2014 (3) TMI 1158 - AT - Income Tax

Disallowance of interest paid to Head Office/overseas branches by invoking the provision of section 40(a)(i) - HELD THAT - As relying on SUMITOMO MITSUI BANKING CORPORATION VERSUS DEPUTY DIRECTOR OF INCOME-TAX, (IT) , RG. 2 (1) , MUMBAI 2012 (4) TMI 80 - ITAT MUMBAI we decide this issue in favour of the assessee and against the revenue. Disallowance u/s.14A of interest and operating expenses in terms of rule 8D - HELD THAT - As stated by the assessee that the investment in question is the same as for the Assessment year 2001-02 and there is no change in the facts and circumstances. There is no change in the facts and circumstances for the year under consideration and for the assessment year 200102, in respect of the investment then no disallowance on account of interest is called for, when the assessee was having its own interest free fund for making investment in securities. As regards the disallowance of operating/ administrative expenses, by following earlier order of this Tribunal, we restrict disallowance at 2% of exempt income. Taxability of the profit arising on revaluation of the unmatured forward forex contracts - HELD THAT - . Having regard to the facts that the loss on revaluation of unmatured forward forex contracts has been allowed by this tribunal in the earlier years i.e. 1998-99 then the natural corollary would be that the profit arising on revaluation of the unmatured forward forex contract is liable to be taxed as income. Accordingly, we dismiss this ground of the assessee. Disallowance of the data processing charges by the AO by classifying them to be royalty and invoking provision of section 40(a)(i) - HELD THAT - Following the earlier orders of this tribunal, we set aside this issue to the record of the Assessing Officer to consider deductibility of this amount as per the provisions of the Act including section 44C. Addition of TP adjustment in respect of interest received on call placement - HELD THAT - In identical issue has been considered by the Tribunal in case of group concern name M/s. Credit Lyonnais (through their successors Calyong Bank) 2014 (7) TMI 1 - ITAT MUMBAI held when the assessee has accepted the taxability as interest received on Nostro account and overseas placements, then as decided by this Tribunal in assessee s own case, the natural consequential effect would be the claim of assessee regarding interest paid to the head office/overseas branches, is allowable deduction. Disallowance of interest and commission by the TPO in respect to ECB advance to Indian borrowers - HELD THAT - As it is clear from the earlier order of this tribunal 2014 (7) TMI 1 - ITAT MUMBAI that the benefit of para 4 of the protocol between India and France does not apply as assessee has rendered the key services for taking decision of granting loan by the syndicate of Banks to the Indian borrowers, however as it was found that the TPO made the adjustment without considering any comparable. By following earlier orders of this Tribunal, we direct the AO/TPO 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 excluding interest received by the foreign branches from the borrowers in question by applying the rate of 20% as accepted in the earlier order. Accordingly, this ground is partly allowed. Rate of tax applicable to the assessee s income - HELD THAT - This issue has been considered and decided by the Tribunal in the assessee s own case for assessment year 2001-02 as held we find that the CIT(A) has sustained the order of the AO by applying rate of tax @ 48%, instead of 35% as asked for by the assessee. Now that the assessee has accepted that the coordinate Bench of Kolkata has dealt with the issue and for the reasons mentioned therein, the AR accepts the rate as applied by the AO. We also find that there is no infirmity in the order of the revenue authorities, which we sustain - we decide this issue against the assessee that the rate of tax applicable on the assessee s income is 48%. Deduction of expenses u/s.37(1) - disallowance incurred by the HO on credit risk assistance - HELD THAT - As decided in M/S. AMERICAN EXPRESS BANK LIMITED 2012 (8) TMI 371 - ITAT MUMBAI held that Departmental Representative was fair enough to concede that it was covered against the Revenue. TP adjustment on account of interest received on call placements - HELD THAT - The rate of interest received by the assessee was found by the CIT(A), within the tolerance limit of /- 5% of arms length price determination by the TPO and accordingly the benefit of proviso to section 92C(2) was given to assessee. We found no error in the order of the CIT(A) qua this issue when the interest charged by the assessee is within the tolerance range of the arms length price determined by TPO. Disallowance of provision toward country risk - AO disallowed the claim of deduction as this was not an actual return of bad debts, but only a provision was made as per the guidelines of the RBI therefore, in view of the first proviso to section 36(1)(viia)(a) of the Act no deduction is allowable to a foreign banking company - HELD THAT - CIT(A) has confirmed disallowance made by the AO, when the assessee itself has fairly conceded that this issue is now covered against the assessee by the decision of special bench of this Tribunal in case of NEW INDIA INDUSTRIES LIMITED. VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX. 2007 (10) TMI 325 - ITAT DELHI-F and Ahmedabad and Gujarat Gas Financial Services Ltd. 2008 (9) TMI 447 - ITAT AHMEDABAD Disallowance made u/s.14A - HELD THAT - We direct the AO to tax the interest received on Nostro account balances and consequently the disallowance made u/s.14A is deleted. Disallowance of provision in respect of non performing assets - HELD THAT - O has disallowed the claim of the assessee because it was found as a provision for NPA. As far as the allowbility of the claim for the provision for NPA is concern, it is settle proposition that the same cannot be allowed. The ld. AR has relied upon the decision of Hon ble Supreme Court in case of Vijaya Bank (supra) however, when the provision in question is for NPA and not for Bad debts then in view of the decision of Hon ble Supreme Court in case of Southern Technology Ltd. Vs. JCIT 2010 (1) TMI 5 - SUPREME COURT , provision for NPA is not a allowable claim. Accordingly, this issue is decided against the assessee. Non allowbility of deduction u/s.36(1)(viia)(b) - HELD THAT - We note that this issue is connected with the issue of disallowance of provision for non performing asset. As the issue of disallowance of non performing asset has been decided against the assessee, therefore, this issue is also decided against the assessee. TP adjustment in respect of credit risk assistance expense charged by HO to the Indian Branch for providing assistance in doing credit risk analysis for the Indian entity - HELD THAT - Since no material has been product to show that this expenditure as claimed by the assessee separately is for the exclusive and dedicated work/service done by the HO to the assessee. Further there is no explanation by the assessee as on what basis this expenditure is charged by HO. Therefore, this issue cannot be decided in the absence of complete fact as whether the Head Office has charged this expenditure on the basis of man hour or dedicated desk was assigned for this purpose exclusively for the service of the assessee. The assessee has also not filed any certificate from the auditor of the Head Office in support of this claim. Accordingly, we set aside this issue to record of the AO/TPO to examine the facts properly and the evidence to be filed by the assessee in support of this claim. The assessee is directed to file relevant evidence and certificate from the auditor of the Head Office to show that the payment has been made towards the dedicated exclusive service rendered by the Head Office to the assessee. Accordingly this ground is allowed for statistical purpose. Chargeability of interest under section 234D - HELD THAT - We have heard learned DR as well as learned AR and considered relevant material on record. At the outset, we note that this issue is now covered against the assessee by the decision of Hon ble Bombay High Court in case of CIT vs. IOC 2012 (9) TMI 517 - BOMBAY HIGH COURT . Accordingly, this issue is decided in favour of the Revenue against the assessee.

Summary

Issues Involved:
1. Taxability of interest received from Head Office/overseas branches.
2. Disallowance of interest paid to Head Office/overseas branches under section 40(a)(i).
3. Application of Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and France.
4. Disallowance under section 14A for expenses related to earning tax-free income.
5. Taxability of profit arising from revaluation of unmatured forward forex contracts.
6. Disallowance of data processing charges as 'royalty' under section 40(a)(i).
7. Treatment of the Head Office and Indian branch as 'associated enterprises' under section 92.
8. Transfer Pricing adjustment on interest received on call placements.
9. Transfer Pricing adjustment for services related to External Commercial Borrowings (ECB).
10. Applicable tax rate on the appellant's income.
11. Deduction of expenses incurred by the Head Office.
12. Disallowance of provision towards country risk.
13. Disallowance of provision for Non-Performing Assets (NPA).
14. Deductibility of Voluntary Separation Plan/Voluntary Retirement Scheme expenses.
15. Chargeability of interest under section 234D.

Detailed Analysis:

1. Taxability of Interest Received from Head Office/Overseas Branches:
The assessee did not press this ground and agreed to pay tax on the interest received from its Head Office/overseas branches. Consequently, this ground was dismissed as not pressed.

2. Disallowance of Interest Paid to Head Office/Overseas Branches Under Section 40(a)(i):
The Tribunal noted that this issue was covered in favor of the assessee by the Special Bench decision in Sumitomo Mitsui Banking Corpn. v. DDIT (136 ITD 66). Following this precedent, the Tribunal allowed the deduction for the interest paid to the Head Office/overseas branches.

3. Application of Article 12 of the DTAA:
The CIT(A) erred in applying Article 12 of the DTAA and charging tax on 10% of the interest paid to the Head Office/branches. The Tribunal held that the provisions of Article 12 were not applicable as both the assessee and its Head Office were residents of the same Contracting State (France).

4. Disallowance Under Section 14A:
The Tribunal noted that the assessee had sufficient interest-free funds for investment, and no disallowance was warranted on account of interest expenditure under section 14A. However, the disallowance on account of operating expenses was restricted to 2% of the exempt income.

5. Taxability of Profit Arising from Revaluation of Unmatured Forward Forex Contracts:
The Tribunal held that since the loss on revaluation of unmatured forward forex contracts was allowed in earlier years, the profit arising from such revaluation was liable to be taxed as income.

6. Disallowance of Data Processing Charges as 'Royalty' Under Section 40(a)(i):
The Tribunal found that the data processing charges paid to the Head Office did not constitute 'royalty' and should be treated as head office expenses. The matter was remanded to the AO to consider the deductibility of the amount as per the provisions of section 44C.

7. Treatment of the Head Office and Indian Branch as 'Associated Enterprises':
The assessee did not press this ground, and it was dismissed as not pressed.

8. Transfer Pricing Adjustment on Interest Received on Call Placements:
The Tribunal upheld the CIT(A)'s decision that the interest charged by the assessee was within the tolerance range of the arm's length price determined by the TPO, and no adjustment was warranted.

9. Transfer Pricing Adjustment for Services Related to ECB:
The Tribunal directed the AO/TPO to make adjustments considering only the fee and other charges (excluding interest) received by the foreign branches from the borrowers, applying a rate of 20%.

10. Applicable Tax Rate on the Appellant's Income:
The Tribunal upheld the CIT(A)'s decision that the applicable tax rate on the assessee's income was 48%, as per the precedent set in the assessee's own case for earlier years.

11. Deduction of Expenses Incurred by the Head Office:
The Tribunal followed the precedent in the assessee's own case and allowed the deduction for expenses incurred by the Head Office under section 37(1).

12. Disallowance of Provision Towards Country Risk:
The Tribunal upheld the disallowance of the provision towards country risk, following the decision of the Special Bench in Net India Industries Ltd. v. ACIT.

13. Disallowance of Provision for Non-Performing Assets (NPA):
The Tribunal upheld the disallowance of the provision for NPA, noting that such provisions are not allowable as per the decision in Southern Technology Ltd. v. JCIT.

14. Deductibility of Voluntary Separation Plan/Voluntary Retirement Scheme Expenses:
The assessee did not press this ground, and it was dismissed as not pressed.

15. Chargeability of Interest Under Section 234D:
The Tribunal decided this issue against the assessee, following the decision of the Hon'ble Bombay High Court in CIT v. IOC (254 CTR 113).

Additional Grounds:
- Disallowance under section 14A: The Tribunal restricted the disallowance to 2% of the exempt income.
- Non-allowability of deduction under section 36(1)(viia)(b): The Tribunal decided this issue against the assessee, consistent with the decision on the provision for NPA.

Revenue's Cross Appeal:
- Deduction of expenses under section 37(1): The Tribunal upheld the CIT(A)'s decision allowing the deduction.
- Transfer Pricing adjustment on interest received on call placements: The Tribunal upheld the CIT(A)'s decision.
- Reducing 5% interest and fees out of the addition made by the TPO: The Tribunal upheld the CIT(A)'s decision.
- TP adjustment in respect of credit risk assistance expense: The Tribunal remanded this issue to the AO/TPO for further examination.
- Chargeability of interest under section 234D: The Tribunal decided this issue in favor of the Revenue.

Conclusion:
The Cross Appeals for both assessment years were partly allowed, and the Revenue's Cross Objections were dismissed.