2017 (8) TMI 479 - AT - Income Tax

Accrual of income - Addition on Deferred Bank Guarantee Commission - method of accounting - Held that - As part of the banking activities, the assessee gives guarantee on behalf of its customers and in consideration thereof, the assessee charged commission from such customers. The commission income arising from the guarantee given on behalf of the customer has been recognized by the assessee over the life of the bank guarantee. On perusal of the statement of facts filed before the Ld. CIT-(A), it is evident that assessee has followed consistent method of accounting of crediting income over the period of life of the bank guarantee, following the decision of the Hon ble Calcutta High Court (1993 (5) TMI 172 - CALCUTTA HIGH COURT ) in its own case for assessment year 1981-82. The Ld. CIT-(A) has allowed relief to the assessee following the above decision of the Hon ble Calcutta High Court. In view of above, we do not find any error in the finding of the Ld. CIT-(A) on the issue in dispute - Decided in the favour of the assessee. Disallowance on account of freight and forwarding & clearing charges - allowable business expenditure - Japanese food stuffs imported for the expat employees - assessee submitted that to develop a congenial business relations and create new business opportunities so as to expend the client base of the bank, it had to serve customary foodstuffs to entertain such Japanese customers visiting various branches of the bank - Held that - In view of the identical issue adjudicated by the Tribunal in the case of the assessee itself, respectfully following the same, we consider the expenditure in dispute as allowable business expenditure - Decided in the favour of the assessee. Transfer pricing adjustment on account of marketing and support services - ECBs issued by Head Office and foreign branches - violation of principle of natural Justice - Held that - We have observed that the Ld. TPO has made adjustment without providing any opportunity of hearing or issuing any show cause to the assessee for proposing the adjustment. The action of the TPO is definitely in violation of the principles of the natural Justice. We are also equally aware of the fact that the Ld. CIT-(A) was not empowered to restore the issue to the file of the TPO for deciding afresh. He should have called for a remand report from the TPO and should have decided the issue after providing opportunity of being heard to the assessee. However, due to mistake on the part of the Ld. CIT-(A), the assessee cannot be allowed to suffer the justice. Further, we note that issue in dispute in the case of Credit Lyonnais (2014 (7) TMI 1 - ITAT MUMBAI) was in respect of interest of charges received from foreign branches regarding syndicating of loan, whereas the issue in dispute in present case is regarding fee from foreign branches in respect of continued ECB. The decision of the said case is distinguishable on facts. Thus we restore the issue of computation of arm s length price in respect of the international transaction of marketing and support services for ECBs issued by Head Office and foreign branches, to the file of the Transfer Pricing Officer (TPO)/ AO for deciding afresh in accordance with law.

Summary

Issues Involved:
1. Deletion of addition on account of Deferred Bank Guarantee Commission.
2. Deletion of disallowance on account of Japanese Food Stuff.
3. Transfer pricing adjustment on account of marketing and support services.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Deferred Bank Guarantee Commission:
The Revenue contended that the CIT(A) erred in deleting the addition of ?1,75,34,052/- made by the Assessing Officer (AO) on account of Deferred Bank Guarantee Commission. The AO argued that the commission accrued when the bank issued the guarantee and should be recognized as income immediately. However, the CIT(A) followed the precedent set by the Hon’ble Calcutta High Court in the assessee's case for AY 1981-82, which stated that the income from guarantee commission should be spread over the period to which it relates. The Tribunal upheld the CIT(A)'s decision, noting that the assessee consistently followed this accounting method and that the Delhi High Court also endorsed this approach for AY 2007-08. Thus, the Tribunal found no error in the CIT(A)'s findings and dismissed the Revenue's appeal on this ground.

2. Deletion of Disallowance on Account of Japanese Food Stuff:
The AO disallowed ?2,76,749/- claimed by the assessee for freight and clearing charges related to Japanese foodstuff, arguing it was not a business expense. The assessee justified the expenditure as necessary for maintaining business relations with Japanese clients and for the welfare of expatriate employees. The CIT(A) deleted the disallowance, referencing the Tribunal's decision in the assessee's favor for AY 1994-95 to 1996-97, where similar expenses were allowed as business expenditures. The Tribunal confirmed the CIT(A)'s decision, reiterating that the expenditure was indeed for business purposes and allowable. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.

3. Transfer Pricing Adjustment on Account of Marketing and Support Services:
The AO made a transfer pricing adjustment of ?1,06,52,699/- for marketing and support services provided by the assessee to its foreign branches for External Commercial Borrowings (ECB). The CIT(A) found that the TPO violated the principles of natural justice by using data not available in the public domain and restored the issue to the TPO for fresh consideration. The Revenue argued that the CIT(A) was not empowered to restore the issue, while the assessee contended that the TPO did not follow the prescribed methods for computing the arm's length price. The Tribunal noted that the TPO's actions violated natural justice principles and that the CIT(A) should have called for a remand report instead of restoring the issue. Despite this procedural error, the Tribunal decided to restore the issue to the TPO/AO for a fresh decision, ensuring the assessee is given adequate opportunity to be heard. The Tribunal allowed the Revenue's appeal on this ground for statistical purposes.

Conclusion:
The Tribunal dismissed the Revenue's appeals on the first two grounds, upholding the CIT(A)'s decisions. However, on the third ground, the Tribunal restored the issue to the TPO/AO for a fresh decision, ensuring compliance with natural justice principles. The appeal was thus partly allowed for statistical purposes. The decision was pronounced on 3rd August 2017.