2021 (5) TMI 1059 - AT - Income Tax

Income taxable in India - Income Salary paid to expat employees - disallowance of salaries by the Head Office including Indian taxes thereon to the expatriate employees working in India exclusively for the PE of the taxpayer in India - HELD THAT - Tribunal in taxpayer s own case for earlier years from 1998-99 to 2010-11 2014 (10) TMI 150 - ITAT DELHI , 2017 (9) TMI 1154 - ITAT DELHI , 2020 (5) TMI 665 - ITAT DELHI respectively and order passed by the Hon ble Delhi High Court in case of taxpayer for AYs 2007-08 2008-09 2016 (4) TMI 817 - DELHI HIGH COURT as agreed that the expenses have been incurred wholly and exclusively by the Indian branch and therefore no part of these expenses can be allocated to any other branch of the HO and that there was no dispute with regard to the non-applicability of Section 44C. DRP has rightly deleted the addition made by the AO by holding that expenses have been incurred wholly and exclusively by the Indian Branch and as no part of these expenses can be allocated to any other Branch of HO section 44C of the Act is not applicable, hence ground no.1 raised by the Revenue is dismissed. Disallowance of interest paid by the Indian branches to HO/overseas branches and taxing interest received by HO/overseas branches from Indian branches made - Scope of provisions of Circular No.740 dated 17.07.1996 of CBDT and provisions contained u/s 9 of the Act - HELD THAT - This issue is covered by the order passed by the Hon ble Delhi High Court in taxpayer s own case for AYs 2007-08 2008-09 2014 (10) TMI 150 - ITAT DELHI wherein issue appears to be covered against the Revenue by the decision of the Calcutta High Court in ABN Amro Bank 2010 (12) TMI 340 - CALCUTTA HIGH COURT Addition of accrued deferred bank guarantee commission to the taxpayer from its HO/overseas branches - HELD THAT - Coordinate Bench of the Tribunal in taxpayer s own case for AY 2007-08 2014 (10) TMI 150 - ITAT DELHI decided the issue in favour of the taxpayer by following the decision rendered by Hon ble Calcutta High Court in taxpayer s own case for AY 1995-96 1993 (5) TMI 172 - CALCUTTA HIGH COURT wherein held that full commission though payable at the outset did not crystallize into perfect right to receive so far as unexpired period was concerned because the payability or receivability from the view of the assessee bank was counter-balanced by the refundability diluting the right to receive into a contingent right as regards unexpired period of the guarantee. The assessee clarified that FEDAI Guidelines places an obligation on the assessee to refund the proportionate commission for the unexpired period. Applicability of provisions of computing of book profit for MAT purpose - whether not applicable to the taxpayer on the ground that the ld. DRP has ignored the provisions contained u/s 2 (17) of the Act? - HELD THAT - . We have perused the order passed by the Tribunal in taxpayer s own case for AYs 2007-08 2008-09 2014 (10) TMI 150 - ITAT DELHI wherein instant issue has been thrashed in detail and decided in favour of the taxpayer stating that section 115JB is not applicable in case of banking companies. Decided against revenue. TP Adjustment - selection of MAM - taxpayer in order to benchmark its international transactions of Counter Guarantee Commission adopted Comparable Uncontrolled Price (CUP) as Most Appropriate Method (MAM) HELD THAT - . We have examined the order passed by the coordinate Bench of the Tribunal for AY 2015-16 2020 (10) TMI 753 - ITAT DELHI wherein identical issue as to receipt of counter guarantee commission from AE has been decided in favour of the taxpayer by applying TNMM by benchmarking the bundled of international transactions with its AE by applying the combined approach. Thus since issue is identical international transactions qua rate of bank guarantee commission is to be benchmarked by applying the TNMM as the MAM on combined approach basis. The taxpayer in its TP analysis has duly followed the TP analysis undertaken by the taxpayer in Assessment Years 2009-10 2015-16, which was perused by the ld. TPO, but has not disputed the same. Consequently, benchmarking of bundle of international transactions by the taxpayer with its AE by applying combined approach and TNMM has been used and margin shown by the taxpayer has otherwise been accepted, in these circumstances, the international transactions qua receipt of counter guarantee commission by the AE cannot be segregated from other international transactions undertaken by the taxpayer as has been held by the ld. TPO/DRP, the margin of combined approach has been accepted at arm s length, hence addition made by the TPO is not sustainable and as such is ordered to be deleted.

Issues Involved:
1. Deletion of addition on account of salary of expatriate employees.
2. Deletion of addition pertaining to interest paid to Head Office (HO) and other overseas branches.
3. Deletion of addition made on account of interest from Indian Branches to the HO.
4. Deletion of addition made on account of accrued Deferred Bank Guarantee commission.
5. Deletion of addition on account of Transfer Pricing adjustment in respect of Arms Length Price (ALP) of Corporate Guarantee.
6. Applicability of section 115JB of the Income Tax Act for computing Book Profit for Minimum Alternate Tax (MAT) purposes.
7. Rejection of primary and secondary analysis for determining ALP of the international transaction pertaining to receipt of guarantee commission.

Detailed Analysis:

1. Deletion of Addition on Account of Salary of Expatriate Employees:
The AO disallowed Rs. 24,56,85,915/- paid as salaries by the HO to expatriate employees working in India. The DRP deleted the addition, referencing Tribunal decisions in the taxpayer's favor for AYs 2007-08 & 2008-09, supported by the Delhi High Court. The Tribunal upheld the DRP's decision, emphasizing that the expenses were incurred wholly and exclusively by the Indian Branch and that Section 44C of the Act was not applicable.

2. Deletion of Addition Pertaining to Interest Paid to HO and Other Overseas Branches:
The AO disallowed Rs. 7,69,92,545/- on account of interest paid by Indian branches to HO/overseas branches and taxed interest received by HO/overseas branches from Indian branches. The DRP deleted these additions, following the Delhi High Court's order in the taxpayer's case for AYs 2007-08 & 2008-09 and the Calcutta High Court's order for AY 1995-96. The Tribunal upheld the DRP's decision, referencing the consistent judicial stance that such interest payments and receipts should not be taxed.

3. Deletion of Addition Made on Account of Accrued Deferred Bank Guarantee Commission:
The AO added Rs. 98,33,728 on account of deferred bank guarantee commission. The DRP deleted the addition, following the Calcutta High Court's decision in the taxpayer's case for AY 1981-82 and subsequent Tribunal decisions. The Tribunal upheld the DRP's decision, referencing the consistent judicial stance that such commissions are contingent and should not be immediately recognized as income.

4. Deletion of Addition on Account of Transfer Pricing Adjustment in Respect of ALP of Corporate Guarantee:
The AO proposed an addition of Rs. 10,43,55,168/- based on the TPO's rejection of the taxpayer's TP analysis. The DRP deleted the addition, accepting the taxpayer's FAR analysis and referencing Tribunal decisions in the taxpayer's favor for AYs 2009-10 and 2015-16. The Tribunal upheld the DRP's decision, emphasizing that the taxpayer performed limited functions and bore no significant risks, thus the TPO's use of bank guarantee rates was inappropriate.

5. Applicability of Section 115JB of the Income Tax Act for Computing Book Profit for MAT Purposes:
The AO applied Section 115JB for computing book profit for MAT purposes. The DRP rejected this application, referencing Tribunal decisions in the taxpayer's favor for AYs 2007-08 & 2008-09. The Tribunal upheld the DRP's decision, emphasizing that the taxpayer's accounts were prepared under the Banking Regulation Act and not under Part II of Schedule VI of the Companies Act, thus Section 115JB was not applicable.

6. Rejection of Primary and Secondary Analysis for Determining ALP of the International Transaction Pertaining to Receipt of Guarantee Commission:
The taxpayer challenged the DRP's rejection of its primary analysis using the CUP method and secondary analysis using TNMM. The Tribunal upheld the DRP's decision to delete the addition proposed by the TPO but acknowledged the validity of the taxpayer's secondary analysis using TNMM, referencing Tribunal decisions in the taxpayer's favor for AYs 2009-10 and 2015-16. The Tribunal concluded that the taxpayer's bundled approach using TNMM was appropriate for benchmarking the international transactions.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the taxpayer's cross objections, upholding the DRP's deletions of the various additions and confirming the applicability of the taxpayer's TP analysis using TNMM for benchmarking international transactions.

← Previous Next →