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Tax Publishers MUFG Bank Ltd. v. ACIT [ITA No. 7895/Del/2019, dt. 16-10-2020] : 2020 TaxPub(DT) 4247 (Del.-Trib.) 1. Allowability of employees exclusively for PE of a foreign bank under head office expenditure under section 44C 2. Applicability of section 14A to a bank which earns pass thru exempt income on securities which are stock in trade 3. Differential rate of tax on a non-resident vis-a-vis DTAA provisions 4. Grossing up of presumptively DTAA tax rated income for allowability of head office expenditure *Facts:* Assessee was the branch PE of a foreign bank based out of Japan subject to Indo-Japan DTAA. They had the following disallowances which were upheld by the DRP. 1. Expenditure of employees who were in charge exclusively of the Indian branch was claimed in full as a deduction this was restricted within the limits imposed under sec. 44C. 2. Section 14A read with rule 8D indirect expenses were disallowed on the pass thru income received by the assessee which were held as stock-in-trade. 3. Assessee was taxed at a rate of 40% vis-a-vis DTAA applicable rates. This was questioned as in contravention to DTAA provisions where the taxes cannot exceed DTAA rates. 4. Certain ECB interest was received out of India by the head office of the assessee which was concessionally taxed as per DTAA @ 10% besides @ 5% under section 194LA. The case of the assessee was that the 5% taxed incomes also be added and taken into account while computing limits of allowable head office expenditure under section 44C. The revenue did not concur with the same and excluded the same in the gross income for computing limits under section 44C. Held in favour of the assessee -- 1. Expenditure on employees who are exclusively for the Indian branch are outside the scope of the limit of section 44C and thus are allowable in full. *Applied:* CIT v. Emirates Commercial Bank Ltd. (2003) 262 ITR 55 (Bom.) : 2003 TaxPub(DT) 1265 (Bom-HC) 2. Section 14A cannot be applied to a bank on securities which are held in stock-in-trade the portion of indirect expense computation will fail. Besides the same the disallowance provision which came into statute subsequent to enactment of a DTAA cannot be applied to a non-resident as it would dilute the DTAA provisions unilaterally which is not permitted as per Vienna Convention of Law Treaties, 1969 (VCLT). Against the assessee 3. The rate of 40% is not against the provisions of DTAA and assessee cannot plead lower rate applicability of only DTAA rates. 4. Assessee cannot claim the lower rate benefit of 5% under section 194LA on the ECB, avail lower DTAA rates @ 10% on interest income then claim benefit of inclusion of the said lower taxed rate of income in the computation of limits of the head office expenditure under the Act. Benefit of DTAA cannot be one sided to the exclusivity of the assessee alone to their convenience. The lower taxed ECB interest thus cannot be included for computing the ceiling on head office expenses. That much lower head office expenditure would be allowable. *Editorial Note:* The decision has number of other fine points which are worth noting.

Tax Publishers

MUFG Bank Ltd. v. ACIT [ITA No. 7895/Del/2019, dt. 16-10-2020] : 2020 TaxPub(DT) 4247 (Del.-Trib.)

1. Allowability of employees exclusively for PE of a foreign bank under head office expenditure under section 44C

2. Applicability of section 14A to a bank which earns pass thru exempt income on securities which are stock in trade

3. Differential rate of tax on a non-resident vis-a-vis DTAA provisions

4. Grossing up of presumptively DTAA tax rated income for allowability of head office expenditure

Facts:

Assessee was the branch PE of a foreign bank based out of Japan subject to Indo-Japan DTAA. They had the following disallowances which were upheld by the DRP.

1. Expenditure of employees who were in charge exclusively of the Indian branch was claimed in full as a deduction this was restricted within the limits imposed under sec. 44C.

2. Section 14A read with rule 8D indirect expenses were disallowed on the pass thru income received by the assessee which were held as stock-in-trade.

3. Assessee was taxed at a rate of 40% vis-a-vis DTAA applicable rates. This was questioned as in contravention to DTAA provisions where the taxes cannot exceed DTAA rates.

4. Certain ECB interest was received out of India by the head office of the assessee which was concessionally taxed as per DTAA @ 10% besides @ 5% under section 194LA. The case of the assessee was that the 5% taxed incomes also be added and taken into account while computing limits of allowable head office expenditure under section 44C. The revenue did not concur with the same and excluded the same in the gross income for computing limits under section 44C.

Held in favour of the assessee --

1. Expenditure on employees who are exclusively for the Indian branch are outside the scope of the limit of section 44C and thus are allowable in full.

Applied: CIT v. Emirates Commercial Bank Ltd. (2003) 262 ITR 55 (Bom.) : 2003 TaxPub(DT) 1265 (Bom-HC)

2. Section 14A cannot be applied to a bank on securities which are held in stock-in-trade the portion of indirect expense computation will fail. Besides the same the disallowance provision which came into statute subsequent to enactment of a DTAA cannot be applied to a non-resident as it would dilute the DTAA provisions unilaterally which is not permitted as per Vienna Convention of Law Treaties, 1969 (VCLT).

Against the assessee

3. The rate of 40% is not against the provisions of DTAA and assessee cannot plead lower rate applicability of only DTAA rates.

4. Assessee cannot claim the lower rate benefit of 5% under section 194LA on the ECB, avail lower DTAA rates @ 10% on interest income then claim benefit of inclusion of the said lower taxed rate of income in the computation of limits of the head office expenditure under the Act. Benefit of DTAA cannot be one sided to the exclusivity of the assessee alone to their convenience. The lower taxed ECB interest thus cannot be included for computing the ceiling on head office expenses. That much lower head office expenditure would be allowable.

Editorial Note: The decision has number of other fine points which are worth noting.