2014 (7) TMI 465 - AT - Income Tax

Addition of interest fee and commission ECG granted by overseas branches Held that - Following M/s Credit Lyonnais Versus ADIT(International Taxation) 2014 (7) TMI 1 - ITAT MUMBAI - 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 adjustment in respect of fee and other charges received by the foreign branches on the borrowers of ECG should be estimated @ 20% - Decided partly in favour of Assessee. Claim of loss in re-valuation - Outstanding foreign exchange contracts Held that - Held that - CIT Versus M/s Woodward Governor India P. Ltd. & M/s Honda Siel Power Products Ltd. 2009 (4) TMI 4 - SUPREME COURT assessee entitled to adjust the actual cost of imported assets at each balance sheet date - Decided against Revenue. Disallowance of expenses u/s 14A r.e Rule 8D of the Act Earning of exempt income Held that - Rule 8D is not applicable for the AYs prior to 2008-09, relying upon Godrej & Boyce Mfg. Co. Ltd. v/s DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT - some reasonable basis has to be adopted, for the purpose of disallowance - the Tribunal has already held that 2% of the total exempt income should be disallowed for the purpose of section 14A, which will take care of administrative expenses, the disallowance u/s 14A, should be restricted to 2% of the exempt income earned by the assessee Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of expenditure under section 14A.
2. Taxability of interest received on Nostro account and overseas placements.
3. Deduction of interest paid to the head office/overseas branch.
4. Deduction in respect of deferred expenditure on mobilisation of Indian Millennium deposit scheme.
5. Re-computation of profit or loss on securities sold.
6. Applicability of transfer pricing provisions for transactions between Head Office and Permanent Establishment.
7. Addition towards interest free and commission with reference to external commercial borrowings.
8. Addition on account of interest received on call placement with the head office.
9. Charging of business income at the rate applicable to foreign companies.
10. Claim of loss in valuation of unmatured contracts.

Detailed Analysis:

1. Disallowance of Expenditure under Section 14A:
The Tribunal noted that the assessee earned interest on investments in NABARD/REC bonds, which were claimed as exempt. The Assessing Officer disallowed Rs. 3,57,96,178, while the Commissioner (Appeals) enhanced it to Rs. 3,62,76,585 using rule 8D. The Tribunal held that rule 8D is not applicable for assessment years prior to 2008-09, as per the Jurisdictional High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v/s DCIT. Following the precedent, the Tribunal restricted the disallowance to 2% of the exempt income.

2. Taxability of Interest on Nostro Account and Overseas Placements:
The assessee did not press this ground, and it was dismissed as "not pressed."

3. Deduction of Interest Paid to Head Office/Overseas Branch:
The Tribunal admitted and allowed the additional ground raised by the assessee for the deduction of Rs. 37,039, consistent with the Tribunal's decision in the assessee's own case for earlier years.

4. Deferred Expenditure on Indian Millennium Deposit Scheme:
The assessee did not press this ground, and it was dismissed as "not pressed."

5. Re-computation of Profit or Loss on Securities Sold:
The Tribunal noted that this issue did not arise in the current year as relief had already been allowed in earlier years. Hence, this ground was rejected.

6. Transfer Pricing Provisions for Transactions Between Head Office and Permanent Establishment:
The assessee did not press these grounds (Grounds 5, 6, and 7), and they were dismissed as "not pressed."

7. Addition Towards Interest Free and Commission with Reference to External Commercial Borrowings:
The Tribunal followed its earlier decision, holding that the adjustment should be made by taking into account only the fee and other charges received by foreign branches from the borrowers of ECB at an estimated rate of 20%. Thus, this ground was partly allowed.

8. Addition on Account of Interest Received on Call Placement with Head Office:
The assessee did not press this ground, and it was dismissed as "not pressed."

9. Charging of Business Income at the Rate Applicable to Foreign Companies:
The Tribunal followed its earlier decision and held that the business income of the assessee should be charged at 41%, the rate applicable to foreign companies in that year. Hence, this ground was dismissed.

10. Claim of Loss in Valuation of Unmatured Contracts:
The Tribunal upheld the decision of the Commissioner (Appeals), who allowed the assessee's claim following the decision of the Tribunal in Deutsche Bank and the Hon'ble Supreme Court in Woodward Governor India Pvt. Ltd. Thus, the ground raised by the Revenue was dismissed.

Conclusion:
The assessee's appeals for the assessment years 2004-05 and 2005-06 were partly allowed, while the Revenue's appeals for the same assessment years were dismissed. The Tribunal's decisions were consistent with its earlier rulings in the assessee's own cases for previous years.