 OF DOUBLE TAXATION AVOIDANCE AGREEMENT(DTAA),THAT THE ASSESSEE WAS REQ UIRED TO DEDUCT TAX AT SOURCE ON THESE PAYMENTS AS ENVISAGED BY THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT.FINALLY,HE DISALLOWED THE CLAIM OF THE ASSESSEE AMOUNTING TO RS. 37.79 CRORES PAID UNDER THE HEAD ARRANGERS FEES, 2.1. ASSESSEE PREFERRED AN APPEAL BEFORE THE(FIRST APPEL LATE AUTHORITY)FAA.AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND THE ASSESSMENT ORDER HE HELD THAT COMMISSION/FEES OF RS.5. 28 CRORES FOR ACTING AS THE COLLECTING BANK FOR IMD PROGRAMME HAD BEEN OFFERED TO TAX IN INDIA, THAT ARRANGERSFEES OF RS. 31.72 CRORE WAS PAID TO THE H.O./OVERSEAS BRANCHES WAS NOT OFFERED FOR TAXATION, THAT OUT OF SAID AMOUNT RS.30.4 CRORE S HAD BEEN PAID TO FARDAN TRADING EST FOR PROCURING THE DEPOSITS, THAT FARDAN TRADING EST WAS AN INDIAN ENTITY INCORPORATED FOR ABU DHABI,THAT ASSESSEE BANK HAD NO SHAREHOLDING IN FAR DAN TRADING EST,THAT RS.25.78 LACS WERE PAID TO CERTAIN CUSTOMERS FROM WHOM DEPOSITS WERE P ROCURED BY HEAD OFFICE/OVERSEAS BRANCHES, THAT CERTAIN OTHER EXPENSES ON ACCOUNT OF STAFF COS T HAD BEEN INCURRED BY THE H.O.,THAT THE EXPENDITURE INCURRED BY THE H.O. WAS REASONABLE, TH AT NO INCOME WAS LEFT OUT OF RS. 31.72 CRORES THAT HAD ACCRUED TO THE ASSESSEE,THAT IN ABS ENCE OF SPECIFIC ARTICLE DEALING WITH FEES FOR TECHNICAL SERVICES IN THE TAX TREATY BETWEEN INDIA AND U.A.E. THE AFORESAID AMOUNT WOULD FALL IN UNDER ARTICLE 7,THAT SAID ARTICLE OF THE TREATY DEA LT WITH BUSINESS PROFIT,THAT IN COMPUTING THE BUSINESS PROFIT DEDUCTION WOULD HAVE TO BE ALLOWED FOR EXPENSES INCURRED,THAT PROVISIONS OF SECTION 40(A)(I) WERE NOT APPLICABLE IN THE CASE UN DER CONSIDERATION,THAT THERE WAS NO INCOME CHARGEABLE TO TAX IN INDIA. FINALLY,HE DIRECTED THE AO TO DELETE THE ADDITION. 2.2. BEFORE US,DEPARTMENTAL REPRESENTATIVE (DR) RELIED U PON THE ORDERS OF THE AO.AUTHORISED REPRESENTATIVE(AR) SUBMITTED THAT SIMILAR ISSUE HAD ARISEN IN THE CASE OF M/S CREDIT LYONNAIS FOR AY 2001-02,THAT THE ISSUE WAS DECIDED BY THE TR IBUNAL IN FAVOUR OF THE ASSESSEE WHILE DECIDING THE ITA NO. 9596/MUM/2004 AND ITA NO. 214/ MUM/2005. HE REFERRED PARAGRAPH NOS. 9 TO 21 OF THE ORDER DATED 22.05.2013 OF M/S CREDIT LYONNAIS. 2.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT IN THE CASE OF CREDIT LYONNAIS (SUPRA) ISSUE OF ARRANGERS FEES WITH REGARD TO MOBILIZING THE DEPOSITS UNDER IMD PROGRAMME HAS BEEN DISCUSSED AT LENGTH.WH ILE DECIDING THE ISSUE,TRIBUNAL HAS ALSO CONSIDERED THE APPLICABILITY OF THE PROVISIONS OF S ECTION 40(A)(I) AND 195 OF THE ACT.DECIDING OF ISSUE OF FEES PAID TO THE ARRANGERS,TRIBUNAL HAS HE LD AS UNDER:- WE, THEREFORE, SUM UP OUR CONCLUSION BY HOLDING TH AT THE AMOUNT PAID BY THE ASSESSEE TO THE NON-RESIDENTS SUB-ARRANGERS IS NOT A FEES FOR MANAG ERIAL OR TECHNICAL OR CONSULTANCY SERVICES. HENCE, THE SAME CANNOT BE BROUGHT WITHIN THE AMBIT OF FEES FOR TECHNICAL SERVICES AS PER SECTION 9(1)(VII) OF THE ACT. IF THIS PAYMENT IS NOT FEES F OR TECHNICAL SERVICES BUT ONLY COMMISSION, THE PROVISIONS OF SECTION 195 REQUIRING THE ASSESSEE TO MAKE DEDUCTION OF TAX AT SOURCE BEFORE REMITTING OR CREDITING THE AMOUNT TO THE ACCOUNTS O F SUB-ARRANGERS, CANNOT APPLY. IF NO DEDUCTION OF TAX AT SOURCE IS REQUIRED, OBVIOUSLY THE PROVISI ONS OF SECTION 40(A)(I) DO NOT COME INTO PLAY. ONCE IT IS HELD THAT THE SAID COMMISSION/BROKERAGE IS NOT CHARGEABLE TO TAX IN THE HANDS OF NON- RESIDENT SUB-ARRANGERS UNDER THE PROVISIONS OF THE ACT, THERE REMAINS NO NEED TO EXAMINE THE TAXABILITY OR OTHERWISE OF THIS AMOUNT IN THEIR HAN DS UNDER THE RESPECTIVE DOUBLE TAXATION AVOIDANCE AGREEMENTS. IN THAT VIEW OF THE MATTER, W E ARE OF THE CONSIDERED OPINION THAT THE LEARNED CIT(A) WAS JUSTIFIED IN REVERSING THE AOS ORDER INSOFAR AS THE APPLICABILITY OF SECTION 4 40(A)(I) IS CONCERNED. CONSEQUENTLY, THE GROUND RAI SED BY THE REVENUE FAILS. RESPECTFULLY FOLLOWING THE ORDER OF COORDINATING BE NCH AND CONSIDERING THE FACT THAT ISSUES INVOLVED IN BOTH THE CASES ARE SIMILAR,WE DECIDE GR OUND NO.1 AGAINST THE AO. 3. GROUND NO.2 IS ABOUT FINDING GIVEN BY THE FAA WITH REGARD TO EXEMPTION CLAIMED BY THE ASSESSEE-BANK U/S. 10 OF THE ACT.DURING THE ASSESSM ENT PROCEEDINGS, AO FOUND THAT ASSESSEE HAD EARNED EXEMPT INCOME OF RS. 3.22 CRORES UNDER THE H EADS INTEREST FROM TAX FREE BONDS (3.01 CRORES) AND UTI DIVIDEND(RS. 21.78 LACS), THAT TH E ABOVE RECEIPTS HAD BEEN CLAIMED AS EXEMPT U/S.10(33) AND 10(15) OF THE ACT. AS PER THE AO, NE T INCOME EARNED OUT OF SUCH RECEIPTS;NOT THE GROSS RECEIPTS;WERE EXEMPT U/S 10(15) AND 10(33) OF THE ACT. HE FURTHER HELD THAT ASSESSEE HAD DEPLOYED TAX FREE FUNDS AS WELL AS TAX BEARING FUND S FOR EARNING TAX FREE INCOME.HE ESTIMATED PRO-RATA EXPENSES INCURRED FOR EARNING TAX FREE INC OME WHICH WORKED OUT TO RS. 2.74 CRORES. FINALLY,HE HELD THAT ASSESSEE WAS ENTITLED TO EXEMP TION OF RS. 48.43 U/S. 10(33) AND 10(15) OF THE ACT,AS AGAINST RS.3.22 CRORES CLAIMED BY IT. 3.1. ASSESSEE PREFERRED AN APPEAL BEFORE THE FAA.AFTER C ONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND THE ASSESSMENT ORDER FAA HELD THAT SIM ILAR ISSUE WAS CONSIDERED BY HIM IN ASSESSEES OWN CASE IN EARLIER AYS., THAT NO NEXUS HAD BEEN PROVED BETWEEN TAX-FREE-INCOME AND INTEREST BEARING FUNDS BY THE AO, THAT THERE WERE S UFFICIENT FUNDS THE FINDINGS SHARES/TAX FREE SECURITIES THAT THE ACTION OF THE AO IN DISALLOWING EXEMPTION U/S 10 OF THE PART OF DIVIDEND/ INTEREST ON TAX FREE SECURITIES COULD NOT BE SUSTAI NED. FINALLY,HE ALLOWED THE APPEAL FILED BY THE ASSESSEE. 3.2. BEFORE US DR,RELIED UPON THE ORDER OF THE AO. AR SU BMITTED THAT L BENCH OF MUMBAI TRIBUNAL VIDE ITS ORDER DATED 20.07.2012 IN ASSESSE ES OWN CASE FOR AY 1995-96 TO 2000-01 HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE.WE HAVE HEARD THE RIVAL SUBMISSIONS.WE FIND THAT AO HAS NOT GIVEN ANY DETAILS AS HOW THE ALLEGED BORROW ED FUNDS WERE USED FOR EARNING TAX FREE INCOME, WHEREAS THE FAA HAD GIVEN A CATEGORICAL FIN DING; AFTER CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE BANK DURING THE APPELLATE PROC EEDINGS BEFORE HIM;THAT THE INTEREST FREE FUNDS AVAILABLE TO THE ASSESSEE WERE FAR MORE THAN THE INVESTMENT MADE DURING THE YEAR.WE ALSO FIND THAT IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOU R OF THE ASSESSEE BY THE TRIBUNAL VIDE ITS ORDER DATED 20.07.2012 (SUPRA). IN THESE CIRCUMSTANCES, W E ARE OF THE OPINION THAT THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL OR FACTUAL INFIR MITY. GROUND NO.2 IS ALSO DEC IDED AGAINST THE AO. AS A RESULT APPEAL FILED BY THE AO STANDS DISMISSED . C.O. NO. 227/MUM/2005 4. BOTH THE GROUND OF CO FILED BY THE ASSESSEE ARE ABO UT TAXING THE SUM OF RS. 37.72 CRORES FOR MOBILISING DEPOSITS FOR IMD PROGRAMME.WHILE DECIDIN G THE GROUND NO.1, FILED BY THE AO, WE HAVE DECIDED THE ISSUE AGAINST THE AO.SO,GROUNDS NO .1 AND 2 OF CO ARE DECIDED IN FAVOUR OF THE ASSESSEE. AS A RESULT, CO FILED BY THE ASSESSEE STANDS ALLOW ED FOR STATISTICAL PURPOSE. ITA4968/M/06 AY2002-03. 5. CROSS APPEALS HAVE BEEN FILED BY THE ASSESSEE AND T HE AO FOR THE NEXT FINANCIAL YEAR,AS STATED EARLIER.GROUNDS OF APPEAL FILED BY THE AO READ AS U NDER: 5 1.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT IN THE ABSENCE OF ANY NEXUS OF THE INVESTMENT IN BONDS WITH BORROWED FUNDS, NO DISALLOWANCE OF INTEREST C AN BE MADE MERELY FOR THE REASON THAT THE ASSESSEE HAS INCURRED INTEREST EXPENDITURE ON CERTAIN BORROWING . 2.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE MADE O F RS.2,73,40,494/- BEING THE INTEREST EXPENDITURE S ET OFF AGAINST THE INTEREST INCOME. 3.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF WEALTH TAX PAYMENT OF RS.,1,05,000/ -WHILE COMPUTING THE BOOK PROFIT U/S.115JB. 4.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE OF RS. 5,00,00,000/- ON ACCOUNT OF PROVISION FOR BAD DEBTS MADE WHILE COMPUTING THE BOOK PROFIT U/S.1I5JB. 5.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT T HE DISALLOWANCE OF RS.20,00,000/- OF HEAD OFFICE EXPEN SES IS NOT IN ORDER WHILE COMPUTING THE BOOK PROFIT U/S.115JB AND IN DIRECTING THE ASSESSING OFFICER TO DELETE IT. THE APPELLANT PRAYS THAT THE ORDER OF THE LD. CIT(A ) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GR OUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. ITA4756/M/06 AY2002-03. ASSESSEE HAS FILED FOLLOWING GROUNDS OF APPEAL: THE COMMISSIONER OF INCOME-TAX (APPEALS)-XXXI, MUMB AI [HEREINAFTER REFERRED TO AS THE CIT(A)}ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER(A O) OF RESTRICTING THE DEDUCTION FOR HEAD OFFICE EXP EN - SES BY APPLYING THE PROVISIONS OF SECTION 44C OF TH E ACT, AS AGAINST THE APPELLANTS CLAIM THAT THE ENT IRE AMOUNT OF RS. 1,79,74,957 ALLOCATED TO THE INDIAN B RANCHES SHOULD BE ALLOWED AS A DEDUCTION AS PER THE PROVISION OF ARTICLE 7(3) OF THE CONVENTION BETWEEN THE GOVERNMENT OF U.A.E. AND THE GOVERNMENT OF INDIA (HEREINAFTER REFERRED TO AS THE TAX TREATY). THE APPELLANTS SUBMIT THAT IN COMPUTING THE TAXABLE BUSINESS INCOME IN INDIA, THE TREATY ALLOWS A DEDUCTION FOR ALL EXPENSES WHEREVER INCURRED AND RE ASONABLY ALLOCABLE TO THE PERMANENT ESTABLISHMENT, INCLUDING ITS SHARE OF EXECUTIVE AND GENERAL ADMINI STRATIVE EXPENSES. AS THE TREATY OVERRIDES THE DOME STIC LAW, THE AMOUNT ALLOCATED BY THE HEAD OFFICE SHOULD BE ALLOWED AS A DEDUCTION IN FULL. THE APPELLANTS PRAY THAT THE AO BE DIRECTED TO ALLO W THE ENTIRE AMOUNT OF HEAD OFFICE EXPENSES. 2.THE CIT(A)ERRED IN UPHOLDING THE AOS ACTION OF N OT ALLOWING THE APPELLANTS CLAIM THAT THE TAX RATE APPLICABLE TO ITS BUSINESS INCOME IS 35% (PLUS SURC HARGE @ 2% APPLICABLE) AND NOT 48% BEING THE RATE APPLICABLE TO FOREIGN COMPANIES FOR THE YEAR UNDER APPEAL. THE APPELLANTS SUBMIT THAT IN VIEW OF ARTICLE 26 OF THE TAX TREATY I.E. THE NONDISCRIMINATION CLAUSE R EAD WITH SECTION 90(2) OF THE ACT, THE BUSINESS INCOME IS CHARGEABLE TO TAX AT THE RATE OF 35% (PLUS SURCH ARGE @ 2%) AS IS APPLICABLE TO DOMESTIC COMPANIES. THE APPELLANTS PRAY THAT THE AO BE DIRECTED ACCORDI NGLY. THE APPELLANTS CRAVE LEAVE TO ADD TO, AMEND, ALTER, VARY, OMIT OR SUBSTITUTE THE AFORESAID GROUNDS OF APPEAL OR ADD A NEW GROUND OR GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL AS THEY MAY BE ADVISED. FOLLOWING ADDITIONAL GROUNDS WERE ALSO FILED BY THE ASSESSEE : APPELLANT PRAYS THAT THE PROVISIONS OF SECTION 11 5 JB SHOULD NOT BE APPLICABLE AS THE APPELLANT IS A B ANK. THE APPELLANTS CRAVE LEAVE TO ADD, TO AMEND, ALTER, VARY, OMIT OR SUBSTITUTE THE AFORESAID GROUNDS OF APPEAL OR ADD A NEW GROUND OR GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL AS THEY MAY BE ADVISED. 6. FOR THE AY UNDER CONSIDERATION, ASSESSEE HAD FILED ITS RETURN OF INCOME ON 31.10.02 SHOWING NIL INCOME, WHEREAS PROFIT AS PER SECTION 115JB WAS SHOWN AT RS. 7.56 CRORES. ASSESSMENT WAS FINALISED BY THE AO ON 28.02.2005 U/S.143(3) OF THE ACT DETERMINING THE TOTAL INCOME OF THE ASSESSEE AT RS. 2.92 CRORES UNDER NORMAL PROVISIONS AND AT RS. 12.77 CRORES U/S.115JB OF THE 6 ACT. 6.1. FIRST TWO GROUND OF APPEAL FILED BY THE AO ARE ABOU T APPORTIONED PROPORTIONATE INTEREST EXPENSES INCURRED FOR EARNING THE INCOME EXEMPT U/S .10 OF THE ACT.DURING THE YEAR, ASSESSEE BANK HAD EARNED INTEREST FROM TAX FREE BONDS OF RS. 3.01CRORES AND HAD CLAIMED IT TO EXEMPT U/S.10(15) OF THE ACT.AO WORKED OUT EXEMPT INCOME O N THE BASIS WHICH HE HAD ADOPTED FOR THE AY.2001-02.HE HELD THAT ASSESSEE WAS ELIGIBLE FOR E XEMPTION U/S.10(15) OF THE ACT FOR RS. 27.71 LACS ONLY,AS AGAINST RS. 3.01 CRORES. 6.2. ASSESSEE FILED AN APPEAL BEFORE THE FAA.AFTER CONSI DERING THE SUBMISSIONS OF THE ASSESSEE AND ORDER OF HIS PREDECESSOR FOR THE AY 2001-02,HE HELD THAT IN ABSENCE OF ANY NEXUS OF THE INVESTMENT IN BONDS WITH BORROWED FUNDS NO DISALLOW ANCE OF INTEREST COULD BE MADE MERELY FOR THE REASON THAT ASSESSEE HAD INCURRED EXPENDITURE O N CERTAIN BORROWINGS. 6.3. BEFORE US,DR RELIED UPON THE ORDER OF THE AO.AR REL IED UPON THE ORDER OF THE TRIBUNAL OF ITS OWN CASE FOR AY 1995-96 TO 2000-01. WHILE DECIDING THE SIMILAR ISSUE, FOR THE LAST AY WE HAVE DECIDED THE ISSUE AGAINST THE AO (PARA3.2). FOLLOWING THE SAME GROUND NO.1 AND 2 FIL ED BY THE AO ARE DECIDED AGAINST HIM. 7. GROUND NO.3 TO 5 RAISED BY THE AO ARE ABOUT COMPUTA TION OF BOOK PROFITS U/S115JB OF THE ACT. WHILE COMPUTING THE INCOME UNDER MAT PROVISIONS,AO ADDED PROVISIONS FOR WEALTH TAX, PROVISIONS FOR BAD AND DOUBTFUL DEBTS(RS.5 CRORES) AND PROVISION FOR HEAD OFFICE EXPENSES (RS. 20 LACS) TO THE INCOME OF THE ASSESSEE. 7.1. ASSESSEE PREFERRED AN APPEAL BEFORE THE FAA.AFTER C ONSIDERING THE SUBMISSIONS OF THE ASSESSEE,FAA HELD THAT EXPLANATION TO SECTION 115JB (2) PROVIDED THAT AMOUNT OF WEALTH TAX COULD NOT BE ADDED BACK WHILE COMPUTING THE BOOK PR OFIT.FOLLOWING THE JUDGMENT DELIVERED BY THE HONBLE HIGH COURT OF MUMBAI IN THE CASE OF ECH JAY FORGINGS PVT. LTD. (251ITR15),HE HELD THAT NET PROFIT COULD NOT BE INCREASED BY THE AMOUN T OF WEALTH TAX PAID, THAT DISALLOWANCE OF PROVISION FOR WEALTH TAX OF RS.1.05 LACS HAD TO BE DELETED.SIMILARLY,HE HELD THAT PROVISION FOR BAD DEBTS ARISEN TO RS.5 CRORES COULD NOT BE ADDED TO THE INCOME OF THE ASSESSEE.HE ALSO RELIED UPON THE ORDERS OF THE MAHARASHTRA STATE ELECTRICIT Y BOARD (82 ITD 422) AND J. G VACUUM PLY LTD.(38ITD242).REGARDING HEAD OFFICE EXPENSES HE HE LD THAT FOLLOWING THE CASE OF APOLLO TYERS (25ITR 273),AO HAD NO AUTHORITY TO RE-CAST TH E PROFIT COMPUTED AS PER THE BOOKS, THAT HE COULD NOT MAKE ANY ADJUSTMENT WITH REGARD TO THE H. O. EXPENSES. 7.2. BEFORE US,DR RELIED UPON THE ORDER OF THE AO.AR SUB MITTED THAT SIMILAR ISSUE HAD ARISEN FOR THE EARLIER AYS IN ASSESSEES OWN CASE,THAT THE TRI BUNAL HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE VIDE ITS ORDER DATED 28.9.2011.HE FURTHER SUBMITTED THAT ADDITIONAL GROUND FILED BY HIM FOR THE ASSESSMENT ORDER UNDER CONSIDERATION WAS AL SO ABOUT THE COMPUTATION TO BE MADE U/S 115JB OF THE ACT. HE REFERRED TO THE ORDER DELIVERE D BY THE MUMBAI ITAT IN THE CASE OF KRUNG THAI BANK PCL (133 DTJ 435). 7.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT WHILE DECIDING THE APPEAL FOR THE AY 2001-02 (ITA/5024/MU M/2010 AND CO-74/MUM/2011)SIMILAR ISSUE WAS DISCUSSED BY THE TRIBUNAL AS UNDER: - 8.IN THE CROSS-OBJECTION FILED BY THE ASSESSEE IT WAS CONTENDED THAT MAT PROVISIONS ARE NOT APPLICABLE TO A BANKING COMPANY AND IN THIS REGARD RELIED UPON DECISION OF THE ITAT,MUMBAI BENCH IN THE CASE OF KRUNG THAI BANK .PCL VS. JOINT DIRECTOR OF INCOME TAX (INTRENATIONAL TAXATION) (2010) 133 TTJ 435 (MUM.) 9.LEARNED DR HAS NOT RAISED ANY OBJECTION FOR ADMI SSION OF THIS ISSUE SINCE GROUND RAISED BY THE ASSESSEE IS SUPPORTED BY THE DECISION OF THE ITAT, MUMBAI BENCH.BY RESPECTFULLY FOLLOWING THE SAME WE DIRECT THE ASSESSING OFFICER TO RECONSIDER THE MATTER IN ACCORDANCE WITH LAW. RESPECTFULLY FOLLOWING THE ABOVE ORDER, WE DIRECT T HE AO TO RECONSIDER THE MATTER IN ACCORDANCE WITH LAW. GROUND NO. 3, 4 & 5 FILED BY THE AO ARE D ECIDED AGAINST HIM AND ADDITIONAL GROUND FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 7 ITA NO. 4756/MUM/2006 ASSESSMENT YEAR 2002-03 8. THE FIRST GROUND OF APPEAL FILED BY THE ASSESSEE IS ABOUT RESTRICTING THE DEDUCTION FOR H.O. EXPENSES.DURING THE ASSESSMENT PROCEEDINGS,AO FOUND THAT ASSESSEE BANK HAD CLAIMED H.O. EXPENSES OF RS. 1.79 CRORES,THAT AMOUNT WAS CLAIMED ON THE BASIS OF ACTUAL EXPENSES INCURRED BY THE H.O.THAT WERE ATTRIBUTABLE TO THE INDIAN BRA NCHES.AO DIRECTED THE ASSESSEE TO IDENTIFY THE EXPENSES WHICH WERE INCURRED BY THE H.O. EXCLUSIVEL Y FOR INDIAN BRANCHES AND TO PRODUCE THE DOCUMENTS FOR VERIFICATION. INVOKING THE PROVISIONS OF SECTION 44C OF THE ACT, AO HELD THAT EXPENSES INCURRED BY THE H.O.WHICH WERE NOT DEBITED TO THE BOOKS OF ACCOUNT OF THE ASSESSEE WERE NOT ALLOWABLE, THAT EXPENDITURE WHICH WAS EXEC UTIVE AND ADMINISTRATIVE IN NATURE HAD TO BE TREATED AS OFFICE EXPENSES IN RESPECT OF WHICH DEDU CTION WAS ALLOWABLE ONLY AS PER THE PROVISIONS OF SECTION 44C OF THE ACT. HE HELD THAT RESTRICTION S ENVISAGED BY SECTION 44C OF THE ACT WOULD APPLY TO ABOVE REFERRED EXPENSES.HE DISALLOWED THE CLAIM MADE BY THE ASSESSEE OF RS. 1.79 CRORES AND HELD THAT DEDUCTION IN RESPECT OF THESE EXPENSES WOULD BE GIVEN AS PER THE LIMITS PRESCRIBED BY SECTION 44C OF THE ACT. 8.1. ASSESSEE PREFERRED AN APPEAL BEFORE THE FAA.AFTER C ONSIDERING THE SUBMISSION OF THE ASSESSEE HE HELD THAT ISSUE OF DEDUCTION FOR H.O.WA S DECIDED BY THE FAA WHILE DECIDING THE APPEAL FOR EARLIER AYS,THAT MATTER WAS DECIDED AGAI NST THE ASSESSEE BANK, THAT ASSESSEE HAD NOT BROUGHT NEW FACTS ON RECORD. FOLLOWING THE ORDER OF HIS PREDECESSOR FOR THE AY 2001-02 AND EARLIER ORDERS OF AY 1998-99 TO 2000-01,HE DISMISSE D THE APPEAL FILED BY THE ASSESSEE. 8.2. BEFORE US AR SUBMITTED THAT SIMILAR ISSUE HAD ARISE N FOR AY 1995-96 TO AY 2000-01,THAT TRIBUNAL VIDE ITS ORDER DATED 20.07.12 HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE.DR RELIED UPON THE ORDER OF THE AO AND FAA. 8.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD.WE FIND THAT IN THE APPEAL DECIDED BY THE TRIBUNAL FOR AYS. 1995-96 TO 2000-01 SIMILAR ISSUE WAS DISCUSSED AND DECIDED IN FAVOUR OF THE ASSESSEE.TRI BUNAL HAS DECIDED THE ISSUE AS UNDER: 17.IN GROUND NO.1 ASSESSEE HAS CHALLENGED THE RESTR ICTION OF DEDUCTION FOR HEAD OFFICE EXPENSES BY APPLYING THE PROVISIONS OF SEC. 44C OF THE ACT A S AGAINST THE ASSESSEES CLAIM THAT THE ENTIRE AMOUNT OF RS. 39,47,623/-ALLOCATED TO THE INDIAN BR ANCHES SHOULD BE ALLOWED AS DEDUCTION AS PER PROVISION OF ARTICLE 7(3) OF LNDIA-UAE DTAA. 18.THIS ISSUE HAS ALREADY BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN THE AFORESAID APPEAL FOR THE ASSESSMENT YEAR 1995-96 IN ITA NO.3462/M/201 0. THE FINDING GIVEN IN THE ABOVE APPEAL APPLIES MUTADIS-MUTANDIS IN THIS GROUND ALSO.THUS, GROUND NO.1 AS RAISED BY THE ASSESSEE STANDS ALLOWED . RESPECTFULLY FOLLOWING THE ORDER FOR THE EARLIER YE ARS, WE DECIDE THE GROUND NO.1 IN FAVOUR OF THE ASSESSEE. 9. GROUND NO.2 IS ABOUT APPLICABILITY OF TAX RATE. WHI LE DECIDING THE TAX LIABILITY OF THE ASSESSEE BANK, AO HELD THAT BUSINESS INCOME OF THE ASSESSEE BANK HAS TO BE TAXED AT HIGHER RATE THAN THE TAX RATES APPLICABLE TO DOMESTIC COMPANIES.IN THE A PPELLATE PROCEEDINGS, FAA UPHELD THE ORDER OF THE AO. 9.1. BEFORE US,AR OF THE ASSESSEE FAIRLY CONCEDED THAT I SSUE WAS DECIDED AGAINST THE ASSESSEE BANK BY TRIBUNALS ORDER DATED 20.07.12.(ITA/)1996/ M/2004).DR RELIED UPON THE SAID ORDER OF THE TRIBUNAL.WE HAVE HEARD THE RIVAL SUBMISSIONS. W E FIND THAT TRIBUNAL IN ITS ORDER DATED 20.07.12 (SUPRA)HAS DECIDED THE ISSUE AS UNDER:- 32.IN GROUND NO.2, THE ASSESSEE HAS CHALLENGED THE AOS ACTION FOR APPLYING THE TAX RATE OF 48% TO THE ASSESSEES BUSINESS INCOME INSTEAD OF 35%. T HE CIT (A) TOO HAS CONFIRMED THE ACTION OF THE AO AFTER GIVING DETAILED REASONING IN PARA NOS. 6.4 TO 6.7 OF THE ORDER. 33.AT THE OUTSET, LEARNED COUNSEL SUBMITTED THAT TH IS ISSUE STANDS COVERED AGAINST THE ASSESSEE BY THE ORDER OF ITAT IN ASSESSEES OWN CASE FOR THE AS SESSMENT YEARS 1995-1996, 1996-1997 AND 1997-1998. 34.AFTER GONE THROUGH THE AFORESAID DECISIONS OF TH E ITAT PASSED IN ITAT NOS.4316 & 431 8 7/M/2000, WE FIND THAT THIS ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE AFTER OBSERVING AND HOLDING AS UNDER: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE MATERIALS ON RECORD AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW A ND THE JUDGMENTS CITED BY BOTH SIDES. WE FIND THAT THIS ISUE IS COVERED AGAIN ST THE ASSESSEE BY THE JUDGMENT OF THE TRIBUNAL RENDERED IN THE CASE OF ABN AMRO BA NK NV VS. JCIT REPORTED IN 777 (CAL) (TM)1041. IN THAT CASE ALSO, CONTENTION WAS ADVANCED ON BEHAL F OF THE ASSESSEE THAT THIS EXPLANATION TO SECTION 90 IS UN-IMPLEMENTABLE BECAU SE OF INAPPROPRIATE LANGUAGE. BUT, IT WAS HELD BY THE TRIBUNAL THAT THI S CONTENTION OF THE ASSESSEE CANNOT BE ACCEPTED. RELEVANT PARA OF THIS TRIBUNAL JUDGMENT I.E. PARA NO. 56 IS BEING REPRODUCED HERE: THE CONTENTION ADVANCED ON BEHALF OF THE ASSESSEE THAT THE SAID EXPLANATION TO SECTION 90 IS UN-IMPLEMENTABLE BECAUSE OF INAPPROPR IATE LANGUAGE DOES NOT APPEAL TO US. THE EXPLANATION IN OUR VIEW PROVIDES FOR TWO EVENTUALITIES. ONE IS THE CHARGE OF TAX IN RESPECT OF A FOREIGN COMPANY V IS--VIS AND INDIA COMPANY (I.E. A DOMESTIC COMPANY). THE SECOND CATEGORY AS P ER EXPLANATION IS THE FOREIGN COMPANY VIS--VIS THE DOMESTIC COMPANY OTHER THAN I NDIAN COMPANY. IT IS NOTEWORTHY THAT THE DOMESTIC COMPANY IS DEFINED UND ER THE FINANCE ACT. FOR THE SAKE OF REFERENCE WE MAY QUOTE THE DEFINITION OF TH E DOMESTIC COMPANY AS PER THE FINANCE (NO.2) ACT, 1996.DOMESTIC COMPANY MEANS A ND INDIAN COMPANY, OR ANY OTHER COMPANY WHICH IN RESPECT OF ITS INCOME LI ABLE TO INCOME TAX UNDER THE IT ACT FOR THE ASSESSMENT YEAR COMMENCING ON THE 1 ST APRIL, 1996, HAS MADE THE PRESCRIBED ARRANGEMENTS FOR THE DECLARATION AND PAY MENT WITHIN INDIA OF THE DIVIDENDS (INCLUDING DIVIDENDS ON PREFERENCE SHARES )PAYABLE OUT OF SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SECTION 194 OF THE ACT. THUS EVEN UNDER THE FINANCE ACT THE DOMESTIC COMPAN Y IS RECOGNIZED AS INDIAN COMPANY AND ANY OTHER COMPANY HAVING MADE ARRANGEME NT FOR DECLARATION OF DIVIDENDS PAYABLE ON SUCH INCOME. WE, THEREFORE, DO NOT FIND THE LANGUAGE OF EXPLANATION TO SECTION 90 AS INAPPROPRIATE. MOREOVE R, INSOFAR AS THERE IS NO DOUBT THE CATEGORY OF THE FOREIGN COMPANY VIS--VIS INDIA N COMPANY HAVING BEEN SPECIFIED IN THE EXPLANATION, ONE NEED TO ASCERTAIN AS TO WHETHER IN ANY CASE THE SECOND CATEGORY OF THE COMPANIES WOULD AT AFT EXIST . WE, THEREFORE, DO NOT FIND MERIT IN THE CONTENTIONS ADVANCED ON BEHALF OF THE ASSESSEE IN THIS REGARD. 35.THUS, RESPECTFULLY FOLLOWING THE AFORESAID DECIS ION, GROUND NO.2 IS DECIDED AGAINST THE ASSESSEE AND STANDS DISMISSED. RESPECTFULLY FOLLOWING THE SAME WE DECIDED GROUND N O.2 AGAINST THE ASSESSEE. APPEAL FILED BY THE ASSESSEE STANDS PARTLY ALLOWED. AS A RESULT,APPEALS FILED BY THE AO STAND DISMISSED. C O FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. APPEAL OF THE ASSESSEE FOR TH E AY.2002-03 IS ALLOWED IN PART. 5 06 50 7 ' 8 / 3 9 #: / # 0 ;. 50 = 0 # 8>/ ,#? $ #: @ # 0 A 0* ) 200 2 -0 3 / 4 E $ #: / # 0 A. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH JULY, 2013 '$4 / 2) $ % 9 @' 10 , # 2013 / 3 F 9 SD/ SD/- ( . / D. MANMOHAN ) ( #$%& #$%& #$%& #$%& / RAJENDRA ) !' !' !' !' / VICE-PRESIDENT $ $ $ $ '( '( '( '( /ACCOUNTANT MEMBER / MUMBAI, @' /DATE: 10.07 . 2013 '$4 '$4 '$4 '$4 / // / ,0G ,0G ,0G ,0G H$G)0 H$G)0 H$G)0 H$G)0 / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / *+ 2. RESPONDENT / ,-*+ 3. THE CONCERNED CIT (A) / I J 4. THE CONCERNED CIT / I J 5. DR L BENCH, ITAT, MUMBAI / GK 3 ,0 , ,, ,Y YY Y , . . % . 6. GUARD FILE/ 3 L - G0 ,0 //TRUE COPY// '$4 / BY ORDER, / # DY./ASST. REGISTRAR , /ITAT, MUMBAI