Salary paid to expatriate fro Head Offie to Branch was an expenditure to be fully allowed without restriction of section 44C of the Act

IN THE INCOME TAX APPELLATE TRIBUNAL

“L” BENCH: MUMBAI

BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER

AND SHRI AMIT SHUKLA, JUDICIAL MEMBER

ITA No.6891/Mum/2007

(Assessment Year: 2004-05)

ITA No.551/Mum/2010

(Assessment Year: 2005-06)

ITA No.4191/Mum/2010

(Assessment Year: 2006-07)

Shinhan Bank

(Erstwhile Chohung Bank),

Wockhardt Towers, 5th Floor,

West Wing, Bandra Kurla Complex,

Bandra (East)

Mumbai -400 001 ....…. Appellant

Vs

The Deputy Director of Income-tax

(International Taxation)- 1(2),

Scindia House, Ground Floor,

Ballard Estate,

Mumbai -400 020 ....… Respondent

ITA No.7421/Mum/2007

(Assessment Year: 2004-05)

ITA No.4576/Mum/2010

(Aassessment Year: 2006-07)

The Deputy Director of Income-tax

(International Taxation)- 1(2),

Scindia House, Ground Floor,

Ballard Estate,

Mumbai -400 020 ....…. Appellant

Vs

Shinhan Bank

(Erstwhile Chohung Bank),

Wockhardt Towers, 5th Floor,

West Wing, Bandra Kurla Complex,

Bandra (East)

Mumbai -400 001 ....… Respondent

PAN: AAACC 2144 A

Appellant-assessee by: Shri Nitesh Joshi

Respondent-revenue by: Shri Narendra Kumar

Date of hearing: 08.05.2012

Date of Pronouncement: 27.06.2012

O R D E R

PER P.M. JAGTAP, AM:

Out of these five appeals, four appeals i.e. two filed by the assessee and two filed by the revenue are cross appeals for A.Y. 2004- 05 and 2006-07 while the remaining fifth appeal is the appeal filed by the assessee for the A.Y. 2005-06. Since some common issues are involved in these appeals, the same have been heard together and are being disposed off by this single composite order for the sake of convenience.

2. First, we shall take the cross appeals filed for A.Y. 2004-05 being ITA Nos.6891/Mum/2007 and 7421/Mum/2007 which are directed against the order of the Ld. CIT (A)-31 Mumbai dated 14.09.2007.

3. Ground no.1 of the assessee’s appeal for A.Y. 2004-05 relates to its claim for the lower rate of tax at 35% as applicable to a resident tax payer by giving the benefit of non-discrimination clause as contained in Article 25 of the India Korea Double Taxation Avoidance Agreement as against tax rate of 40% (+ surcharge) levied by the A.O. as well as Ld. CIT (A).

4. At the time of hearing before us, the Ld. Representatives of both the sides have agreed that this issue is squarely covered in favour of the revenue and against the assessee by the decision of the Tribunal in the assessee’s own case for the A.Y. 2002-03 reported in (2006) 6 SOT 145 (Mum) wherein a similar issue was considered by the Tribunal in Paragraphs no.11.2 & 11.3 and 12 of its order which read as under:

“11.2 It is, thus, evident that DTAA recognizes the fact that the amendments made in the IT Act are not affected in so far or they are not in conflict with the specific provisions of the DTAA.

Therefore we are of the view that the amendment made in section 90(2) by way of insertion of explanation is applicable in so far as it is not in conflict with the provision of DTAA. In the context of amendment made in the section 90 w.r.e.f. 1.4.1962 it is useful to quote para 49 in the ABN Amro Bank NV case (supra) wherein Hon’ble ITAT has quoted from the decision of Hon’ble SC in Gramophone Co. of India Ltd. vs. Birendra Bhadur Pandy & Ors ACR 1984 SC 667.

49. Before considering the claim of the assessee in the light of the amendment of section 90 with retrospective effect from 1^st April, 1962, we consider it useful to keep in mind the applicability of the Indian tax laws vis-à-vis DTAA with the foreign country. In this connection, reference to the decision of the Hon’ble Supreme Court in the case of Gramophone Co. of India Ltd. vs. Birendra Bahadur Pandy & Others. AIR 1984 SC 667 is relevant. In this case, their Lordships of the Hon’ble Supreme Court held that in the event of conflict between international law, the Court must follow municipal law. The relevant para 5 is quoted hereunder for the sake of convenience.

There can be no question that nations must march with the international community and the municipal law must respect rule of international law even as nations respect international law may be accommodated in the municipal law even without express legislative sanction provided they do not run into conflict with Act of Parliament. But when they do run into such conflict, the

sovereignty and integrity of the Republic and the supremacy of the constituted legislature in making the laws may not be subjected to external rules except to the extent legitimately accepted by the constituted legislatures themselves. The doctrine of incorporation also recognizes the position that the rules of international law are incorporated into national law and considered to be part of the national law, unless they are in conflict with an Act of Parliament. Comity of conations or no, municipal law must prevail in case of conflict. National Courts cannot say “yes” if Parliament has said “no” to a principle of international law. National courts will endorse international law but not if it conflicts with national law. National courts being organs of the National State and not organs of international law must perforce apply national law if international law conflicts with it. But the Courts are under an obligation within legitimate limits, to so interpret the municipal statute as to avoid confrontation with the comity of nations or the well established principles of international law. But if conflict is inevitable, the later must yield.

“11.3 Thus, in the present case, we hold that, firstly there is no conflict of the explanation with DTAA as

(i) the area of operation of explanation and the Art-25(1) are in different field.

(ii) Explanation clarifies the position as it always stood.

(iii) DTAA did not prescribe any separate or specific rate or any particular criteria to be applied on income of Korean companies assessed in India.

(iv)Explanation does not deal with assessability of any items of income. Secondly, even if any conflict is envisaged, still then the provision of DTAA will yield to law passed independently by Parliament in view of decision of Hon’ble Supreme Court in Gramphone Co.’s case (supra)”.

“12. The last argument of the learned counsel is that, at least sub paragraph 2 of Article 25, will hold the field. According to the assessee, an existence of a P.E. of assessee company is not disputed, Indian Enterprises such as domestic companies and cooperative societies are charged with lesser rates as compared to non-resident companies. This situation is less favourable for assessee-company. Therefore according to learned counsel, it hits Article -25(2). In our view this stand is misconceived. The word “less favourable” has not been defined either in the DTAA or in IT Act. Therefore, it cannot be constructed to mean that levy of higher rate on the income on non-domestic company would be “less favourable”. This paragraph [Article -25(2)], as per model convention is designed to curb the discrimination in the treatment of P.E. as compared with resident enterprises belonging to the same sector of activities. Even though, broadly Indian domestic Bank and P.E. of the assessee bank are engaged in banking activities but as highlighted earlier, activities are not the same, they may only be, similar. Secondly, co-operative societies are charged with different rates looking to their social involvement and upliftment of poor and the prospects of their betterment though cooperative sector. Clause (6)(1) and (8) of the model conversion on Article -25(2) provide that it will not be a discrimination, if the contracting state provides special privilege to public bodies, or whose activities are performed for public benefit, or to its own bodies being integral part of the State etc. (Ref-page 1200 of Klaus Vogel’s Commentary on Double taxation Convention). Therefore, it is not acceptable to compare cooperative societies with non-resident banking companies upon whom there is no such social burden. Further, as held earlier, explanation to section 90 so introduced w.e.f. 1.4.1962 is an integral part of section. It clearly lays down that charging of foreign company at a higher rate will not be treated as less favourable.”

5. As the issue involved in the year under consideration i.e. A.Y. 2004-05 as well as all material facts relevant thereto are similar to that of A.Y. 2002-03, we respectfully follow the decision of the Tribunal rendered in A.Y. 2002-03 (supra) and uphold the impugned order of the Ld. CIT (A) confirming the tax rate of 40% (+ surcharge) levied by the A.O. on the income of the assessee. Ground no.1 of the assessee’s appeal is accordingly dismissed.

6. The issue raised in ground no.2 of the assessee’s appeal relates to the addition of ` 44,98,000/- made by the A.O. and confirmed by the Ld. CIT (A) on account of unrealized profits on revaluation of securities.

7. The assessee in the present case is a banking company registered in Korea which is carrying on banking business in India through its branch at Mumbai with the permission of Reserve Bank of India. As a part of its banking business, the assessee claimed to have invested in securities which were categorized as “available for sale”. As per the accounting policy consistently followed, the net appreciation in the value of the said securities was not recognized as income by the assessee on the ground that it represented unrealized and notional profits. The A.O. following the stand taken in the case of the assessee for earlier years treated such net appreciation in the value of securities amounting to ` 44,98,000/- as income of the assessee taxable in the year under consideration and the said amount was added by him to the total income of the assessee. On appeal, the Ld. CIT (A) confirmed the addition made by the A.O. on this issue by taking a view, which was contrary to the view taken by his predecessors while deleting the similar addition made by the A.O. in the earlier years i.e. A.Y. 2001-02, 2002- 03 and 2003-04.

8. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that a relief on similar issue was allowed by the Ld. CIT (A) to the assessee in the earlier years by deleting the addition made by the A.O. on account of unrealized profits on revaluation of securities and the appeals filed by the revenue on this issue for the said years have already been dismissed by the Tribunal vide its order reported in 126 ITD 448 for the following reasons in paragraph No.10 of the said order:

 “We have heard the rival submissions and looked into the relevant material on record. There is no dispute on the fact that such securities are the ‘current investments’ in the nature of stock-intrade. The method of ‘cost or market price, whichever is less’ is one of the recognized methods for the valuation of the closing stock as having got the seal of approval from the Hon’ble Supreme Court in the case of Chainrup Sampatram (supra). Under this method if the market price is higher than the cost price, then the cost price is to be considered for valuing the closing stock. But if the cost is more than the market price, then that item of stock has to be valued at the market price. The logic behind this method is that the loss in the value be recognized in the final accounts without unduly accounting for the appreciation in the value of stock. The learned CIT (A) has taken note of the circular issued by the RBI as per which the valuation is to be made scrip-wise and further if there is any appreciation in the value of securities on account of the method of valuation as indicated in the Annexure, it should not be booked as income. It has further been suggested in this circular that the ‘banks which have adopted a more prudent method of valuation of securities than the one now being suggested, may continue the practice hitherto followed by them.’ From here it is clear that the apex bank has also suggested the method of valuation of closing stock ‘at cost or market price, whichever is less’. It is the method which is being consistently followed by the assessee as recorded by the authorities below. Adverting to the facts of the instant case we find that the assessee has valued its closing stock scrip-wise by following this method as per which the appreciation in the value due to the higher market value has been ignored but the depreciation in the value of the other items of stock has been reflected. As the above referred amount of ` 15,43,400 represents the excess of market price over the cost price in respect of certain scrips and further going by the method of valuation adopted by the assessee as ‘cost or market price whichever is less’, the same in our considered opinion cannot be added to the total income. We, therefore, uphold the impugned order on this count. This ground fails. Similar grounds raised by the Revenue in asst. yrs. 2001-02, 2002-03 and 2003-04 are also liable to be and are hereby dismissed. Another connected issue in asst. yr. 2000-01 is against not allowing deduction claimed by the assessee at ` 45,000 on account of revaluation of remaining part of closing stock of securities. From the computation of income done by the AO it is apparent that he had allowed deduction for ` 45,000 as claimed by the assessee. In such a situation there cannot be any question of agitating for an addition which has not been made by the AO himself. This ground is not allowed.”

9. As the issue involved in the year under consideration i.e. A.Y. 2004-05 and all the material facts relevant thereto are similar to that of the earlier years decided by the Tribunal, we respectfully follow the order of the Tribunal for the said earlier years and delete the addition made by the A.O. and confirmed by the Ld. CIT (A) on account of unrealized profits on the realization of securities. Ground no.2 of the assessee’s appeal is accordingly allowed.

10. The issue raised in ground no.3 relates to the addition of ` 9,75,544/- made by the A.O. and confirmed by the Ld. CIT (A) on account of upfront guarantee commission.

11. The assessee as a part of its banking business provides bank guarantees and charged guarantee commission for such services. As per the Accounting Policy consistently followed, the guarantee commission is being recognized by the assessee over the life of the guarantee on accrual basis. The guarantee commission received for the year under consideration to the extent of ` 9,75,544/- was not recognized by the assessee as its income for A.Y. 2004-05 on the ground that the guarantee period relating to the said commission was subsequent to 31st March, 2004. According to the A.O., the period of guarantee had nothing to do with the assessee’s right to receive the commission and accordingly the amount of ` 9,75,544/- was brought to tax by him in the hands of the assessee for A.Y. 2004-05 holding that the said income was accrued to the assessee at the time when the corresponding guarantees were issued. On appeal, the Ld. CIT (A)

confirmed the addition made by the A.O. on this issue.

12. We have heard the arguments of both the sides and also perused the relevant material on record. As agreed by the Ld. Representatives of both the sides, this issue is squarely covered in favour of the revenue and against the assessee by the decision of the Tribunal in assessee’s own case for earlier years reported in 126 ITD 448 wherein, similar additions made by the A.O. on account of upfront guarantee commission were confirmed by the Tribunal. The Tribunal, however, accepted the alternative contention of the assessee relating to double taxation of the same amount in two years and accordingly directed the A.O. to exclude from the income of the assessee the amount of upfront guarantee commission offered in the subsequent year on accrual basis which was already taxed on receipt basis. Respectfully following the said decision of the Tribunal in the assessee’s own case for the earlier years, we confirm the addition made by the A.O. and confirmed by the Ld. CIT (A) on account of upfront guarantee commission for the A.Y. 2004-05. We, however, direct the A.O. to exclude the said amount from the income of the assessee if the same has been offered to tax in the subsequent year i.e. A.Y. 2005-06. Subject to this direction, ground no.3 of the assessee’s appeal is dismissed.

13. The issue raised in ground no.4 relates to the addition of ` 57,12,426/-made of by the A.O. and confirmed by the Ld. CIT (A) by way of disallowance of interest paid by the Indian Branch of the assessee bank to its Head office.

14. As agreed by the Ld. Representatives of both the sides, the issue involved in ground no.4 of the assessee’s appeal now stands squarely covered in favour of the assessee by the decision of Special Bench of the ITAT in the case of M/s. Sumitomo Mitsui Banking Corp. rendered by the order dated 30th March, 2012 passed in ITA No.5402/Mum/2006 wherein it was held that although the interest paid to the Head office of the assessee bank by the Indian branch which constitutes its PE in India is not deductible as expenditure in the domestic law being payment to self, the same is deductible while determining the profit attributable to the PE which is taxable in India as per the provisions of article 7(2) and 7(3) of the relevant ‘Tax Treaty’ read with Paragraph 8 of the Protocol which are more beneficial to the assessee. Respectfully following the said decision of the Special Bench, we delete the disallowance made by the A.O. and confirmed by the Ld. CIT (A) on account of interest paid by the Indian branch of the assessee bank to its head office abroad and allow ground no.4 of the assessee’s appeal.

15. In ground no.1 of its appeal for A.Y. 2004-05, the revenue has challenged the action of the Ld. CIT (A) in allowing the loss claimed by the assessee on account of revaluation of foreign-exchange contracts amounting to ` 3,06,55,833/-.

16. At the time of hearing before us, the Ld. Representatives of both the sides have agreed that the issue involved in ground no.1 of the revenue’s appeal is squarely covered in favour of the assessee by the decision of the Special Bench of the Tribunal in the case of Dy. CIT vs. Bank of Baharain & Kuwait reported in (2010) 41 SOT 290 (Mum) (SB) wherein a similar loss claimed by the assessee on account of revaluation of foreign exchange contracts was held to be allowable by the Special Bench for the following reasons given on page no.296:

“(i) A binding obligation accrued against the assessee the minute it entered into forward foreign exchange contracts.

(ii) A consistent method of accounting followed by the assessee could not be disregarded only on the ground that a better method could be adopted.

(iii) The assessee had consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on March 31.

(iv) A liability is said to have crystallized when a pending obligation on the balance sheet date is determinable with reasonable certainty. The considerations for accounting the income are entirely on different footing.

(v) As per accounting standard-11, when a transaction is not settled in the same accounting period in which it occurred, the exchange difference arises over more than one accounting period.

(vi) The forward foreign exchange contracts have all the trappings of stock-in-trade.

(vii) In view of the decision of the Supreme Court in the case of Woodward Governor of India (P.) Ltd. (supra), the assessee’s claim was allowable.

(viii) In the ultimate analysis, there was no revenue effect and it was only the timing of taxation of loss / profit.”

Respectfully following the decision of the Special Bench of this Tribunal, we uphold the impugned order of the Ld. CIT (A) allowing the claim of the assessee for loss on account of revaluation of foreign exchange contracts and dismiss ground no.1 of the revenue’s appeal.

17. In ground no.2 of its appeal, the revenue has challenged the action of the Ld. CIT (A) in deleting the addition of ` 59,10,370/- made by the A.O. on account of interest paid by the Indian branch of the assessee bank to its Head office treating the same as income arising in India in the hands of the Head office.

18. At the time of hearing before us, the Ld. Representatives of both the sides have agreed that the issue involved in ground no.2 of the Revenue’s appeal now stands squarely covered in favour of the assessee by the decision of Special Bench of the ITAT in the case of M/s. Sumitomo Mitsui Banking Corp. vs. Dy. Director of Income-tax rendered  by the order dated 30th March, 2012 passed in ITA No.5402/Mum/2006 wherein it was held that interest paid to the Head office of the assessee bank by the Indian branch cannot be taxed in India in the hands of the assessee bank being payment to self which cannot give rise to income that is taxable in India as per Domestic Law or even as per the relevant ‘Tax Treaty’. Respectfully following the said decision of the Special Bench of this Tribunal, we uphold the order of the Ld. CIT (A) on this issue and dismiss ground no.2 of the revenue’s appeal.

19. Now, we shall take-up the appeal filed by the assessee for the A.Y. 2005-06 being ITA No.551/Mum/2010 which is directed against the order of Ld. CIT (A)-11, Mumbai dated 23rd December, 2009.

20. As regards ground no.1 taken by the assessee in this appeal, it is\ observed that the issue raised therein relating to the tax rate applicable in the case of the assessee is similar to the one involved in Ground no.1 of the assessee’s appeal for A.Y. 2004-05 which has been decided by us

in Paragraph No.5 of this order. Following our conclusion drawn in A.Y. 2004-05, we decide this issue against the assessee and dismiss ground no.1.

21. As regards ground no.2, it is observed that the issue raised therein relating to disallowance of interest paid by the Indian branch of the assessee bank to its head office abroad is similar to the one involved in ground no.4 of the assessee’s appeal for A.Y. 2004-05 which has been decided by us in paragraph 14 of this order. Following our  conclusion drawn in A.Y. 2004-05, we delete the disallowance made by the A.O. and confirmed by the Ld. CIT (A) on this issue and allow ground no.2 of the assessee’s appeal.

22. Ground no.3 raised by the assessee in this appeal relating to the addition made by the A.O. and confirmed by the Ld. CIT (A) on account of interest received by the Indian branch from its head office has not been pressed by the Ld. Counsel for the assessee at the time of the hearing before us. The same is accordingly dismissed as not pressed.

23. Now, we shall take-up Cross appeals for A.Y. 2006-07 in ITA Nos.4181 and 4567/Mum/2010 which are directed against the order of Ld. CIT (A)-11, Mumbai dated 22nd March, 2010.

24. As regards ground no.1 of the assessee’s appeal relating to its claim for the lower rate of tax at 35% as applicable to a resident tax payer by giving the benefit of non-discrimination clause as contained in Article 25 of the India Korea Double Taxation Avoidance Agreement as against tax rate of 40% (+ surcharge) levied by the A.O. as well as Ld. CIT (A), it is observed that the issue is similar to the one involved in ground no.1 of the assessee’s appeal for A.Y. 2004-05 which has been decided by us in paragraph 5 of this order. Following our conclusion drawn in A.Y. 2004-05, we dismiss ground no.1 of the assessee’s appeal.

25. As regards ground no.2 relating to issue of disallowance of interest paid by the Indian Branch of the assessee bank to its Head office, it is observed that this issue is similar to the issue involved in ground no.4 of the assessee’s appeal for A.Y. 2004-05 which has been decided by us in paragraph 14 of this order. Following our conclusion drawn in A.Y. 2004-05, we allow ground no.2 of the assessee’s appeal.

26. Ground no.3 raised by the assessee in this appeal relating to the addition made by the A.O. and confirmed by the Ld. CIT (A) on account of interest received by the Indian branch from its head office has not been pressed by the Ld. Counsel for the assessee at the time of the hearing before us. The same is accordingly dismissed as not pressed.

27. In its appeal for A.Y. 2006-07, the revenue has challenged the action of the Ld. CIT (A) in holding that ‘salary’ paid to expatriate employees deputed from Head Office to the Indian Branch is an expenditure to be allowed in full without the restriction of sec.44C of the Income-tax Act.

28. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that a similar issue has been decided by the Tribunal in assessee’s own case for the earlier years by its order reported in 126 ITD 448 (supra) wherein it was held that what is covered u/s.44C is the expenditure that is common in nature meaning thereby that the benefit of the said expenditure is derived both by the Head Office and the Branch. It was held that payment of salary made in the case of the assessee was to expatriate employees who were working actually with the assessee in India though the payment was made to them by the Head Office outside India. It was held that the expenditure incurred on such payment thus was incurred exclusively for the branch in India and the same was not covered within the purview of sec.44C. As submitted by the Ld. Counsel for the assessee, the appeal filed by the revenue against the said order of the Tribunal passed in assessee’s own case for earlier years on this issue has been dismissed by the Hon’ble Bombay High Court on 21^st December, 2010. This issue now thus stands squarely covered in favour of the assessee by the decision of the Hon’ble Bombay High Court rendered in assessee’s own case for earlier years and respectfully following the same, we uphold the impugned order of the Ld. CIT (A) holding that salary paid to expatriate employees deputed from Head Office to Indian Branch was an expenditure to be allowed in full without restriction of sec.44C of the Act.

29. In the result, all the three appeals of the assessee are partly allowed whereas the two appeals of the revenue are dismissed.

Order pronounced in the open court on this day of 27th June 2012.

                                                 Sd/-                             Sd/-

                                        (AMIT SHUKLA)       (P.M. JAGTAP)

                                  JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, Date: 27th June 2012

Copy to:-

1) The Appellant.

2) The Respondent.

3) The CIT (A) –11, Mumbai.

4) The DIT (International Taxation)__ concerned, Mumbai.

5) The D.R. “L” Bench, Mumbai.

6) The Guard file.

/ / True Copy / /

By Order

Asstt. Registrar

I.T.A.T., Mumbai

*Chavan