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2024 (12) TMI 972 - AT - Income TaxTP adjustment on account of Correspondent Banking Activities - HELD THAT - We find the Coordinate Bench in A.Y. 2002-2003 and 2003-2004 2020 (1) TMI 443 - ITAT MUMBAI has considered this issue hold that the assessee had considerably benefitted out of earning income from Indian FIs and float income pursuant to correspondent banking activities and the said benefit directly flows to the assessee. There is no reason for allocating head office expenses to the costs incurred for rendering services as the head office expenditure allocated to India is for the purpose of main line of banking business undertaken by the assessee and the inputs provided by the head office are not directly related to the incidental marketing support activity rendered by the assessee. Though we find lot of force in the aforesaid argument of the ld. AR, in any case, the nature of services are such that they are reciprocal in nature and hence, there cannot be any attribution of mark up on the same. Hence, we hold that no mark up should be loaded on the attribution of costs towards incidental marketing activities undertaken by the assessee in connection with the correspondent banking activities. We are not inclined to adjudicate the other arguments advanced by the ld. AR that no search process has been identified by the ld. TPO and no AE has been identified in respect of the subject mentioned marketing support services etc and the comparables chosen thereon by the ld. TPO etc as the adjudication of the same would become academic in nature. We hold that no transfer pricing adjustment on account of correspondent banking activity is warranted in the instant case. Decided in favour of assessee. Adjustment on account of Marketing and Support Services relating to External Commercial Borrowings - CIT(A) deleted addition - Coordinate Bench in 2020 (1) TMI 443 - ITAT MUMBAI held that said receipt of fee / commission income has been accepted to be at arm s length. Hence, there is no question of further fee that is required for the assessee in respect of continuing ECBs. We find that the ld. CIT(A) had categorically observed that HSBC India does not assume any risk in respect of continuing ECBs compared to the nature of service rendered by them. This categorical finding has not been controverted by the revenue before us. Hence, we hold that no transfer pricing adjustment in respect of the services rendered by HSBC India in respect of continuing ECBs more so when the entire commission income / Debt Syndication Fee income received by the assessee have already been accepted to be at arm s length. Adjustment on account of marketing of derivatives - The Coordinate Bench in A.Y.2004-05 2024 (10) TMI 523 - ITAT MUMBAI held that TPO has not followed any method and disregarded his own show cause notice and relied upon undisclosed secret comparables in respect of controlled transactions. Thus he submitted that the Ld. CIT (A) findings ought to be upheld, especially since the pricing policy of the Assessee of 30% of the NNBV is a globally accepted practice, followed by the HSBC group. TPO has accepted the same in AY 2002- 03 and AY 2003-04. Hence, the CIT (A) order should be upheld and the adjustment deleted. Interest received from HSBC Bank USA and HSBC Hongkong, Singapore and Japan offices - The Coordinate Bench 2024 (10) TMI 523 - ITAT MUMBAI in revenue s appeal AO has applied ALP at LIBOR 15 basis points based on the borrowing rate of the assessee on a USD loan taken from HSBC London. Such approach is not correct because LIBOR rate cannot be applied on the US loan taken from HSBC USA. The ld. TPO ought to have considered the Fed Fund which is a target interest rate that is fixed by the Federal Open Market Committee ('FOMC') for implementing the USA's monetary policies, plus the relevant geographic market funds is the USA, for which the Fed Fund rate used should be the most appropriate for the purposes of benchmarking rather than taking LIBOR rates. Accordingly, we agree with the contention of the ld. Counsel. Accordingly, we hold the order of the ld. CIT(A) and accordingly, the ground raised by the Revenue is dismissed. TP issues relate to the Transition Support Services - TPO was of the firm belief that only single year updated NCP margins of comparable companies need to be considered and accordingly determined Arm s Length mark-up at 20.47% and made the impugned adjustment which was confirmed by the Ld. CIT(A) - We are of the considered view that the Transfer Pricing Officer has rightly taken the single year data. Merely because the data for financial year 2006-07 was not available, for 13 comparable out of 22 comparable would not allow the assessee to consider multiple year data. We do not find any error or infirmity in the application of single year data used by the Transfer Pricing Officer. We accordingly, decline to interfere with the findings of the Ld. CIT(A), this ground is dismissed. Expenditure incurred on separation/termination of employees - As relying on 2024 (10) TMI 523 - ITAT MUMBAI for the A.Y.2004-2005 we hold that expenditure is fully deductible under section 37 of the Act, since the expenditure is incurred wholly and exclusively for its business and the rationalization was not a part of voluntary separation scheme and, as such, was not covered by the provisions of Section 35DDA of the Act. Accordingly, this ground is allowed. Expenses incurred for mobilization of deposits from Non-resident Indian to be allowed. Addition on account of overfunding of Employees Gratuity Fund - We find for every year the reduction of expenses claimed is based on valuation determined as per actuarial valuation. Therefore, the ratio laid down in the case of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT squarely apply on the facts of the case in Hand. There is no dispute that the excess payment made in the prior years to Employees Gratuity Fund is now been adjusted against the allowability arising for the financial year 2005-06. Contention of the Ld. DR is that the assessee itself had added the amount, is not accepted as the same has been done by the assessee out of the abundant caution and has explained vide letters dated 08.10.2008 and 203.02.2010 and filed note dated 24.02.2010. Moreover, in the draft assessment order the Assessing Officer himself has allowed the claim of ₹.5.08 Crores. Considering the facts in totality, we do not find any error or infirmity in the findings of the Ld. CIT(A), this Ground is dismissed. Addition on account of interchange income received by the offshore (non-India) branches of the assessee - As per Tribunal in assessee s own case by various earlier years, the addition is deleted. Addition on account of Employee Share Scheme u/s 40A(9) and addition of provision for employee share scheme as contingent liability - The underlying facts in the issue are that cost of shares of ultimate holding company acquired by the assessee to be granted to employees as bonus or incentive have been disallowed by the Assessing Officer. Identical issue was considered in the case of HSBC Data Processing Electronic (India) Private Limited 2019 (7) TMI 981 - ITAT HYDERABAD wherein the Coordinate Bench held that Having regard to the rival contentions and the material on record, we find this this issue is covered in favour of assessee and therefore, we direct the AO to grant relief to the assessee by following the direction of the Special Bench in the case of Biocon Limited 2013 (8) TMI 629 - ITAT BANGALORE The appeal against which has been dismissed by the Hon ble Karnataka High Court 2020 (11) TMI 779 - KARNATAKA HIGH COURT . Addition on account of tax free income - The assessee was having sufficient interest free own funds to make the impugned investments in shares. Therefore, there is no question of utilization of any interest bearing funds. Therefore, there is no question of any disallowance of interest on earing exempt income. However, expenditure on account of administrative expenses cannot be ruled out, therefore in our considered opinion the disallowance to the extent of 1% of the exempt income should meet the ends of justice. Therefore, we direct the Assessing Officer to restrict the disallowance to the extent of 1% of the total exempt income, this ground is partly allowed. Addition on account of Nostro Account Maintenance Charges u/s 40(a)(ia) - This Tribunal in 2023 (7) TMI 1518 - ITAT MUMBAI for the A.Y. 2013-14 and 2014-15 held Nostro Account Maintenance Charges are in the nature of bank charges levied on transaction and the same are not subject to tax deduction at source u/s 195 - the provisions of Section 40(a)(i) of the Act cannot be attracted in case of the deemed remittance of Nostro Account Maintenance Charges without deduction of tax at source. In the case before us also the CIT(A) has concluded that the Assessee was not under obligation to withhold tax from Nostro Account Maintenance Charges in terms of Section 195 of the Act and therefore, could not be treated as an assessee in default . Accordingly, demand raised by the Assessing Officer on the Assessee u/s 201(1) and 201(1A) of the Act was deleted by the CIT(A). The order passed by the CIT(A) does not suffer from any infirmity to this extent.
Issues Involved:
1. Transfer Pricing Adjustments: Correspondent Banking Activities, Marketing and Support Services, Marketing of Derivatives, Interest from Overseas Branches, Transition Support Services. 2. Domestic Issues: Expenditure on Employee Separation/Termination, Depreciation Claim, Expenses for Mobilization of Deposits, Overfunding of Employee Gratuity and Pension Funds, Provision for Unfunded Pension Liability, Interchange Income, Employee Share Scheme, Tax-Free Income, Canteen and Other Subsidies, Nostro Account Maintenance Charges. Detailed Analysis: Transfer Pricing Adjustments: 1. Correspondent Banking Activities: - The Tribunal addressed the transfer pricing adjustment of Rs. 2,72,81,846/- for Correspondent Banking Activities. The issue, similar to previous years, was resolved by considering that the Indian entity and overseas branches of HSBC derived reciprocal benefits, thus no transfer pricing adjustment was warranted. The Tribunal followed earlier decisions where it was held that no markup should be applied to costs attributed to incidental marketing activities. 2. Marketing and Support Services for External Commercial Borrowings (ECB): - The adjustment of Rs. 3,49,53,287/- for ECB services was contested. The Tribunal found that the Debt Syndication Fees received were already at arm's length, and HSBC India did not assume risks for continuing ECBs. Thus, no further adjustment was necessary, aligning with prior decisions. 3. Marketing of Derivatives: - An adjustment of Rs. 7,11,74,284/- was challenged. The Tribunal noted that the derivative contracts were between Indian customers and overseas AEs, with all risks borne by the latter. The Assessee earned a marketing fee of 30% NNBV, which was deemed appropriate, and thus, no further adjustment was justified. 4. Interest from Overseas Branches: - Interest received from HSBC USA, Hongkong, Singapore, and Japan was reviewed. The Tribunal agreed with the CIT(A) that the transactions were at arm's length, rejecting the application of LIBOR rates by the AO, as the Fed Fund rate was more appropriate for benchmarking. 5. Transition Support Services: - The Tribunal upheld the use of single-year data by the Transfer Pricing Officer for determining the arm's length markup at 20.47%, dismissing the Assessee's appeal for using multiple-year data. Domestic Issues: 1. Expenditure on Employee Separation/Termination: - The Tribunal allowed the deduction of expenses incurred on employee separation under Section 37, as they were not part of a voluntary separation scheme covered by Section 35DDA. 2. Depreciation Claim: - The claim related to Gillanders Arbuthnot and Company Ltd. was deemed infructuous, as it had been allowed as revenue expenditure. 3. Expenses for Mobilization of Deposits: - The Tribunal upheld the deletion of additions related to expenses for mobilizing deposits from Non-resident Indians, consistent with earlier decisions. 4. Overfunding of Employee Gratuity and Pension Funds: - The Tribunal dismissed the revenue's grounds concerning overfunding, following previous rulings that allowed adjustments based on actuarial valuations. 5. Provision for Unfunded Pension Liability: - The Tribunal noted that the CIT(A) had decided this issue against the Assessee, and the revenue's ground was dismissed as it was already in their favor. 6. Interchange Income: - The Tribunal upheld the deletion of additions related to interchange income received by offshore branches, following consistent past decisions. 7. Employee Share Scheme: - The Tribunal followed the decision in HSBC Data Processing Electronic (India) Pvt. Ltd., allowing the Assessee's claim, consistent with the Biocon Limited case. 8. Tax-Free Income: - The Tribunal directed a 1% disallowance of administrative expenses related to tax-free income, acknowledging sufficient interest-free funds for investments. 9. Canteen and Other Subsidies: - The Tribunal upheld the deletion of disallowances related to canteen and other subsidies, consistent with past rulings. 10. Nostro Account Maintenance Charges: - The Tribunal confirmed that these charges were not subject to tax deduction at source, aligning with prior decisions that classified them as bank charges not requiring TDS. In conclusion, the appeals were partly allowed, with the Tribunal largely following precedent cases and upholding the CIT(A)'s decisions. The additional ground regarding the validity of the assessment was dismissed as not pressed.
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