ANTWERP DIAMONDS BANK NV, MUMBAI V. DDIT (IT) RG 1(1), MUMBAI

ITA 8480/MUM/2011

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2652 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 10 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 10-02-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 14-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VANDANA SAGAR
• Assessee Lawyers: K K VED; N A PATADE
• Keywords: Reopening of assessment; Business expenditure; Permanent establishment
• Section: 143(3); 244A; 234B; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI BEORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI SANDEEP GOSAIN, JUDICIAL MEMBER ITA NO. 8480/MUM/2011 (ASSESSMENT YEAR : 2007-08) ANTWERP DIAMOND BANK NV (NOW MERGED WITH KBC BANK NV) 2 ND FLOOR, ENGINEERING CENTRE, 9 MTHEW ROAD, OPERA HOUSE, MUMBAI 400 004 PAN: AAADCA 2713J ... APPELLANT VS. THE DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)- 1(1), SCINDIA HOUSE, BALLARD PIER, MUMBAI 400 038 .... RESPONDENT APPELLANT BY : S/SHRI K.K.VED & N.A.PATADE RESPONDENT BY : MS. VANDANA SAGAR DATE OF HEARING : 19/08/2015 DATE OF PRONOUNCEMENT : 30/10/2015 ORDER PER G.S. PANNU,AM: THE CAPTIONED APPEAL IS PREFERRED BY THE ASSES SEE AND IS DIRECTED AGAINST THE IMPUGNED ORDER DATED 11/10/ 2011 PASSED BY DDIT (INTERNATIONAL TAXATION)-1, MUMBAI PERTAINING TO THE ASSESSMENT 2 ITA NO. 8480/MUM/2011 (ASSESSMENT YEAR : 2007-08) YEAR 2007-08 PASSED UNDER SECTION 143(3) R.W.S. 144 C(13) OF THE INCOME TAX ACT, 1961( IN SHORT THE ACT). 2. THE APPELLANT BEFORE US IS A FOREIGN BANKING COM PANY INCORPORATED IN BELGIUM AND IS TAX RESIDENT OF BELG IUM. IT IS CARRYING ON BANKING BUSINESS IN INDIA ON THE STRENGTH OF LIC ENCE GRANTED BY THE RESERVE BANK OF INDIA. FOR THE YEAR UNDER CONSIDER ATION, IT FILED A RETURN OF INCOME ON 14/11/2007 DISCLOSING A TOTAL INCOME OF RS.41,78,76,187/-, WHICH WAS SUBJECT TO SCRUTINY A SSESSMENT, WHEREIN THE TOTAL INCOME HAS BEEN ASSESSED AT RS.42,40,38,7 00/-. THE ASSESSMENT UNDER SECTION 143(3) R.W. 144C(13) OF TH E ACT DATED 11/10/2011 WAS FINALIZED BY THE ASSESSING OFFICER I N TERMS OF THE DIRECTIONS ISSUED BY DRP-1, MUMBAI UNDER SECTION 14 4C(5) OF THE ACT DATED 23/9/2011. THE APPELLANT HAD APPROACHED THE DRP AGAINST THE VARIATION TO THE RETURNED INCOME PROPOSED BY THE AS SESSING OFFICER IN HIS DRAFT ASSESSMENT ORDER PASSED UNDER SECTION 144 C(1) OF THE ACT DATED 23/12/2010. IN THIS BACKGROUND, WE MAY NOW T AKE UP THE FOUR ISSUES RAISED BY THE ASSESSEE IN SERIATIM. 3. THE FIRST ISSUE IS WITH REGARD TO A DISALLOWANCE OF RS.34,64,227/- , WHICH REPRESENTED DATA PROCESSING COSTS PAID TO T HE HEAD OFFICE. IN THIS CONTEXT, THE BRIEF FACTS ARE THAT ASSESSEE CLA IMED THAT IT HAS PAID RS.34,64,227/- TO THE HEAD OFFICE AS REIMBURSEMENT FOR DATA PROCESSING COST ON THE BASIS OF DEBIT NOTE ISSUED B Y THE HEAD OFFICE TO THE INDIA BRANCH TOWARDS ALLOCATION OF THE SAID EXP ENDITURE. THE HEAD OFFICE HAS ACQUIRED ITS MAIN BANKING SOFTWARE AND W HEN THE ASSESSEE BRANCH WAS SET UP IN INDIA IN MUMBAI THE SOFTWARE LICENCE WAS AMENDED TO ALLOW THE BRANCH ALSO TO USE THE SAME SOFTWARE MAKING IT 3 ITA NO. 8480/MUM/2011 (ASSESSMENT YEAR : 2007-08) ACCESSIBLE THROUGH THE SERVERS LOCATED AT BELGIUM. SINCE THE BRANCH IN INDIA IS USING THE IT RESOURCES SITUATED AT BELGI UM AND PAID BY THE HEAD OFFICE, THE BRANCH REIMBURSED TO THE HEAD OFFI CE PRO-RATA COST FOR THE USE OF THE SAID RESOURCES. THE AFORESAID EXPENDITURE WAS NOT ALLOWED BY THE ASSESSING OFFICER, AS ACCORDING TO H IM, THE SAID EXPENDITURE WAS IN THE NATURE OF ROYALTY AND, THE REFORE, TAX WAS LIABLE TO BE DEDUCTED AT SOURCE, WHICH THE ASSESSEE HAD NO T DEDUCTED. THEREFORE, AS PER THE ASSESSING OFFICER SUCH EXPEND ITURE WAS HIT BY THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT. THE AFO RESAID STAND OF THE ASSESSING OFFICER WAS IN LINE WITH HIS STAND FOR TH E EARLIER ASSESSMENT YEARS 2004-05 TO 2006-07. 3.1 IN THIS BACKGROUND, IT WAS A COMMON POINT BETWE EN THE PARTIES THAT IN ASSESSMENT YEAR 2004-05 VIDE ORDER DATED 1 4/03/2014 THE TRIBUNAL HAS DECIDED THE SAID ISSUE IN FAVOUR OF T HE ASSESSEE. IT WAS ALSO A COMMON POINT BETWEEN THE PARTIES THAT IN ASS ESSMENT YEAR 2006-07, THE TRIBUNAL VIDE ITA NO.5857/MUM/2010 DAT ED 10/4/2015 FOLLOWED THE EARLIER DECISION OF THE TRIBUNAL FOR A .Y 2004-05 DATED 14/03/2014 AND HELD THAT THE DATA PROCESSING COST PAID BY THE ASSESSEE DOES NOT AMOUNT TO ROYALTY AND, THEREFORE, THERE WA S NO REQUIREMENT OF DEDUCTION OF TAX AT SOURCE SO AS TO WARRANT THE APPLICATION OF SECTION 40(A)(I) OF THE ACT. FOLLOWING THE AFORESAID PRECE DENTS, WHICH CONTINUE TO HOLD THE FIELD, WE ALLOW THE PLEA OF THE ASSESSE E. ACCORDINGLY, ON THIS ASPECT THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITION OF RS. 34,64,227/- MADE OUT OF THE DATA PROCESSING COSTS. THUS, ON THIS ASPECT THE ASSESSEE SUCCEEDS. 4 ITA NO. 8480/MUM/2011 (ASSESSMENT YEAR : 2007-08) 4. THE SECOND ISSUE IN DISPUTE RELATES TO INTEREST PAID TO HEAD OFFICE OF RS.23,49,91,691/- ON SUBORDINATED DEBTS AND TERM BORROWINGS. THE ASSESSEE HAD CLAIMED THE DEDUCTION OF INTEREST WHILE COMPUTING TAXABLE INCOME OF THE INDIA BRANCH, WHICH IS THE ASSESSEE BEFORE US. THE ASSESSEE BRANCH ALSO DEDUCTED TAX O N INTEREST @10% IN ACCORDANCE WITH THE CBDT CIRCULAR NO.740 DATED 17/0 4/1996 READ WITH ARTICLE-11 OF THE TAX TREATY BETWEEN INDIA AND BELG IUM. SIMULTANEOUSLY, SUCH INTEREST INCOME WAS ALSO OFFER ED TO TAX @ 10% IN THE HANDS OF THE HEAD OFFICE IN THE RETURN OF INCOM E. 4.1 THE ASSESSING OFFICER DID NOT ACCEPT THE PLEA O F THE ASSESSEE AND DISALLOWED THE CLAIM OF DEDUCTION ON ACCOUNT OF INT EREST PAID TO HEAD OFFICE BY FOLLOWING HIS STAND IN THE ASSESSMENT FOR EARLIER ASSESSMENT YEARS 2004-05 TO 2006-07. 4.2 BEFORE US, IT WAS A COMMON POINT BETWEEN THE PA RTIES THAT IN THE EARLIER ASSESSMENT YEARS OF 2004-05 TO 2006-07 VIDE ITA NOS. 7224/MUM/2007, A.Y.2004-05 DATED 28/2/2013, ITA NO. 1798/MUM/2009, A.Y. 2005-06 DATED 04/09/2013 AND IT A NO. 5857/MUM/2010, A.Y. 2006-07 DATED 10/4/2015, THE IS SUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. 4.3 BEFORE US, IT HAS ALSO BEEN CANVASSED THAT THE ASSESSING OFFICER ERRED IN NOT CONSIDERING THE DECISION OF HONBLE CA LCUTTA HIGH COURT IN THE CASE OF ABN AMRO BANK.N.V. VS. CIT, 198 TAXMA N 376(CAL). IT HAS ALSO BEEN POINTED OUT THAT IN THE IMMEDIATELY PRECE DING ASSESSMENT YEAR OF 2006-07 THE AMOUNT OF RS.43,68,985/-, WAS DISALLOWED ALSO ON THE GROUND THAT THE REQUISITE TAX WAS NOT DEDUCTED AT SOURCE AND, 5 ITA NO. 8480/MUM/2011 (ASSESSMENT YEAR : 2007-08) THEREFORE, THE PROVISIONS OF SECTION 40(A)(I) OF TH E ACT WERE APPLIED. AS THE RELEVANT TAX HAS BEEN DEDUCTED AND PAID IN THE COURSE OF THE IMPUGNED ASSESSMENT YEAR, IT IS CONTENDED THAT THE SAME BE ALLOWED AS A DEDUCTION IN THE CURRENT ASSESSMENT YEAR ALSO. W E DEEM IT FIT AND PROPER TO DIRECT THE ASSESSING OFFICER TO APPLY THE PRECEDENTS IN ASSESSEES OWN CASE IN THE PAST YEARS AND REWORK TH E INCOME ON THIS ASPECT ACCORDINGLY AND ALSO BY TAKING INTO ACCOUNT ASSESSEES PLEA FOR A FURTHER DEDUCTION OF RS.43,68,985/- PURPORTED TO HA VE BEEN DISALLOWED IN THE EARLIER ASSESSMENT YEARS ON ACCOUNT OF PROV ISIONS OF SECTION 40(A)(I) OF THE ACT. THUS, ON THIS ASPECT ASSESSEE SUCCEEDS FOR STATISTICAL PURPOSES. 5. THE THIRD ISSUE ON THIS APPEAL IS WITH REGARD T O TAXABILITY OF INTEREST OF RS.23,49,91,691/- ON SUBORDINATED DEBT S AND TERM BORROWINGS BY THE HEAD OFFICE FROM THE INDIA BRANC H. ON THIS ASPECT, IT WAS POINTED OUT THAT HAVING REGARD TO THE DECISI ON OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF ABN AMRO BANK.N. V. (SUPRA), THE SAME IS NOT TAXABLE IN THE HANDS OF THE HEAD OFFICE . WE FIND THAT IN A.Y 2004-05 VIDE ORDER IN ITA NO.7224/M/2007 DATED 28/ 2/2013 THE TRIBUNAL HAS CONSIDERED AN IDENTICAL CONTROVERSY. AS PER THE TRIBUNAL, SINCE THE ASSESSEE WAS ELIGIBLE TO THE BENEFITS OF TAX TREATY BETWEEN INDIA AND BELGIUM, INTEREST COULD NOT BE TAXED IN THE HANDS OF THE ASSESSEE BEING A FOREIGN ENTERPRISE BEING PAYMENT T O SELF, BUT THE SAME IS DEDUCTIBLE WHILE DETERMINING THE PROFITS A TTRIBUTABLE TO ITS PERMANENT ESTABLISHMENT, WHICH IS TAXABLE IN INDIA AS PER THE TAX TREATY. FOLLOWING THE AFORESAID PRECEDENT, WE DIRECT THE AS SESSING OFFICER TO RE- 6 ITA NO. 8480/MUM/2011 (ASSESSMENT YEAR : 2007-08) WORK THE TAX LIABILITY ACCORDINGLY. THUS, ON THIS ASPECT ALSO ASSESSEE SUCCEEDS. 6. THE LAST ISSUE IN THIS APPEAL IS WITH REGARD TO DEDUCTION OF INTEREST PAID ON INCOME TAX OF RS.1,95,510/- WHILE COMPUTING THE INCOME OF THE ASSESSEE. THE ASSESSING OFFICER NOTICED THAT WHILE COMPUTING TOTAL INCOME ASSESSEE HAD CLAIMED DEDUCTION OF RS.1,97,51 0/- BEING INTEREST PAYABLE UNDER SECTIONS 234B & 234C OF THE ACT. THE ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT EVEN INTERE ST PAID UNDER SECTIONS 234B AND 234C OF THE ACT IS IN THE NATURE OF PAYMENT OF INCOME TAX. 7. ON THIS ASPECT THE LD. REPRESENTATIVE FOR THE AS SESSEE HAS CONTENDED THAT THERE IS A DIFFERENCE IN THE NATURE OF PAYMENT OF INCOME TAX VIS--VIS PAYMENT OF INTEREST UNDER SEC TIONS 234B & 234C OF THE ACT. IN THIS CONTEXT, THE LD. REPRESENTATIVE F OR THE ASSESSEE REFERRED TO THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ARTHUR ANDERSON & COMPANY VS. ASSTT.CIT,324 ITR 240(BOM) AND POINTED OUT THAT THE EXPRESSION TAX DEFINED UNDER SECTION 2(43) OF THE ACT DOES NOT INCLUDE PENALTY OR INTEREST AND, THER EFORE, THE PROHIBITION CONTAINED UNDER SECTION 40(A)(II) OF THE ACT COVER S ONLY INCOME TAX PAID OR PAYABLE, AND NOT THE INTEREST PAID ON INCOME-TAX . 8. ON THE OTHER HAND, LD. DEPARTMENTAL REPRESENTATI VE APPEARING FOR THE REVENUE HAS CONTESTED THE STAND OF THE ASSE SSEE BY RELYING ON THE FOLLOWING DECISIONS:- (1) SHAH CONSTRUCTION CO.LTD. V ITO, (1986) 26 TTJ 0378(MUM) 7 ITA NO. 8480/MUM/2011 (ASSESSMENT YEAR : 2007-08) (2) DCIT VS. SANDVIK ASIA LTD., (2011) 15 TAXMANN .COM 381(PUNE)(TM) 9. HAVING CONSIDERED THE RIVAL SUBMISSIONS, IN OUR CONSIDERED OPINION, THERE CAN BE NO TWO OPINIONS THAT IN THE L IGHT OF THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE BHARAT COM MERCE & INDUSTRIES LTD. VS. CIT , 230 ITR 733 (SC), INTERES T PAYABLE FOR DEFAULTS COMMITTED BY THE ASSESSEE IN DISCHARGING STATUTORY OBLIGATION OF PAYMENT OF ADVANCE TAX IS NOT A PERMISSIBLE DEDUCTI ON. AS PER THE HONBLE SUPREME COURT PAYMENT OF SUCH INTEREST IS I NEXTRICABLY CONNECTED WITH ASSESSEES TAX LIABILITY AND, THEREF ORE, THE SAME HAS ALSO TO BE CONSIDERED AS FALLING WITHIN THE PURVIEW OF S ECTION 40(A)(II) OF THE ACT. IN FACT, EVEN THE HONBLE BOMBAY HIGH COURT I N THE CASE OF CIT VS. GHATKOPAR ESTATE & FINANCE CORPORATION (P) LTD., 1 72 ITR 222 (BOM) HAS HELD THAT INTEREST PAID BY THE ASSESSEE ON DELA YED PAYMENT OF INCOME TAX CANNOT BE ALLOWED AS DEDUCTION UNDER THE PROVISIONS OF THE ACT. HONBLE GAUHATI HIGH COURT IN THE CASE OF A SSAM FOREST PRODUCTS (P) LTD. VS. CIT, 180 ITR 478 (GAU) HAS ALSO HELD T HAT INTEREST IS TO BE UNDERSTOOD AS PART AND PARCEL OF THE LIABILITY TO P AY TAX AND IS NOT DEDUCTIBLE IN TERMS OF SECTION 40(A)(II) OF THE ACT . THE HONBLE DELHI HIGH COURT IN THE CASE OF RAJ NARAIN AGARWAL VS. C IT, 259 ITR 720, FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF BHARAT COMMERCE INDUSTRIES LTD. (SUPRA) HELD THAT I NTEREST PAYABLE TO THE INCOME TAX DEPARTMENT UNDER SECTIONS 217 AND 22 0 (2) OF THE ACT IS NOT TO BE ALLOWED AS A BUSINESS EXPENDITURE. T HE THIRD MEMBER DECISION IN THE CASE OF SANDVIK ASIA LTD. (SUPRA) RELIED UPON BY LD. DEPARTMENTAL REPRESENTATIVE ALSO SUPPORTS THE ACTI ON OF THE ASSESSING 8 ITA NO. 8480/MUM/2011 (ASSESSMENT YEAR : 2007-08) OFFICER DENYING THE DEDUCTION FOR PAYMENT OF INTERE ST UNDER SECTIONS 234B AND 234C OF THE ACT IN VIEW OF SECTION 40(A)(I I) OF THE ACT. 10. BEFORE US, LD. REPRESENTATIVE FOR THE ASSESSEE HAS RELIED UPON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF ARTHUR ANDERSON & COMPANY(SUPRA) FOR THE PROPOSITION THAT INTEREST PAID UNDER SECTIONS 234B & 234C OF THE ACT DO NOT FALL W ITHIN THE MISCHIEF OF SECTION 40(A)(II) OF THE ACT AS THE SAME DO NOT CON STITUTE TAX PAID OR PAYABLE. IN THIS CONTEXT, WE HAVE PERUSED THE JUD GMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ARTHUR ANDERSON & COMPANY(SUPRA) AND FIND THAT THE PRIMARY ISSUE THEREIN RELATED TO THE CHALLENGE TO THE REOPENING OF ASSESSMENT BY INVOKING THE PROVISIONS OF SECTION 147/148 OF THE ACT. THE RELEVANT FACTS WERE THAT ASSESSEE HAD DISCLOSED CERTAIN INTEREST INCOME IN THE RETURN OF INCOME WHICH REPRE SENTED INTEREST RECEIVED FROM THE INCOME TAX DEPARTMENT UNDER SECTI ON 244A OF THE ACT NET OF THE AMOUNT OF INTEREST PAID TO THE INCOM E TAX DEPARTMENT UNDER SECTION 220(2) OF THE ACT. THE ASSESSMENT WA S ORIGINALLY COMPLETED UNDER SECTION 143(3) OF THE ACT ACCEPTING THE SAID POSITION AS SUCH. THEREAFTER, THE ASSESSMENT WAS SOUGHT TO BE REOPENED BY ISSUING NOTICE UNDER SECTION 148 ON THE GROUND THAT INSTEAD OF NET INTEREST, THE ENTIRE INTEREST RECEIVED UNDER SECTI ON 244A OF THE ACT WAS REQUIRED TO BE OFFERED FOR TAXATION, SINCE UNDER S ECTION 40(A)(II) OF THE ACT INCOME TAX PAID OR PAYABLE DOES NOT CONSTITUTE DEDUCTIBLE EXPENDITURE. IN THIS BACKGROUND, ASSESSEE THEREIN PREFERRED A WRIT PETITION BEFORE THE HONBLE HIGH COURT CONTENDING THAT THE REOPENING OF ASSESSMENT WAS BAD IN LAW BECAUSE ASSESSEE HAD D ISCLOSED FULLY AND TRULY ALL MATERIAL FACTS PERTAINING TO ASSESSMENT. THE AFORESAID 9 ITA NO. 8480/MUM/2011 (ASSESSMENT YEAR : 2007-08) CONTROVERSY HAS BEEN ADDRESSED BY THE HONBLE HIGH COURT AND THE STAND OF THE ASSESSEE WAS UPHELD, AS ACCORDING TO T HE HONBLE HIGH COURT THE INVOKING OF SECTION 147/148 OF THE ACT WA S INVALID HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE. IN OUR CONSIDERED OPINION, THE CONTROVERSY BEFORE US HAS BEEN DIRECTL Y ANSWERED BY THE HONBLE SUPREME COURT IN THE CASE OF BHARAT COMMERC E INDUSTRIES LTD.(SUPRA) AND THAT THE JUDGMENT OF THE HONBLE BO MBAY HIGH COURT SOUGHT TO BE RELIED UPON BY THE ASSESSEE IN THE CAS E OF ARTHUR ANDERSON & COMPANY(SUPRA) IS NOT IN THE CONTEXT OF THE ISSU E RELATING TO DEDUCTIBILITY OF PAYMENT OF INTEREST FOR DEFAULT I N PAYMENT OF ADVANCE TAX. THEREFORE, THE DECISION OF THE HONBLE BOMBAY HIGH COURT DOES NOT HELP THE PLEA OF THE ASSESSEE AND ON THIS GROUND T HE ASSESSEE FAIL. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30/10/2015. SD/- SD/- (SANDEEP GOSAIN) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT ME MBER MUMBAI, DATED 30/10/2015 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT , 2. THE RESPONDENT. 3. THE CIT(A)- 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI VM , SR. PS