IN THE ITAT MUMBAI BENCH ‘L’
Deputy Director of Income-tax, (International Taxation) 2(1), Mumbai
Toronto Dominion Bank Ltd.
IT APPEAL NOS. 8465, 8466, 8483 & 8484 (MUM.) OF 2004
[ASSESSMENT YEARS 2000-01 & 2001-02]
AUGUST 8, 2012
R.S. Syal, Accountant Member
These four cross appeals relating to the assessment years 2000-2001 and 2001-2002 involve common issues. For the sake of convenience, these have been clubbed for disposal by a consolidated order.
Assessment Year 2000-2001
2. The assessee is aggrieved against the sustenance of disallowance of Rs. 15,21,000 being interest paid to its Singapore branch u/s 40(a)(i) of the Act and simultaneously taxing the interest received by Singapore branch amounting to Rs. 15,21,000 as interest income in its hand under the provisions of Article 11of the DTAA between India and Canada.
3. At the very outset the learned Counsel for the assessee contended that the issue raised in this appeal is covered by the recent Special Bench order in the case of Sumitomo Mitsui Banking Corpn. v. Dy. DIT (IT)  136 ITD 66 holding that interest paid by the PE to head office or to other branches outside India is deductible in the hands of the PE and the same interest is not taxable in the hands of the head office. The learned Counsel for the assessee submitted that the language of the DTAA with Japan as considered by the Special Bench in the case of Sumitomo Mitsui Banking Corpn. (supra) along with its protocol is similar to the language of the DTAA between India and Canada. It was, therefore, submitted that similar view be taken in the instant case as well by deleting both the additions sustained in the first appeal. The learned Departmental Representative candidly accepted the position so stated on behalf of the assessee. Respectfully following the precedent we hold that neither the amount of Rs. 15.21 lakh can be added u/s 40(a)(i) nor it can be taxed as per Article 11 of the DTAA with Canada as has been accepted by the ld. DR that the language of DTAA with Canada and Japan on this issue is similar. The impugned order is, therefore, reversed.
4. Ground no. 1 of the Revenue’s appeal is against the deletion of addition on account of interest of Rs. 8,70,238 paid on purchase of securities by the assessee-company for the broken period. The learned Counsel for the assessee contended that similar issue has been decided by the Tribunal in assessee’s favour in an earlier year which view has since been affirmed by the Hon’ble High Court. The learned Departmental Representative fairly agreed to the such submission advanced on behalf of the assessee. The impugned order is upheld to this extent. This ground is, therefore, not allowed.
5. The only other ground is against the direction of the learned CIT(A) to spread advisory fee/commission over a period of time instead of taxing it in the year under consideration. The facts apropos this ground are that the assessee rendered certificate for advisory services to three parties during the year in question. Vide order sheet entry dated 05.03.2003, the A.O. called upon the assessee to explain the modus operandi of the fee for advisory services and why the same was not offered for taxation in entirety in this year. The assessee furnished details submitting that it received fee from three clients namely (i) Tata Communication Limited, (ii) Birla AT & T Communications Limited, and (iii) BPL Communications Limited, out of which a part was recognized as income and the remaining part was deferred to be considered as income over the length of the loan. Insofar as the fee from Tata Communication Limited is concerned, the assessee stated that it related to arrangement fees received in connection with the loan granted by the TDB and pertaining to setting covenants, negotiations and execution of documentation, creation of security etc. It was claimed that since the benefit of this transaction extended over the term of the loan, it was deferred and recognized over the life of the loan on a straight line basis. Insofar as the fee from Birla AT & T Communications Limited is concerned the assessee submitted that the fees were received for advisory professional services rendered by the assessee and was accounted for entirely in the year of receipt itself. Regarding the advisory fee received from BPL Communications Limited, the assessee stated that it was at the rate of 1% received in connection with the loan granted by TDB and pertaining to setting covenants, negotiations etc. As the benefit of this transaction extended over the term of loan, this fee was deferred and recognized over the life of the loan on straight line basis. The Assessing Officer observed that there was no dispute on the advisory fee received from Birla AT & T Communications Limited which was disclosed as income in entirety. Regarding fee from the other two parties, it was observed that the same was charged by the assessee on the basis of some percentage of the loan granted. It was opined that once the loan was granted, the fee accrued to the assessee and further since the fee was not returnable at any point after receipt, the entire income accrued on the rendering of services. The AO found that not only the assessee acquired the right to receive the amount, but also actually received it during the year. Relying on the judgment of the Hon’ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. v. CIT  26 ITR 27, the AO held that the entire amount which was deferred by the assessee but received in the current year was also taxable as it also accrued in the year in question. The learned CIT(A) overturned the assessment order on this point by holding that a mere claim to income without any enforceable right there to cannot be regarded as accrual income for the purpose of income-tax.
6. Having heard the rival submissions and perused the relevant material on record it is observed that the assessee stated before the A.O. that this advisory fee related to the loan granted and pertaining to setting covenants, negotiations and execution of documentation, creation of security etc. It shows that the amount from each party was one time receipt related with the rendering of such services for the purposes of sanction of loan. If the remuneration is for preparing documents or for rendering other related services concerning the sanction of loan, it will have relevance only up to the stage of sanction of loan. Disbursal of loan or the period during which the loan is repaid are totally alien to the rendering of the services in connection with the obtaining of loan. Once it is so, there can be no question of spreading it to the period for which the loan was utilized. The learned AR submitted that the assessee was required to monitor the loan given jointly by certain banks and it was also required to render certain services after the sanction of loan. But for a general submission, he could not lead any evidence to substantiate his arguments. On a specific query, the learned AR could not furnish a copy of agreement with any of these parties to indicate the contention now raised before us contrary to what was submitted before the A.O. It has also been fairly admitted on behalf of the assessee that under no circumstance the amount of advisory fee was returnable. As the said advisory fee is based on a percentage of loan, say 1%, and there is no question of repaying such advisory fee at any time after the receipt, in our considered opinion, the entire income accrued in the year in question itself on the rendering of services. There is no logic in spreading such advisory fee over the life of the loan. That being the position, the income accrued at that very stage itself and could not have been deferred over the life of loan. The learned Departmental Representative has correctly relied on the judgment rendered by the Hon’ble Kerala High Court in Kerala Urban Development Finance Corpn. Ltd. v. CIT  266 ITR 245 in which case the administration and supervision charges were collected and retained by the assessee, a nodel agency for disbursement and loan realized by HUDCO to various urban local bodies. It has been held in this case that the income accrued to the assessee at the time of disbursal of loan and hence assessable to tax in the year in which the loan amount was disbursed. Certain other decision relied by the learned Departmental Representative reiterate the same view. It is still further noted that the Mumbai Bench of the Tribunal in the case of Dy. DIT (International Taxation) v. Chohung Bank  126 ITD 448 considered almost a similar case in which that the assessee bank gave guarantee for the period extending the close of the year. The question arose as to whether such commission should be considered for the period of guarantee or charged to tax in the year in which the guarantee was given. The Tribunal held that the entire commission accrued at the time of giving guarantee and no part of it can be spread to next year. In view of the above discussion, we are of the considered opinion that the learned CIT(A) was not justified in directing the spread over of the advisory fee over the period of loan. We, therefore, vacate the impugned order on this issue and restore the action taken by the A.O. This ground is allowed.
7. In the result, the appeal of the assessee is allowed and that of the Revenue is partly allowed.
Assessment Year 2001-2002
8. The two grounds raised by the assessee in its appeal are similar to those for assessment year 2000-2001 but for change in the amount of Rs. 2,03,34,257 being the interest disallowed u/s 40(a)(i) and also charged to tax under Article 11 of the DTAA. Both the sides are in agreement that the facts and circumstances of the instant year are mutatis mutandis similar to those of the preceding year. Following the view taken hereinabove we decide both the grounds in assessee’s favour.
9. First ground of the Revenue’s appeal is admittedly similar to ground no. 1 for assessment year 2000-2001. Following the view taken hereinabove for the said earlier year, we decide this issue in favour of the assessee.
10. Second ground is also similar to that for assessment year 2000-2001, which has been decided by us in favour of the Revenue. In this year, there is one new dimension. The assessee offered some part of the advisory fee received in earlier year for taxation in the current year, which was treated as deferred income in the said earlier year. It is quite obvious that with our reversing the order of the CIT(A) and restoring the action of the AO in bringing the entire amount to tax in the preceding year, the amount already voluntarily offered by the assessee for taxation in the current year, on the strength of its treatment as deferred income in earlier year, cannot be taxed once again. It is observed from the impugned order that the assessee claimed before the ld. CIT(A) that a sum of Rs. 24.36 lakh represents the amount of advisory fee offered for tax in the current year which the AO had charged to tax in assessment year 2000-2001. In principle we agree that if the entire amount has been taxed in a year, then no part of the same can be charged to tax in the subsequent year. As the necessary facts in this regard are not available on record, we set aside the impugned order on this issue and remit the matter to the file of A.O. for examining as to whether the amount of Rs. 24.36 lakh taxed in the current year is part of the amount of advisory fee taxed in assessment year 2000-2001. If this amount is part of total amount taxed in the preceding year, then the same cannot be charged to tax once again. This ground is, therefore, partly allowed for statistical purposes.
11. In the result, the appeal of the assessee is allowed and that of the Revenue is partly allowed for statistical purposes.