Rajendra, Accountant Member
Challenging the order, dated 23/08/2012, of the CIT (A)-15, Mumbai, the Assessing Officer (AO)and the AO have filed cross appeals for the year under consideration. Assessee, a nonresident company, engaged in corporate and investment banking, is operating in India through branches in Mumbai and Delhi. It filed its return of income on 31/10/25, declaring loss of Rs. 28.62 crores. A revised return was filed on 30/03/2007, declaring loss of Rs. 30.71 crores he AO completed the assessment under section 143 (3) of the Act, on 31/12/2008, determining its income at Rs. 18.32 crores.
2. Vide its letter dated 2/02/2015, the assessee has filed additional ground of appeal, wherein an alternative ground has been raised about provision for standard advance of Rs. 24 lakhs. It was argued before us, that the additional ground raised by it involved a question of law and did not require investigation of facts. We find that the ground raised by the assessee does not require further enquiry of facts. So, we admit additional ground raised by it.
3. An application was made by the assessee on 14/05/2015 four admitting additional evidences as per rule 29 of the Income Tax Appellate Tribunal Rules, 1963.Referring to the submissions made in the application, the Authorised Representative(AR) stated, before us, that the documents submitted were relevant for ground number 7B, that the details of amalgamation and merger expenses and supporting invoices/vouchers were not considered by the departmental authorities while deciding the issue, that is documents were vital for proper adjudication of the ground raised by the assessee. The Departmental Representative(DR) left the issue to the discretion of the bench. We have gone through the application made by the assessee and considered the arguments of representatives of both sides. We are of the opinion that the documents submitted by the assessee would be useful to decide the ground. Therefore in the interest of Justice, we admit the same.
4. First we would take up the appeal of the the assessee. During the course of hearing before us, the Authorised Representative(AR) did not press ground number 7A.Hence, same stands dismissed, as not pressed.
4.a. He also stated that grounds number 6A and 6B had become academic/infructuous. So, both the grounds are not being adjudicated.
4.b. He fairly considered that grounds number 1, 5A, 5B and 10 stand decided against the assessee by the orders/judgment of Tribunal/honorable High Court of Bombay. Accordingly we dismiss the above-mentioned grounds.
4.1. Representatives of both the sides agreed that grounds number 2A and 2B, and 9 were decided in the favour of the assessee by the Tribunal in the earlier Assessment Years (AY.s). [ITA No.6615/M/2003 ; A.Y.1997-98 ;C.O. No.283/Mum/2003 & ITA No.6400/Mum/2003 for A.Y.1997-98 dated 12/09/2012 in the case of M/s. Credit Agricole Indosuez Ramon House. ITA No.3098/Mum/2000 A.Y. 1994-95 in the case of M/s. Banque Indosuez (known as Credit Agricole Indosuez); C.O. No.156/Mum/2000; ITA No.5040/Mum/2004 A.Y.1998- 99(Credit Agricole Indosuez);ITA No.4520/Mum/2004 A.Y.1998-99; ITA No.7919/Mum/2004 A.Y. 1999-2000(M/s. Calyon Bank (formerly known as Agricole Indosuez); ITA No.7993/ Mum/ 2004(1999-2000)(M/s. Calyon Bank) ; ITA No.2270/Mum/2005 A.Y. 2000-2001(Credit Agricole Indosuez); ITA No.2464/Mum/2005 A.Y.2000-01(Credit Agricole Indosuez) dated 21/ 09/ 2012)].
Accordingly, we allow above-mentioned two grounds, raised by the assessee.
4.1.a. They also agreed that additional ground filed by the assessee stands decided in its favour, by the order of the Tribunal passed with regard to the miscellaneous application filed by it for the AY. 2003-04(MA/375/Mum/2014/ dated 14.11.2014). Therefore, we allow the additional ground, raised by the assessee.
4.2. It was also brought over notice by the AR and the DR that ground number 4, dealing with disallowance to be made under section 14A of the Act has been deliberated upon and decided by the Tribunal in the earlier AY.s(supra), that the honorable Bombay High Court has also dealt with it while deciding the appeals for the AY.s 2002-03 and 2003-04, that the Tribunal had restricted the disallowance of expenditure up to 2% of the exempt income earned by the assessee, that the honourable Bombay High Court had held that provisions of rule 8D of the Income Tax Rules, 1962 would be applicable from the AY.2008-09 only. Considering the above, we direct the AO to restrict the disallowance at the rate of 2% of the exempt income earned by the assessee during the year under consideration, while making disallowance under section 14 A of the Act. Ground number four is decided in favour of the assessee, in part.
4.2.a. With regard to ground number eight representatives of both the sides agreed that the Tribunal, while deciding the identical issue in the earlier years, had held that judgment should be made by the AO after taking into account the fee and other charges only received by the foreign branches from the borrowers of the ECB, that the rate of 20%, estimated by the First Appellate Authority (FAA)was proper, that the honourable Bombay High Court had confirmed the view taken by the Tribunal for the AY.s.2002-03 and 2003-04. Accordingly, we direct the AO to follow the direction of the Tribunal of the earlier years. We partly allow ground number eight.
5. Ground number 7B is about confirming the action of the AO of allowing 50% of the 1/5 of the expenses incurred by the assessee, under the head amalgamation and merger expenses. During the assessment proceedings, the AO found that the assessee had claimed deduction, under section 37(1) of the Act for amalgamation and merger expenses, amounting two Rs. 9.93 crore, that the expenses was incurred towards the merger of the erstwhile CL with the assessee, that the expenditure incurred by it had been debited under various heads in the profit and loss account and was claimed as deduction in view of the judgment of the honourable Supreme Court in the case ofCommissioner of Income Tax v. Bombay Dyeing and Manufacturing Company Ltd. (1996) (219 ITR 521).The AO held that the expenses were deductible in accordance with the provisions of section 35DD of the Act. Accordingly, he allowed the deduction only 50% of the prorated expenses, as the documentary evidences or not furnished in support of the claim. Vide its application dated 29/12/2010, the assessee filed additional evidence before the FAA, who remanded the matter to the AO for verification. After considering the evidences of the assessee, the AO reported that the additional evidences were mere break-ups of merger expenses, that the documents did not prove that the expenses were incurred towards merger. Before the FAA, the assessee argued that remand report was issued without allowing any opportunity to its, that the claimed by it was allowable under section 37 (1) of the Act. After considering the available material, the FAA upheld the order of the AO. He also mentioned that the assessee had claimed that it could not produce certain evidences before the AO during the remand proceedings, that the AO had not afforded him an opportunity to prove the allow ability of the claim. The FAA held that claim made by the assessee was not acceptable, that the same was not mandated as per rule 46A of the Rules.
5.1. Before us the AR stated that considering the sensitivity of the documents the assessee was not in a position to produce all the desired documents before the AO, that the details of breakup of expenses were filed before the FAA on 29/12/2010, that the evidences were not considered by the AO/FAA. In the earlier part of our order, we have decided to admit the additional evidences filed by the assessee with regard to amalgamation and merger expenses. In our opinion, the issue raised by the assessee has to be decided after considering the same. Therefore, in the interest of Justice, we are restoring ground number 7B to the file of the AO for fresh adjudication. He is directed to decide the issue after considering the evidences produced before us and after affording a reasonable opportunity of hearing to the assessee. Ground 7B is decided in favour of the assessee, in part.
6. Ground no.3, raised by the asssessee is about confirming the action of the AO in holding that direct expenses, amounting to Rs. 3.44 crores, towards various charges, fell within the purview of executive and general administration expenditure. The AO found that head office system implementation charges(HOSIC-49.06 lakhs), EDP recharge(HO EDP-82.92 lakhs), Regional Service Center Asia Charges(RSCAS-1.99 crores)and Asia Data Processing Centre Cost(ADPCC-12.73 lakhs)fell within purview of executive and general administration expenditure under section 44C of the Act, that the charges in questions were not in the nature of 'fees for technical services dealt with in the CBDT Circular no.649 dated 31.03.1993.
6.1. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA) and made elaborate submissions. After considering the available material, he held expenses incurred by the assessee fell within the purview of section 44C of the Act.
6.2. Before us, the AR argued that expenses incurred by the assessee represented the location of expenses specific to the Indian branch, that same were direct and specific expenses not in the nature of general/executive expenses, that the HO had incurred the expenditure for effectively carrying on business by the Indian branch that the FAA had himself admitted that the above-mentioned expenses were allocated to India branch, that the nature of the disputed expenses were same as in the case of Credit Risk and EDP assistance for the effective carrying on of the business, that the expenses in question were not in the nature of general, administrative or executive expenses, that HO SI charges represented charges for use of information systems useful for Indian business operations., that EDP charges were part of cost of processing data related with the capital market line of business, that RSCA was set up at Singapore to manage all common recurring IT tasks among the units e.g. creating a staff of IT knowledge base and retaining specialized expertise in ISBA (Integrated System For Banking Administration), that ADP Centre, a division of Singapore branch, was the regional data production center of CACIB in the Asia Pacific region, that data processing services provided by ADPC included online sessions, batch window, availability of reports and up-dating of Wings software, that details of the expenses were submitted by the assessee to the AO vide letter dated 17-12-2008, that the expenses were separately invoiced to the India branch based on the actual resources utilized for providing services to the India branch, that the aforesaid charges represented expenditure incurred wholly and exclusively for the purpose of the appellant's business in India. He referred to Pg.81-103 of the paper book that contained the invoices relating to cost-allocation under various heads. He further argued that in the earlier years the Tribunal, in assessee's own case, wherein it was held that cost of credit risk assistance and EDP assistance were a direct allocation of expenses to the Indian branch for business operations in India and that same was allowable under section 37 of (1) of the Act. He relied upon the cases ofCommissioner of Income Tax v. Emirates Commercial Bank Ltd (2004) 262 ITR 55,Commissioner of Income Tax v. American Express Bank Ltd., (2012) 138 ITD 288,American Express Bank Ltd (ITXA 1294 of 2013),British Bank of Middle East v. (2005) 4 SOT 122 (Mum),Bank of America NT & SA v. DCIT, (2009) 27 SOT 97. The DR supported the order of the FAA and stated that.
6.3. We have perused the invoices, statement of expenditure received by the assessee during the year from its sister concerns (Pgs 83 to 103 and (Pgs 111 to 118) of the PB. The invoices talks of software maintenance, various-stems-items, duration etc. These documents also gives details of allocation(Pg.112 of the PB)of expenses. From the order of the departmental authorities, it is clear that they have not verified details appearing in these papers. Whether the expenditure-except cost of credit risk assistance and EDP assistance-would be covered by the provisions of section 44 C or not has to be decided after considering the details appearing in the documents and the judgment/order in assessee's own case i.e.DIT (IT) v. Credit Agricole Indosuez, (2015) 377 ITR 102andAsstt. DIT (International Taxation) v. Credit Agricole Indosuez, (2013) 33 taxmann.com 441/58 SOT 97 (Mum.-Trib). Therefore, we are of the opinion that matter needs further verification. So, in the interest of natural justice, we are restoring back the issue to the file of AO for fresh adjudication, except for two items namely cost of credit risk assistance and EDP assistance. He is directed to afford reasonable opportunity of hearing to the assessee and decide the issue. Ground No.3 stands partly allowed.
7. Ground no.9 is about not adjusting the interest income (Rs.7.23 crores received as per the provisions of section 244A of the Act)against the interest expenditure (Rs.13.42 crores).
7.1. We find that identical issue has been dealt with and has been decided by the Tribunal in favour of the assessee in the case ofBank of America (ITA/177/M/2012 dated 03.07.2014 at page 184-86of the Legal PB.)
Respectfully, following the above order of the Tribunal, we decide ground no.9 in favour of the assessee.
8. During the course of hearing before us, representatives of both the sides agreed that grounds no.1, 2, 3 and 5, raised by the AO, stand decided against him, by the orders of the Tribunal for the earlier AY.s. Considering the orders of the Tribunal, as mentioned at paragraph no.4.1. of our order, we dismiss the above referred four grounds of appeal.
9. Ground no.4, raised by the AO, is about tax ability of certain expenses in the hands of HO/OB amounting to Rs. 5.55 crores. During the assessment proceedings, the AO found that the HO/branches were in receipt of income on four counts i.e. interest paid on subordinated loan to HO(Rs. 2.03 crores), Interest paid on Nostro account(Rs. 1.83 crores), Fee for technical services and payment towards software assistance(1.52 crores+Rs. 57.45 lakhs)and FTS for software services rendered(Rs.3.46 crores).In its reply, to the query raised by the AO, the assessee stated that the branch and the head office were the same entity and the payments made under the heads interest/commission received from the HO/branches was payment to self or was receipt from self and that the sums in question were not taxable. However, the AO did not agree with the assessee and held that as per the provision of Article 7 of the DTAA while computing the income of the branch income had to be considered separately, that the payments made by the assessee to the HO for the credit risk evaluation done in respect of its files would amount to income in the nature of FTS of the HO, that payments made under various heads was taxable as FTS as pert Article 13(4)of the DTAA also, that the assessee had not produced necessary evidences to show that the expenses were not on cost basis, that disputed amounts were also taxable as per Circular no.649 issued by the CBDT. Finally, he held that Rs. 5.55 crores were taxable as the income of the HO and that same were FTS taxable under Article 13(2)of the Indo French Tax Treaty.
9.1. In the appellate proceedings, the FAA, after considering the submissions of the assessee and the assessment order held that the payments made by the Branch in India are only the reimbursement of expenses incurred by the HO/regional centers, that the AO had alleged that sufficient evidences were not produced, that he had not explained as to which evidences were not furnished, that any of the services rendered by the HO had made available technical know how, skill or it involved transfer of any technical plan or design to the Indian branch, that the disputed amount did not constitute FTS, that the same was not taxable as income arising to the HO in India.
9.2. Before us, the DR stated that the assessee had not produced any evidence to justify the claim, that the AO had rightly taxed the income arising to Indian branch as well as to sister concerns located at Singapore & Hongkong, that both the branches were part of the assessee group, that the borrowers were from India, that the income had accrued and arisen in India, that there was business connection in the income arising from such transactions, that even if there was no business connection income could be taxed under the DTAA. He referred to Article 12 of the tax treaty. The AR argued that the HO had incurred certain expenditure, that it had allocated the expenditure of branches to all branches including the assessee, that the expenditure was neither administrative nor managerial. Referring to Article 13 and clause 7 of the Protocol to the DTAA, he stated that amount in question could not be taxed in India, even if same were managerial. He relied upon the cases ofSumitoMo v. Dy. DIT (IT (2012) 19 taxmann.com 364/136 ITD 66 (Mum.)andSteria (India) Ltd. v. Commissioner of Income Tax (2016) 386 ITR 390)and stated that make available provisions were not there in the DTAA.
9.3. We have heard the rival submissions. We find that the assessee had made payment to the HO towards allocation of expenses incurred by the HO. Therefore, in our opinion such an expenditure cannot be treated as FTS nor can it be treated rendering of services to the assessee by the HO. It was pure and simple allocation of expenses among various group entities. There is nothing on record to prove that the HO had made available knowledge to the India branch by performing activities specifically for the India Branch. Considering these facts we hold that the order of the FAA does not suffer from any legal or factual infirmity. We would also like to refer to the judgment of the Hon'ble Delhi High Court delivered in the matter of Steria(India)Ltd.(supra). The Hon'ble Court has deliberated upon the similar issue and has, while deciding the writ petition, decide it as under:
"The Protocol to theDouble Taxation Avoidance Agreement between India and France (see  209 ITR (St.) 130, 157)provides that if under any Convention, Agreement or Protocol signed after September 1, 1989, between India and a third State which is a member of the OECD, India limits its taxation at source, inter alia, on fees for technical services to a rate lower or a scope more restricted than the rate of scope provided for in this Convention, the same rate or scope as provided for in that Convention Agreement or Protocol shall also apply under this Convention. There is no warrant for the restrictive interpretation placed on clause 7 of the Protocol to the Double Taxation Avoidance Agreement between India and France in such a manner that that if a reference is made to one Convention signed after September 1, 1989 between India and another OECD member State for the purposes of ascertaining if it had a more restrictive scope or a lower rate of tax, then that Convention alone has to be referred to for both purposes or that it is not permissible for the assessee, in terms of clause 7 of the Protocol, to rely upon one Convention between India and an OECD member State for the purposes of taking advantage of a lower rate of tax and then refer to another Convention between India and another OECD member State to take advantage of a more restricted scope. The words "a rate lower or a scope more restricted" occurring therein envisage that there could be a benefit on either score, i.e., a lower rate or a more restricted scope. One did not exclude the other. The purpose of clause 7 of the Protocol is to afford to a party to the India-France Convention the most beneficial of the provisions that may be available in another Convention between India and another OECD country.
The wording of clause 7 of the Protocol makes it self-operational. Once the Double Taxation Avoidance Agreement has itself been notified, and contains the Protocol including clause 7 thereof, there is no need for the Protocol itself to be separately notified or for the beneficial provisions in some other Convention between India and another OECD country to be separately notified to form part of the Indo-France Double Taxation Avoidance Agreement. Clause 7 of the Protocol, which forms part of the Double Taxation Avoidance Agreement between India and France, automatically becomes applicable.
.....the definition of "fee for technical services" occurring in article 13(4) of the Double Taxation Avoidance Agreement between India and the United Kingdom clearly excludes managerial services. What was being provided by SF to the assessee in terms of the management services agreement were managerial services. It was plain that once the expression "managerial services" was outside the ambit of "fee for technical services", the question of the assessee having to deduct tax at source from payments for the managerial services, would not arise. The payment made by the assessee to SF for the managerial services provided by the latter could not be taxed as fees for technical services and the payments were not liable to withholding of tax under section 195 of the Act."
Respectfully following the above judgment we dismiss ground no.4 raised by the AO.
10. Sixth ground of appeal deals with interest income of Rs. 2.10 crores received by the Singapore Branch of the assessee. During the assessment proceedings, the AO found that branch located at Singapore had received interest on External Commercial Borrowing(ECB) loan. He called for further details in that regard and held that source of the income interest was in India, that the Indian borrowers were making payment of interest, that risk associated with the loans lied in India, that the interest income arising out of ECB loans advanced to Indian borrowers was chargeable to tax in accordance with the provisions of Article 11 of the India Singapore DTAA.
10.1. In the appellate proceedings, the FAA held that the assessee filed From No. 3 CEB, that the TPO had determined ALP of the international transactions, that circular no. 5 of 2004 dated 28.09.2004 provided that attribution of profit to a PE would be based on arm's length principle, that PE was remunerated on arm's length basis on taking into account all the risk taking functions, that no further attribution could be made, that foreign branches were operating in different jurisdiction, that they were not separate non-resident entities.
10.2. The DR advanced the same arguments that were made for the GOA 4. The AR stated that interest income was assessed separately, that attribution, if any, was to be made about fee not qua interest, that funding was done by the overseas entity, that the Indian entity was liasoning with the borrowers. The AR contended that the Indian companies would borrow from overseas branches, that the assessee would lend them money for that purpose, that interest income arising out of said transaction are being assessed separately, that attribution had to be about fee received and not qua interest. In the appeal of the assessee the issue was about the fee, that the India PE would liaison with borrower to avail loans from outside entity, that there could not be any attribution of interest, that interest was not covered by the DTAA. He relied upon Pride Foramer SAS (40 taxmann.com 100 of Uttarakhand HC), Morgan Stanley & Co.(162 Taxman 165), Set Satellite (Signapore)Pte. Ltd. (173 Taxman 475), B4U International Holdings Ltd.(57 taxmann.com 146)and BNP Paribas SA (69 taxmann.com 6).
10.3. We have heard the rival submissions. We find that the earnings on account of ECB loans can be classified into two categories namely interest and commission, that interest pertained to the loans funded by the Hong Kong and Singapore branches, that the India branch did not advance any funds for the loans, that commissions was received by the lead arrangers or Colead arrangers, that the Indian entity would provide assistance in general relationship management and will provide assistance to Singapore entity, if required.
It has been held, in both the matters, relied upon by the assessee, that the provisions of sub-Articles (1) and (2) of Article 12 of India-France DTAA would apply only when recipient of interest was not having a permanent establishment in country where it had received interest. It is an undisputed fact that in the assessee's case, banking operations were carried out by the PE in India. Besides, the PE was remunerated on an arm's length basis. In BNP Paribas SA (supra), it was held that once an enterprise was found to be carrying on the related business or profession through a PE or a fixed base in the other contracting state, the scheme of tax-ability on the gross basis, as implicit in the taxation of dividend, interest, royalties and fees for technical services, and other incomes, under the tax treaties, would comes to an end. In Indo French DTAA, for example, articles 11(6), 12(5), 13(6) and 23(2) provide so. We are aware that in the case ofSumitomo Mitsui Banking Corporation (136 ITD 66), the Special Bench has decided the issue in favour of the Department and against the assessee. But respectfully following the judgment of the Hon'ble Uttrakhand (supra), we decide ground no. 6 against the AO.
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/> 11. Ground no. 7 is about interest income from Hongkong Branch. Following our order for last GOA, we dismiss seventh ground raised by the AO. 12. Last ground of appeal deals with commitment fees and commission paid by the Indian borrowers, amounting to Rs. 3.01 crores. During the assessment proceedings, the AO held that the source of the income in respect of commission and commitment was in India, that the Indian borrowers were making payment of on both the counts, that the risk was associated with the loans lied in India, that there was a business connection in India, as far as assessee was concerned. He finally held that the commission earned by the Hong Kong branch of the assessee in respect of ECB loans advanced to Indian borrowers was chargeable to tax in India. 12.1. Aggrieved by the order of the AO, the assessee preferred an appeal. The FAA, after considering the available material, held that ALP of the international transactions of the PE in India was determined by the TPO, that the AO had made addition of the adjustments arrived at by the TPO, that after such adjustment it would be the position that the Indian PE of the assesse bank had been remunerated at the ALP and that the profit attributable to India PE is based on the functions undertaken, assets employed and risks assumed. He further observed that remuneration at ALP would extinguish any further attribution of profit to the PE, that 50% of commitment fee(Rs. 5,41,43,714/-) and commission(Rs. 62,11,440/-) received by assessee's Hong Kong branch was not chargeable to tax as income of the assessee by virtue of section 9(1)(i) r.w.s 115 A of the Act. 12.2. The DR argued that the disputed amount was not interest, that it consisted of commission and commitment charges, that same was taxable as per the provisions of Article 7 of the DTAA, that it was not a case of double deduction. The AR stated that the commitment fees/commission etc. were clearly effectively connected to the Indian PE, that 20% income was attributed as the ALP for the services performed by the India branch, that the said position was confirmed by the Bombay HC in the assessee's own case in earlier AY.s., that nothing further could be taxed in the hands of the Hong Kong branch, that it would lead to the same amounts being assessed to tax twice. 12.3. We have heard the rival submissions. We find that identical issue was dealt by the Hon'ble Bombay HC and was adjudicated in favour of the assessee while deciding the appeals for the earlier years(Income tax Appeal no. 1781 of 2014 dated 23.03.2017 and IT Appeal no.1748 of 2014 dated 23.03.2017). Respectfully following the judgment of the Bombay HC, we dismiss last ground of appeal, raised by the AO. As a result, appeal filed by the assessee is partly allowed and the appeal of the AO is dismissed.