No Tax on Interest accrued/ received by Indian PE from its HO/ overseas branches

MUFG Bank Ltd. Vs ACIT (International Taxation) (ITAT Delhi)

With respect to the addition on account of the interest received by Indian branches from head office and other overseas branches amounting to ₹ 3,499,476/–. During the year , assessee has received an interest of ₹ 3,499,476 from its head office and overseas branches. The assessee has included this income in its computation of total income however during the assessment proceedings it is claimed that this amount should be excluded from its income being payment to self and hence same is not taxable. It was submitted by the assessee that since Indian branches in head office and other overseas branches of the assessee are one assessee for the purpose of taxation Under the act and the interest received by the Indian branches of the assessee from its head office and other overseas branches cannot be taxed in the hands of the assessee being payment to self which cannot give rise to the income that is taxable in India as per the domestic laws of India. The assessee relied on the several judgments of the High Court and coordinate benches. Assessee also submitted that this issue is squarely covered in favour of the assessee by the decision of the coordinate bench dated 25 January 2017 in assessee‟s own case for assessment year 2010 – 11 where the issue is squarely decided in favour of the assessee. The learned assessing officer held that head office and the permanent establishment of the assessee are treated as two different distinct entities for tax purposes and therefore interest income in question is income received by its permanent establishment from head office and other branches. The learned AO further stated that the order of the coordinate bench for assessment year 2000 – 11 and 2011 – 12 on this issue has not been accepted by the revenue and an appeal has been filed before the honourable Delhi High Court. Accordingly he rejected the contention of the assessee.

The learned authorised representative submitted that income earned from head office and overseas branches is not taxable in the hands of the PE in India since they are not separate legal entities and are part of the same foreign company therefore no income can arise when the transactions are carried out by different parts of the same legal entity. It is a settled principle of law that no man can make profit out of himself. Therefore, the interest income of Rs. 34,99,476 earned from head office and overseas branches is not chargeable to tax. It is also submitted that the Tribunal for A.Y. 2010-11 has decided this issue in favour of the assessee as under:-

“It is a settled principle of law that in the absence of decision of the Hon’ble jurisdictional High Court on an issue, the order of the non-jurisdictional High Court should be followed by the Tribunal. Besides, Tribunal while passing the order on the issue in the appeals for the assessment year on 19.09.2014 was having no benefit of the decision of Hon’ble Bombay High Court in the case of DIT vs. Credit Agricole Indosuez (supra) dated 17.06.2015. In view of this position we are bound to follow the decision of Hon’ble Bombay High Court in the case of DIT vs. Credit Agricole Indosuez (supra) on the issue. We thus respectfully  following the ratio laid down in the decision, hold that the authorities  below were not justified in taxing the interest received by the Indian  PE/branches of the assessee from its head office/other overseas branches  of the assessee from its head office / other overseas branches as no  person can make profit out of itself. The Assessing officer is, therefore,  directed to delete the addition in question. Ground No.5 is accordingly allowed.”

It was further submitted that above order was followed subsequently by the Tribunal in A.Y. 2003-04 (Para 20 Page 101 of Compilation), A.Y. 2009-10 (Para 23 Page 161 of Compilation) and in A.Y. 2013-14 (Para 12 Page 116 of Compilation).

The learned departmental representative vehemently supported the order of the learned assessing officer and direction of the learned dispute resolution panel.

We have carefully considered the rival contention and perused the orders of the lower authorities. In absence of any changes in the facts and circumstances of the case, as this issue has already been decided by the coordinate benches in the assessee‟s own case for earlier years and subsequent year, respectfully following the same we direct the learned assessing officer to not to tax the sum of ₹ 34,99,476 which is interest accrued and received by the Indian permanent establishment from its head office and overseas branches. Accordingly the learned assessing officer is directed to reduce the income of the assessee by the above sum. Accordingly ground number [2] of the appeal is allowed.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal is filed by the assessee against the assessment order passed by the Assistant Commissioner of Income Tax, (IT), Circle-2(2)(1), New Delhi (ld AO), u/s 143(3) of The Income Tax Act (The Act) dated 29.08.2019 for Assessment Year 2015-16.

The assessee has raised following grounds of appeal:-

“1 Disallowance of salary paid overseas to expatriates of the Appellant working in India by the Head Office (^„HO‟) and the Indian taxes paid thereon by the HO: INR 48,41,53,789

1.1 That on the facts and in the circumstances of the case and in law, the Hon‘ble Dispute Resolution Panel (^„DRP‘) erred in confirming the addition, as proposed in the draft assessment order, for an amount of INR 48,41,53,789 paid as salaries by the HO overseas, in foreign currency (including Indian taxes thereon), without appreciating that such salary paid by the HO to the expatriate employees working in India exclusively for the Permanent Establishment (‘PE’) of the Appellant, is fully allowed as deduction under section 37(1) of the Act.

1.2 That on the facts and in the circumstances of the case and in law, the Hon‘ble DRP and the ld. AO have erred in not following the favourable decision of the Hon‘ble Delhi Court/Hon‘ble Tribunal in the Appellant‘s own case for earlier years.

1.3 Without prejudice to above, the Id. AO erred in not refunding the tax deducted at source on such salaries in view of the fact that the deduction for such salaries paid to expatriate employees outside India was not allowed by him.

2. Interest amounting to INR 34,99,476 accrued/ received by the Indian PE from its HO overseas branches.

2.1 That on the facts and in the circumstances of the case and in law, the Hon‘ble DRP erred in confirming the addition, as proposed in the draft assessment order, for an amount o INR 34,99,476 being the interest accrued/ received by the Indian PE of the Appellant on funds lying with the HO/ other Overseas branches.

2.2 That on the facts and in the circumstances of the case and in law, the Hon‘ble DRP erred in not following the favourable decisions of the Hon‘ble Tribunal in the Appellant‘s o wn case for earlier years.

3. Disallowance under section 14A of the Act on account of exempt interest earned on Pass Through Certificates (‘PTCs‟) amounting to INR 2,25,21,366.

3.1 That on the facts and in the circumstances of the case and in law, the Hon‘ble DRP and Id. AO were unjustified in disallowing a sum of INR 2,25,21,366 under section 14A of the Act read with Rule 8D of the Income-tax Rules (^„Rules‘) on account of exempt interest income from PTCs earned by the Appellant.

3.2 That on the facts and in the circumstances of the case and in law, the Hon‘ble DRP and Id. AO erred in not appreciating the fact that no expenditure was incurred by the Appellant to earn the interest income from PTCs.

3.3 That on the facts and in the circumstances of the case and in law, the Hon‘ble DRP and the Id. AO erred in not appreciating the fact that the investment in PTCs were made by the Appellant out of its own interest free funds.

3.4 That on the facts and in the circumstances of the case and in law, the Hon‘ble DRP and the Id. AO erred in not appreciating the fact that investment in PTCs is stock in trade of the Appellant and therefore, provisions of section 14A of the Act read with Rule 8D ojf the Rules are not applicable in the case of the Appellant.

4. Addition on account of interest received on External Commercial Borrowings (‘ECBs‟) given to the Indian Borrowers

4.1 That on the facts and in the circumstances of the case and in law, the Hon‘ble DRP and Id AO were unjustified in holding that interest received by the Appellant on ECBs given to Indian borrower parties are taxable in India.

4.2 That on the facts and in the circumstances of the case and in law, the Hon‘ble DRP erred in not following the favourable decisions of the Hon‘ble Tribunal in the Appellant‘s own case for earlier years.

4.3 Without prejudice to above ground, on the facts and circumstances of the case and in law, the Id. AO has erred in not determining the correct amount of deduction under section 44C of the Act, by ignoring the alleged addition made to the total income on account of interest received by the Appellant on ECBs.

5. Taxability of interest under section 244A of the Act on income tax refund

That on the facts and circumstances of the case and in law, the Id. AO has erred in taxing the interest under section 244A on income-tax refund amounting to INR 6,83,72,179 at tax rate of 40% (excluding surcharge and education cess) instead of beneficial tax rate of 10% as provided under Article 11 of India – Japan DTAA.

6 Applicable rate of tax

6.1 That on the facts and circumstances of the case and in law, the Hon‘ble DRP and the Id. AO erred in imposing the tax rate of 40% (plus surcharge and education cess) on the income of the Appellant.

6.2 Under the provisions of Article 24 of the DTAA, the applicable rate of tax on the income of the Appellant attributable to its PE in India cannot exceed the applicable rate of tax (as per the Finance Act for the subject AY) in the case of Domestic Companies and consequential directions may kindly be issued in this regard.

7. Short grant of credit for TDS

That on the facts and circumstances of the case and in law, the Id. AO erred in not granting credit of tax of INR 1,92,29,851 withheld by income-tax department on interest on income tax refund.

8. Erroneous computation of tax liability

That on the facts and circumstances of the case and in law, the Id. AO has erred in determining tax liability of INR 282,93,37,371 (before credit of prepaid taxes) on the assessed income as against INR 276,00,20,917.

9. Transfer Pricing adjustment

9.1 That on facts and in law, the Hon‘ble DRP and Ld. AO/TPO erred in making an adjustment of INR 10,34,85,509 to the returned income of the Appellant in respect of the international transaction pertaining to “receipt of counter guarantee commission from Associated Enterprises (“AEs”) (“impugned transaction”).

9.2 That on the facts and circumstances of the case and in law, the Hon‘ble DRP and Ld. AO/TPO have erred in rejecting the primary as well as corroborative analysis undertaken by the Appellant for determining the arm‘s length price (“ALP”) of the impugned transaction and conducting a fresh economic analysis for the determination of ALP of the Appellant‘s impugned transaction and holding that the impugned transaction is riot at arm‘s length.

9.3 That on the facts and circumstances of the case and in law, the Hon‘ble DRP and Ld AO/ TPO have erred in characterizing the impugned transaction as corporate/ financial/performance guarantee without appreciating the distinction in functions performed, asset utilized and risks assumed (“FAR”) between the impugned transaction and corporate/financial/performance guarantee undertaken by independent third party banks.

9.4 That on the facts and circumstances of the case and in law, the Hon‘ble DRP and Ld. AO/TPO have erred in determining the ALP of the impugned transaction by:

a) Using erroneous comparable uncontrolled price (“CUP”) data, obtained by issuance of notice under section 133(6) of the Act and

b) Resorting to cherry picking of comparable banks without adopting any scientific methodology in identifying such comparables.

9.5 Without prejudice to Ground No. 9.4, that on the facts and circumstances of the case and in law, the Hon‘ble DRP and Ld. AO/TPO have erred in using non-comparable guarantee rates from the data obtained under section 133(6) of the Act, thereby, resorting to cherry picking of prices to determine the ALP of the impugned transaction.

9.6 That on the facts and circumstances of the case and in law, the Hon‘ble DRP and Ld. AO/TPO have erred in not providing an opportunity to cross-examine the third party banks from whom guarantee fee quotes have been obtained under section 133(6) of the Act for determining the ALP of the impugned transaction, thereby, violating the principles of natural justice.

10. That on the facts and in the circumstances of the case and in law, the ld. AO has erred in initiating penalty proceedings, being against the provisions of the Act.

11. General

a) Each of the above ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant.”

3. The brief facts of the case shows that the assessee is a banking company incorporated in Japan and is a tax resident of Japan. The assessee is engaged in wholesale banking operations in India Under a license From the Reserve Bank of India and is covered by The Banking Regulation Act, 1949. It is earlier known as the Bank of Tokyo Mitsubishi UFJ Ltd. MUFG group is the holding company for the Japan, Mitsubishi UJF trust and banking Corporation (MUTB) and certain other companies from Japan. The group’s primary activities are that of administration and management of banking and other financial services provided by its group companies. The assessee is carrying on mainly banking activities and limited to wholesale banking only. It is engaged in institutional banking, credit/landing and other facilities to the corporate.

4. It filed its return of income for the assessment year 2015 – 16 on 30/11/2015 declaring total income of ₹ 11,103,709,068/– including an amount of ₹ 6,757,743,503/– in schedule SI of return of income which is taxable at the rate of 10%/5% on gross basis.

5. During the course of assessment proceedings the learned assessing officer noted that assessee has entered into 13 different international transactions. It was also noted that Assessee Company has provided counter guarantee to beneficiaries in India on instruction of overseas branch of BMTU Japan. These guarantees are backed by counter guarantees from respective overseas branches of that company. Those overseas branches of BTMU pay assessee a commission for such guarantee provided to Indian beneficiaries at the rate of up to 1% of the guaranteed amount. The assessee adopted Transactional Net Margin Method with respect to all other transaction and stated that it’s all international transactions are at arm’s-length. The learned transfer pricing officer rejected this contention, separately benchmarked Gurantee commission transaction stated that the CUP Method would be the most appropriate method for benchmarking transaction for bank guarantees. He issued enquiry letter to various banks and collected information u/s 133 (6) of the act. Thereafter for the purpose of the guarantee he adopted average rate of bank guarantee at the rate of 2.23 percentages as commission income. Accordingly he determined commission at the rate of 2.23% on the value of game bank guarantee/standby letter of credit issued. He computed that the guarantee commission at the rate of 2.23 percentage at ₹ 134,380,249 out of which the assessee has already been paid a sum of ₹ 30,894,740/– and therefore net adjustment was proposed of ₹ 103,485,509. Accordingly order u/s 92 CA (3) of the act was passed on 31^st of October 2018.

6. The learned assessing officer further noted that over and above the above transfer pricing adjustment on account of corporate guarantee commission of ₹ 103,485,509/–, disallowance u/s 14 A of the act is also required to be made of ₹ 22,521,366/– , addition on account of deduction claimed in respect of salary paid to the expatriates employees amounting to ₹ 484,153,789/– is also required to be made. Therefore the adjusted total income of the assessee was worked out at ₹ 525,68,31,974/–. The learned AO reduced the above sum by granting deduction at the rate of 5% u/s 44C of the act of ₹ 262,841,599 and thereafter computed the income of the permanent establishment of assessee in India at ₹ 4,993,990,375. Over and above that learned assessing officer also made an addition in terms of the income Under India Japan DTAA on account of receipt of interest on external commercial borrowing by head office or other overseas branches amounting to ₹ 668,93,71,324/–. Accordingly total income of the assessee was computed at ₹ 11,683,361,699/–. The learned assessing officer computed the business income of Permanent establishment of assessee in India at ₹ 4,993,990,375 which is to be taxed at the rate of 40% plus applicable surcharge and education cess. Out of the interest income on external commercial borrowings, he computed the total income of ₹ 6,689,371,324, out of which a sum of ₹ 518,00,31,066/– is to be taxed at the rate of 10% as Per the provisions of article 11 of the India Japan DTAA and an amount of ₹ 1,509,340,258/– is to be taxed at the rate of 5% Under the provisions of Section 194LC of the income tax act. Accordingly draft assessment order was passed by the learned assessing officer on 24/12/2018. The assessee preferred an objection before the learned Dispute Resolution Panel. The learned DRP passed a direction u/s 144C (5) of the act on 25/6/2019. Based on those directions the learned assessing officer passed an assessment order u/s 143 (3) of The Income Tax Act 1961 on 29/8/2019 making following adjustment which are subject of appeal before us:-

i. in addition on account of deduction claimed in respect of salary paid to the expatriates employees of ₹ 484,153,789/–

ii. transfer pricing addition on account of the corporate guarantee commission of ₹ 103,485,509/–

iii. disallowance u/s 14 A of the income tax act of ₹ 22,521,366/–

iv. charge of interest on external commercial borrowing of ₹ 518,00,31,066 to be taxed at the rate of 10% as per the provisions of article 11 of the Double Taxation Avoidance Agreement and charge on ₹ 1,509,340,258/– taxed at the rate of 5% u/s one 9/4 LC of the income tax act.

7. Assessee aggrieved with the above order of the learned assessing officer has preferred an appeal before us.

8. The Ground no [1] of appeal is against the disallowance of salary paid to overseas expatriates of the appellant working in India by the Head Office (HO) and Indian taxes paid thereon by the head office amounting to Rs. 484153789/-. Facts show that head office of the assessee is situated in Japan and has deputed certain employees to work in its branches situated in India. The sole responsibility of such expatriates employees while deputation in India is to exclusively manage the business operation of the branches of the assessee in India. According to the employment and remuneration policy of the assessee part of the salaries for the services rendered by the expatriates employees in India are paid to such expatriates employees outside India i.e. by the head office of the bank Japan and the balance amount is paid to such employee is in India. It is claimed that entire salary including which is paid outside India is exclusively towards the services rendered by the employees for Indian operations of the bank while on reputation in India. Such salaries are accounted by debiting only that portion of salary paid to the expatriate employees which was paid in Indian rupees by the branches in India. Salary paid in the foreign currency by the head office was not routed through the profit and loss account of the Indian branches and such salaries accounted for at the head office level. The assessee bears the Indian tax payable on the salaries paid to the expatriate’s employees including the salary paid by the head office in Japan computed after grossing up of the salaries paid to such expatriates employees. Tax deduction u/s 192 of the income tax act was also carried out. Accordingly in computing the taxable income of the assessee’s permanent establishment India for the impugned assessment year the assessee claimed deduction of ₹ 484,153,799/– in respect of salaries paid by the head office to the expatriates employees and taxes paid thereon but not debited in the books of PE in India . The claim of the assessee is as the sum paid represented expenditure incurred for the purpose of the business operation of the India of Indian branches of the assessee and therefore same are allowable as a deduction. The learned assessing officer recorded the facts as per paragraph number [5] of his order wherein he held that these employees worked for head office as well as for its branch offices in India. There was no exclusivity of work and it cannot be accepted that the services given by these employees were wholly and exclusively for the purpose of the branch office in India only. Under the circumstances he held that the part of the work which was done for the purpose of the permanent establishment’s business was remunerated by the permanent establishment and head office paid for the work pertaining to the head office or other branches. Therefore he placed reliance on the judgment of the honourable Calcutta High Court in case of ABN Amro Bank NV versus Commissioner of income tax wherein the honourable court held that for taxation purposes head office and PE are to be treated as separate entities. He further held that it is the duty of the assessee to substantiate any claim made by it by proper evidence for it is to be allowed as a deduction under the act. He held that looking to the composite nature of employment there is no demarcation to show that the expenses incurred by the head office were incurred wholly and exposure for the purposes of the business of the permanent establishment. Therefore, he held that the salary paid to expatriate employees by the head offices not allowed as a deduction u/s 37 of the act for comuting income of PE as being not incurred wholly and exclusively for the purposes of the business of the permanent establishment. He further held that in respect of expenses incurred by the head office deduction of 5% of the adjusted total income of its permanent establishment in India is allowed to the assessee as per the provisions of Section 44C of the act as other income is at a be taxed at gross basis as per the provisions of the India Japan DTAA. He further noted that the honourable High Court of Delhi in ITA number 604/2015 and 605/2015 for assessment year 2007 – 08 and 2008 – 09 the issue is squarely decided in favour of the assessee. However as the revenue has not accepted the above order of the honourable High Court and SLP has been filed to keep the issue alive, he followed the stand taken by the Department in earlier years and made the disallowance.

9. The learned authorised representative submitted that expatriate employees deputed by the HO are working exclusively for the Indian branches. Therefore, the salary paid to expatriates is incurred wholly and exclusively for the purpose of carrying on the business of branches in India and thus, the salary paid to expatriate is deductible as an expense under section 37(1) of the Act and not covered within the scope of “head office expenditure” under section 44C of the Act. It is submitted that this issue is now covered by the order of the High Court in A.Y. 2007-08 and 2008-09 wherein the High Court dismissed the appeal of the Department holding as under :

“Salaries paid to expatriates”

9. The first question urged concerns the payment of salaries to the expatriates. In deciding this issue in favour of the Assessee, the ITAT has in the impugned common order referred to and relied upon the decision of its coordinate bench at Kolkata in ABN Amro Bank vs. JCIT (2005) 97 ITD 1 (ITAT [Kol.]). Further the ITAT followed the decision of the Bombay High Court in CIT vs. Emirates Commercial Bank Ltd. (2003) 262 ITR 55 (Bom.) where the Bombay High Court approved the view taken by the ITAT. The ITAT agreed that the expenses have been incurred wholly and exclusively by the Indian branch and therefore no part of theses expenses can be allocated to any other branch of the HO and that there was no dispute with regard to the non-applicability of section 44C of the Act.

10. This Court has perused the order of the Bombay High Court in Emirates Commercial (supra) where on identical facts, the issue was decided in favour of the Assessee. This order of the Bombay High Court has been affirmed by the Supreme Court by order dated 26 August 2008 in Commissioner of Income Tax v. M/s. Emirates Commercial Bank Ltd. which in turn referred to an order of the same date in Commissioner of Income Tax v. Deutsche Bank AG (CA No. 1544 of 2006)

11. In that view of the matter, this court declines to frame a question on this issue.”

Thus it was submitted that above Judgment of the High Court has also been followed by the Tribunal in A.Y. 2010-11 (Para 8 Page 54 of Compilation) High Court in A.Y. 2010-11 (Para 3 Page 78 of Compilation), Tribunal in A.Y. 2003-04, 2004-05 (Para 8 Page 91of Compilation), A.Y. 2009-10 (Para 8 Page 154 of Compilation) and, by Tribunal in A.Y. 2013-14 (Para 6 Page 112 of Compilation). Therefore, it was submitted issue is squarely covered in favour of the assessee.

10. The learned departmental representative vehemently supported the order of the learned assessing officer and submitted that as AO has filed Special Leave Petition before the honourable Supreme Court to keep the issue alive the above disallowance has been made.

11. On careful consideration of the rival arguments we find that in absence of any change drawn to our notice in the facts and circumstances of the case, respectfully following the decision of the honourable High Court and subsequently followed by the coordinate benches for assessment year 2013 – 14, we direct the learned assessing officer to delete the disallowance of salary paid overseas to the expatriates of the appellant working in India by the head office and the Indian taxes paid thereon by that office amounting to ₹ 484,153,789. Accordingly ground number [1] of the appeal is allowed.

12. Ground number [2] of the appeal is with respect to the addition on account of the interest received by Indian branches from head office and other overseas branches amounting to ₹ 3,499,476/–. During the year , assessee has received an interest of ₹ 3,499,476 from its head office and overseas branches. The assessee has included this income in its computation of total income however during the assessment proceedings it is claimed that this amount should be excluded from its income being payment to self and hence same is not taxable. It was submitted by the assessee that since Indian branches in head office and other overseas branches of the assessee are one assessee for the purpose of taxation Under the act and the interest received by the Indian branches of the assessee from its head office and other overseas branches cannot be taxed in the hands of the assessee being payment to self which cannot give rise to the income that is taxable in India as per the domestic laws of India. The assessee relied on the several judgments of the High Court and coordinate benches. Assessee also submitted that this issue is squarely covered in favour of the assessee by the decision of the coordinate bench dated 25 January 2017 in assessee‟s own case for assessment year 2010 – 11 where the issue is squarely decided in favour of the assessee. The learned assessing officer held that head office and the permanent establishment of the assessee are treated as two different distinct entities for tax purposes and therefore interest income in question is income received by its permanent establishment from head office and other branches. The learned AO further stated that the order of the coordinate bench for assessment year 2000 – 11 and 2011 – 12 on this issue has not been accepted by the revenue and an appeal has been filed before the honourable Delhi High Court. Accordingly he rejected the contention of the assessee.

13. The learned authorised representative submitted that income earned from head office and overseas branches is not taxable in the hands of the PE in India since they are not separate legal entities and are part of the same foreign company therefore no income can arise when the transactions are carried out by different parts of the same legal entity. It is a settled principle of law that no man can make profit out of himself. Therefore, the interest income of Rs. 34,99,476 earned from head office and overseas branches is not chargeable to tax. It is also submitted that the Tribunal for A.Y. 2010-11 has decided this issue in favour of the assessee as under:-

“It is a settled principle of law that in the absence of decision of the Hon‘ble jurisdictional High Court on an issue, the order of the non-jurisdictional High Court should be followed by the Tribunal. Besides, Tribunal while passing the order on the issue in the appeals for the assessment year on 19.09.2014 was having no benefit of the decision of Hon‘ble Bombay High Court in the case of DIT vs. Credit Agricole Indosuez (supra) dated 17.06.2015. In view of this position we are bound to follow the decision of Hon‘ble Bombay High Court in the case of DIT vs. Credit Agricole Indosuez (supra) on the issue. We thus respectfully  following the ratio laid down in the decision, hold that the authorities  below were not justified in taxing the interest received by the Indian  PE/branches of the assessee from its head office/other overseas branches  of the assessee from its head office / other overseas branches as no  person can make profit out of itself. The Assessing officer is, therefore,  directed to delete the addition in question. Ground No.5 is accordingly allowed.”

It was further submitted that above order was followed subsequently by the Tribunal in A.Y. 2003-04 (Para 20 Page 101 of Compilation), A.Y. 2009-10 (Para 23 Page 161 of Compilation) and in A.Y. 2013-14 (Para 12 Page 116 of Compilation).

14. The learned departmental representative vehemently supported the order of the learned assessing officer and direction of the learned dispute resolution panel.

15. We have carefully considered the rival contention and perused the orders of the lower authorities. In absence of any changes in the facts and circumstances of the case, as this issue has already been decided by the coordinate benches in the assessee‟s own case for earlier years and subsequent year, respectfully following the same we direct the learned assessing officer to not to tax the sum of ₹ 34,99,476 which is interest accrued and received by the Indian permanent establishment from its head office and overseas branches. Accordingly the learned assessing officer is directed to reduce the income of the assessee by the above sum. Accordingly ground number [2] of the appeal is allowed.

16. Ground number [3] of the appeal is with respect to the disallowance u/s 14 A of the act on account of the exempt interest income earned on pass-through certificates amounting to ₹ 22,521,366/– claimed as exempt u/ 10 [35A] of the Act. The learned assessing officer noted that assessee has earned an income of ₹ 37,002,690/– Under that interest income on pass through certificates which is claimed as exempt u/s 10 (35A) of the act. The assessee company has not disallowed the proportionate expenditure incurred on the above income as per the provisions of Section 14 A of the income tax act. The assessee was asked to show cause as to why the disallowance of proportionate expenditure incurred by it not be calculated as per the provisions of Section 14 of the act. The assessee submitted that assessee is a banking company in India operates under a license from The Reserve Bank Of India and is governed by The Banking Regulation Act 1949. As per the guidelines issued by the reserve bank of India the banks in India are mandatorily required to make certain advances and loans to the priority sector undertaking. Therefore to meet the above target the assessee being a bank banking company is mandatorily required to contribute to the priority sector lending and if it fails to do so penal consequences are invited. Therefore the above investment has been made as per the directions of reserve bank of India. Assessee further submitted that the investment in pass through certificates does not have any fresh investment during the subject assessment year. Assessee also submitted that the investment in the above certificates was made by the assessee out of its own non interest bearing funds available with the assessee as assessee has a capital as on 31^st of March 2012 of ₹ 25,194,635,979/– and reserve and surplus is of ₹ 6,112,135,553/–. It was further submitted that the balance of investment in pass through certificates as on 1 April 2014 was only ₹ 1,112,527,359 as on 31^st of March 2015 is nil. Assessee also claimed before the assessing officer that there were no expenditure is incurred for earning exempt income and therefore no disallowance u/s 14 A can be made. It was further stated that on the basis of the above interest free funds is available with the assessee, no borrowed funds are utilized for earning exempt income. It was further stated that without prejudice that even where investments are made from a common pool of funds comprising of both borrowed and own funds it shall be a presumed that the investments have been made with the assessee‟s own funds and not with the borrowed funds. Therefore it was stated that no disallowance of any interest expenses can be made where no interest-bearing funds are utilized for investing in assets which give rise to exempt income. Assessee further submitted that assessee has shown the pass through certificates as stock in trade of the assessee as “available for sale “category and its redemption has been recognized as business income by the assessee. Therefore these instruments qualifies as stock in trade of the assessee and no disallowance u/s 14 A of the act can be made. The learned assessing officer rejected the contentions of the assessee and imputed the disallowance u/s 14 A of the income tax act. The learned assessing officer considered the expenditure directly relating to the pass through certificates interest expenditure at Rs Nil , however proportionate disallowance of the indirect interest expenditure was made of Rs 1 97,40,048/–. ¹/₂% of the average value of the investment was also considered at ₹ 2,781,318/– .Accordingly total disallowance was made of ₹ 22,521,366/–.

17. The learned authorised Representative raised multiple arguments with respect to the above disallowance as Under:-

1. The provisions of section 14A are not applicable in the instant case for the following reasons:

a. Section 14A is not applicable in case of bank when the investments are held as stock-in-trade.

b. Rule – 8D(2)(ii) & (iii) does not apply to stock-in-trade therefore, disallowance made by the AO deserves to be set aside.

c. Section 14A does not apply as provisions of the DTAA are more beneficial to the assessee.

d. Section 14A does not apply as income earned from securitization trust is taxable under section 115TA of the Act.

e. Disallowance made under Rule – 8D(2)(ii) is bad as the assessee had enough interest free funds available.

Each of the aforesaid contention is explained in detail below.

Section 14A is not applicable in case of bank when the investments are held as stock-in-trade:

2. It is submitted that the investment in PTCs is made by the assessee in pursuance of the Master Circular No. RBI/2011-12/107dated 1 July 2011 (enclosed at Page45-67 of Paperbook – A)which mandatorily requires the banks to invest in PTCs issued by the securitization trust. The investment made by the assessee in PTCs issued by “Sansar Trust 2012” also qualifies as investment as per the Master Circular No. RBI/2011-12/107 dated 1 July 2011 as certified by certificate dated 20.03.2012 (Page 68 of Paperbook – A). Therefore, the investment made by the assessee is in the course of carrying on its banking business and constitutes its stock-in-trade. It is pertinent to note that when the income from PTC was taxable in A.Y. 2012-13, 2013-14 and some part of A.Y. 2014-15, the income was offered and taxed under the head “profits and gain from business of profession”therefore, it is an accepted position that the investment made by the assessee in PTCs is a trading asset forming part of stock-in-trade. In this regard the assessee places reliance on the Judgment of Supreme Court in CIT vs. NawanshaharCentral Co-op. bank Ltd. (289 ITR 6) wherein it was held as under(Page 195 of Compilation):

“2.This Court has consistently held that investments made by a banking concern are part of the business of banking. The income arising from  such investments would, therefore, be attributable to the business of bank  falling under the head “Profits and gains of business”  and thus deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961. This has been so held in Bihar State Co-operative Bank Ltd. v. CIT [1960] 39 ITR 114 (SC), CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194 (SC) and CIT v. Ramanathapuram District Co-operative Central Bank Ltd. [2002] 255 ITR 423 (SC).

3. The principle in these cases would also cover a situation where a Co­operative bank carrying on the business of banking is statutorily required to place a part of its funds in approved securities. The appeals are accordingly dismissed without costs.”

3. For completeness, the assessee also brings to the notice of the Tribunal that the AO himself, for invoking provisions of section 14A,has held that mobilization of deposits and investing such funds in appropriate channels to earn income is the prime business activity of the assessee. Hence, the AO is also in agreement with the contention of the assessee that investment made in PTCs is in the course of carrying on its business consequently, it forms part of stock-in-trade of the assessee.

4. It has been held by Delhi Tribunalin case of Punjab National Banks vs. DCIT (ITA No. 1519/Del/2016) (Para 8 Page – 203 of Compilation)that the provisions of section 14A are not applicable in case of a bank if exempt income is earned from the investments which are held as stock in trade. The relevant portion of the order is extracted as under:

“8. It is observed that decisions relied upon by Ld. Sr. DR has been passed prior to decision of Hon‟ble Supreme Court in the case of Maxopp Investment vs. CIT (supra). Further, Hon‟ble Supreme Court in the case of Maxopp Investment vs. CIT (supra), has rendered a clear finding in respect of banking institutions which is peculiar.

Present assessee before us is also a Bank, where shares were held as stock-in-trade and therefore it becomes business activity of assessee. In our opinion specific observation Hon‘ble Supreme Court in the case of Maxopp  Investment vs CIT (supra), reproduced hereinabove are squarely applicable to fact of the present case. Respectfully following the view taken by Hon‘ble Supreme Court in the case of Maxxop Investment vs CIT (supra), we allow this ground raised by assessee and hold that these were not investments made by assessee and hold that these were not investments made by assessee in order to fall within the ambit of Rule 8D(iii) of Income tax Rules 1963.”

Similar view was also taken by Kolkata Tribunal in case of UCO Bank Ltd. vs. DCIT (ITA No.1615/Kol/2016) (Para 13 Page 216 of Compilation) wherein it was held as under:

“… We therefore find that qua the assessee engaged in the banking  business, the Hon‘ble Supreme Court upheld that Judgment of the  Hon‘ble Punjab & Haryana High Court in the case of Pr. CIT vs State  Bank of Patiala (supra) as per which no disallowance under section 14A  is permissible in terms of Rule 8D in case of assesses engaged in banking  business. Respectfully following the Judgment of the Supreme Court in case of State Bank of Patiala (supra), we direct the Ld. AO to delete the disallowance of Rs.2,90,37,490 made under Rule 8D(2)(iii). Ground No.2 of the Revenue‘s appeal is therefore dismissed and the grounds assessee‘s CO are allowed.”

6. Similar view has also been taken by Pune Tribunal in case of Bank of Maharashtra vs. DCIT (ITA No. 1370/Pun/2016) (Para 8.4 Page – 232 of Compilation) wherein the disallowance under section 14A was deleted as the exempt income was earned from securities held as stock-in-trade following the Judgment of Supreme Court in case of Maxopp Investment Ltd. vs. CIT (402 ITR 640).

7. In view of the above, it is submitted that the disallowance made by the AO under section 14A is unsustainable as the securities are held as stock-in-trade.

Rule – 8D(2)(ii) & (iii) does not apply to stock-in-trade:

8. It is submitted that the disallowance made by the AO under Rule – 8D(2)(ii) of Rs. 1,97,40,048 on account of interest expenditure and Rs. 27,81,318 under Rule – 8D(2)(iii) is bad in law as those provisions are applicable only when exempt income is earned from securities which are held as “Investments”. Since, in the instant case, the securities are held as “stock-in-trade”, the provisions of Rule – 8D(2)(ii) & (iii) are not applicable and therefore, the disallowance made by the AO is bad in law.

9. In this regard, the assessee refers to the decision of Kolkata Tribunal in case of DCIT vs. Gulshan Investment Co. Ltd.(142 ITD 89) wherein the Tribunal held that the provisions Rule 8D(2)(ii) & (iii) do not apply when securities are held as stock in trade and the only disallowance can be made is under Rule-8D(2)(i). The operative portion of the decision is reproduced as under(Page 246 of Compilation):

“6. A plain look at the above rule shows that 8 D(2)(ii) and (iii) can only  be applied in the situations in which shares are held as investments, and that this rule will not have any application when the shares are held as  stock in trade. It is so for the elementary reason that the one of the variables on the basis of which disallowance under rules 8D(2)(ii) and (iii) is to be computed is the value of “investments, income from which does not or shall not form part of total income”, and, when there are no such investments, the rule cannot have any application. When no amount can be computed in the light of the formula given in rule 8 D(ii) and (iii), no disallowance can be made under rule 8D (2)(ii) and (iii) either. As held by Hon’ble Supreme  Court in the case of CIT v. B C Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1, when computation provisions fail, the charging provisions  cannot be applied, and by the same logic, when the computation  provisions under rule 8 D (2) (ii) and (iii) fail, disallowance under the said provisions cannot be made either as the said provision is rendered unworkable.”

7. However, that does not exclude the application of rule 8 D(2)(i) which refers to the “amount of expenditure directly relating to income which does not form part of total income”. In other words, in a case where  shares are held as stock in trade and not as investments, the disallowance  even under rule 8 D is restricted to the expenditure directly relatable to  earning of exempt income. Consequently, while Section 14 A will still apply in the cases whether shares are held as stock in trade or as investments, and that is precisely what a Special Bench of this Tribunal has held in the case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 (Mum.), the disallowance to be made under section 14 A read with rule 8 D will be restricted to direct expenses incurred in the earning of dividend income.”

10. It is also important to note that the Tribunal has held in case where securities are held as stock-in-trade, the disallowance will be restricted to Rule-8D(2)(i) i.e. expenses incurred directly in relation to exempt income. However, in the instant case, the AO himself has found that there are no expenses incurred by the assessee which can come within the provisions of Rule 8D(2)(i)(Page –40 of Final assessment order).

11. Similar view was also taken by the Ahmedabad Tribunal in case of Anjalee Exim Pvt. Ltd. vs. ACIT (ITA No. 2386/Ahd/2011) (Para 4 Page 249 of Compilation) and Chandigarh Tribunal in case of The State Bank of Patiala vs. ACIT (ITA No. 215/Chd/2015) (Para 15 Page 264 of Compilation). In view of the above, it is submitted that the disallowance made by the AO applying Rule – 8D(2)(ii)&(iii) is bad in law and deserves to be deleted.

12. If the Hon’ble Bench agrees with the argument of Stock-in-trade then, the following contentions will become academic. However, if the Bench does not agree with the argument of Stock-in-trade then the following argument must be considered for adjudication of this ground.

Section 14A does not apply as the provisions of India-Japan DTAA are more beneficial:

13. As mentioned above, the assessee, being a resident of Japan, is entitled to the benefits of India-Japan DTAA. Article – 7(3) of the DTAA provides that in determining the profits of a permanent establishment, there shall be allowed as deductions of expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred. The Protocol dated 7 March 1989 further explains that the deduction in respect of executive and general administrative expenses will be allowed in accordance with domestic law of India but such deduction will not be less than what is allowable under the Act on the date of signature of the convention. For ready reference, the relevant extract of the Protocol is reproduced as under(Page – 312 of Compilation):

“7. With reference to paragraph 3 of article 7 of the Convention, it is understood that in India the deductions in respect of the executive and general administrative expenses as referred to in the said paragraph shall be allowed in accordance with the domestic law of India, but such  deductions shall in no case be less than what are allowable under the  Indian Income-tax Act as effective on the date of signature of this  Convention.”

14. The provisions of section 14A were not on the statute book when the DTAA between India and Japan was signed and were inserted by Finance Act, 2001 much after the signing of India-Japan DTAA. Therefore, in view of the provisions in the Protocol, no expenses can be disallowed under section 14A ofthe Act as the provisions of DTAA do not permit disallowance of expenses based on provisions inserted in domestic law after the signing of the convention. Therefore, the provisions of the DTAA being more beneficial to the assessee, shall prevail over the domestic law.

15. In this regard, reliance is placed on the Judgment of Bombay High Court in case of DIT vs. Deutsche Bank AG (215 Taxman 143) wherein the issue was whether the amendment made to section 44C from A.Y. 1994-95 would apply, when the DTAA provided that the allowable deductions shall not be less than what is allowable on the signing of DTAA. The High Court held in favour of the assessee observing as under(Page 344 of Compilation):

“3. In its order dated 28th January 2010, the Tribunal has referred to the Agreement for the Double Taxation Avoidance Agreement (DTAA) Treaty entered into between Federal Republic of Germany and India on 28th June 1984. The aforesaid DTAA inter alia, provided that deduction in respect of head office expenses would not be less than  what is allowable under the Indian Income Tax Act as existing on 28th  June 1984. This position changed only by virtue of amendment to the DTAA in the Assessment Year 1998-99.

4. It therefore follows that during Assessment Year 1994-95, Section  44C of the said Act as applicable would be one existing as on 28th  June 1984 and not as existing during the subject assessment year. This  is because the preamended Section 44C of the said Act allowed more deduction to head office expenses then the amended Section 44C of the said Act.  Consequently, the issue as raised before the Tribunal and this Court would continue to be governed for the subject assessment year by the order of this Court in the matter of Deutsche Bank AG (supra).”

16. Similar view was taken by the Mumbai Tribunal in case of Abu Dhabi Commercial Bank Ltd. vs. ACIT (138 ITD 83) (Para 14 Page 355 of Compilation). Therefore, it is submitted that the provisions of section 14A cannot be invoked as the DTAA does not allow the disallowance of expenses based on provisions inserted after the signing of the DTAA.

17. It is also submitted that the provisions of section 14A although inserted w.r.e.f. 1
April 1962 however, insofar as the DTAA is concerned, it shall have no effect as the protocol in the DTAA specifically provide that the deduction for expenses is to be allowed in accordance with the provisions in the Income-tax Act, 1961 as on the signing of the DTAA. And, there has been no amendment to the provisions of Article – 7(3) in DTAA after it was executed in 1989. Therefore, amendment in the Income-tax Act, 1961 will not automatically override the provisions of the DTAA unless specifically agreed upon by the parties. In this regard, reliance is placed on the Judgment of Delhi High Court in case of New Skies Satellite B.V. vs. DIT (382 ITR 114) wherein the High Court has held as under(Page 337 of Compilation):

“41.This Court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in  operation to the terms of an international treaty. In other words, a  clarificatory or declaratory amendment, much less one which may seek to  overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this Court, indefensible.

42. It takes little imagination to comprehend the extent and length of negotiations that take place when two nations decide to regulate the reach and application of their legitimate taxing powers. In Union of India v. AzadiBachao Andolan [2003] 263 ITR 706/132 Taxman 373 (SC) where the Indo Mauritius Double Tax Avoidance Convention was before the Supreme Court, the Court said the following of the essential nature of these treaties,

“132. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief is that treaties are negotiated and entered into at a political level go ahead and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief , David R. Davis, Principles of International Double Taxation Relief , Page4 (London Sweet & Maxwell, 1985)points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions. It is observed (vide para 1.06):

The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighted more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one way.

Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides.”

43. The Vienna Convention on the Law of Treaties, 1969 (“VCLT”) is universally accepted as authoritatively laying down the principles governing the law of treaties. Article 39 therein states the general rule regarding the amendment of treaties and provides that a treaty may be amended by agreement between the parties. The rules laid down in Part II of the VCLT apply to such an agreement except insofar as the treaty may otherwise provide. This provision therefore clearly states that an  amendment to a treaty must be brought about by agreement between the  parties. Unilateral amendments to treaties are therefore categorically  prohibited.

44. We do not however rest our decision on the principles of the VCLT,  but root it in the inability of the Parliament to effect amendments to  international instruments and directly and logically, the illegality of any Executive action which seeks to apply domestic law amendments to the  terms of the treaty, thereby indirectly, but effectively amending the treaty unilaterally. As held in Azadi Bachao Andolan’s case (supra) these treaties are creations of a different process subject to negotiations by sovereign nations. The Madras High Court, in CIT v VR. S.RM. Firm [1994] 208 ITR 400 held that “tax treaties are considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries”.

18. In view of the above, it is submitted that the retrospective insertion of section 14A cannot be read into the provisions of DTAA therefore, the disallowance of Rs. 2,25,21,366 made by the AO under section 14A r.w. Rule 8D is unsustainable and bad in law.

Section 14A does not apply to income earned from securitization trust asit is taxable under section 115TA of the Act:

19. It is submitted that the income received by the assessee from securitization trust is taxed under section 115TA of the Act under which the tax is paid by the trust @30%. Therefore, the income received by the assessee is taxed in the hands of the trust and is not taxed in the hands of the beneficiary on receipt of the same. It is important to note that under the Act for income earned by the trust, the trustee is treated as a representative assessee under section 160(iv) of the Act and assessment is made on the trustee in the capacity of a representative assessee. Therefore, the tax that is paid under section 115TA of the Act is paid as a representative assessee, as the trustee has no interest in the income since it is earned for the benefit of beneficiaries under the trust i.e. the assessee. In this regard, reliance is placed on the Judgment of Supreme Court in case of C.R. Nagappa vs. CIT (73 ITR 626) wherein the Judgment of Bombay High Court in case of CIT vs. Balwantrai Jethalal (34 ITR 187) was approved holding as under(Page 374 of Compilation):

“In a later judgment of the same High Court, the court reversed the earlier opinion: Commissioner of Income-tax v. Balwantrai Jethalal Vaidya [1958] 34 ITR 187. The court held in that case that the liability of trustees to income-tax is co-extensive with that of the beneficiaries and cannot in any case be a larger or wider liability. If the assessment is made upon a trustee, his liability to pay tax must be determined in accordance with section 41 of the Income-tax Act. It was observed in that case that section 41 gives no option to the taxing department to treat the income received by the trustee on behalf of the beneficiary as his own income or to treat it as the income of the trustee on behalf of the beneficiary. It was further observed:

“If the assessment is upon a trustee, the tax has to be levied and recovered in the manner provided in section 41. The only option that the Legislature gives is the option embodied in sub-section (2) of section 41, and that option is that the department may assess the beneficiaries instead of the trustees, or having assessed the trustees it may proceed to recover the tax from the beneficiaries. But on principle the contention of the department cannot be accepted that, when a trustee is being assessed to tax, his burden which  will ultimately fall upon the beneficiaries should be increased and whether that burden should be increased or not should be left to the option of the  department. The basic idea underlying section 41, and which is in  conformity with principle, is that the liability of the trustees should be co­extensive with that of the beneficiaries and in no sense a wider or a larger liability. Therefore, it is clear that every case of an assessment against a  trustee must fall under section 41, and it is equally clear that, even though  a trustee is being assessed, the assessment must proceed in the manner laid down in Chapter III.””

20. It is important to note that before the insertion of Chapter – XIIEA, the income earned from the securitisation trust was taxable at Maximum Marginal Rate of 30% by virtue of section 161(1A) of the Act (See Circular No. 3/2014 Page 367 of Compilation). However, after insertion of Chapter XII-EA, the income is taxablein the hands of trust @30% under section 115TA of the Act. And, since the trustee pays tax in capacityof representative assessee, there is no change insofar as the assessee is concerned as the tax paid by the trust from the income earned for beneficiaries.

21. The fact that the trustee is taxed as a representative assessee is also evident from the proviso to section 115TA of the Act, which provides that if the income of the beneficiary is not chargeable to tax by virtue of provisions of section 10 of the Act, then the trustee is not requiredto pay tax under section 115TA of the Act on distribution of income. Such provisions are not found in section 115-O of the Act wherein a company is required to pay dividend distribution taxeven when the shareholder‟s income is exempt under section 10 of the Act for a simple reason that company is not assessed as a representative assessee for the shareholders and is a separate legal person independent of the shareholders.

22. It is also submitted that the Judgment of Supreme Court in case of Godrej & Boyce Manufacturing Co. Ltd. vs. CIT (394 ITR 449) is distinguishable on facts as in that case the argument of the assessee was that the tax paid under section 115-O of the Act is the tax paid on the dividend income earned by the assessee which was rejected Supreme Court holding as under (Page 398 of Compilation):

“31. So far as the provisions of Section 115-O of the Act are concerned, even if it is assumed that the additional income tax under the aforesaid provision is on the dividend and not on the distributed profits of the dividend paying company, no material difference to the applicability of Section 14A would arise. Sub-sections (4) and (5) of Section 115-O of the Act makes it very clear that the further benefit of such payments  cannot be claimed either by the dividend paying company or by the  recipient assessee.  The provisions of Sections 194, 195, 196C and 199 of the Act, quoted above, would further fortify the fact that the dividend income under Section 115-O of the Act is a special category of income which has been treated differently by the Act making the same non-includible in the total income of the recipient assessee as tax thereon had already been paid by the dividend distributing company. The other species of dividend income which attracts levy of income tax at the hands of the recipient assessee has been treated differently and made liable to tax under the aforesaid provisions of the Act. In fact, if the argument is that tax paid by the dividend paying company under Section 115-O is to be understood to be on behalf of the recipient assessee, the provisions of Section 57 should enable the assessee to claim deduction of expenditure incurred to earn the income on which such tax is paid. Such a position in law would be wholly incongruous in view of Section 10(33) of the Act.”

23. However, the provisions similar to section 115-O (4) & (5) are absent in Chapter XII-EA for a reason that the trustee is taxed as a representative assessee and since his liability is dependent on the liability of beneficiary such provisions are contrary to the taxation of trust under the scheme of the Act.

24. In view of the above, it is submitted that the income received from securitisation trust is not exempt and is taxed in the hands of trustee as a representative assessee under section 115TA of the Act. Accordingly, no disallowance under section 14A can be made with respect to income received by the assessee from securitisation trust.

Disallowance under Rule 8D(2)(ii) is incorrect as the assessee has enough interest free funds available:

25. The investment of Rs. 397.29 crore in PTCs was made in March 2012 and the entire investment was made from own funds as the own funds were far in excess of the investment made by the assessee. As can be seen from Balance Sheet of the assessee as on 31 March 2012(Page 25 of Paperbook – A):

Capital                                                                Rs. 2,519.46 crore
(Amount from HO – Rs 2,203.88 crore and retained profits – Rs. 315.58 crore)

Reserves & Surplus                                               Rs. 611.21 crore
Total                                                                  Rs. 3,130.67 crore

26. Since interest free funds available with the assessee were in excess of the borrowed funds, the AO was wrong in holding that the borrowed funds were used in making investments in PTC. In this regard, reliance is placed on the following judgments wherein it has been held that disallowance under section 14A cannot be made when own funds are available with the assessee:

a. ITAT AY 2003-04 (ITA No. 2150/Del/2008) in assessee‟s own case (Para 30 Page 103 of Compilation)

b. ACIT vs. Delhi International (89 com 326) (Del. Trib.) (Para 47 Page 431 of Compilation)

c. Hero Cycles (P.) Ltd. vs. CIT (379 ITR 347) (SC) (Para 16 Page 440 of Compilation)

d. Reliance Industries Ltd. vs. CIT (410 ITR 466) (SC) (Para 7 Page 442 of Compilation)

e. CIT vs. HDFC (366 ITR 505) (Bom.) (Para 4 Page 445 of Compilation)

f. CIT vs. Ashok Apparel (106 com 63) (Bom.) (Para 7 Page 450 of Compilation)

g. PCIT vs Shreno Ltd. – 409 ITR 401 (Guj) (Para 16 & 17) (Pages 458 & 459 of Compilation)

18. The learned departmental representative vehemently supported the order of the learned assessing officer and submitted that as assessee has earned exempt income during the year, the disallowance u/s 14 A of the act is mandatory.

19. We have carefully considered the rival contention and perused the orders of the lower authorities. In the present case the assessee has earned and tax free income of interest of ₹ 37,002,619/– which is claimed is an exempt income u/s 10 [35A] of the Act . The assessee has not disallowed any sum u/s 14 A of the act. The learned assessing officer has computed the disallowance of ₹ 22,521,366/–. The learned AO did not disallow any interest expenditure income which is directly relating to the investment in the passthrough certificates. However he imputed the proposed disallowance of indirect interest expenditure of Rs 197,40,048/–. He further disallowed 0.5% of the average value of investment as administrative expenditure. Thus the total disallowance was computed at ₹ 22,521,366/–. The assessee has raised the first issue that it is treated the passthrough certificates as its stock in trade in case of a bank, provisions of Section 14 a cannot be applied and no disallowance of expenditure can be made. The honourable Supreme Court in Maxopp investments Ltd versus Commissioner of income tax for 02 ITR 640 in paragraph number 40 has held that when a bank is holding securities as stock in trade it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is on door not becomes immaterial. In fact, it would be at work of fate that when the investee company declared dividend, though shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to on profits. In the present case the assessee is holding this passthrough is certificates which are exempt under the provisions of Section 10 (35A) of the act. The distribution of income by the trust which is claimed as exempt by the assessee is also a quirk of the fact. The assessee has constantly arguing that it is holding those passthrough certificates as its stock in trade and profit on and from them are offered as a business income. In view of this we do not find any difference if the income is received as a dividend u/s 10 (34) or is distributed by a securitisation trust which is also exempt u/s 10 (35A) of the act. In view of this, we are of the view that if these passthrough certificates are held as stock in trade by the assessee and distribution of income is also exempt in the hands of the assessee, it is also on the same footing as in case of other banks which are receiving the dividend from securities held as stock in trade. Therefore, we hold that in this case, provisions of Section 14 A does not apply. Hence no disallowance is called for under that Section. Accordingly, made by the learned assessing officer u/s 14A of the income tax act of ₹ 22,521,366/– is unwarranted. Further, as the assessee is granted relief on the first argument that Section 14 A is not applicable in case of bank when the investments are held as stock in trade, other arguments raised are merely academic. Accordingly ground number [3] of the appeal of the assessee is allowed.

20. One limb of Ground number [4] of the appeal is against the taxability of interest earned on external commercial borrowing to Indian customers. During the year the assessee has received interest of ₹ 6,689,371,324 from external commercial borrowing loan given by the head office/overseas branches to various customers in India. The learned assessing officer has taxed this income at the rate of 10% applying the article 11 (2) of double Taxation Avoidance Agreement. In view of this we dismiss ground number [4] of the appeal to that extent.

21. The other limb of ground number (4) is with respect to the deduction u/s 40 4C. The learned assessing officer has held that since the interest on external commercial borrowing loans are taxed on gross basis, therefore there is no question of allowing any deduction from such income and accordingly did not consider the interest on external commercial borrowing loans for the purpose of computing deduction under that Section. The assessee is aggrieved with that.

22. The learned authorised representative submitted that the deduction u/s 44C is granted either at the rate of 5% of adjusted total income or amount of expenditure attributable to the business of assessee in India. He referred to the explanation to that Section where “Adjusted Total Income” is defined. He submitted that there are certain exclusions which are not required to be given effect to while computing the adjusted total income, however, the total income is required to be computed in accordance with the provisions of this act. Therefore, according to him the deduction u/s 44C is computed based on the total income as adjusted by such specific provisions mentioned therein only. The assessee contended that the learned assessing officer in the assessment order has computed the total income of the assessee at ₹ 11,683,361,699/– however has still computed the deduction u/s 44C of the act without considering the interest taxed Under article 11 (2) of Double Taxation Avoidance Agreement. Assessee submits that the assessee is not seeking deduction against the interest income tax under article 11 (2) of the DTAA or u/s 194LC of the act. But in fact, it is seeking deduction under the head profits and gains from business or profession which has not been computed correctly by the assessing officer u/s 44C of the act. Thus the argument of the assessee is that the assessing officer may be directed to compute deduction u/s 44C of the act after including the interest income tax Under article 11 (2) of the double taxation avoidance agreement and u/s 194LC of the act. In nutshell, assessee claims that 5% deduction on account of the head office expenses should also be granted as deduction u/s 44C of the act taking into account the income that is charged to tax u/s 11 (2) of the Double Taxation Avoidance Agreement. The assessee relied upon the decision of the honourable Bombay High Court in 263 ITR 590 wherein in paragraph number six it has been held that the expression total income has been defined u/s 2(45) to mean total income of the income referred to in Section five and computed in the manner laid down Under the provisions of the income tax act. He further relied upon the decision of the honourable Delhi High Court in CIT versus Kribhco 349 ITR 618. Therefore he submitted that the deduction u/s 44C of the act shall be granted after considering the interest taxed under article 11 (2) of the double taxation avoidance agreement and u/s 194LC of the act.

23. The learned departmental representative vehemently supported the order of the learned assessing officer and stated that the above income has been taxed according to the provisions of article 11 (2) of the Double Taxation Avoidance Agreement and therefore same cannot be included in the adjusted total income as same has not been computed in accordance with the provisions of the income tax act as business income but by applying the provisions of the Double Taxation Avoidance Agreement. He submitted that the ECB loans are given to the Indian parties and thus the interest arises as such in India and is liable to be brought to tax as per article 11 of the Double Taxation Avoidance Agreement. He further stated that the debt claim is not connected with the permanent establishment as the loan has been given by the head office or other overseas branches of the assessee and it does not have anything to do with the Indian permanent establishment of the assessee. He submitted that Section 44C of the act applies only when the income of the assessee is included under the provisions of Section 28 to Section 43A of the act. Therefore he submitted that assessee is not entitled to claim of deduction of 5% on the interest income on ECB loans.

24. We have carefully considered the rival contention and perused the order of the learned AO. We have perused the objections raised by the assessee before the learned dispute resolution panel. As per objection number 3.3 before the learned Dispute Resolution Panel assessee stated without prejudice to the taxability of the interest received on external commercial borrowing that the learned assessing officer has erred in not determining the correct amount of deduction u/s 44C of the act by ignoring the alleged addition made to the total income on account of interest received by the assessee on external commercial borrowings. This objection of the assessee has not been subject matter of the direction by the learned Dispute Resolution Panel. In short, the learned dispute resolution panel did not give any direction to the AO on this account. However, as no fresh facts are required to be investigated, we proceed to adjudicate this argument of the assessee. According to the provisions of Section 44C of the act nonresidents carrying on any business or profession in India through the branches are entitled to deduction in computing the taxable business profits in respect of general administrative expenses incurred by the foreign head office insofar as such expenses can be related to the business or profession in India. Therefore for computing the business income of those assesses, standard deduction of 5% of their adjusted total income as computed in accordance with the provisions of this act is granted as deduction. The ^„Adjusted Total Income‟ is defined in explanation (i) of that Section to mean that the total income computed in accordance with the provisions of this act. It excludes certain allowances such as depreciation, additional depreciation and certain expenditure covered u/s 36 (1) (ix) of the act. It also prohibits allowance under sections 72, 73, 74 and 74A with respect to the losses carried forward. The ld AR has not addressed any argument on the facts of the case that when the assessee‟s income is taxed on gross basis as per rates adopted as per DTAA, can for claiming expenses out of that income , assessee look at the Domestic tax laws, i.e. section 44C of the act. Our answer is emphatic No. In the present case the income of the interest on external commercial borrowing is not computed under the head of income chargeable under the head profits and gains of the business as provided u/s 28 to 43A of the act. Further the income of the assessee is taxed under article 11 (2) of the India Japan DTAA on gross basis at the rate of 10%. It is the option of the assessee to govern by the provision of the Domestic tax Laws or DTAA, whichever is more beneficial to assessee. But there is no mandate that assessee can opt for lower taxes as per DTAA and claim expenses as per Domestic tax laws. Therefore there cannot be any further expenditure claimed as deduction from that income. That will dilute the amount of tax payable on interest income in the source country as payable according to the Double Taxation Avoidance Agreement. There is no mandate in the DTAA to grant any such deduction from income taxed u/s 11 (2) of the Act. In view of this, we do not find any infirmity in the order of the learned assessing officer in not granting deduction u/s 44C of the act from the above income which is taxed under article 11 (2) of the DTAA on gross basis at the rate of 10%. As we hold that there is no need to go to Section 44C of the act in this case, reliance placed by the assessee on the several judicial precedents with respect to the definition of meaning of total income/ adjusted income is not relevant. In view of this ground number (4) of the act of the appeal is dismissed.

25. Ground number [5] of the appeal is against the taxation of interest received by the assessee u/s 244A of the income tax act on income taxes refund received during the year. In the return of income the interest was offered to tax at the rate of 10% under article 11 (2) of the DTAA. In the assessment order the learned AO did not tax it according to the claim of the assessee but taxed the entire income at the rate of 40% after including the above income. Therefore assessee is aggrieved with that.

26. The learned authorised representative submitted that the above issue has been decided in favour of the assessee by the coordinate bench in assessee‟s own case for assessment year 2013 – 14 wherein following the decision of the order special bench in case of Assistant Commissioner Of Income Tax Versus Clough Engineering Ltd 130 ITD 137 and the Bombay High Court in case of DIT versus credit Agricole Indo Seuz 377 ITR 102. Therefore it was submitted that the interest received on income tax refund is taxable at the rate of 10% under article 11 (2) of the DTAA.

27. The learned departmental representative vehemently supported the order of the learned assessing officer and stated that above interest income has not arisen out of any debt claim as covered Under article 11 (5) of the act and therefore it does not qualify as interest.

28. We have carefully considered the rival contentions and perused the order of the learned assessing officer. We find that the issue squarely covered in favour of the assessee by the decision of the Honourable Bombay High Court in 377 ITR 102 wherein the issue has been set aside to the file of the learned assessing officer to determine/adopt the rate of tax on refund in the light of relevant clauses of the DTAA and the decision of the special bench in clough engineering [supra] . Therefore, we also set aside this issue to the file of the learned assessing officer to decide on the rate of tax on interest on income tax refund received by the assessee. Accordingly ground number [5] of the appeal of the assessee is allowed.

29. Ground number [6] of the appeal is on the applicable rate of taxes. The assessee being a foreign company the income is taxed at the rate of 40% as per the rates provided by the finance act, 2015 for assessment year 2015 – 16. However the assessee being a resident of Japan is entitled to the benefits of the double taxation avoidance agreement between India and Japan. Therefore the claim of the assessee is that as per article 24 (2) of the DTAA, the taxation of a permanent establishment shall not be less favourable than the other enterprises in the contracting State carrying on the same activities. Therefore according to the assessee the tax rate of 40% levied on the total income of the assessee in India amounts to discrimination. The learned assessing officer has tax the total income at the rate of 40%. On objection before the learned dispute resolution panel, the same was dismissed following the decision of the coordinate bench in assessee’s own case for assessment year 2007 – 08 and 2008 there 09 dated 19/9/2014 reported in 49 com 441.

30. The learned authorised representative though vehemently stated that the levy of tax at the rate of 40% on the total income of the assessee is not permissible as per article 24 (2) of the DTAA. However he submitted that this issue has been decided against the assessee in the earlier years and the issue is pending for adjudication before the honourable High Court.

31. The learned departmental representative vehemently supported the order of the learned assessing officer and stated that this issue is already decided against the assessee in case of the assessee for earlier years and therefore the same should be followed.

32. We have carefully considered the rival contention and find that this issue has already been decided against the assessee by the order of the coordinate bench in assessee’s own case for assessment year 2009 – 10 dated 21^st of May 2020 as submitted by the learned authorised representative, for the same reasons, as there is no change in the facts and circumstances of the case brought over notice, ground number [6] of the appeal is dismissed.

33. The ground number [7] is with respect to the short grant of the tax deduction at source credit by the learned assessing officer at the time of computation of the demand payable by the assessee. At the time of hearing the learned authorised representative submitted that the learned assessing officer as per rectification order dated 23/10/2019 has granted the credit for tax deduction at source of Rs 1 92,29,851/– therefore now this ground has become infructuous. Accordingly same is dismissed.

34. Ground number [8] is with respect to the erroneous competition of tax liability. The learned authorised representative submitted that the learned assessing officer while rectification order dated 23^rd of October 2019 has rectified this error and therefore this ground of appeal has become infructuous. Therefore same is dismissed.

35. Ground number [9] is related to the transfer pricing adjustment proposed by the learned transfer pricing officer confirmed by the learned Dispute Resolution Panel of ₹ 103,485,509 to the returned income of the appellant in respect of international transaction pertaining to receipt of counter guarantee commission from associated enterprises. The fact shows that during the year the assessee has entered into various international transactions with its associated enterprises. One of the international transactions is receipt of commission for issuance of guarantee to 3^rd parties against the counter counter guarantees issued by the overseas branches. The assessee has already accounted for a commission of ₹ 31,066,225/– for issuance of guarantee against the counter guarantee issued by the associated enterprise. Issue is that the customers of the associated enterprise of the assessee may need a guarantee from a bank in India to participate in a tender, performance guarantee or in relation to its business in India. In such a case the customer of the associated enterprise approaches associated enterprise to arrange for a guarantee in India. Associated enterprises then issues counter guarantee in favour of the assessee for issuing a further guarantee in favour of a beneficiary in India. For the guarantee provided by the assessee to the beneficiaries, associated enterprise provides guarantee to assessee. This guarantee provided by associated enterprise to the assessee is termed as a counter guarantee. Further in this regard assessee performs very limited functions such as processing the request of guarantee from associated enterprise, issuance/delivery of the guarantee on stamp paper, seeking confirmation from the associated enterprise for cancellation/extension of the guarantee. Therefore the claim of the assessee is that assessee does not perform any function apart from issuing the guarantee in favour of the beneficiary. The claim of the assessee is also that that it does not undertake any separate evaluation of the beneficiary and all background and creditworthiness checks are performed by the associated enterprise only. It is further stated that in case a guarantee is invoked, the assessee is fully protected by the counter guarantee issued by the associated enterprise and associated cost and risk is passed on back-to-back by the assessee to its associated enterprises. Therefore, the entire risk of default by the borrower is completely assumed by the associated enterprise and the assessee does not bear any risk in the entire arrangement or transaction. For issuance of guarantee the associated enterprises pay the assessee commission up to 1% of the guaranteed amount. Assessee aggregated the all transaction with other banking transactions with associated enterprise as according to it it is interlinked and since all the international transactions form part of the assessee‟s banking operation, the assessee benchmarked the transactions applying the Transactional Net Margin Method as the Most Appropriate Method and as according to the assessee as these transaction cannot be looked into isolation for benchmarking purposes. The learned transfer pricing officer has benchmarked the above transaction applying CUP method as the most appropriate method and used naked bank guarantee rates of other banks for the purpose of benchmarking the transaction. Accordingly the TPO held that the commission at the rate of 2.23 percentage on the value of the bank guarantees/standby letter of credit issued should have been charged by the assessee from its associated enterprise . Therefore he computed the guarantee commission receivable by the assessee of ₹ 134,380,249/–, assessee has already been paid ₹ 30,894,740/– , therefore, the net adjustment of ₹ 103,485,509 was made. On objection before the learned Dispute Resolution Panel the order of the learned Transfer Pricing Officer was upheld. Therefore assessee is aggrieved with that adjustment and is in appeal as per this ground.

36. The learned authorised representative submitted that the identical issue has been decided in favour of the assessee by the coordinate bench for assessment year 2009 – 10 in assessee‟s own case wherein it has been held that when the assessee has undertaken bundled of international transactions with its associated enterprise and the same has been benchmarked by applying combined approach and the method adopted is transactional net margin method where the margin shown by the assessee have been accepted, then there is no merit in segregation of the international transaction of the receipt of guarantee commission and benchmarking the same separately adopting CUP method.

37. Before us the learned authorised representative has also raised an issue that the transfer pricing officer in the order dated 31^st of October 2018 has not disputed that the all international transactions carried out by the assessee are to be aggregated for the purpose of benchmarking under the transactional net margin method. In fact the learned transfer pricing officer has accepted the aggregation of the transaction for the purpose of benchmarking of international transactions; however, without giving any reason as to why the aggregation of the transaction is incorrect , he used the CUP method for benchmarking the impugned international transaction. Therefore the claim of the assessee is that once the aggregation of the transaction is accepted for the purpose of applying transactional net margin method, then, it is not open to the learned transfer pricing officer to delink one transaction and apply a different method. For this proposition he relied upon the decision of the honourable Delhi High Court in case of 389 ITR 469 in case of Magneti Marelli powertrain India private limited versus the Deputy Commissioner Of Income Tax. He further submitted that even otherwise the external CUP in the form of guarantees issued by the local banks with hundred percent cash margin shall be considered is the local banks do not bear any risk on account of being secured by hundred percent cash margin which is similar to the risk profile of the assessee in case of the impugned international transaction where the assessee is completely secured by back-to-back counter guarantee of the associated enterprise. He submitted that the learned TPO has used the guarantee rate of risk bearing guarantees for the purpose of benchmarking, however, I’ve guarantee rates 400% cash margin guarantees are considered than the arm’s-length range comes to 0.50% to 0.60% with a median of 0.5433% which is lower than the average guarantee rate of 0.70% on by the assessee from its associated enterprise. Therefore, the transfer pricing adjustment is not warranted. He further submitted that even otherwise guarantee rates of the risk bearing guarantees issued by the assessee for its customers in India without any counter guarantee from associated enterprise shall be considered. He submitted that even in that case the median of 0.75% and the average guarantee fee rate of 0.70% received by the assessee from its associated enterprise for issuing completely risk-free guarantees is at arm’s-length. In view of this he submitted that, the issue is squarely covered in favour of the assessee that the international transaction of guarantee cannot be separately benchmark and further even if it is separately to be benchmarked it is at arm’s-length.

38. The learned departmental representative vehemently supported the order of the learned transfer pricing officer and direction of the learned dispute resolution panel.

39. We have carefully considered the rival contention and perused the orders of the lower authority and the direction of the learned dispute resolution panel. As in the case of the assessee In ITA No. 1162/Del/2014 for Assessment Year: 2009-10 dated 21/5/2020 has considered the identical issue as Under:-

“53. We have heard the rival contentions and perused the record. The issue raised vide ground of appeal no.12 is against the transfer pricing adjustment made on account of Receipt of guarantee commission. The assessee while benchmarking its international transactions in the transfer pricing report applied combined approach and has benchmarked under TNMM method. The case of the assessee is that the Transfer pricing analysis undertaken by applying TNMM method on combined approach should be accepted, as the margins of the assessee has been accepted and no adjustment has been made in the hands of the assessee. The only adjustment which was made in the hands of the assessee was on account of Receipt of guarantee commission. The case of the assessee before us is that as PE in India, it has limited role and was not bearing any risks. The assessee received part of guarantee commission in its capacity as facilitator only. When the persons needed guarantee in India to participate in a tender, then service of the Bank was utilized for issuing guarantee in favour of the beneficiary. The evaluation of the beneficiary for the creditworthiness of the customers was performed by the overseas branches, whereas the assessee had limited role in issuing letter of guarantee, it received 1% guarantee commission. In these facts, there is no merit in comparing the rate received by the assessee with the rate charged by different banks who are operational in India and providing financial guarantee to its customers, with all risk involved therein. In such facts and circumstances, the Assessing Officer/TPO erred in applying the rate charged by Axis Bank, Canara Bank, Punjab National Bank and State Bank of India, etc. with arithmetic mean of 2.71% to benchmark the international transactions between the assessee and its overseas branches of receipt of bank guarantee commission. The details of the international transaction are tabulated in the order of the TPO itself and the same clearly reflect that no transaction is undertaken except with overseas branches. The assessee undoubtedly is also providing the services to its customers in India where it a risk bearing entity. We are of the view that where the assessee has undertaken bundle of international transactions with its AE and the same has been benchmarked by applying combined approach and the method of TNMM has been used and the margins shown by the assessee have been accepted; then there is no merit in segregating the international transaction of the receipt of the guarantee commission and benchmarking the same separately. The margins of the combined approach has been accepted at Arm‟s Length. Consequently, there is no merit in the transfer pricing adjustment made in the hands of the assessee. The same is thus directed to be deleted. The ground of appeal No.12 is thus deleted.”

40. As the facts and circumstances of the case are identical to the facts decided in case of the assessee for assessment year 2009 – 10, respectfully following the decision of the coordinate bench, we allow this ground of appeal of the assessee holding that as the banking business of the assessee and the transactions related to the issue of guarantee commission on by the assessee are interlinked and closely connected, they should have been benchmarked in a bundled manner. Accordingly ground number 9 of the appeal of the assessee is allowed.

41. Now we come to the additional ground raised by the assessee. Assessee has raised following additional ground of appeal:-

That on the facts and in the circumstances of the case, the liability for education cess on income-tax levied for AY 2015-16 ought to be allowed as a deduction under the head income from business and profession.”

42. Assessee submitted that it filed its return of income for AY 2015-16, wherein the Appellant paid education cess on the income-tax levied on the total income chargeable under the Act (refer relevant extracts of the return of income filed by the Appellant for AY 2015-16 enclosed as Annexure B). Subsequently, the learned Assessing Officer also assessed the income of the Appellant at 40% (plus applicable surcharge and cess on income-tax) in the assessment order passed for AY 2015-16. Refer para 28 at page 54 of assessment order for AY 2015-16 passed by the learned Assessing Officer. Recently, the Jurisdictional Tribunal have taken a view that the Education cess and Secondary Higher Education cess is deductible as an expenditure while computing the income under the head “Profits and Gains from Business or Profession”. In view of the above, the Appellant raises an additional ground with respect to deduction of Education cess and Secondary Higher Education cess levied on income-tax for A.Y. 2015-16. The Appellant submits the additional ground raised by the Appellant is a legal issue and stems from the facts already on record. In this regard, the Appellant placing reliance on the following judicial precedents and humbly request the Tribunal to admit the additional ground of appeal:

a. National Thermal Power Co. Ltd. Vs. CIT [229 ITR 383 (SC)]

b. CIT vs. Jai Parabolic Springs Ltd. [306 ITR 42 (Delhi HC)]

c. CIT vs. Sam Global Securities Ltd. [360 ITR 682 (Delhi HC)]

d. CIT vs. Honda Siel Power Products Ltd. [169 Taxman 40 (Delhi HC)]

e. Gadore Tools Pvt. Ltd. vs. CIT [238 ITR 268 (Delhi HC)]

43. The learned authorised representative reiterated the above facts stated in its application for admission of the additional ground vehemently submitted that the additional ground goes to the root of the matter, can be raised at any time during the course of hearing of the appeal, legal in nature therefore should be admitted.

44. The learned departmental representative vehemently opposed the additional ground raised by the assessee and stated that this ground was never raised before the lower authorities and the facts are also not readily available therefore it requires an investigation on computation and therefore this ground may not be admitted.

45. We have carefully considered the rival contention and perused the application of the additional ground raised by the assessee and find that the additional ground raised by the assessee is legal in nature does not require any further facts to be investigated, to be decided on the principal, therefore, same is admitted in view of the several judicial precedents relied upon.

46. The learned authorised representative submitted that the issue of deduction regarding education cess has been decided by the honourable Bombay High Court in case of Cesar Goa Ltd versus joint Commissioner of income tax hundred and 17 com 96 and honourable Rajasthan High Court in case of Chambal fertilisers and chemicals Ltd versus joint Commissioner of income tax 102 CCH 202 in favour of the assessee holding that assessee is entitled to the deduction of education cess while computing income Under the head profits and gains from business and profession. Therefore in the absence of judgment of a jurisdictional High Court against the assessee on this issue, the judgment of the honourable Bombay and Rajasthan High Court is binding on the tribunal. To support his contention he relied on the decision of the honourable Bombay High Court in case of CIT versus GodavariDevi Saraf 113 ITR 589 wherein it has been held that in absence of any decision of the jurisdictional High Court, the decision of the non jurisdictional High Court is binding on the tribunal of a different state. Similarly he relied upon 150 ITR 1, 210 ITR 580 and 167 TTJ 689. He further submitted that the liability to pay the education cess has also arising during assessment year 2015 – 16 as it is dependent on the liability of the income tax payable Under the act it accrues in the previous year relevant to assessment year 2015 – 16. He simply stated that merely because the liabilities quantified wherein the computation of total income is made does not make any impact so far as the timing of accrual of such liability. He relied on the decision of the honourable Supreme Court, albeit, in the wealth tax matter in 59 ITR 767 in Kesoram industries and Cotton Mills Ltd versus Commissioner of wealth tax. He also submitted a computation that how the education cess allowability amount is determined. On the question raised by the bench that how the above education cess is considered to be an expenditure only and exclusively incurred for the purposes of the business u/s 37 (1) of the act he submitted that this question is no longer res Integra in view of the decision of the honourable Bombay High Court in hundred and 17 taxmann.com 96 wherein it has been held that the assessee is entitled to deduction Under the head profits and gains from business or profession. Therefore he submitted that the deduction for education cess paid by the assessee shall be allowed as a deduction in computing the income Under the head profits and gains of business and profession.

47. The learned departmental representative vehemently submitted that education cess is a tax, hit by the provisions of Section 43B, not allowable as deduction u/s 40 a (ii) of the act and further same is not an expenditure only and exclusively incurred for the purposes of the business.

48. We have carefully considered the rival contention. The above issue was never raised before the learned assessing officer or before the learned CIT – A but raised before us. On principal that whether education cess is allowable as a deduction to the assessee u/s 37 (1) of the income tax act the issue has been decided by the honourable Bombay High Court in hundred and 17 taxamann . com 96 in Sesa Goa Ltd. Versus joint Commissioner of income tax as Under:-

“15. The substantial question of law No. (iii) in Tax Appeal No. 17 of 2013 and the only substantial question of law in Tax Appeal No. 18 of 2013 is one and the same namely, ‘whether EducationCessand Higher and Secondary Education Cess, collectively referred to as “cess” is allowable as a deduction in the year of its payment ?’.

The aforesaid question arises in the context of provisions of Section 40(a)(ii) which inter alia provides that notwithstanding anything to the contrary in sections 30 to 38 of the IT Act, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”, –

(a) in the case of any assessee –

(ia)

(ib)

(ic) …

(ii) any sum paid on account of any rate or tax levied onthe profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.

[Explanation 1.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.]

[Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;]

17. Therefore, the question which arises for determination is whether the expression “any rate or tax levied” as it appears in Section 40(a)(ii) of the IT Act includes “cess“. The Appellant – Assessee contends that the expression does not include “cess” and therefore, the amounts paid towards “cess” are liable to be deducted in computing the income chargeable under the head “profits and gains of business or profession”. However, the Respondent – Revenue contends that “cess” is also included in the scope and import of the expression “any rate or tax levied” and consequently, the amounts paid towards the “cess” are not liable for deduction in computing the income chargeable under the head “profits and gains of business or profession”.

18. In relation to taxing statute, certain principles of interpretation are quite well settled. In New Shorrock Spinning and Manufacturing Co. Ltd. Raval, 37 ITR 41 (Bom.), it is held that one safe and infallible principle, which is of guidance in these matters, is to read the words through and see if the rule is clearly stated. If the language employed gives the rule in words of sufficient clarity and precision, nothing more requires to be done. Indeed, in such a case the task of interpretation can hardly be said to arise : Absoluta sententia expositore non indiget. The language used by the Legislature best declares its intention and must be accepted as decisive of it.

19. Besides, when it comes to interpretation of the IT Act, it is well established that no tax can be imposed on the subject without words in the Act clearly showing an intention to lay a burden on him. The subject cannot be taxed unless he comes within the letter of the law and the argument that he falls within the spirit of the law cannot be availed of by the department. [See CIT Motors & General Stores 66 ITR 692 (SC)].

20. In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied, into the provisions which has not been provided by the legislature [See CIT Radhe Developers 341 ITR 403]. One can only look fairly at the language used. No tax can be imposed by inference or analogy. It is also not permissible to construe a taxing statute by making assumptions and presumptions [See Goodyear v. State of Haryana 188 ITR 402(SC)].

21. There are several decisions which lay down rule that the provision for deduction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee and it should be so construed as to effectuate the object of the legislature and not to defeat it. Further, the interpretation cannot go to the extent of reading something that is not stated in the provision [See AGS Tiber CIT 233 ITR 207].

22. Applying the aforesaid principles, we find that the legislature, in Section 40(a)(ii) has provided that “any rate or tax levied” on “profits and gains of business or profession” shall not be deducted in computing the income chargeable under the head “profits and gains of business or profession”. There is no reference to any “cess”. Obviously therefore, there is no scope to accept Ms. Linhares’s contention that “cess” being in the nature of a “Ta x” is equally not deductable in computing the income chargeable under the head “profits and gains of business or profession”. Acceptance of such a contention will amount to reading something in the text of the provision which is not to be found in the text of the provision in Section 40(a)(ii) of the IT Act.

23. If the legislature intended to prohibit the deduction of amounts paid by a Assessee towards say, “education cess” or any other “cess“, then, the legislature could have easily included reference to “cess” in clause (ii) of Section 40(a) of the IT Act. The fact that the legislature has not done so means that the legislature did not intend to prevent the deduction of amounts paid by a Assessee towards the “cess“, when it comes to computing income chargeable under the head “profits and gains of business or profession”.

24. The legislative history bears out that the Income Ta x Bill, 1961, as introduced in the Parliament, had Section 40(a)(ii) which read as follows :

“(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains”

25. However, when the matter came up before the Select Committee of the Parliament, it was decided to omit the word “cess” from the aforesaid clause from the Income-tax Bill, 1961. The effect of the omission of the word “cess” is that only any rate or tax levied on the profits or gains of any business or profession are to be deducted in computing the income chargeable under the head “profits and gains of business or profession”. Since the deletion of expression “cess” from the Income-tax Bill, 1961, was deliberate, there is no question of reintroducing this expression in Section 40(a)(ii) of IT Act and that too, under the guise of interpretation of taxing statute.

26. In fact, in the aforesaid precise regard, reference can usefully be made to the Circular No. F. No. 91/58/66-ITJ(19), dated 18th May, 1967 issued by the CBDT which reads as follows :-

“Interpretation of provision of Section 40(a)(ii) of IT Act, 1961 – Clarification regarding.- “Recently a case has come to the notice of the Board where the Income-tax Officer has disallowed the ‘cess’ paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the Old Act and Section 40(a)(ii) of the new Act.

2. The view of the Income-tax Officer is not correct.

Clause 40(a)(ii) of the Income-tax Bill, 1961 as introduced in the Parliament stood as under:-“(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains”.

When the matter came up before the Select Committee, it was decided to omit the word ‘cess” from the clause. The effect of the omission of the word ‘cess” is that only taxes paid are to be disallowed in the assessments for the years 1962-63 and onwards.

3. The Board desire that the changed position may please be brought to the notice of all the Income-tax Officers so that further litigation on this account may be avoided.[Board’s F. No. 91/58/66-ITJ(19), dated 18-5-1967.]

27. The CBDT Circular, is binding upon the authorities under the IT Act like Assessing Officer and the Appellate Authority. The CBDT Circular is quite consistent with the principles of interpretation of taxing statute. This, according to us, is an additional reason as to why the expression “cess’ ought not to be read or included in the expression “any rate or tax levied” as appearing in Section 40(a)(ii) of the IT Act.

28. In the Income-tax Act, 1922, Section 10(4) had banned allowance of any sum paid on account of ‘any Cess,rate or tax levied on the profits or gains of any business or profession‘. In the corresponding Section 40(a)(ii) of the IT Act, 1961 the expression ‘cess’ ” is quite conspicuous by its absence. In fact, legislative history bears out that this expression was in fact to be found in the Income-tax Bill, 1961 which was introduced in the Parliament. However, the Select Committee recommended the omission of expression “Cess” and consequently, this expression finds no place in the final text of the provision in Section 40(a)(ii) of the IT Act, 1961. The effect of such omission is that the provision in Section 40(a)(ii) does not include, “cess” and consequently, “Cess” whenever paid in relation to business, is allowable as deductable expenditure.

29. In Kanga and Palkhivala’s “The Law and Practice of Income Tax” (Tenth Edition), several decisions have been analyzed in the context of provisions of Section 40(a)(ii) of the IT Act, 1961. There is reference to the decision of Privy Council in CIT Gurupada Dutta 14 ITR 100, where a union rate was imposed under a Village Self Government Act upon the assessee as the owner or occupier of business premises, and the quantum of the rate was fixed after consideration of the ‘circumstances’ of the assessee, including his business income. The Privy Council held that the rate was not ‘assessed on the basis of profits’ and was allowable as a business expense. Following this decision, the Supreme Court held in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [82 ITR 580] that the expression ‘profits or gains of any business or profession‘ has reference only to profits and gains as determined in accordance with Section 29 of this Act and that any rate or tax levied upon profits calculated in a manner other than that provided by that section could not be disallowed under this sub-clause. Similarly, this sub-clause is inapplicable, and a deduction should be allowed, where a tax is imposed by a district board on business with reference to ‘estimated income‘ or by a municipality with reference to ‘gross income’. Besides, unlike Section 10(4) of the 1922 Act, this sub-clause does not refer to ‘cess‘ and therefore, a ‘cess‘ even if levied upon or calculated on the basis of business profits may be allowed in computing such profits under this Act.

30. The Division Bench of the Rajasthan High Court (Jaipur Bench) in Income-tax Appeal No. 52/2018 decided on 31st July, 2018 (Chambal Fertilisers and Chemicals Ltd. v. CIT Range-2, Kota), by reference to the aforesaid CBDT Circular dated 18th May, 1967 has held that the ITAT erred in holding that the “education cess” is a disallowable expenditure under section 40(a)(ii) of the IT Act. Ms. Linhares was unable to state whether the Revenue has appealed this decision. Mr. Ramani, learned Senior Advocate submitted that his research did not suggest that any appeal was instituted by the Revenue against this decision, which is directly on the point and favours the Assessee.

31. Mr. Ramani, in fact pointed out three decisions of ITAT, in which, the decision of the Rajasthan High Court in Chambal Fertilisers and Chemicals Ltd.(supra) was followed and it was held that the amounts paid by the Assessee towards the ‘education cess‘ were liable for deduction in computing the income chargeable under the head of “profits and gains of business or profession”. They are as follows :-

(i) DCIT Peerless General Finance and Investment and Co. Ltd. (ITA No. 1469 and 1470/Kol/2019 decided on 5th December, 2019 by the ITAT, Calcutta;

(ii) DCIT Graphite India Ltd. (ITA No. 472 and 474 Co. No. 64 and 66/Kol/2018 decided on 22nd November, 2019)by the ITAT, Calcutta;

(iii) DCIT Bajaj Allianz General Insurance (ITA No. 1111 and 1112/PUN/2017 decided on 25th July, 2019) by the ITAT, Pune.

32. Again, Ms. Linhares, learned Standing Counsel for the Revenue was unable to say whether the Revenue had instituted the appeals in the aforesaid matters. Mr. Ramani, learned Senior Advocate for the Appellant submitted that to the best of his research, no appeals were instituted by the Revenue against the aforesaid decisions of the ITAT.

33. The ITAT, in the impugned judgment and order, has reasoned that since “cess” is collected as a part of the income tax and fringe benefit tax, therefore, such “cess” is to be construed as “tax”. According to us, there is no scope for such implications, when construing a taxing statute. Even, though, “cess” may be collected as a part of income tax, that does not render such “cess“, either rate or tax, which cannot be deducted in terms of the provisions in Section 40(a)(ii) of the IT Act. The mode of collection, is really not determinative in such matters.

34. Linhares, has relied upon M/s Unicorn Industries v. Union of India and others, 2019 SCC Online SC 1567 in support of her contention that “cess” is nothing but “tax” and therefore, there is no question of deduction of amounts paid towards “cess” when it comes to computation of income chargeable under the head profits or gains of any business or profession.

35. The issue involved in Unicorn Industries (supra) was not in the context of provisions in Section 40(a)(ii) of the IT Act. Rather, the issue involved was whether the ‘education cess, higher education cess and National Calamity Contingent Duty (NCCD)‘ on it could be construed as “duty of excise” which was exempted in terms of Notification dated 9th September, 2003 in respect of goods specified in the Notification and cleared from a unit located in the Industrial Growth Centre or other specified areas with the State of Sikkim. The High Court had held that the levy of education cess, higher education cess and NCCD could not be included in the expression “duty of excise” and consequently, the amounts paid towards such cess or NCCD did not qualify for exemption under the exemption Notification. This view of the High Court was upheld by the Apex Court in Unicorn Industries (supra).

36. The aforesaid means that the Supreme Court refused to regard the levy of education cess, higher education cess and NCCD as “duty of excise” when it came to construing exemption Notification. Based upon this, Mr. Ramani contends that similarly amounts paid by the Appellant – Assessee towards the “cess” can never be regarded as the amounts paid towards the “tax” so as to attract provisions of Section 40(a)(ii) of the IT Act. All that we may observe is that the issue involved in Unicorn Industries (supra) was not at all the issue involved in the present matters and therefore, the decision in Unicorn Industries (supra) can be of no assistance to the Respondent – Revenue in the present matters.

37. Linhares, learned Standing Counsel for the Revenue however submitted that the Appellant – Assessee, in its original return, had never claimed deduction towards the amounts paid by it as “cess“. She submits that neither was any such claim made by filing any revised return before the Assessing Officer. She therefore relied upon the decision of the Supreme Court in Goetze (India) Ltd. v. Commissioner of Income-tax (2006) 284 ITR 323 (SC) to submit that the Assessing Officer, was not only quite right in denying such a deduction, but further the Assessing Officer had no power or jurisdiction to grant such a deduction to the Appellant – Assessee. She submits that this is what precisely held by the ITAT in its impugned judgments and orders and therefore, the same, warrants no interference.

38. Although, it is true that the Appellant – Assessee did not claim any deduction in respect of amounts paid by it towards “cess” in their original return of income nor did the Appellant – Assessee file any revised return of income, according to us, this was no bar to the Commissioner (Appeals) or the ITAT to consider and allow such deductions to the Appellant – Assessee in the facts and circumstances of the present case. The record bears out that such deduction was clearly claimed by the Appellant – Assessee, both before the Commissioner (Appeals) as well as the ITAT.

39. In CIT Pruthvi Brokers & Shareholders Pvt. Ltd. 349 ITR 336, one of the questions of law which came to be framed was whether on the facts and circumstances of the case, the ITAT, in law, was right in holding that the claim of deduction not made in the original returns and not supported by revised return, was admissible. The Revenue had relied upon Goetze (supra) and urged that the ITAT had no power to allow the claim for deduction. However, the Division Bench, whilst proceeding on the assumption that the Assessing Officer in terms of law laid down in Goetze (supra) had no power, proceeded to hold that the Appellate Authority under the IT Act had sufficient powers to permit such a deduction. In taking this view, the Division Bench relied upon the Full Bench decision of this Court in Ahmedabad Electricity Co. Ltd. v. CIT (199 ITR 351 to hold that the Appellate Authorities under the IT Act have very wide powers while considering an appeal which may be filed by the Assessee. The Appellate Authorities may confirm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of the Assessee in accordance with law.

40. The decision in Goetze (supra) upon which reliance is placed by the ITAT also makes it clear that the issue involved in the said case was limited to the power of the assessing authority and does not impinge on the powers of the ITAT under section 254 of the said Act. This means that in Goetze (supra), the Hon’ble Apex Court was not dealing with the extent of the powers of the appellate authorities but the observations were in relation to the powers of the assessing authority. This is the distinction drawn by the division Bench in Pruthvi Brokers (supra) as well and this is the distinction which the ITAT failed to note in the impugned order.

41. Besides, we note that in the present case, though the claim for deduction was not raised in the original return or by filing revised return, the Appellant – Assessee had indeed addressed a letter claiming such deduction before the assessment could be completed. However, even if we proceed on the basis that there was no obligation on the Assessing Officer to consider the claim for deduction in such letter, the Commissioner (Appeals) or the ITAT, before whom such deduction was specifically claimed was duty bound to consider such claim. Accordingly, we are unable to agree with Ms. Linhare’s contention based upon the decision in Goetze (supra).

42. For all the aforesaid reasons, we hold that the substantial question of law No. (iii) in Tax Appeal No. 17 of 2013 and the sole substantial question of law in Tax Appeal No. 18 of 2013 is also required to be answered in favour of the Appellant – Assessee and against the Respondent-Revenue. To that extent therefore, the impugned judgments and orders made by the ITAT warrant interference and modification.”

49. Therefore respectfully following the decision of the honourable Bombay High Court and honourable Rajasthan High Court, we set aside the issue back to the file of the learned assessing officer directing him to allow the education cess as deduction u/s 37 (1) of the act after verifying the computation of the same. Accordingly additional ground raised by the assessee is allowed with above direction.

50. In the result appeal of the assessee is partly allowed.

Order pronounced in the open court on 16/10/2020.