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2013 (8) TMI 175 - AT - Income TaxDeduction of Staff costs and Specific expenses incurred by the head office on behalf of the assessee - whether such expenses were not covered by the expenses mentioned u/s 44C? - Held that - These amounts ought to have been included in the overall Head office expenses deductible u/s 44C as canvassed on behalf of the Revenue is not acceptable as section 44C does not cover exclusive expenses incurred by the Head office for a particular branch. Rather, it embraces the allocation of common head office expenses defined in Explanation (iv) to section 44C amongst various branches. See CIT VS. Emirates Commercial Bank Ltd. (2003 (4) TMI 2 - BOMBAY HIGH COURT ), Addtl. DIT (IT) Vs. Bank of Bahrain & Kuwait (2011 (1) TMI 923 - ITAT, MUMBAI ) and JCIT VS. American Express Bank Ltd. (2012 (8) TMI 371 - ITAT MUMBAI). Since the claim of the assessee in the present case expenses were incurred by the head office exclusively for the Indian branch, could not be controverted on behalf of the Revenue, thus theses expenses have been rightly held to be allowable in full without being covered under head office expenses as provided for in section 44C. Against assessee. Exemption u/s 10 in respect of tax free bonds - Departmental appeal against allowing exemption - Held that - As the investment in tax free bonds was made in an earlier year and there is no current fresh investment in any bonds fetching exempt income no interest can be disallowed u/s 14A. In so far as the disallowance of Operating expenses made by the A.O. is concerned, the AO made it on a proportionate basis by taking the figure of operating expenses from Profit and loss account and then apportioning it in the ratio of total interest earned as to interest of 9.5% tax free bonds. This does not appear to be a correct basis for apportionment. At the same time, it is noticed that the CIT(A) has also not given any reasons for deleting such disallowance. As in the case of Credit Lyonnais (2012 (12) TMI 640 - ITAT MUMBAI ), the tribunal has directed to curtail the disallowance for operating expenses at the rate of 2% of the exempt income. Following the precedent, AO directed to restrict the disallowance accordingly. Addition on account of transfer pricing adjustment - Revenue s appeal is against the deletion of addition - Held that - Each LIBOR contributor panel bank formulates its own rate for a day which is put into the application which links directly to a rate setting team at Thomson Reuters. LIBOR is not a rate in itself which is charged or paid for the user of inter bank deposits. It is only an average of the rates submitted by various panel banks, after exclusion of four each of highest and lowest responses, which is daily reported at 11 30 a.m.. It is required to be considered as arithmetical mean of such prices, thereby making available the option of plus minus 5% variation to the assessee. As the present addition of Rs.50,476 made by the AO was the outcome of not allowing plus minus 5% cushion, which is richly due to the assessee CIT(A) was justified in deleting this addition. Allowance of deduction of head office expenses - Held that - As there is sufficient material justifying the payment made to head office to the tune of Rs.2.12 crore attributed by the head office to the Indian branch, against which the assessee claimed deduction to the permissible extent u/s 44C of Rs.98.98 lakh, we are of the considered opinion that no interference is warranted in the impugned order on this issue. Charging of interest u/s 234D - selection of date from which it will be charged - Held that - Legislature cannot be considered as oblivious of the fine distinction between the date of grant of refund and the date of receipt of refund as the first refers to the date on which refund is issued, the second refers to the date on which it is actually received by the assessee. The legislature in its wisdom has employed the expression date of receipt in several sections, such as section 155(8A) before its omission and certain sections providing exemption under the head Capital gains . To claim that the date of receipt of refund should be reckoned as a starting point instead of the date of grant of refund would amount to doing violence to the unambiguous language of the provision. As it is the expression date of grant of refund which has been employed u/s 234D, which in the present case is 29.10.2004, the interest has been rightly charged from this date. This ground is, therefore, not allowed.
Issues Involved:
1. Deduction of Staff Costs and Specific Expenses under Section 44C. 2. Loss on Revaluation of Foreign Exchange Contracts. 3. Exemption under Section 10 for Tax-Free Bonds. 4. Transfer Pricing Adjustment on Interest Income. 5. Deduction of Head Office Expenses. 6. Charging of Interest under Section 234D. Detailed Analysis: 1. Deduction of Staff Costs and Specific Expenses under Section 44C: The first issue concerns the deductibility of Staff costs of Rs.16,66,659 and Specific expenses of Rs.21,977 incurred by the head office on behalf of the Indian branch of the Development Bank of Singapore. The Commissioner of Income-tax (Appeals) allowed these expenses in full, holding that they were not covered by Section 44C, which pertains to the allocation of common head office expenses among various branches. The Tribunal upheld this view, citing the jurisdictional High Court's decision in CIT vs. Emirates Commercial Bank Ltd., which clarified that Section 44C does not cover exclusive expenses incurred for a specific branch. Therefore, the expenses were rightly held to be deductible in full. 2. Loss on Revaluation of Foreign Exchange Contracts: The second issue is the allowance of a loss of Rs.3,88,12,817 on account of the revaluation of foreign exchange contracts. Both parties agreed that this issue had been consistently decided in favor of the assessee in earlier years. The Tribunal followed these precedents and upheld the Commissioner of Income-tax (Appeals)'s order, allowing the loss. 3. Exemption under Section 10 for Tax-Free Bonds: The third issue involves the exemption of Rs.66,50,000 under Section 10(15) for interest income from tax-free bonds. The Assessing Officer had reduced the exemption to Rs.13,18,463 after apportioning expenses incurred for earning such tax-free income. The Tribunal noted that the Mumbai bench had previously held that exemption under Section 10(15) is available on the gross amount of interest. The Tribunal upheld the exemption on the gross interest amount of Rs.66,50,000 but directed the Assessing Officer to restrict the disallowance of operating expenses to 2% of the exempt income, amounting to Rs.1,33,000. 4. Transfer Pricing Adjustment on Interest Income: The fourth issue concerns a transfer pricing adjustment of Rs.50,476 on interest income from loans to associated enterprises. The Transfer Pricing Officer (TPO) had rejected the assessee's claim of a +-5% adjustment to the LIBOR rate, leading to the addition. The Tribunal held that LIBOR should be considered as the arithmetical mean of rates from various banks, allowing the +-5% adjustment. Thus, the Tribunal upheld the deletion of the addition by the Commissioner of Income-tax (Appeals). 5. Deduction of Head Office Expenses: The fifth issue is the deduction of head office expenses amounting to Rs.99,93,000. The TPO had determined the Arm's Length Price (ALP) of these expenses at Nil due to a lack of documentary evidence. However, the Tribunal found that the assessee had provided sufficient evidence, including bills and details of expenses, justifying the payment. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s order, allowing the deduction to the extent permissible under Section 44C. 6. Charging of Interest under Section 234D: The final issue is the charging of interest under Section 234D. The assessee contended that interest should be charged from the date of actual receipt of the refund, while the Revenue argued it should be from the date of grant of the refund. The Tribunal held that the interest should be charged from the date of grant of the refund, as specified in Section 234D. Therefore, the interest was rightly charged from 29.10.2004. Conclusion: The Tribunal partly allowed the Revenue's appeal and dismissed the assessee's cross-objection. Key decisions included upholding the full deduction of staff and specific expenses, allowing the loss on revaluation of foreign exchange contracts, confirming the exemption on gross interest from tax-free bonds, permitting the +-5% adjustment to the LIBOR rate for transfer pricing, allowing the head office expenses deduction, and affirming the charging of interest from the date of grant of the refund under Section 234D.
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