2022 (8) TMI 1130 - AT - Income Tax

Income deemed to accrue or arise in India - taxability of interest payable to head office of the assessee - AO taxed the interest income @ 10% of gross amount under Art 11(2)(a) of the India Japan DTAA - HELD THAT - We find that coordinate bench of the Tribunal in ADIT (International Taxation) vs M/s Mizuho Corporation Bank Ltd. 2014 (4) TMI 733 - ITAT MUMBAI for assessment year 2005 06 while deciding similar issue in favour of assessee 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. Disallowance of depreciation - HELD THAT - In the present case depreciation was claimed inter-alia in respect of addition to the assets made during the assessment years 2007 08 and 2008 09. We find that in the aforesaid assessment years AO has passed orders giving effect to the directions of CIT(A) and accordingly granted depreciation under the Act. Since in respect of assets added in preceding years depreciation is year to year deduction available to the taxpayer and therefore is dependent on the order(s) passed in previous years. Thus we find no infirmity in order passed by the learned CIT(A) on this issue. Accordingly grounds no. 3 and 4 raised in Revenue s appeal are dismissed. TP adjustment on account of back-to-back counter bank guarantee - HELD THAT - No details have been furnished to support the claim that no risk was borne by the Indian branch. Further though in Form No. 3 CEB assessee has claimed to determine the arm s length price of international transaction of issuing bank guarantee against the counter guarantee issued by the associated enterprise by applying CUP method however there are no details available on record as to how such benchmarking has been carried out by the assessee. We find that the TPO by considering the rate charged by Bank of Baroda for issuance of guarantee against 100% counter guarantee by reputed international banks has made the transfer pricing adjustment by considering it to be an appropriate CUP. However there is no further analysis as to how the said transaction is an appropriate CUP to the transaction undertaken by the assessee s Indian branch considering the FAR in both the transactions and whether any adjustment for differences as per Rule 10B(1)(a) of the Income Tax Rules is possible. CIT(A) vide impugned order on an ad hoc basis directed computation of commission for guarantee by making addition of 10% increase in the rate of commission charged by the assessee to arrive at the arm s length rate - 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.The assessee is directed to produce all the documents before the TPO in support of its claim. Further the TPO shall be at liberty to call for any details or documents for proper benchmarking of the impugned international transaction. TP adjustment on account of interest received/paid on inter-bank placements amongst the assessee and the foreign branches - HELD THAT - From the perusal of the record it is evident that the TPO has not correctly appreciated the benchmarking undertaken by the assessee. Further there are no adverse findings against USD depo rates used by the assessee for the purpose of granting/receiving of loans/advances from the associated enterprise. Accordingly we deem it appropriate to remand this issue to the file of TPO for de novo benchmarking of international transaction pertaining to borrowing/lending by applying the USD depo rates after necessary verification/examination of the details. We further direct that if upon examination it is found that the interest rate paid or received by the assessee is within the high and low of US depo rates during the day of payment/receipt then the international transaction of borrowing/lending be considered to be at arm s length. As a result grounds no. 1 and 2 raised in assessee s appeal are allowed for statistical purpose.

Summary

Issues Involved:
1. Taxability of interest payable to the head office.
2. Disallowance of depreciation.
3. Transfer pricing adjustment on account of back-to-back counter bank guarantee.
4. Transfer pricing adjustment on account of interest received/paid on interbank placements.

Issue-wise Detailed Analysis:

1. Taxability of Interest Payable to the Head Office:
The assessee, a bank incorporated in Japan with branch offices in India, filed its return of income for the assessment year 2010-11. The Assessing Officer (AO) treated the interest income received by the head office from the Indian branch as income deemed to accrue in India and taxed it at 10% under Article 11(2)(a) of the India-Japan DTAA. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal based on a prior Tribunal decision in the assessee's favor. The Tribunal upheld the CIT(A)'s decision, citing the Special Bench ruling in Sumitomo Mitsu Banking Corp., which held that interest paid by an Indian branch to its overseas head office is not chargeable to tax in India.

2. Disallowance of Depreciation:
The assessee claimed depreciation expenses, including for additions to assets made in previous years (2007-08 and 2008-09). The AO disallowed the depreciation, but the CIT(A) allowed it, following earlier decisions. The Tribunal found no fault in the CIT(A)'s order, noting that depreciation is a year-to-year deduction dependent on prior years' orders, and upheld the CIT(A)'s decision.

3. Transfer Pricing Adjustment on Account of Back-to-Back Counter Bank Guarantee:
The assessee's Indian branch issued guarantees on behalf of overseas clients, secured by back-to-back inter-bank indemnities. The Transfer Pricing Officer (TPO) applied a higher rate of commission based on a comparable uncontrolled price (CUP) method, leading to an adjustment. The CIT(A) directed a 10% increase in the commission rate. The Tribunal found that the CIT(A)'s ad hoc method lacked detailed analysis and remanded the issue to the TPO for de novo benchmarking, instructing the assessee to provide comprehensive documentation.

4. Transfer Pricing Adjustment on Account of Interest Received/Paid on Interbank Placements:
The assessee entered into international transactions involving loans/advances with associated enterprises, using USD depo rates for benchmarking. The TPO erroneously applied LIBOR rates, leading to adjustments. The Tribunal remanded the issue to the TPO for proper benchmarking using USD depo rates, directing verification of details to ensure the interest rates fall within the high and low of US depo rates on the transaction dates.

Assessment Year 2011-12:
The issues and facts for the assessment year 2011-12 were identical to those of 2010-11, with differences only in figures. The Tribunal applied the same decisions mutatis mutandis to the appeals for 2011-12, resulting in the appeals being allowed for statistical purposes.

Conclusion:
The Tribunal dismissed the Revenue's appeal concerning the taxability of interest and disallowance of depreciation, remanded the transfer pricing issues for de novo benchmarking, and allowed the assessee's appeals for statistical purposes. The Tribunal's decisions were consistent across both assessment years.