ITAT Rules Interest Paid to Overseas Head Office Deductible

ITAT Rules Interest Paid to Overseas Head Office Deductible and Restricts Guarantee Commission Adjustment

Issue

Whether interest paid by an Indian Permanent Establishment (PE) to its foreign Head Office is deductible, and whether Transfer Pricing adjustments on guarantee commission must give credit for amounts already recovered from the Associated Enterprise (AE).

Facts

The assessee is an Indian Permanent Establishment (PE) of DBS Bank Ltd., Singapore, for Assessment Years 2010–11 to 2012–13.
The Indian PE claimed a tax deduction for interest paid to its foreign Head Office and overseas branches.
The Assessing Officer (AO) disallowed the interest deduction, holding that payments between a branch and its Head Office constitute non-deductible payments to self.
For guarantee transactions, the assessee charged a 0.10% commission for guarantees issued in India backed by counter-guarantees from its Head Office/overseas branches.
The Transfer Pricing Officer (TPO) adopted an internal Comparable Uncontrolled Price (CUP) based on transactions with unrelated domestic customers, applied a 1.2% rate, and computed an adjustment without granting credit for the 0.10% already charged to the AE.
The record indicated that the average guarantee commission earned from unrelated domestic parties was 0.56%.

Decision

Interest Paid to Head Office: Allowed in favour of the assessee. Interest paid by the Indian PE to its overseas Head Office and branches is deductible in computing the taxable profits of the PE under Section 9 read with Article 7 of the India-Singapore DTAA.
Guarantee Commission TP Adjustment: Decided partly in favour of the assessee. Once internal CUP is adopted for benchmarking, the arm’s length adjustment must be restricted strictly to the difference between the determined arm’s length rate and the commission already recovered from the AE.
Granting credit for the 0.10% already recovered, the maximum allowable adjustment is restricted to 0.46% (being the difference between the 0.56% benchmark rate and 0.10%).

Key Takeaways

Deductibility of HO Interest Under DTAA: Under Article 7 of the India-Singapore DTAA, interest paid by an Indian PE to its foreign Head Office or overseas branches is an allowable expense in determining the PE’s taxable business profits.
Mandatory Credit in TP Adjustments: When applying an internal CUP method, the TPO must account for revenues already earned; failure to grant credit for amounts recovered from an AE results in an erroneous over-adjustment.
Adjustment Limited to Differential Shortfall: Transfer pricing adjustments are restricted to the net margin gap between the benchmark arm’s length rate and the actual rate charged by the taxpayer.

IN THE ITAT MUMBAI BENCH ‘I’

DBS Bank Ltd.

Additional Director of Income-tax, (IT)^*

Beena Pillai, Judicial Member
and ARUN KHODPIA, Accountant Member

IT Appeal Nos. 4732 and 4644 (MUM) of 2015 and others
[Assessment years 2010-11 to 2012-13]

JULY 29, 2026

Fenil Bhatt, AR and P.J. Pardiwala, Sr. Adv. for the Appellant. Satya Pal Kumar, CIT (DR) and Rajendra Jaypal, Sr. DR for the Respondent.

ORDER

1. Present cross-appeals filed by the assessee arise out of orders passed by Ld.CIT(A) – 55/56, Mumbai, dated 30/06/2016 and 28/09/2017 for AYs 2010-11, 2011-12 and 2012-13 respectively. As the issues involved in the captioned appeals are identical, they were heard together and are disposed off by way of this common order

2. At the outset, both sides submitted that the grounds raised by assessee for all the years under consideration are identical and similar and, therefore, for the sake of convenience grounds for AY 2010-11 in appeals filed by assessee as well as revenue are reproduced as under:-

Assessee’s appeal

“1) The Commissioner of Income-tax (Appeals)-55, Mumbai [hereinafter referred to as the CIT(A)] ought to have directed the Addl. Director of Income-tax (International Taxation) – Range 1, Mumbai (hereinafter referred to as the AO) to exclude the interest of Rs.228,759 received from Head Office, while computing the taxable income for the year under appeal, since this represents payment from self and therefore not taxable.

2) The CIT(A) erred in not appreciating that Transfer pricing provisions cannot be applied for transactions between Head office/overseas branches (General Enterprise (GE)) and Permanent Establishment (PE) as it is one and the same person and not separate legal independent enterprises.

3) The CIT(A) erred in upholding the action of the AO / Transfer Pricing Officer (‘TPO’) in making addition of Rs.72,84,851 for alleged short commission received from Head office / overseas branch GE for bank guarantees issued to third parties in India on the basis of back-to-back indemnities/ guarantees issued by the GE to the PE.

4) The CIT(A) erred in not considering the appellants Global Pricing Policy for issuance of guarantee under the Counter Guarantee by GE.

5) The CIT(A) erred in not appreciating the fact that functions performed, assets utilised and risk assumed by PE while issuing guarantee to the third party in India are not comparable with the functions performed while issuing guarantees which were backed by a counter guarantee from GE.

6) The learned CIT(A) erred in confirming the action of the learned AO in treating the income earned from cancellation of foreign exchange forward contracts amounting to Rs 583,298,553 as being chargeable to tax under the head ‘Income from other sources’ as against ‘Capital Gains’ as treated by the Appellant. The learned CIT(A) relying on the order of the learned AO erred on the following sub-grounds while arriving at the above conclusion:

7) In not treating the foreign exchange forward contract as a ‘capital asset’ and consequently not characterizing the transaction of cancellation thereof as a transfer under the provisions of the Act or the India-Singapore treaty.

8) In concluding that the transaction of purchase/ sale of the securities and booking of the foreign exchange forward cover are independent transactions and therefore, the gains arising due to cancellation of the foreign exchange forward should not necessarily take the same character as that of capital gains arising on sale of securities.

9) In concluding that the position taken by the Appellant in the debt securities cannot be hedged by taking a contrary position in foreign exchange currency.

10) In concluding that where any transaction is entered into to enhance/ safeguard/ stop erosion of the gains, the same will amount to application of gains to earn further gains.

The appellants crave leave to add, to amend, alter, vary, omit or substitute the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as they may be advised. “

Revenue’s appeal

“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of interest expenses of Rs 17,55,90,087/- without appreciating the fact that interest payable by the Indian Permanent Establishment of the Foreign Bank to its HO and other overseas Branches is not deductible expenses in computing total income?”

2. The Appellant prays that the order of the Ld. CIT (A) on the above grounds be set aside and that of the Assessing Officer restored.

3. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary. “

2. Brief facts for AY 2010-11 are as under:-

The assessee filed its return of income declaring total income of Rs.466,34,70,887/- on 29/09/2010. The case was selected for scrutiny by issuing notice u/s 143(2) along with notice u/s 142(1), in response to which representatives of the assessee appeared before Ld.AO and filed requisite details as called for.

2.1. On examination of the details, Ld.AO noted that, assesse is a branch of Non-resident Banking Company situated in Singapore. It was submitted that the Bank is engaged in activities permitted by the RBI which includes corporate and institutional banking, trade finance, transactional and treasury solutions. The Ld.AO noted that during the year under consideration the bank was operating from ten branches in India and was involved in wholesale lending (both loan and trade based) to its corporate customers. It was noted that it also offered treasury solutions to its clients and was involved in retail banking, private banking, credit card services, auto loans, portfolio management and financial planning for clients. During the course of the assessment proceedings, the assessee filed a revised income vide letter dated 22/08/2013 wherein, the income declared was Rs.471,58,00,305/-. The Ld.AO, after calling for various submissions on the issues made following disallowance in the hands of the assessee:-

(i)

Disallowance of interest paid to H.O -Rs.17,55,90,087/-

(ii)

Disallowance of interest paid on Nostro account -Rs.20,644/-

(iii)

Disallowance of club membership – Rs. 7,21,160/-

(iv)

Addition of income from FII which was claimed as exempt under DTAA with Singapore – Rs. 58,32,98,553/

2.3. As there was an international transaction which was identified, the issue was referred to the Ld.TPO to determine ALP of the such international transaction. The Ld.TPO observed that, the H.O. at Singapore, paid Rs.12,09,324/- to assessee as the guarantee commission which was charged at 0.1%. The Ld.TPO after considering various submissions of the assessee was of the opinion that the rate at which the commission has to be paid to the assessee should be based on the internal comparable uncontrolled price that is available. The Ld.TPO thus proposed an adjustment of Rs.72,84,851/- towards the commission short received by the assessee relating to issuing bank guarantees based on the commission charged by the assessee to the third parties in the domestic market.

2.4. On receipt of the draft assessment order, the assessee intimated its inclination to file an appeal before the Ld.CIT(A). Accordingly, final assessment order was passed making additions / disallowances in the hands of the assessee of the above referred items vide order dated 26/03/2014.

Aggrieved by the order of the Ld.AO assesse preferred appeal before Ld.CIT(A).

2.5. The Ld.CIT(A) partly allowed the issues raised by assessee in respect of the interest paid to the H.O., in respect of the disallowance made towards the Nostro account, and other disallowance/additions, TP addition made on short commission received from the H.O., and characterization of the gains earned from cancellation of foreign exchange forward contracts under the head income from other sources as capital gains was upheld.

Aggrieved by the order of the Ld.CIT(A) assesse as well as revenue are in appeal before this Tribunal.

2.6. At the outset, both sides submitted that Ground No.1 raised by assessee in its appeal is directly linked with the single issue raised by the revenue in its appeal. Accordingly, the revenue appeal is also considered along with Ground No.1 of the assessee.

2.6.1. It is submitted that, the Ld.AO made addition of Rs.17,55,90,087/- being interest paid to H.O./overseas branches, which was deleted by the Ld.CIT(A). The Ld.AR submitted that, the Ld.CIT(A) relied on the orders passed by this Tribunal in assessee’s own case as well as the order passed by his predecessor for AY 2009-10 vide order dated 26/03/2014. He submitted that, the payment of interest constitute income to the self and is, therefore, not chargeable to tax in the hands of the H.O.

2.7. The Ld.Sr.Counsel submitted that, during the assessment proceedings, the assessee had submitted that the interest payment is an allowable expenditure u/s 36(1)(iii) of the Act which cannot be disallowed. The Ld.Sr.Counsel emphasized that against such interest payment, the assessee had deducted tax at source which was ignored by Ld.AO.

2.8. Ld.Sr.Counsel for the assessee submitted that the assessee is a non-resident banking company operating in India through its branch office, constituting a PE of DBS Bank Ltd., Singapore. During the year, the assessee had paid interest of Rs.1,63,73,490/-to its Head Office and overseas branches at Singapore, Hong Kong and London, and claimed the same as deduction. The Ld. Sr. Counsel submitted that such payment of interest to the Head Office/overseas branches was an allowable expenditure in computing the profits of the Indian PE and the same could not be disallowed merely because the payment was made to the Head Office. It was further submitted that tax had also been deducted at source while making such payment.

2.9. Referring to the impugned disallowance, the Ld.Sr.Counsel contended that the issue now stands covered in favour of the assessee by the decision of the Special Bench of the Tribunal in Sumitomo Mitsui Banking Corpn. v. Deputy DIT (IT) 364/136 ITD 66 (Mumbai) (SB), wherein it has been held that interest paid by an Indian PE to its Head Office/overseas branches is deductible while computing the profits attributable to the PE.

2.10. On the contrary the Ld.DR relied on the orders passed by the authorities below.

We have perused the submissions advanced by both sides in light of the record placed

3. It is noted that, this issue has been considered by Co-ordinate bench of the Tribunal in assessee’s own case for the preceding AY, vide order dated 15/06/2018 wherein this Tribunal observed and held as under:-

“5. We have heard the learned Counsels appearing for both the parties and perused materials on record. It is agreed before us by both the sides that the issue in dispute has been decided in favour of the assessee by the Tribunal in assessment year 2003-04, 2005-06 and 2006-07. As could be seen from the impugned assessment order itself, the Assessing Officer referring to the order of the learned Commissioner (Appeals) in assessment year 2003-04, has made the disallowance. However, in assessment year 2003-04, the Tribunal in ITA no.248/Mum./2007, dated 7th October 2013, has decided the issue in favour of the assessee holding as under:-

“2.3 We have perused the records and considered the matter carefully. The dispute is regarding deduction on account of interest paid by the assessee, being an Indian branch to the head office of the bank. We find that the same issue had been considered by the larger special bench of Tribunal in case of Sumitomo Mitsui Banking Corpn. v. DCIT (supra) and special bench in that case held that under the domestic law the interest paid by the Indian branch to the head office was not allowable as deduction as this was payment to self. Further it was also held that the interest payment was allowable as deduction while determining the profit attributable to the PE being the Indian branch under the provisions of Article 7(2) and 7(3) of Indo Japanese treaty read with paragraph 8 of the protocol. The special bench also held that the said interest cannot be taxed in the hands of the assessee bank in India under the domestic law as it was payment to self. There was no express provisions in the relevant tax treaty which was contrary to the domestic law. Therefore, interest payment was not taxable in the hands of the bank and thus there was no question of any tax deducted at source. The issue is thus covered in favour of the assessee and we accordingly set aside the order of CIT(A) and allow the claim of expenditure on account of interest.”

6. Following the aforesaid decision, the Tribunal has allowed assessee’s claim in assessment year 2005-06 and 2006-07 in ITA no. 8671/Mum./2010, dated 3rd March 2017 and ITA no. 9067/Mum./2010, dated 12th February 2018, respectively. There being no difference in fact brought to our notice by the learned Departmental Representative, following the consistent view of the Tribunal on the disputed issue arising in assessee’s own case in the preceding assessment years, we uphold the order of the learned Commissioner (Appeals). Ground raised is dismissed. “

3.1. Further it is noted that, Hon’ble Mumbai Special Bench in the case of Sumitomo Mitsui Banking Corpn. (supra) has considered identical issue. We, therefore, do not find any force in the grounds raised by revenue.

Accordingly, Grounds raised by the revenue stand dismissed.

4. As a consequence Ground No. 1 raised by assessee in assessee’s appeal becomes academic at this stage and does not require adjudication.

5. Ground No.2 challenges the applicability of transfer pricing provisions to transactions between the Head Office / overseas branches and the Indian PE on the footing that they constitute one and the same person and not separate legal entities.

We are unable to accept the aforesaid contention. Hon’ble Ahmedabad Special Bench of this Tribunal in TBEA Shenyang Transformer Group Company Ltd. v. Dy. CIT [2025] 210 ITD 53 (Ahmedabad – Trib.) has held that transactions between a foreign enterprise and its Indian PE can, subject to fulfillment of the statutory conditions, constitute international transactions exigible to arm’s length determination under Chapter X of the Act. Therefore, the broad legal proposition canvassed by the assessee that transfer pricing provisions are per se inapplicable to transactions between the Head Office / overseas branches and the Indian PE merely because they are the same person cannot be accepted.

Accordingly, Ground No.2 raised by the assessee stand dismissed.

6. Ground Nos. 3-5 raised by assessee is against the addition of Rs.72,84,851/- for the alleged short commission received from H.O. / Overseas Branch for bank guarantees issued to third parties in India.

6.1. Brief facts leading to this issue are that, during the year under consideration the AE issued bank guarantees on behalf of its group entities to parties in India through the assessee, on which it received guarantee commission as per group pricing policy. The Ld.Sr.Counsel submitted that the role performed by the assessee includes functions like liaisoning between the beneficiary in India and group entity, discharge or payments to the beneficiary in case the claim is invoked and recovery of the same from the group entity. He submitted that during the year under consideration assessee received a guarantee commission of Rs.12,09,324/- which was charged at 0.1% or USD 75 min/USD 150 Max, depending upon the amount of loan. The Ld.Sr.Counsel submitted that assesse acts as a guarantor for a third party transaction which is backed by a counter guarantee given by tis group entity.

6.2. He submitted that the Ld.TPO rejected assessee’s benchmarking and called upon assessee to explain as to why the rate charged to unrelated parties on the guarantees issued by the assessee should not be treated as internal CUP. The Ld.Sr.Counsel submitted that the assessee vide letter dated 24/01/2014, submitted that these transactions arise in the normal course of business operations whereby the receipts are consistent with the group pricing policy and after taking commercial factors into consideration. The Ld.Sr.Counsel submitted that the Ld.TPO however, held that the transaction entered into with the clients in the domestic market and the transaction entered into on behalf of the group entity were same and hence applied the rate of 1.2% on the total value of the guarantee as commission which was computed at Rs.72,84,851/-.

6.3. Ld.Sr.Counsel submitted that, the Transfer Pricing adjustment made in respect of guarantee commission was unsustainable both on facts and in law. It was submitted that the Ld.AO/TPO had erred in treating the guarantees issued by the Indian PE to unrelated third parties in India as comparable with guarantees issued by the PE on behalf of its General Enterprise/overseas branches backed by counter-guarantees from the GE. Elaborating the factual distinction, the Ld. Sr. Counsel submitted that the functions performed, assets utilised and risks assumed by the PE in the two sets of transactions were materially different and, therefore, the internal CUP adopted by the Ld.TPO was fundamentally flawed.

6.4. It was submitted that in the case of guarantees issued directly by the PE to third-party customers in India, the PE itself undertook KYC due diligence, client assessment, evaluation of the applicant’s requirements, negotiation of guarantee terms, credit appraisal and approval, besides assuming the customer’s credit risk and bearing the consequences of default. In contrast, where the PE issued guarantees backed by counter-guarantees from the Head Office/overseas branches, the aforesaid core functions such as KYC, client assessment, evaluation of the applicant’s requirements, negotiation of guarantee terms and credit evaluation were performed by the GE and not by the PE. In such cases, according to the Ld.Sr.Counsel, the PE merely carried out processing and administrative functions under the instructions of the GE. It was further submitted that in the counter-guarantee arrangement, the PE did not assume the credit risk of the applicant, since any demand or default loss was to be reimbursed by the GE, and therefore the PE’s role was essentially limited to processing and local execution.

6.5. The Ld.Sr.Counsel further submitted that, once the guarantees issued on behalf of the GE were backed by counterguarantees of the overseas branches/Head Office, the risk profile of the PE stood materially altered and the PE could not be regarded as functionally comparable to a case where it independently issued guarantees to third parties in India on its own account.

6.6. According to the Ld.Sr,Counsel, the conditions prescribed under Rule 10B for application of the Comparable Uncontrolled Price method were not satisfied, as strict comparability between the controlled and uncontrolled transactions was absent. It was also contended that even assuming some degree of comparability, reasonably accurate adjustments ought to have been carried out to neutralise the material differences in functions performed and risks assumed, which had not been done by the Ld.TPO.

6.7. The Ld.Sr.Counsel also submitted that sample copies of guarantees issued to unrelated domestic parties and guarantees issued on behalf of the GE were furnished during the transfer pricing proceedings, but the Ld.TPO failed to appreciate the actual terms governing the two categories of transactions. It was argued that the rate of guarantee commission charged by the PE to unrelated domestic customers depended on the specific terms of the guarantee, the nature of the customer relationship, the commercial understanding between the parties, the level of risk undertaken and other business considerations, and therefore the average commission rate charged to third parties could not automatically be adopted as an internal CUP for the international transaction with the GE.

6.8. In support of the aforesaid proposition, reliance was placed on the decision of the coordinate Bench of this Tribunal in case of Everest Kanto Cylinder Ltd. v. Dy. CIT (LTU) (Mumbai), wherein it was held that guarantee commission cannot be determined by universal application of a fixed rate and that the same depends on the facts of each case, including the terms of the guarantee, risk undertaken, relationship between the parties and commercial expediency. The Ld.Sr.Counsel thus contended that the average guarantee commission rate of 1.2% charged by the PE to third parties could not be treated as a valid internal CUP for benchmarking the international transaction with the GE.

6.9. In respect of the Global Pricing Policy, Ld.Sr.Counsel submitted that the Ld.TPO erred in disregarding assessee’s transfer pricing study as well as the global pricing policy governing guarantees issued by the PE on behalf of its GE/overseas branches. It was submitted that the transaction of issuing bank guarantees was in the normal course of the PE’s banking operations and the receipts therefrom were consistent with the group’s global pricing policy framed on commercial considerations. In this regard, a copy of the global pricing policy for issuance of guarantee / counter-guarantee had been furnished before the Ld.TPO.

6.10. The Ld.Sr.Counsel submitted that, the said policy had been put in place to standardize and facilitate the process of issuance of guarantees where a guarantee issued by one branch was backed by a counter-guarantee from another branch. As per the policy, the issuing branch, i.e., the Indian PE, was entitled only to a processing fee @ 0.1% p.a., subject to a minimum of USD 75 and maximum of USD 150, depending upon the loan amount. It was contended that the policy clearly demarcated the functions and risk profile of the instructing branch / GE and the issuing branch / PE. The instructing branch assumed the full credit risk of the client and the corresponding capital allocation was also made in the country of the instructing branch, whereas the PE, being the issuing branch, merely acted as a processing arm lending its name for issuance of local guarantees backed by a counter-guarantee from the instructing branch. It was further submitted that the text of the counter-guarantee had been standardized to clearly define the role and liabilities of the instructing branch and that, from the group’s perspective, the capital for guarantee issuance was assumed only by the instructing branch since it bore the credit risk of the client. The issuing branch’s processing fee was stated to be in addition to the risk fee / issuance fee charged by the instructing branch, and a combined price comprising the risk fee and processing fee was quoted to the customer.

6.11. The Ld.Sr.Counsel contended that the Ld.TPO wrongly compared the processing fee received by the PE for issuing guarantees on behalf of the GE with the guarantee commission charged by the PE to independent third parties in India in respect of guarantees issued on its own account. According to the Ld.Sr.Counsel, the two were not comparable since, in the former case, the PE merely rendered administrative / processing support and did not assume the underlying credit risk, whereas in the latter case the PE itself undertook the risk and therefore earned a full guarantee commission.

6.12. The Ld.Sr.Counsel further submitted that the Ld.TPO proceeded on certain incorrect factual assumptions while making the adjustment. It was pointed out that the Ld.TPO wrongly observed that the money had been charged to the GE and that the GE recovered the same from third party clients and paid it to the PE. Clarifying the actual position, the Ld.Sr.Counsel submitted that where a claim under the guarantee was invoked by the beneficiary, the beneficiary would make the claim on the PE, the PE would call upon the GE to remit the funds to India, and the beneficiary would then be paid by the PE after recovery from the GE. Thus, the entire credit risk in such cases ultimately rested with the GE, which had provided the primary counter-guarantee, and not with the PE.

6.13. It was also submitted that the Ld.TPO was factually incorrect in alleging that even in a similar transaction of issuing guarantees to domestic third parties, the assessee always secured itself fully with collateral security to cover the risk. According to the Ld.Sr.Counsel, this allegation overlooked the assessee’s consistent stand that, while issuing guarantees on behalf of the GE, the PE was merely providing administrative support in favour of the GE’s client and was not itself assuming the risk undertaken in an independent third-party guarantee transaction. Since the PE bore no risk in such cases, the pricing of such transaction could not be equated with the pricing of a guarantee independently issued by the PE to an unrelated party in India.

6.14. Without prejudice to the above, the Ld. Sr. Counsel submitted that even if the guarantee commission charged by the PE to third-party clients were to be taken as a starting point, the average commission rate charged to such third-party clients worked out to 0.56%, and after reducing therefrom the 0.10% processing fee already recovered by the PE from the related party, the net differential would come to 0.46%. On this basis, it was submitted that the adjustment, if at all warranted, would work out only to Rs.65,80,286/- as against the addition of Rs.72,84,851/-made by the Ld.TPO.

6.15. On the contrary, the Ld.DR relied on the orders passed by the authorities below.

We have perused the submissions advanced by both sides in light of the records placed before us.

7. The Ld.Sr.Counsel primarily contended that, the guarantee commission charged to unrelated third parties in the domestic market cannot be adopted as an internal CUP for benchmarking the corporate guarantee extended to its AE, since the guarantees issued to third parties are backed by adequate collateral security, thereby materially reducing the risk assumed by the assessee. It is, therefore, contended that the transactions are not strictly comparable.

7.1. Though the aforesaid contention merits consideration, we do not consider it necessary to adjudicate the same in the present case in view of the alternate plea raised by the assessee. We find from the material placed on record that the average guarantee commission earned by the assessee from unrelated third parties works out to 0.56% of the guarantee amount. It is also an admitted position that the assessee has already recovered guarantee commission at the rate of 0.10% from its AE. The Revenue has not disputed either the working of the average commission rate or the factum of recovery of commission at 0.10%.

7.2. Once the internal CUP adopted by the Ld.TPO is accepted as the basis for benchmarking, the arm’s length adjustment can only be confined to the difference between the arm’s length rate so determined and the commission already recovered by the assessee from its AE. The Ld.TPO was, therefore, not justified in making an adjustment without granting credit for the commission already charged by the assessee. The object of the transfer pricing provisions is to determine the arm’s length price of the international transaction and not to disregard the consideration actually received by the assessee.

7.3. In the facts of the present case, therefore, even assuming that the average guarantee commission of 0.56% represents the arm’s length rate, the adjustment, if any, could only be restricted to the differential rate of 0.46%, being the difference between 0.56% and 0.10% already recovered from the AE. We accordingly direct the Ld.AO/TPO to recompute the adjustment by restricting the guarantee commission adjustment to 0.46% of the value of the corporate guarantee, after verifying the computation furnished by the assessee. The alternate ground of the assessee is accordingly allowed.

Accordingly, this ground raised by the assessee stands partly allowed.

8. Ground Nos. 6 to 10 raised by the assessee relate to the action of the Ld. AO in treating the notional income arising on cancellation of foreign exchange forward contracts amounting to Rs.58,32,98,553/- as chargeable to tax under the head “Income from Other Sources”, instead of assessing the same under the head “Capital Gains”.

8.1. Brief facts leading to this issue are that during the year under consideration, the assessee entered into foreign exchange forward contracts to hedge its foreign exchange exposure in respect of investments made in India. The assessee earned gains of Rs.58,32,98,553/- on cancellation of such foreign exchange forward contracts. The said gains arose on account of the difference between the forward rate stipulated in the contracts cancelled and the spot rate prevailing on the respective dates of cancellation.

8.2. While computing its income, the assessee treated the aforesaid gains as falling under the head “Capital Gains” and claimed the same to be non-taxable in India in terms of Article 13(4) of the India-Singapore DTAA. It was submitted that the forward contracts had been entered into in accordance with RBI Master Circular No. 06/2009-10, whereby Foreign Institutional Investors (FIIs), such as the assessee, were permitted to hedge the market value of their entire investment in equity shares and/or debt securities held as on a particular date. It was contended that since the investments in Indian securities constituted capital assets in the hands of the assessee, any gain arising in relation thereto, including gains on cancellation of the hedging contracts, partook the character of capital gains.

8.3. In support of the above contention, the assessee placed reliance on the decision of the Coordinate Bench of the Tribunal in Citicorp Banking Corporation Bahrain v. ADIT reported in 2011 -TII-40-ITAT-MUM- INTL) and also on the decision of the Coordinate Bench in Credit Suisse (Singapore) Ltd. v. Asstt. DIT (International Taxation) /53 SOT 306 (Mumbai) , wherein it was held that income/loss arising on cancellation of foreign exchange forward contracts entered into for hedging investments is assessable under the head “Capital Gains” and not under the head “Income from Other Sources.” Accordingly, the assessee submitted that the impugned forward contracts had been entered into solely for hedging its investments in India and, therefore, the resultant gains could not be assessed under any other head of income.

8.3. The Ld.AO, however, rejected the aforesaid contentions. According to the Ld.AO, the assessee neither furnished requisite details nor substantiated, despite specific opportunities, that the impugned forward contracts had been entered into for hedging its investments in India. The Ld.AO further observed that a forward exchange contract could not be regarded as a capital asset and that the transactions giving rise to the impugned gains were independent in nature. The Ld.AO was also of the view that, in terms of Article 13 of the India-Singapore DTAA, the impugned gains could not be characterised as capital gains since there was no alienation of any property. It was, therefore, concluded that the gains arising on cancellation of the forward contracts had no nexus with the transfer of a capital asset. Accordingly, the Ld.AO held that the amount of Rs.58,32,98,553/- was liable to be assessed under the head “Income from Other Sources.”

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A).

9. The Ld.CIT(A) observed that, by entering into the foreign exchange forward contracts, the assessee had not acquired any right in the nature of a capital asset. It was further observed that the hedging transactions undertaken by the assessee in respect of its investments in India did not result in the acquisition of any asset so as to constitute a capital asset within the meaning of the Act. Accordingly, concurring with the reasoning and findings of the Ld.AO, the Ld.CIT(A) upheld the action of the Ld.AO in assessing the gains arising on cancellation of the foreign exchange forward contracts under the head “Income from Other Sources.”

Aggrieved by the order od the Ld.CIT(A), the assessee preferred an appeal before this Tribunal.

10. Before us, the Ld. AR submitted that the assessee entered into foreign exchange forward contracts with its authorised dealer solely for the purpose of hedging the foreign exchange exposure arising from its investments in Indian securities. It was contended that, the underlying Indian securities were held by the assessee as capital assets and, therefore, any income arising therefrom was liable to be assessed under the head “Capital Gains.” The Ld.AR submitted that the forward contracts, being integrally connected with and entered into for hedging the capital investments, partook the same character as the underlying capital assets. Accordingly, any gain or loss arising on account of appreciation or depreciation in foreign currency pursuant to cancellation of such forward contracts was also required to be treated as capital in nature.

10.1. In support of the above submissions, the Ld. AR placed reliance on the decisions of the Coordinate Benches of the Tribunal in Citicorp Banking Corporation, Bahrain (supra) and Credit Suisse AG/Singapore (supra), wherein it was held that gains or losses arising on cancellation of foreign exchange forward contracts entered into for hedging capital investments are assessable under the head “Capital Gains.”

10.2. Per contra, the Ld.DR relied upon the orders of the authorities below and supported the findings recorded therein.

We have considered the submissions advanced by both sides in the light of the material available on record.

11. It is observed that the issue under consideration is no longer res integra. The Coordinate Bench of the Tribunal in Citicorp Banking Corporation, Bahrain (supra), while adjudicating an identical issue, has followed the decision of Hon’ble Special Bench Cochin Tribunal in Apollo Tyres Ltd. v. Asstt. CIT [2004] 89 ITD 235 (Delhi) as well as the decision of the Hon’ble Supreme Court in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC). The Coordinate Bench, while considering an identical issue in the case of Credit Suisse (Singapore) Ltd. (supra), has made the following categorical observations:-

“7. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute. The only issue before us is that the gains of Rs. 304,847,277/-on cancellation of foreign exchange forwarding contracts is a capital receipt liable to capital gain or to be assessed under the head income from other sources’.

8. In Citicorp Investment Bank (Singapore) Ltd. (supra) the Tribunal after considering the decision of the Special Bench of the Tribunal in the case of Apollo Tyres Ltd. (supra) relied on by the Id. D.R. and the decision of Citicorp Banking Corpn., (supra) has held vide para 4.4 of the order as under:

” The dispute raised before us is only with regard to the nature of income from early settlement of forward foreign exchange contract taken to safeguard the foreign exchange loan which had been availed by the assessee for purchase of debentures. The income from sale of debenture has been assessed as capital gain. Therefore, respectfully following the decision of the Tribunal in the case of sister concern Citicorp Bank Corporation, Bahrain (supra) we hold that gains arising from early settlement of forward foreign exchange contract has to be treated as capital gain. We accordingly set aside the orders of the CIT(A) and allow the appeals filed by the assessee.”

9. In Citicorp Banking Corpn., Behrain (supra), the Tribunal after following the decision of the Special Bench of the Tribunal in Apollo Tyres Ltd. (supra) and Sutlej Cotton Mills Ltd. v. CIT [1979] 116ITR 1 (SC) has held vide penultimate para of the order as under:-

“So far as the facts before us are concerned, nowhere it is controverted by both the authorities below that the dominant purpose for entering into foreign exchange forward contract by the assessee was for clearly to hedge against the depreciation of the foreign currency and it has direct nexus with the investments made by the assessee. It is also admitted fact that the assessee is not doing any business here and the assessee is FIl and only engaged in the investment and this fact is nowhere denied by both the authorities below. In our opinion, the loss accrued/arose on account of cancellation of foreign exchange forward contract is capital loss having direct nexus with the investment of the assessee and hence the assessee is entitled to set off the same. So far as the reference u/s. 115AD is concerned, in our opinion, the said section decide the quantum of the tax payable by the FIlS on the income from securities or capital gains and it has nothing to do with the determination of the nature of gain or loss, whether same is on account of capital or revenue account. Accordingly, grounds taken by the assessee are allowed.”

10. In All India Tea & Trading Co. Ltd. (supra) relied on by the Id. D.R., it has been held (Headnote):

“Held, that the assessee used the lands for agricultural purposes and derived agricultural income from the lands at the time of their requisition in 1949. The lands were being used by the landless people, after requisition, for agricultural purposes and were also deriving agricultural income from the lands at the time of their acquisition in 1959. Therefore, at all material times, the lands were agricultural lands and they were held by the assessee as owner although the assessee lost their physical possession in 1949 by requisition. Though the assessee was prevented from earning any agricultural income from the lands due to the requisition, the landless people by using the lands for agricultural purposes actually derived agricultural income from the lands in 1949, and at no point of time the agricultural lands became “capital assets” in the hands of the assessee. Therefore, the sum of Rs. 1,34,459 was exempt from capital gains tax.”

In the case before us the issue is entirely different, therefore, the decision relied on by the Id. D.R. is distinguishable and not applicable to the facts of the present case.

11. In the absence of any other distinguishing feature brought on record by the Id. D.R., we respectfully following the consistent view of the Tribunal (supra) hold that the gains arising on cancellation of foreign exchange forward contract has to be treated as capital gain and accordingly the A. O. and the DRP were not justified in treating the said gain as ‘income from other sources’. The grounds taken by the assessee are, therefore, allowed.

12. The next dispute is regarding is levy of interest u/s 234B of the Act.

13. At the time of hearing both the parties have not argued the above ground. This being so, we are of the view that the levy of interest u/s 234B of the Act is only consequential. The A.O. is directed to recompute the interest at the time of giving effect to this order. The grounds taken by the assessee are, therefore, partly

14. In the result, assessee’s appeal stands partly allowed.”

11.1. We also refer to the specific observations of the Coordinate Bench of the Tribunal in Citicorp Banking Corporation, Bahrain (supra), wherein the Tribunal, after an elaborate consideration of the manner in which foreign exchange forward contracts are entered into by Foreign Institutional Investors (FIIs), held as under:-

“4. We have heard the rival submissions of the parties and perused the records. The Ld. Counsel vehemently argued that the assessee is Foreign Institutional Investor and has no other activity in India. It is argued that forward contracts are entered into by the assessee solely for protecting its investment and it has a direct nexus with the investment made by the assessee. He further argues that the purpose for which the contract was entered into is the determinative whether the forward contract was on account of the capital asset or not account of any trading asset but as the assessee has entered into the forward contract for getting the cover of the risk for depreciation in the value of the foreign currency. Hence, if there is gain or loss the same is to be treated on capital account only. He also argued that the forward contracts are entered into to the extent of the investment made by the assessee, in other word, restricted to the investment cost and not beyond that and any loss in case on cancellation of foreign exchange forward contract; as in the case of the assessee; is to be allowed to be set off u/s.71 of the Act. Per contra, the Ld. D.R. supported the order of the A. O. So far as the facts are concerned, the same are not in dispute. The Ld. Counsel relied on the decision of the Hon’ble Special Bench of Delhi in the case of Apollo Tyres Ltd. v. ACIT 89 ITD 235 (Delhi) (SB) = (2004-TIOL-32-ITAT-DEL-SB). In the said case, the issue was in respect of the gain on the cancellation of the foreign exchange forward contract. In the said case, the assessee had entered into foreign exchange contract with a view to secure protection against the foreign liability. The Hon’ble Special Bench has discussed the modalities of the foreign exchange forward contract in detail and relying on the decisions of the Hon’ble Supreme Court in the case of Canara Bank Ltd. (supra), Sutlej Cotton Mills Ltd. (supra) and other plethora of decisions held as under:-

“16. In the light of the principles above referred to, we have no hesitation in holding that gains from cancellation of forward exchange contracts were capital receipt and did not arise from any business of dealings in foreign exchange or any adventure in the nature of trade. The forward contracts in the instant case were entered into by the assessee with the sole purpose of guarding against enhancement of liabilities in repayment of foreign loans due to exchange rate fluctuations. These loans have been raised for the purpose of acquisition of plant and machinery abroad and, therefore, gains arising from cancellation of the contract, to the extent these relate to principal amounts of outstanding loans would clearly fall in the capital field. The essential characteristic which stamp the character of a revenue nature on any transaction, namely, multiplicity of transactions, a prior association of business and the existence of a scheme, system and business operations are totally conspicuous by their absence in the present case before us. In our considered opinion the dominant intention, motive and purpose of entering into forward foreign exchange contracts and cancellation thereof were clearly to provide a hedging mechanism against enhancement of liabilities for repayment of foreign loans raised for the purpose of acquisition of capital asset by the assessee. The conduct of the assessee, as manifested in the facts and features of the case enumerated hereinabove does not reflect profit motive in entering into forward contracts and cancelling the same thereafter. The crucial date is 27-3-1992 when the Reserve Bank of India lifted the ban on cancellation of foreign exchange contracts since Liberalized Exchange Rate Management System had been introduced by the Government. In the instant case before us, contracts have substantially beer. booked prior to 27-3-1992 and with regard to these contracts profit motive possibly cannot be attributed to the assessee. Even with regard to contracts entered into and cancelled after 27-3-1992, we noticed that the transactions are a few in number and looking to the magnitude of the outstanding Dollar loan, the contracts entered into are only 6 in number out of which 2 have been cancelled during the year. Gains arising from these 2 contracts have been shown by the assessee as revenue receipt since these contracts relate to payment of interest liabilities on Dollar loans. The entire factual matrix of the case concerning the execution and cancellation of forward contracts does not in our opinion stamp the transaction with a business character. Merely because the assessee-company did not choose to roll over the contracts beyond 30-4-1992 would not alter the intrinsic nature of the contracts being in the capital field. If the contracts brought forward from the preceding year are accepted and acknowledged by the revenue authorities as being in capital account, mere cancellation on 30-4-1992 would not have denaturing’ effect and divest them of inherent capital nature particularly when cogent reasons have been cited by the assessee for cancellation, namely, the emerging trends of the international monetary market and revised Reserve Bank of India regulations permitting cancellation of forward foreign exchange covers. In the changed scenario, the assessee felt that the rupee currency may not depreciate in the future. The dominant motive, purpose and intention of the assessee was clearly to hedge against enhancement of rupee liability for repayment of foreign currency loans.”

5. So far as the facts before us are concerned, nowhere it is controverted by both the authorities below that the dominant purpose for entering into foreign exchange forward contract by the assessee was for clearly to hedge against the depreciation of the foreign currency and it has direct nexus with the investments made by the assessee. It is also admitted fact that the assessee is not doing any business here and the assessee is FIl and only engaged in the investment and this fact is nowhere denied by both the authorities below. In our opinion, the loss accrued/arose on account of cancellation of foreign exchange forward contract is capital loss having direct nexus with the investment of the assessee and hence the assessee is entitled to set off the same. So far as the reference u/s. 115AD is concerned, in our opinion, the said section decide the quantum of the tax payable by the FIIS on the income from securities or capital gains and it has nothing to do with the determination of the nature of gain or loss, whether same is on account of capital or revenue account. Accordingly, grounds taken by the assessee are allowed. “

Respectfully following the aforesaid decisions of the Coordinate Benches, we direct the Ld.AO to allow the claim of the assessee. Accordingly, the grounds raised by the assessee on this issue stand allowed.

12. It is an admitted position between the parties that the same issues arising in Assessment Years 2011-12 and 2012-13, as detailed in the table below, are common and identical to those adjudicated by us for Assessment Year 2010-11 in the preceding paragraphs. The details are as under:

Assessee’s appeal
Issue	AY 2010-11 (Ground Nos)	AY 2011-12 (Ground Nos)	AY 2012-13 (Ground Nos)
Interest received from H.O.	1	1	1
Applicability of TP provisions for transactions between HO/Overseas branches (General Enterprise) and Permanent Establishment	2	2	3
Global Pricing Policy for issuance of guarantee under the Counter Guarantee by GE	3-5	3-5	4
			2
Department’s appeal
Issue	AY 2010-11 (Ground Nos)	AY 2011-12 (Ground Nos)	AY 2012-13 (Ground Nos)
Interest received from H.O.	1	1	1
Guarantee Commission received from third party for extending guarantee.		2-5	3
Levy of surcharge and education cess.			2

12.1. Accordingly, respectfully following the view taken on the issues that are common with Assessment Year 2010-11, as discussed and tabulated hereinabove, the corresponding grounds raised by the assessee for Assessment Years 2011-12 and 2012-13 are decided mutatis mutandis in the same terms.

There are some grounds for assessment years 2011-12 & 201213 that needs to be considered independently as under

Revenue Appeal for Assessment year 2011-12:

13. Ground No.2-5 raised by the revenue is against the view of the Ld.CIT(A), in restricting the Guarantee commission to be fixed at 0,5% as against 1.01% fixed by the Ld.TPO.

13.1. We have considered the rival submissions and perused the material available on record. This issue has already been adjudicated by us while deciding Ground nos.3-5 in the assessee’s appeal for A.Y. 2010-11 in the preceding paragraphs. We have held therein that, even assuming the average guarantee commission earned by the assessee from unrelated parties at 0.56% is accepted as the appropriate benchmark, the transfer pricing adjustment can only be confined to the differential between such arm’s length rate and the commission of 0.10% admittedly recovered by the assessee from its Associated Enterprise. Accordingly, the adjustment, if any, could only be restricted to 0.46% of the value of the corporate guarantee.

13.2. We find support for the above view from the decision of Hon’ble Bombay High Court in CIT v. Everest Kento Cylinders Ltd. /378 ITR 57 (Bombay) , wherein the Hon’ble Court upheld the Tribunal’s determination of guarantee commission at 0.50% for a corporate guarantee extended to an Associated Enterprise and declined to interfere with the Tribunal’s findings, holding that no substantial question of law arose. The decision recognizes that the commission charged for a corporate guarantee to an Associated Enterprise cannot be equated with the commission charged by commercial banks and that determination of the arm’s length guarantee commission is essentially a matter of fact depending upon the nature of the transaction and the surrounding circumstances. The decision thus lends support to the proposition that a reasonable guarantee commission in respect of corporate guarantees ordinarily falls substantially below the rates charged by banks.

13.3. In the facts of the present case, however, we need not independently determine whether 0.50% or 0.56% represents the appropriate arm’s length rate, since the assessee itself has accepted, without prejudice, the average internal CUP of 0.56% and has demonstrated that commission at the rate of 0.10% has already been recovered from its Associated Enterprise. Therefore, applying the principle that transfer pricing adjustment is confined only to the shortfall between the arm’s length price and the price actually charged, we hold that the adjustment can only be restricted to the differential rate of 0.46%. Consequently, the direction of the Ld.CIT(A) restricting the adjustment by adopting 0.50% as the guarantee commission cannot be sustained to that extent. We accordingly direct the Ld.AO/TPO to recompute the adjustment by applying the differential rate of 0.46% after due verification of the computation.

Accordingly, these grounds raised by the Revenue stands partly allowed.

Assessee’s appeal for AY 2012-13

14. Ground No. 2 raised by the assessee for A.Y. 2012-13 pertains to the dispute of tax rate on interest received from the Department. The grievance of the assessee is against the action of the Ld. AO in taxing such interest at the rate of 42.024%, instead as against 15% in terms of Article 11 of the India-Singapore DTAA.

14.1. The brief facts are that the assessee, a tax resident of Singapore, during the year under consideration received interest of Rs. 1,50,75,489 under section 244A of the Act from the Department on refund of income-tax. In the return of income, the assessee offered the said interest to tax at the rate of 15% by invoking Article 11(2)(b) of the India-Singapore DTAA, contending that the receipt constituted ‘interest’ within the meaning of Article 11 and was accordingly taxable at the treaty rate.

14.2. The Ld.AO, rejected assessee’s claim. According to the Ld.AO, the interest received on income-tax refund was liable to be taxed at the rate applicable to the income attributable to the assessee’s PE in India and, accordingly, subjected the said interest to tax at the rate of 42.024%, instead of the treaty rate of 15% claimed by the assessee under Article 11 of the India-Singapore DTAA.

Aggrieved by the order of the Ld.AO, the assessee preferred appeal before Ld.CIT(A).

15. The Ld.CIT(A) after considering the submissions of the assessee held that the definition of “interest” contained in Article 11 (3) of the India-Singapore DTAA is exhaustive, as it employs the expression “means”. It was observed that interest received under section 244A of the Act on income-tax refund does not fall within the categories of debt-claims, Government securities, bonds or other instruments specifically covered by Article 11(3). The Ld.CIT(A) thus held that, such interest is outside the scope of Article 11 of the DTAA and, therefore, is not entitled to the concessional rate of tax prescribed therein. The Ld.CIT(A) further held that since Article 11 does not govern the impugned receipt, the same is taxable in India at the applicable domestic rate, and accordingly confirmed the action of the Ld.AO.

Aggrieved by the order of the Ld.CIT(A), the assessee preferred appeal before this Tribunal.

16. The Ld.Sr.Counsel submitted that the assessee had received interest of Rs. 1,50,75,489 under section 244A of the Act on refund of income-tax, which was offered to tax at the rate of 15% in accordance with Article 11(2)(b) of the India-Singapore DTAA. It was contended that the Assessing Officer erred in taxing the said interest at the rate applicable to the Permanent Establishment by treating the same as business profits.

16.1. The Ld.Sr.Counsel submitted that interest on income-tax refund constitutes “interest” within the meaning of Article 11 of the DTAA and that Article 11 (4) would have no application as the debtclaim giving rise to such interest is not effectively connected with the assessee’s PE in India. It was submitted that the liability to pay income-tax is that of the foreign enterprise and payment of such tax is merely an appropriation of profits; therefore, the subsequent refund together with interest cannot be regarded as being effectively connected with the PE either under the asset test or the activity test.

16.2. In support of the above proposition, the Ld.Sr.Counsel placed reliance on the decision of the Hon’ble Special Bench of Delhi Tribunal in Asstt. CIT v. Clough Engineering Ltd. [2011] 130 ITD 137 (Delhi) (SB) , which was subsequently approved by the Hon’ble Bombay High Court in DIT (IT) v. Credit Agricole Indosuez [2015] 377 ITR 102 (Bombay) . Reliance was also placed on the decision of the Hon’ble Bombay High Court in DHL Operations B.V. v. DDIT [IT Appeal No. 431 of 2012, dated 17.07.2014] and the decisions of the co-ordinate Benches in Bechtel International Inc. v. Asstt. DIT, International Taxation [2012] 135 ITD 377 (Mumbai), Hapag Lloyd Container Linie GmbH v. Asstt. DIT (International Taxation) (Mumbai)/[2011] 131 ITD 122 (Mumbai), International Global Networks BV v. Deputy DIT (International Taxation) (Mumbai)/[2012] 50 SOT 433 (Mumbai) and MSC Mediterranean Shipping Company, S.A. v. Deputy DIT (International Taxation) 154 ITD 478 (Mumbai), wherein it has been consistently held that interest on income-tax refund is taxable under Article 11 of the applicable DTAA and not as business profits attributable to a PE. It was thus prayed that the interest be directed to be taxed at the treaty rate of 15% under Article 11 of the India-Singapore DTAA.

16.3. On the contrary, the Ld.DR relied on the orders passed by the authorities below.

We have perused the submissions advanced by both sides in light of records placed before us.

17. The issue that needs to be considered is whether the interest received by the assessee under section 244A of the Act on refund of income-tax is liable to be taxed as “interest” under Article 11 of the India-Singapore DTAA at the rate prescribed therein or as business profits attributable to the Permanent Establishment in India.

17.1. The Ld.CIT(A) proceeded on the premise that the interest received under section 244A of the Act does not fall within the definition of “interest” contained in Article 11 (3) of the India-Singapore DTAA and, therefore, is not entitled to the concessional rate provided under Article 11(2). We are unable to subscribe to the such reasoning.

17.2. We find that identical issue came up for consideration before the Hpn’ble Special Bench of Delhi Tribunal in Clough Engineering Ltd.(supra). The Special Bench, after examining the scope of Article 11 of the India-Australia DTAA, held that although the refund of tax may arise on account of taxes deducted from the receipts of the PE, the liability to pay income-tax is that of the foreign enterprise and payment of tax is merely an appropriation of profits. Consequently, the debt-claim represented by the income-tax refund cannot be regarded as being effectively connected with the PE either under the asset test or the activity test. Hon’ble Special Bench, thus held that the interest on incometax refund is taxable under Article 11 of the treaty and not as business profits under Article 7.

17.3. The aforesaid principle has been expressly approved by Hon’ble Bombay High Court in Credit Agricole Indosuez(supra) . Hon’ble Court held that interest received on income-tax refund by a non-resident is not effectively connected with its PE and, therefore, cannot be assessed as business profits but is liable to be taxed as “interest” under the relevant Article of the applicable tax treaty. The same view has also been reiterated by Hon’ble Bombay High Court in DHL Operations B.V. (supra), wherein, following the decision of Hon’ble Special Bench in Clough Engineering Ltd. (supra), it was held that interest on income-tax refund is taxable under Article 11 of the applicable DTAA and not as business profits attributable to the Permanent Establishment.

17.4. In the present case, the Revenue has not brought on record any distinguishing feature so as to warrant a departure from the aforesaid binding precedents. Once it is held that the debt-claim giving rise to the interest on income-tax refund is not effectively connected with the assessee’s Permanent Establishment in India, the exclusion contained in Article 11(4) has no application. Consequently, the interest received under section 244A of the Act falls to be taxed under Article 11 of the India-Singapore DTAA.

17.5. Respectfully following the ratio laid down by Hon’ble Special Bench in Clough Engineering Ltd. (supra), as affirmed by Hon’ble Bombay High Court in Credit Agricole Indosuez (supra) and reiterated in DHL Operations B.V. (supra), we hold that the interest received by the assessee under section 244A of the Act is taxable under Article 11 of the India-Singapore DTAA. Accordingly, the assessee is entitled to the treaty rate of tax prescribed under Article 11(2)(b), and the Ld.AO is directed to recompute the tax liability by applying the said treaty rate.

Accordingly this ground raised by the assessee is accordingly allowed.

Revenue’s Appeal for Assessment year 2012-13

18. Ground No.2 raised by the revenue is on levy of surcharge and education cess as the assessee has PE in India and hence should be taxed according to the provisions of Income Tax Act 1961.

We have carefully considered the rival submissions and perused the order of the Ld.CIT(A).

18.1. The Ld.CIT(A) placed reliance on the decision of Hon’ble Kolkata Tribunal in DIC Asia Pacific Pte. Ltd. v. Asstt. DIT, International Taxation [2012] 52 SOT 447 (Kolkata) in ITA No.1458/Kol/2011 for holding that surcharge and education cess cannot be levied over and above the rate of tax prescribed under Article 11 of the India-Singapore DTAA. We find ourselves in agreement with the principle enunciated in the said decision. The rationale underlying the decision is that, where the applicable provision of the DTAA prescribes that the tax in the source State “shall not exceed” a specified percentage, such percentage represents the maximum tax that can be levied by the source State on the concerned income. Surcharge and education cess are not independent levies but constitute components of the income-tax payable under the Finance Act. Consequently, where the Treaty prescribes a ceiling on the rate of tax, surcharge and education cess cannot be levied in addition thereto, as such levy would result in the effective rate of tax exceeding the limit contractually agreed upon by the Contracting States.

18.2. Equally, the above principle cannot be extended to cases where the relevant Article of the DTAA does not itself prescribe any rate or ceiling of tax. Articles such as Article 7 merely allocate taxing rights and provide the basis for determination of profits attributable to a PE. In such cases, once the taxable income is determined in accordance with the Treaty, the rate of tax is governed by the provisions of the Income-tax Act read with the relevant Finance Act, including surcharge and health & education cess, unless the Treaty expressly provides otherwise. Thus, the applicability of surcharge and cess is dependent upon the nature of the charging provision under the DTAA and not merely upon the existence of a PE or the status of the assessee as a non-resident.

In the present case, the Ld.AO is directed to apply the tax rates as per the principle laid down herein above.

Accordingly, this ground raised by the revenue stands partly allowed.

In the result, appeal filed by assessee and revenue for all the years under consideration stands partly allowed.