2023 (3) TMI 1030 - AT - Income Tax

Representative assessee u/s 163 - agent of foreign company / Head Office - Income deemed to accrue or arise in India - AO treated the interest income received by the Head office from the branch office in India as income taxable in India and taxed the interest income @ 10% of the gross amount under Article 11(2)(a) of the India, Japan DTAA - HELD THAT - it is also clear from the findings of the ld. CIT(A) wherein held that it is not necessary to invoke provision of section 163 and give notice u/s 163 because the branch and the head office were the same entity and inadvertently at the concluding part he stated it was necessary to issue notice under section 163 of the Act. - decided against the revenue. Chargeability of income and withholding tax - We have perused the decision of the ITAT as referred supra for A.Y. 2010-11 2022 (8) TMI 1130 - ITAT MUMBAI wherein identical issue on similar facts held that interest paid by the Indian Branch of the assessee bank to its overseas head office is not chargeable to tax in India - provisions of sec.195 consequently would not be attracted in case of such payment of interest by the Indian Branch to overseas Head office and the question of disallowance of the said interest by invoking the provisions of sec.40(a)(i) does not arise - Decided in favour of assessee. Adjustment u/s 92CA(3) - compensation received sought by the assessee in the international transaction relevant to issuing of bank guarantee on the strength of back to back guarantee by the AEs - HELD THAT - As decided in assessee own case 2022 (8) TMI 1130 - ITAT MUMBAI we deem it appropriate to remand this issue to the file of TPO for de novo benchmarking of impugned international transaction of issuing bank guarantee against counter guarantee issued by the associated enterprise. Assessee is directed to produce all the documents before the TPO in support of its claim. TPO shall be at liberty to call for any details or documents for proper benchmarking of the impugned international transaction. Thus following the decision of ITAT we restore this issue to the file of TPO for adjudicating de novo as directed by the ITAT in the decision as referred supra, therefore, the appeal of the revenue is allowed for statistical purposes.

Issues Involved:
1. Necessity of issuing notice under Section 163 of the Income Tax Act for treating a branch as an agent of its Head Office.
2. Taxability of interest income received by the Head Office from the Indian branch.
3. Applicability of Section 40(a) of the Income Tax Act concerning disallowance of interest payment.
4. Determination of Arm's Length Price (ALP) for commission on guarantees issued by the bank.
5. Validity of the method used by CIT(A) for ALP rate determination.
6. Comparison of bank guarantees with corporate guarantees for transfer pricing purposes.

Issue-wise Detailed Analysis:

1. Necessity of Issuing Notice under Section 163:
The Tribunal addressed whether it was necessary to issue a notice under Section 163 of the Income Tax Act to the branch of the bank for treating it as an agent of the Head Office. The CIT(A) had deleted the addition made by the Assessing Officer (A.O.) by following the decision of ITAT Mumbai in the assessee's own case for A.Y. 2005-06. The Tribunal upheld the CIT(A)'s decision, stating that it is not necessary to invoke the provisions of Section 163 and give notice under Section 163 because the branch and the Head Office are the same entity.

2. Taxability of Interest Income:
The A.O. taxed the interest income received by the Head Office from the Indian branch at 10% under Article 11(2)(a) of the India-Japan DTAA. The CIT(A) deleted this addition, following the ITAT Mumbai's decision in the assessee's own case for A.Y. 2005-06, where it was held that interest paid by the Indian branch to its overseas Head Office is not chargeable to tax in India. The Tribunal upheld the CIT(A)'s decision, noting that the issue is covered by the ITAT Special Bench decision in the case of Sumitomo Mitsu Banking Corp.

3. Applicability of Section 40(a):
The A.O. disallowed the interest payment under Section 40(a) of the Income Tax Act for non-deduction of tax. The CIT(A) deleted this disallowance, following the ITAT Mumbai's decision in the assessee's own case for A.Y. 2005-06. The Tribunal upheld the CIT(A)'s decision, stating that the provisions of Section 195 would not be attracted in the case of such payment of interest by the Indian branch to the overseas Head Office.

4. Determination of ALP for Commission on Guarantees:
The TPO made an adjustment of Rs. 2,38,66,708/- towards compensation received by the assessee in the international transaction related to issuing bank guarantees. The CIT(A) directed the A.O. to recompute the commission for guarantees by making an addition of 10% increase in the rate of commission currently being charged by the assessee. The Tribunal remanded the issue to the TPO for de novo benchmarking of the international transaction, following the ITAT's decision in the assessee's case for A.Y. 2010-11.

5. Validity of Method for ALP Rate Determination:
The CIT(A) directed the A.O. to recompute the commission for guarantees by making an addition of 10% increase in the rate of commission. The Tribunal found that the CIT(A) had made this decision on an ad hoc basis and remanded the issue to the TPO for proper benchmarking, noting that the TPO should consider the functions performed, assets used, and risks undertaken by the assessee bank.

6. Comparison of Bank Guarantees with Corporate Guarantees:
The CIT(A) allowed relief to the assessee based on the decision of the Bombay High Court in Everest Kento Cylinder Limited, which stated that no comparison for transfer pricing purposes can be made between guarantees issued by commercial banks and corporate guarantees issued by a holding company for the benefit of its subsidiary. The Tribunal upheld the CIT(A)'s decision, noting that the issue is covered by the ITAT's decision in the assessee's own case for A.Y. 2010-11.

Conclusion:
The Tribunal dismissed the Revenue's appeals on grounds related to the necessity of issuing notice under Section 163, taxability of interest income, and applicability of Section 40(a). The Tribunal allowed the Revenue's appeals for statistical purposes on grounds related to the determination of ALP for commission on guarantees and remanded the issue to the TPO for de novo benchmarking. The Tribunal upheld the CIT(A)'s decision on the comparison of bank guarantees with corporate guarantees.

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