2018 (1) TMI 799 - AT - Income Tax

Non deduction of TDS - disallowance of interest paid to the head office(HO)/ overseas branches on deposits placed with the assessee u/s. 40(a)(i) - Held that - As decided in case of ABN Amro Bank NV 2010 (12) TMI 340 - CALCUTTA HIGH COURT the appellant is a foreign company incorporated in Netherlands and having its principal branch office in India. The head office of the appellant is not liable to pay any tax under the Act - Therefore, there was and still is no obligation on the part of the appellant s said branch to deduct tax while making interest remittance to its head office or any other foreign branch. The permanent establishment and the head office have to be taken as separate entities for all purposes. But in the making of payment of interest no tax has to be deducted under section 195(1) - If no tax is deductible under section 195(1) section 40(a)(i) of the Act will not come in the way of the appellant claiming such deduction as from its income - Decided in favour of assessee. Applying an ad hoc rate of 20% for agency fee and interest income of the overseas branches for the External Commercial Borrowings(ECB) - Held that - It is a fact that loan was granted by the AE. s and all the gains and risks of the transaction was with them only. The assessee was compensated by the AE. s for the job done by it. As far as interest income is concerned, it is clear that there was no contract /agreement between the assessee and the AE. s to share the interest amount. The assessee is objecting to the adjustment made under the head interest income. It has no objection with regard to the other portion of the adjustment. So, we direct the TPO/AO that only 20% of the agency fee should be attributed to the assessee and the interest attributed to its income should be deleted. See M/s Credit Lyonnais Versus ADIT(International Taxation) 2014 (7) TMI 1 - ITAT MUMBAI . - Decided partly in favour of assessee Derivative transactions and their ALP - TPA - Held that - The assessee had adopted the GTPP to determine ALP of the IT s thus no defect in its approach. Method applied by the TPO and the details of controlled transactions, relied upon by him, were not available in the public domain. The assessee did not have any opportunity to examine the comparability of FAR of the transactions selected by the TPO. Thus use of untested comparables to determine the ALP is against the basic spirit of the TP provisions and the Rule 10 of the Rules The TPO had also violated the principles of natural Justice by not confronting the assessee with the comparables used against it. He proposed an addition of ₹ 51. 12 crores to the income of the assessee without affording an opportunity to it, so that it could become aware of the basis for the adjustment. Only on this count the adjustment could be validly deleted. INPV calculation can be different for different banks because of their functioning. So, in our opinion it would be inappropriate to apply for a uniform multiplier effect on the value of sales credit/INPV of derivative transactions. INPV fixed by Indian branch of another foreign bank in India should not have been compared with the assessee case, because the above said branch of the foreign bank itself was dealing with its another AE. In short, we hold that the methodology adopted by the TPO, for determining the ALP of INPV of the derivative transactions, was incorrect from the very beginning and was fundamentally wrong. FAA had rightly held that the TPO was not justified in considering JP Morgan Chase Bank and Bank of America, NA having similar arrangements with their AEs as appropriate comparables for the aforesaid transaction.We are also agreeable to the argument submitted by the assessee that the PSM can never be applied for benchmarking marketing support service functions. As per Rule 10B(d), PSM is applicable mainly in IT. s involving transfer of unique intangibles or in multiple IT. s which are so inter-related that they cannot be evaluated separately for the purpose of determining the ALP of any one transaction. - Decided in favour of assessee

Issues Involved:
1. Disallowance of interest paid to the head office/overseas branches under section 40(a)(i) of the Act.
2. Application of an ad hoc rate for agency fee and interest income of overseas branches for External Commercial Borrowings (ECB).
3. Determination of Arm's Length Price (ALP) for derivative transactions.

Detailed Analysis:

1. Disallowance of Interest Paid to Head Office/Overseas Branches:
The second ground of appeal concerns the disallowance of interest paid to the head office (HO) or overseas branches (OBs) under section 40(a)(i) of the Income Tax Act. The assessee admitted that no tax was deducted at source on the interest payment to HO/OBs. The AO disallowed the claim based on Circular No. 740 of 1996 issued by the CBDT. The First Appellate Authority (FAA) upheld the AO's decision, relying on the Special Bench of the Tribunal's order in the case of Bank of Tokyo Mitsubishi Ltd. and ABN AMRO Bank NV. However, the assessee argued that the Tribunal's order was reversed by the Hon’ble Calcutta High Court, which held that no tax was deductible under section 195(1), and thus, section 40(a)(i) would not apply. The Tribunal, respecting the Calcutta High Court's judgment in the case of ABN Amro Bank NV, decided the second ground of appeal in favor of the assessee.

2. Application of Ad Hoc Rate for Agency Fee and Interest Income:
The third ground of appeal deals with the application of an ad hoc rate of 20% for agency fee and interest income of overseas branches for ECB transactions. The Transfer Pricing Officer (TPO) had made an adjustment based on a revenue split method, applying a 25% rate. The FAA reduced this rate to 20%, considering it a more appropriate measure, as the entire risk on credit (ECB) was borne by the foreign banks. The Tribunal found that the assessee played a limited role in the sequence of activities for sanctioning loans by the AEs to Indian customers and directed that only 20% of the agency fee should be attributed to the assessee, and the interest attributed to its income should be deleted. The Tribunal referred to the case of M/s Credit Lyonnais, which supported this view.

3. Determination of ALP for Derivative Transactions:
The solitary ground of appeal raised by the AO concerns the ALP for derivative transactions. The TPO had rejected the external comparable selected by the assessee and applied the Profit Split Method (PSM) for benchmarking the ALP, proposing an upward adjustment. The FAA, however, held that the TPO was not justified in comparing the assessee with other foreign banks and allowed the appeal filed by the assessee. The Tribunal found that the TPO had accepted that the assessee's role was limited to marketing services and that the rest of the activities were handled by the AEs. The Tribunal held that the methodology adopted by the TPO was fundamentally wrong and that the assessee had rightly applied the Transactional Net Margin Method (TNMM) according to its Global TP Policy. The Tribunal also noted that the TPO had violated the principles of natural justice by not confronting the assessee with the comparables used against it. The Tribunal confirmed the FAA's decision, finding no legal or factual infirmity.

Conclusion:
The appeals of the assessee were partly allowed, and the appeals of the AO were dismissed. The Tribunal upheld the FAA's decisions on the grounds of disallowance of interest, application of ad hoc rates for agency fees, and the determination of ALP for derivative transactions, finding the FAA's decisions to be legally and factually sound.

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