IN THE ITAT MUMBAI BENCH ‘L’
Sumitomo Mitsui Banking Corporation
Deputy Director of Income-tax (IT), Range 2(1)
IT APPEAL NOS. 5402 & 5458 (MUM.) OF 2006
[Assessment Year 2003-04]
JUNE 29, 2012
I.P. Bansal, Judicial Member
These are cross appeals directed against the order passed by Ld. CIT(A) XXXI, Mumbai dated 31/07/2006 for assessment year 2003-04. The grounds of appeal of the assessee as well as revenue are as under:
Grounds of Appeal of the Assessee:
“Based on the facts and the circumstances of the case, and in law, the learned Commissioner of Income Tax (Appeals)-XXXI, Mumbai [hereinafter referred to as ‘the CIT(A)’] erred in upholding the assessment order [dated 20 December 2005 issued by the learned Deputy Director of Income-tax (International Taxation) Range – 2(1), Mumbai (hereinafter referred to as ‘the AO’) under section 143(3) of the Income-tax Act, 1961 (‘the Act’) in relation to the assessment year 2003-2004, relevant to the previous year ended 31 March 2003, in the case of Sumitomo Mitsui Banking Corporation – an Indian branch of Sumitomo Mitsui Banking Corporation, Japan having banking business in India (hereinafter referred to as ‘the Appellant’)] on certain grounds.
The Appellant’s Grounds of Appeal against the order of the CIT(A) are specifically stated below:
1. Rate at which tax is leviable
The CIT(A) erred in confirming the AO’s action of taxing the Appellant at the rate normally applicable to non-resident companies.
The Appellant submits that considering the facts and circumstances of its case and the Agreement for Avoidance of Double Taxation between India and Japan (DTAA), the rate at which tax should be levied on it should not be more than the rate at which an Indian Company similarly placed and carrying on similar activities (viz a company in which the public are substantially interested) is taxed and the CIT(A) ought to have directed the AO accordingly.
The Appellant submits that the AO be directed to levy tax on the Appellant at the rate applicable to Indian Companies in which public are substantially interested.
2. Disallowance of interest payable on inter office accounts
The CIT(A) erred in confirming the view of the AO that the interest payable of Rs. 5,02,66,781 by the Appellant to its head office and other overseas offices is not deductible in computing its total income.
The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the interest payable to its head office and its other overseas offices on the debit balance arising in their accounts in its course of business is deductible in computing its total income and the CIT(A) ought to have held as such.
The Appellant submits that the AO be directed to delete the disallowance so made by him and to recompute its total income accordingly.
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The CIT(A) erred in upholding the adjustment made by the AO, to the extent of Rs. 4,39,743 to the total income on account of transfer pricing simply based on the order under section 92CA(3) of the Act without independently considering the submissions of the appellant.
The Appellant submits that on the facts and circumstances of the case the CIT(A) ought to have appreciated that the allocation of indirect costs by the TPO, for the purpose of computing the cost of providing services to its overseas entities with respect to the credit monitoring services, was excessive considering that no fresh ECB loans had been granted during the year.
The Appellant submits that the AO be directed to delete the addition made on account of transfer pricing.
Grounds of Appeal of the Revenue:
(1) “On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the identity of the head office and the branch office being the same, the interest payment to head office cannot be allowed as a deduction in the hands of the branch and the corresponding interest income cannot be assessed in the hands of the head office.”
(2) “On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in reducing the Transfer Pricing adjustment in respect of indirect expenses by Rs. 2,46,025/- while appreciating that the TPO had suggested the adjustment after making a proper study.
(3) “On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the assessee being a non resident and the entire income of the assessee is subject to TDS u/s. 195 of the I.T. Act, 1961, no liability u/s. 234B arises, ignoring the fact:
(i) that since the tax deducted at source was not adequate to meet the entire tax liability, it was obligation on the part of the assessee to make the deficit good by making the payments towards the advance tax.
(ii) that since the assessee failed to pay the advance tax, the Assessing Officer was right in charging interest u/s. 234 B and 234C of the Act.”
The Appellant prays that the order of Ld. CIT(A) on the above grounds be set aside and that of the A.O. restored.
Appeal of the Assessee & Ground relating to TP of the Department being common ground:
2. Ld. A.R has placed before us a chart which was taken into consideration while deciding both these appeals.
3. According to the chart, Ground No. 1 of the assessee’s appeal is stated to be covered against the assessee by the decision of the Tribunal in assessee’s own case by decision dated 31/10/2003 in ITA No. 1230/Bom/1995 in the case of Dy. CIT v. Sakura Bank Ltd. (copy of the decision was placed at pages 1 to 6 of the paper book). It may be mentioned that assessee was formerly known as Sakura Bank Limited. The concluding portion of the decision of the Tribunal has been recorded in Para 8 of the said order and the same is reproduced below:
“8. We have considered the rival submissions and have perused the records. The essential facts are as follows. When learned CIT(A) passed the impugned order, it contained no mistake or error. The question as to the correct rate of tax to be applied to the assessee involved a debatable issue, on which the revenue itself has taken contradictory stands for different years. The order of the assessing officer u/s. 154 thus could not have been sustained. However, the real question before us is whether the controversy gets settled by insertion of Explanation to section 90 with retrospective effect from 1/4/62. The assessee company is assessed in the status of a foreign company – a status same as that shown in the assessee’s return. Section 2(23A) defines a foreign company as a company which is not a domestic company. “Domestic Company” has been defined under section 2(22A) as an Indian company or any other company which in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment within India of the dividends (including dividends on preference shares) payable out of such income. The words have been incorporated in Explanation to section 90. On facts it is apparent that the assessee was a foreign company inasmuch as it is not a domestic company. We find no substance in the contention of the learned counsel for the assessee that applicability of the said proviso would involve examination of facts and collection of new evidence. We have no doubt that the order of the learned CIT(A) was correct on the day it was passed. However, the controversy is settled by the subsequent amendment made by the legislature with respective effect. We think that the ratio laid down by the Hon’ble Apex Court in the case of ACIT v. J.K. Synthetic (supra) is applicable to the present case. The provisions of section 143(1)(a) are akin to those of section 154. The Hon’ble Apex Court held that since the controversy was settled by a retrospective amendment the matter had to be decided Revenue’s favour. The decision of the Hon’ble Jurisdictional High Court in the case of CIT v. Sudhir Mehta (supra) relied upon by the learned counsel related to a case where matter had concluded and the ITAT refused to amend its order on the basis of a retrospective amendment. In the case before us, the matter is not concluded but is pending before us by way of an appeal and we are called up to judge whether the rectification order passed by the learned Assessing Officer was correct in law. Insertion of Explanation to section 90 makes it clear that a higher rate of law for foreign companies is not to be regarded as violating non-discrimination clause. The learned AO’s order rectifying the rate of tax would be a correct order in the light of the said Explanation. We cannot ignore the retrospective amendment and the ratio laid down by the Hon’ble Apex Court in CIT v. J.K. Synthetics. As the controversy is covered by the retrospective amendment, the issue has to be decided in Revenue’s favour. The order of the learned CIT(A) is accordingly reversed and that of the learned Assessing Officer is restored.”
3.1 Ld. D.R pointed out that similar issue was decided by the Tribunal in the case of Chohung Bank v. Dy. DIT  102 ITD 45/6 SOT 144 (Mum.), wherein it has been held that charging of the assessee as foreign banking company at higher rate applicable to non-domestic company was not hit by non-discrimination clause of Article-25 of DTAA with Korea.
3.2 In view of the situation, after hearing both the parties, respectfully following the decision of ITAT in assessee’s own case Ground No. 1 of assessee’s appeal is dismissed.
4. Ground No. 2 was stated to be covered in favour of the assessee by the decision of Special Bench of ITAT in assessee’s own case which is dated 30/3/2012 and copy of which is placed at pages 7 to 76 of the paper book. The issue was concluded in favour of the assessee by para 88 of the said decision, which is reproduced below:
“88. Keeping in view all the facts of the case and the legal position emanating from the interpretation of the relevant provisions of 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 bank by its Indian branch which constitutes its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the PE which is taxable in India as per the provisions of article 7(2) & 7(3) of the Indo- Japanese treaty read with paragraph 8 of the protocol which are more beneficial to the assessee. The said interest, however, cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domestic law. Even otherwise, there is no express provision contained in the relevant tax treaty which is contrary to the domestic law in India on this issue. This position applicable in the case of interest paid by Indian branch of a foreign bank to its Head Office equally holds good 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 the payment of interest made to the Head Office. At the time of hearing before us, the learned representatives of both the sides have also not made any 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, it follows that the provisions of section 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the PE, 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 No. 2 in affirmative i.e. again in favour of the assessee.”
In view of the aforementioned decision of Special Bench in the case of the assessee itself, after hearing both the parties we allow ground No. 2 filed by the assessee.
5. Apropos Ground No. 3, the AO has discussed this issue in para 8 of the assessment order. The TPO under section 92CA(3) of the Income Tax Act, 1961 (the Act) had suggested adjustment of Rs. 6,85,779/- to the international transaction of the assessee which has been added by the AO. The Ld. CIT(A) has discussed this issue in para 5 of the impugned order. The aforementioned adjustment is made on the activity of the assessee for providing credit monitoring assistance for the overseas entities. It was submitted that in the year 2001, Hong Kong branch of the appellant had participated in various syndicated loans to the buyers across globe. Out of the said syndicated loans, two loans were granted to Indian companies namely US$ 6 Million to Reliance Petroleum Ltd.(RPL) and US$ 10 Million to National Thermal Power Corporation (NTPC). The period of loan was 6 years and 2.5 years respectively. It was submitted that loan regarding NTPC agreement was signed in May, 2001 and loan was disbursed in September, 2001. The assessee had participated as arranger along with State Bank of India, New York Branch. The loan provided to RPL was also in 2001 and assessee had worked as one of the arranger besides several others. No fresh loan was arranged during the year. The only function of the assessee’s Mumbai branch was to assist overseas branch in monitoring the loan by reviewing financial statements and any developments which are reported in the newspapers in India. Thus it was submitted that very minuscule service was provided by Mumbai Branch to its Hong Kong branch for which it was designated two employees who provided these services to the overseas branch. It was submitted that there being no ECB transaction took placed during the year, the work in relation to monitoring was very minimal. It was pleaded that disallowance made by the AO was on higher side. On these submissions of the assessee Ld. CIT(A) has observed that the said issue was examined by the CIT(A)-IV vide his order dated 20/03/2006 in A.Y 2002-03. He observed that salary on the persons employed for such work was admitted by the assessee and 10% of the total amount devoted by the employees specifically assigned for this work has been accepted by the assessee as salary cost and thus Rs. 1,49,767/- was admitted by the assessee as expenditure of salary devoted to that work. Further, it was observed by the ld. CIT(A) that allocation of indirect expenses was a sum of Rs. 4,73,770/- and computing this with reference to total operating expenditure the ratio was computed at 0.32% and thus the total cost was computed at Rs. 6,23,435/- and after applying 10% mark up the total amount chargeable for the services rendered by the assessee was computed at Rs. 6,85,779/-, which was added as income of the assessee. The assessee had objected to the allocation of indirect cost of Rs. 4,73,668/-. The Ld. CIT(A) has also observed that no fresh ECB loans were served during the year. At the time of negotiation and grant of ECB loans lot of processing of data and evaluation of financial data was undertaken. However, after having granted the loan monitoring is a minimal exercise consisted of only reviewing financial statement and watching reports in the newspapers and in view of such nature of work the salary allocation of Rs. 1,49,769/- and further allocation in indirect expenses of Rs. 4,73,668/- was quite high and he reduced the indirect cost for such activities to Rs. 2,50,000/- and adding an amount of Rs. 1,49,767/- towards salary cost the total disallowable item was computed at Rs. 3,99,767/-, to which 10% mark up was added and total amount chargeable for such services was computed at Rs. 4,39,743/- and balance addition of Rs. 2,46,035/- was deleted. The assessee is aggrieved with the sustained disallowance and revenue in its appeal vide Ground No. 2 has agitated deletion made by ld. CIT(A).
5.1 The Ld. A.R arguing this ground in assessee’s appeal submitted that Ld. CIT(A) after having recorded a finding that minimal exercise was required to do the activities which was required to be done has wrongly been sustained the addition to the extent of Rs. 4,39,743/-. He submitted that such addition should be reduced.
5.2 On the other hand, Ld. DR relied upon the assessment order and pleaded that relief has wrongly been granted by Ld. CIT(A). The AO was right in making the addition, which was very much reasonable. Therefore, Ld. DR pleaded that addition deleted by Ld. CIT(A) should be restored.
5.3 We have heard both the parties and their contentions have carefully been considered. The order of TPO has not been placed before us. But it is clear from the order of Ld. CIT(A) that assessee had submitted before him that direct salary cost should be considered and indirect overhead cost should not be considered as concerned employees performed insignificant role for the credit monitoring assistance done for the overseas associate enterprises. However, it is true that no fresh ECB loans have been granted during the year under consideration but services indeed have been rendered by the assessee to its overseas entities. The cost of the two employees for this has been evaluated at Rs. 1,49,767/-, which is even admitted by the assessee. The question remains only for the allocation of indirect expenses which have been estimated by Ld. CIT(A) at Rs. 2,50,000/- and on the aggregate of salary and indirect expenses 10% mark up has been applied. Considering the entirety of the circumstances of the case, we estimate the indirect expenses at Rs. 1,50,000/- in place of Rs. 2,50,000/- estimated by Ld. CIT(A) and the same will be in addition to the cost of salary allocation of Rs. 1,49,769/-. On aggregate of these two amounts 10% mark up will be applied and addition will be worked out by the AO accordingly. We direct. Therefore, Ground No. 3 of the assessee’s appeal is partly allowed and Ground No. 2 of the revenue’s appeal is dismissed.
Appeal of the Revenue:
6. In ground No. 1 revenue is agitating the finding of Ld. CIT(A) vide which it has been held that identity of the head office and the branch office being same, the interest payment to head office cannot be allowed as deduction in the hands of the branch office and the corresponding interest income cannot be assessed in the hands of the head office. This issue has already been adjudicated while deciding Ground No. 2 of assessee’s appeal, which is decided in accordance with the order of the Special Bench. Accordingly this ground of the revenue is dismissed.
7. Apropos, Ground No. 3 raised by the revenue in its appeal Ld. CIT(A) has deleted the interest levied on the assessee under section 234B & 234C of the Act on the ground that the entire income of the assessee was subject to deduction of tax at source under section 195 of the Act, therefore, there was no liability to pay advance tax under section 208/209(1)(d) of the Act and following the decision of ITAT in the case of Motorola Inc. v. Dy. CIT  95 ITD 269 and also the decision in the case of DDIT v. Bechtel International Inc. in ITA No. 2920/Mum/05 order dated 21/4/2006 Ld. CIT(A) has deleted this interest. Revenue is aggrieved hence, has raised ground No. 3.
7.1 Ld. D.R relied upon the order of CIT(A).
7.2 On the other hand Ld. A.R of the assessee relied upon the following decisions:
(1) DIT v. Jacabs Civil Incorporated Mitsubishi Corporation  330 ITR 578
(2) DIT (International Taxation) v. NGC Network Asia LLC  313 ITR 187 (Bom)
(3) Motorola Inc., (supra)
7.3 In this view of the position, after hearing both the parties, we decline to interfere in the relief granted by Ld. CIT(A), whereby interest levied on the assessee under section 234B & 234C has been deleted. Such deletion is in accordance with aforementioned decisions. No contrary decision has been brought to our notice. This ground of the revenue is dismissed.
8. In the result, appeal filed by the assessee is partly allowed and appeal filed by the revenue is dismissed.