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2023 (4) TMI 1284 - AT - Income TaxDisallowance of interest expenses u/s. 14A - CIT(A) in the impugned order has given finding of fact that the assessee has surplus interest free funds in the form of capital and reserves to cover the investment made. Purportedly, no fresh investments were made in the impugned assessment year - HELD THAT - The assessee had made investments in NABARD tax free bonds in assessment year 1996-97 and 1997-98. Similar disallowance u/s. 14A of the Act was made by the Assessing Officer in assessment year 1998-99 for earning tax free interest income. The Co-ordinate Bench deleted the disallowance. The Hon ble Apex Court in the case of South Indian Bank Ltd 2021 (9) TMI 566 - SUPREME COURT has reiterated the legal position, that the proportionate disallowance of interest is not warranted u/s.14A of the Income Tax Act for investment made in tax free bonds/ securities which yielded tax free dividend and interest to assessee bank in those situation where, the interest free own funds available with the assessee, exceeded their investment. Revenue has not disputed the fund position as highlighted by the CIT(A) in the impugned order. Decided in favour of assessee. Allocation of interest towards earning of income on foreign exchange loans - AO held that net interest income is taxable at concessional rate of 20% u/s. 115A - HELD THAT - As decided in assessee own case the legislature has intended to tax the interest only on gross basis. Further in support of his arguments ld. A.R has also cited Article 10 11 of DTAA with Canada - Notification No.10503(F No.505/2/87-FTD) - Further it has also been mentioned that section 90(2) of IT Act also provides that the provisions of this Act shall apply to the extent they are more beneficial to that assessee. The order of the first appellate authority is quite elaborate on this subject and needs no interference - Decided in favour of assessee. TDS u/s 195 - Disallowance u/s. 40(a)(ia) - not deducting TDS on interest paid to Head Office - branch office of the assessee in India paid interest to the Head Office/ overseas branches - HELD THAT - As decided in Sumitomo Mitsui Banking Corporation 2012 (4) TMI 80 - ITAT MUMBAI there is no express provision contained in the relevant tax treaty which is contrary to the domestic law in India on this issue. This position applicable in the case of interest paid by Indian branch of a foreign bank to its Head Office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the Head Office. At the time of hearing before us, the learned representatives of both the sides have also not made any separate submissions on this aspect of the matter specifically. Having held that the interest paid by the Indian branch of the assessee Bank to its head office and other branches outside India is not chargeable to tax in India, it follows that the provisions of section 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the PE, the question of disallowance of the said interest by invoking the provisions of section 40(a)(i) does not arise - Decided in favour of assessee. Disallowance of Broken Period Interest - assessee has paid broken period interest on securities held as stock in trade on 31/03/2002 - AO disallowed the same - CIT(A) deleted the addition - HELD THAT - It is no more resintegra that broken period interest is an allowable deduction. The CIT(A) has granted relief to the assessee by placing reliance on the decision of Hon'ble Jurisdictional High Court. There are catena of judgements allowing deduction in respect of broken period interest. The Hon'ble Supreme Court of India has dismissed the SLP of the Department in the case of State Bank of India upholding the order of Hon ble Karnataka High Court 2020 (9) TMI 493 - KARNATAKA HIGH COURT allowing broken period interest as deduction. Thus, we find no infirmity in the impugned order on this issue. Ergo, ground No.4 of the appeal is dismissed. Restricting the claim of bad debts u/s 36(1)(vii) - Hon ble Gujarat High Court in the case of CIT vs. UTI Bank Ltd. 2013 (1) TMI 209 - GUJARAT HIGH COURT has observed that the CBDT Circular No.17 of 2008 dated 26/11/2008 had clarified the position beyond any doubt. Thus, the Hon ble High Court refused to admit the appeal of Revenue observing that the Circular, issued by the Board in exercise of its statutory powers u/s. 119(2) of the Act may have the effect of relaxing the rigors of statutory provision. Thus, in the light of aforesaid decisions and CBDT Instructions we find no merit in ground No.5 of the appeal, hence, the same is dismissed. Salary paid to expatriate employees - HELD THAT - Undisputedly, the salary expenditure of expatriate employees was for rendering services wholly and exclusively for assessee in India. The quantum of expenditure and payment of salary to employees expatriated to India by head office has not been doubted by the AO. The solitary objection of Assessing Officer for disallowing expenditure is that no debit note was raised by head office. CIT(A) has negated the objection raised by the AO by placing reliance on the decision in the case of Kedarnath Jute Manufacturing Co 1971 (8) TMI 10 - SUPREME COURT Regarding applicability of section 44C of the Act, the CIT(A) placed reliance on the decision of Hon'ble Jurisdictional High Court in the case of Emirates Commercial Bank 2003 (4) TMI 2 - BOMBAY HIGH COURT to conclude that payment of salary to expatriate employees paid by the head office is an allowable expenditure in view of Article 7(3) of the DTAA and section 37 of the Act and such expenditure does fall within the ambit of section 44C. TP Adjustment in respect of Correspondent Banking Services rendered by the assessee to its AEs - Comparable selection - CIT(A) rejected all the four comparable on the ground of functional disparity. The CIT(A) further rejected Kinetic Trust Ltd. and PNR capital Services Ltd. proposed by the assessee on the ground of difference in functions. The CIT(A) made estimated T.P addition by applying 20% markup - HELD THAT - Though there is no concept of estimated T.P addition, the ld. Authorized Representative for the assessee stated at Bar that the assessee had accepted the adjustment made by the CIT(A). The Revenue has assailed the findings of CIT(A) in rejecting T.P adjustment made by the TPO. TP concept was in nascent stage in assessment year 2002-03. The jurisprudence on Transfer Pricing was in infancy stage. Having rejected comparables the CIT(A) ought to have selected fresh set of comparables to benchmark the transaction. CIT(A) rightly rejected the comparables selected by the TPO as none of the comparables selected by the TPO were functionally comparable to the activities carried out by the assessee. We are of the considered view that transfer pricing adjustment made by the TPO has been rightly rejected by the CIT(A). Thus, the ground No.7 raised in appeal by Revenue fails. Comparability analysis - TPO has selected comparable that is engaged in merchant banking activities - assessee is engaged in banking services - HELD THAT - We find that while adjudicating Transfer Pricing issue, the CIT(A) has rejected all the comparable selected by the TPO. One of the comparable ( Pioneer Investcorp Ltd.) selected by the TPO was a registered category one merchant banker with SEBI. The CIT(A) has rejected the said comparable on the ground of functional disparity. The Revenue has failed to substantiate that the a functions carried out by the assessee are similar to those of a merchant banker. The assessee in ground No.2 has assailed rejection of comparables suggested by the assessee. No submissions were made by the ld. Authorized Representative for the assessee in this regard. Ergo, ground No.2 of the appeal is dismissed.
Issues Involved:
1. Disallowance of interest expenses under Section 14A of the Income Tax Act. 2. Allocation of interest towards earning income on foreign exchange loans. 3. Disallowance under Section 40(a)(ia) for non-deduction of TDS on interest paid to Head Office. 4. Disallowance of broken period interest. 5. Restricting the claim of bad debts. 6. Disallowance of salary paid to expatriate employees. 7. Transfer Pricing adjustment. Summary: 1. Disallowance of Interest Expenses under Section 14A: The Revenue challenged the deletion of Rs. 91,46,886/- disallowed by the Assessing Officer as interest expenses for earning interest on tax-free bonds. The CIT(A) deleted the disallowance following previous orders and Tribunal decisions. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling in South Indian Bank Ltd. vs. CIT, which stated that proportionate disallowance of interest is not warranted when own funds exceed investments in tax-free bonds. 2. Allocation of Interest towards Earning Income on Foreign Exchange Loans: The Revenue contested the deletion of Rs. 82,46,164/- allocated as costs for earning interest income on foreign currency loans. The CIT(A) deleted the disallowance following the Tribunal's decision in the assessee's case for previous assessment years. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue failed to distinguish the earlier order. 3. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Interest Paid to Head Office: The Assessing Officer disallowed Rs. 77,78,947/- for non-deduction of TDS on interest paid to the Head Office. The CIT(A) upheld the disallowance but for a different reason, following the Special Bench decision in ABN AMRO Bank NV vs. ADIT. The Tribunal, relying on the Special Bench decision in Sumitomo Mitsui Banking Corporation vs. DCIT, held that interest paid to the Head Office is neither deductible nor chargeable to tax in India, thus dismissing the Revenue's ground and allowing the assessee's ground. 4. Disallowance of Broken Period Interest: The Revenue challenged the deletion of Rs. 9,32,48,681/- disallowed by the Assessing Officer as broken period interest. The CIT(A) deleted the disallowance based on the decision in American Express International Banking Corporation vs. CIT. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's dismissal of the SLP in CIT vs. State Bank of India, which allowed broken period interest as a permissible deduction. 5. Restricting the Claim of Bad Debts: The Revenue contested the deletion of the restriction on the claim of bad debts. The CIT(A) allowed the deduction following the Tribunal's decisions in Oman International Ltd. vs. DCIT and Vijaya Bank vs. CIT. The Tribunal upheld the CIT(A)'s decision, also referring to CBDT Instruction No.17/2008. 6. Disallowance of Salary Paid to Expatriate Employees: The Revenue challenged the deletion of Rs. 1,35,35,218/- disallowed by the Assessing Officer as salary paid to expatriate employees. The CIT(A) deleted the disallowance following the decision in CIT vs. Emirates Commercial Bank. The Tribunal upheld the CIT(A)'s decision, noting that the salary expenses were for services rendered wholly and exclusively in India and were allowable under Article 7(3) of the DTAA and Section 37 of the Act. 7. Transfer Pricing Adjustment: The Revenue contested the CIT(A)'s reduction of the transfer pricing adjustment from 42.73% to 20%. The CIT(A) rejected the comparables selected by the TPO due to functional disparity and made an estimated TP addition. The Tribunal upheld the CIT(A)'s decision, noting that the TPO's comparables were not functionally similar to the assessee's activities. Conclusion: The appeal of the Revenue is dismissed, and the appeal of the assessee is partly allowed.
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