2014 (7) TMI 1 - AT - Income Tax

Applicability of rate of tax on foreign company Held that - Following M/s. Credit Lyonnais (through their successors Calyon Bank) and Others Versus The Asstt. Director of Income-tax (International Taxation) - 1(2) And Others 2013 (5) TMI 639 - ITAT MUMBAI as it has already been decided against the assessee thus, the ground of the appeal is dismissed Decided against Assessee. Disallowance of loss on valuation of securities Held that - CIT(A) has decided the issue against the assessee and resultantly there was no occasion for the Revenue to challenge the same - it is simple and plain that when deduction has been allowed on account of loss arising on revaluation of investments in earlier years, the subsequent write back of the same amount cannot escape taxation - the amount is chargeable to tax - the loss on valuation of securities was held to be allowable in the earlier years, therefore, the subsequent write back of the amount cannot be allowed and is chargeable to tax the AO is directed to ensure that the same amount is not tax twice. Transfer pricing adjustment - Fee or commission for the services performed towards foreign currency loans granted by the overseas branches Held that - The role of the assessee in the transactions of foreign currency loan under ECB was to provide financial analysis of the borrowers, general market conditions and regulatory environment - the role of the assessee is not merely facilitation of conclusion of loan agreement or signing thereof but the services provided by the assessee are the core-basis for taking the decision of granting the loan by the syndicate - The assessee provided the services regarding clients creditability analysis, its capacity so as to consider the capacity to repay the loan and risk involved in the loan transaction - the role of the assessee in providing such a crucial service is inevitable for taking the decision of providing loan and as such cannot be said to be a mere facilitation of conclusion of the loan agreement or signing. The TPO as well as CIT(A) has not brought out any comparable for determination of the arms length price but took the total income comprising interest as well as other fees charged by the foreign branches for allocation/attribution to the assessee - the ALP has not been determined by taking into consideration uncontrolled similar transaction - the interest cannot be taken into account for attribution of income towards service charges/fees - only the fee charged by the foreign branches can be taken into consideration for making adjustment under transfer pricing provisions - the AO/TPO is directed to make adjustment in respect of the services performed by the assessee for foreign currency loan arranged for its existing clients by taking into account only the fee and other charges received by the foreign branches from the borrowers - none of the parties have come out with the suitable comparables, the estimation made by the CIT(A) at the rate of 20% is just and proper Decided partly in favour of Assessee. Expenditure attributable to tax exempt income Held that - As decided in assessee s own case for the earlier assessment year, it has been rightly held by the CIT(A) that the assessee had sufficient interest free funds available with its disposal for making investment in such tax free securities/shares from which dividend income was earned - the assessee has made investment in such securities/shares from which exempt income was earned, out of its own interest free funds, there can be no disallowance u/s 14A - the AO did not make any disallowance on account of other expenses in relation to exempt income, there cannot be any question of sustaining any such disallowance when the AO himself has not made it Decided against Revenue.

Issues Involved:
1. Rate of tax applicable to the assessee.
2. Taxability of interest received on Nostro Account and overseas placements.
3. Deduction for interest paid to Head Office/Overseas branches.
4. Disallowance of loss on valuation of securities.
5. Levy of interest under Section 234D.
6. Invoking provisions of section 92CA (Transfer Pricing).
7. Transfer Pricing adjustment on account of fee or commission for services performed towards foreign currency loans.
8. Addition on account of interest received by the assessee on call placements with Head Office/overseas branches.
9. Deleting the disallowance of expenditure attributable to tax-exempt income.
10. Allowing the claim of loss on revaluation of unmatured forex contracts.
11. Deduction for commission for twelve months.
12. Addition on account of arm's length price on international transactions.
13. Interest charged by the assessee on funds placed with Head Office and Overseas Branches.
14. Deduction on deferred expenses on mobilization of deposits under Indian Millennium Deposit Scheme (IMDS).

Detailed Analysis:

1. Rate of Tax Applicable to the Assessee:
The Tribunal consistently decided against the assessee in earlier years, confirming that the business income is chargeable to tax at the rate applicable to foreign companies (48%). This ground of the assessee's appeal was dismissed.

2. Taxability of Interest Received on Nostro Account and Overseas Placements:
The assessee did not press this ground, and it was dismissed. However, the Tribunal allowed the deduction for interest paid to the Head Office/overseas branches, following the precedent set in the assessee's own case for the assessment year 2001-02.

3. Deduction for Interest Paid to Head Office/Overseas Branches:
The Tribunal allowed the deduction for interest paid to the Head Office/overseas branches, as the assessee accepted the taxability of interest received on Nostro account and overseas placements.

4. Disallowance of Loss on Valuation of Securities:
The authorities below disallowed the claim on the ground of hypothetical loss. However, since the claim was allowed in full in the earlier year and the issue is pending before the High Court, the Tribunal directed the AO to ensure the amount is not taxed twice.

5. Levy of Interest under Section 234D:
The Tribunal confirmed the levy of interest under Section 234D, referencing the jurisdictional High Court decision in CIT Vs. Indian Oil Corporation Limited, which applies to assessments completed after 1-6-2003.

6. Invoking Provisions of Section 92CA (Transfer Pricing):
The assessee did not press this ground, and it was dismissed.

7. Transfer Pricing Adjustment on Account of Fee or Commission for Services Performed Towards Foreign Currency Loans:
The Tribunal held that the role of the assessee in providing financial analysis and regulatory environment information is crucial for loan decisions, thus not merely facilitating loan agreements. The Tribunal directed the AO/TPO to make adjustments considering only the fee and charges other than interest received by the foreign branches, and upheld the CIT(A)'s estimation of 20% as just and proper.

8. Addition on Account of Interest Received by the Assessee on Call Placements with Head Office/Overseas Branches:
The Tribunal dismissed the additional ground raised by the assessee, upholding the TPO's application of the LIBOR rate for determining the arm's length price of interest.

9. Deleting the Disallowance of Expenditure Attributable to Tax-Exempt Income:
The Tribunal dismissed the revenue's appeal, following the precedent that the assessee had sufficient interest-free funds for making investments in tax-free securities/shares.

10. Allowing the Claim of Loss on Revaluation of Unmatured Forex Contracts:
The Tribunal decided this issue in favor of the assessee, following the precedent set in earlier years.

11. Deduction for Commission for Twelve Months:
The Tribunal allowed this ground in favor of the revenue, noting that the entire expenditure was allowed for the assessment year 2001-02, thus not allowable for the year under consideration.

12. Addition on Account of Arm's Length Price on International Transactions:
The Tribunal dismissed the revenue's appeal, following its findings in the assessee's appeal for the assessment year 2002-03.

13. Interest Charged by the Assessee on Funds Placed with Head Office and Overseas Branches:
The Tribunal dismissed the revenue's appeal, noting that the corrected amount computed and accepted by the CIT(A) was not controverted by the revenue.

14. Deduction on Deferred Expenses on Mobilization of Deposits under Indian Millennium Deposit Scheme (IMDS):
The Tribunal decided this issue against the assessee, noting that the full claim was allowed in the earlier year, thus no deduction can be allowed for the year under consideration.

Conclusion:
The Tribunal disposed of the appeals and cross objections by considering precedents and relevant material on record, providing detailed reasoning for each decision. The appeals of the assessee and department were partly allowed, and the cross objection of the assessee was allowed for statistical purposes.

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