9911796707
TMI Blog2024 (10) TMI 523X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO has not filed an appeal against the CIT(A) order on this ground. Without prejudice, the Assessee submitted that the disallowance cannot exceed 1% of the total exempt income earned during the year, as determined by the Tribunal in AY 2002-03 and 2003-04. Thus, consistent with the past precedence, we hold that disallowance of 1% of the total exempt income is justified for the purpose of disallowance u/s 14A. Accordingly, this ground is partly allowed. Depreciation towards the compensation for vacating the premises towards Gillanders - HELD THAT:- Here in this case, the Tribunal as noted above has already held that expenditure incurred by the assessee for vacating the premises given to the tenant is business expenditure and allowable as Revenue expenditure as paying compensation to the tenant for vacating premises cannot be capital expenditure. Since ITAT has allowed similar amount as revenue expenditure, therefore, consistent with the same we allow same as revenue expenditure. Accordingly, this ground is allowed in favour of the assessee. Deferred guarantee commission - guarantee commission was received in respect of the period for which the guarantee was issued and assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (A) has directed the AO to disallow 50 per cent of the total salary and perquisite, in respect of the perquisite component of the off shore salary, therefore, no disallowance can be made as the said amount has not been claimed as a deduction in the return of income; and secondly we agree with the contention of the Ld AR that the disallowance of 50 per cent of both onshore salary and offshore salary (cash component) should be restricted proportionately to 11 months only and not the entire year. Accordingly, this ground is allowed partly. Salary pertaining to Mr. C. Trench and Mr. Peter E. Davies - It is not in dispute that a nominal time of 3 days and 12 days, respectively, was spent on internal audit work for overseas branches. As a part of their global role in a multinational group, these expatriate employees were required to undertake certain co-ordination work for overseas branches. The Tribunal in the Assessee own case for AY 2002-03 and 2003-04 has held that; These are mere incidental activities carried out by the employees, which acquire group wise liaising and coordination and the same need not be required to be compensated. Given the nominal amount of time spent on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , no adjustment on account of corresponding banking activity is warranted. Services provided by employees of the Assessee to overseas' AE's - Respectfully following the above order of the Tribunal in assessee s case [ 2020 (1) TMI 443 - ITAT MUMBAI] AY 2002-03 and 2003-04, we delete the adjustment made by the TPO. Furthermore, the Assessee has voluntarily disallowed a proportionate salary for certain employees in relation to services rendered to foreign AEs. Given the fact that the primary banking transactions have been accepted at ALP, then separately benchmarking the incidental activities is not feasible. As held by the Tribunal, the oversight role provided by the employees at the group level is part of the functions of the employees in a multinational group. These employees (other than Mr Bhatia, who has been dealt with separately) are not functioning on a day-to-day basis for any group entity. Hence, it cannot be considered as a separate international transaction as the liaison and coordination services provided by the employees at the group level cannot be regarded as distinct transactions. Accordingly, this ground is decided in favour of the assessee following the pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision in the Trust Deed for refunds, the Assessee neither obtained nor received any amount from the Trust nor has the Trust agreed to refund any amount to the Assessee. Furthermore, by making these payments, the Assessee did not obtain any benefit regarding liability remission or cessation, nor did it write off any liabilities in its accounts. Hence, the unilateral credit to the Profit Loss A/c. did not amount to any cessation of liability that could be taxed. Also it has been submitted that the excess funds have been adjusted against the contribution of liability payable to the gratuity fund in AY 2006-07 - CIT(A) in AY 2006-07 has not allowed the deduction as the same has been allowed in AY 2005-06. If assessee has recongnised the excess contribution as asset in its books and credited to profit and loss account and has been reduced their contribution payable for A.Y. 2006-07 as it was already discharged in A.Y. 2005-06. Then it has been allowed in this year because in A.Y. 2006-07 ld. CIT(A) has not allowed deduction of this amount on the ground that same has been allowed in A.Y. 2005-06. Even if we agree with the ld. AO that it should be disallowed in this year, then the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the ld. Counsel. Accordingly, we hold the order of the ld. CIT(A) and accordingly, the ground raised by the Revenue is dismissed. - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER For the Assessee: Shri Porus Kaka a/w. Divesh Chawla For the Revenue: Shri Anoop Hiwase ORDER PER AMIT SHUKLA (J.M): The aforesaid cross appeals have been filed by the assessee as well as by the Revenue against separate impugned orders dated 25/08/2010 31/03/2016, passed by Commissioner of Income Tax (Appeals)-56 for the quantum of assessment passed u/s. 143(3) for the A.Y. 2004-05 2005-06. 2. In both the years issues involved are common arising out of identical set of facts, therefore, the same were heard together. At the outset it has been stated and admitted by both the parties that all the grounds are covered by the earlier year s decision of the Tribunal in assessee s case. 3. The effective grounds of appeal raised in both the years which have been agued based on chart submitted by the Ld. Counsel of the assessee are being discussed instead of reproducing the entire grounds of appeal. We will discuss in brief the issues raised in various grounds. ITAT Appeal No: 7336/MUM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund a particular investment is made and it may not be permissible for the revenue to make an estimation of a proportionate figure . 20 .The disallowance would be legally impermissible for the investment made by the assessees in bonds/shares using interest free funds, under section 14A. In other words, if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax-free securities then in such cases, disallowance under section 14A cannot be made. 27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A for investments made in tax-free bonds/securities which yield tax-free dividend and interest to assessee banks where, interest free own funds available with the assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees. 5. We find that the ITAT, in Assessee's own case for AYs 1997-98 to 2001-02 has decided this issue in the Assessee's favor. Relevant extracts of the ITAT's order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment made in the securities and bonds of the assessee which had yielded exempt income. Hence, by placing reliance on the decision of the Hon'ble Jurisdictional High Court in the case of Reliance Utilities and Power Ltd., reported in 313 ITR 340 and HDFC Bank Ltd. reported in 366 ITR 505, there cannot be any disallowance on account of interest on borrowed funds u/s. 14A of the Act. However, certain administrative expenses certainly need to be disallowed u/s. 14A of the Act as the law has been amended with retrospective amendment from 01/04/1962 onwards. In this regard, we find that the Hon'ble Calcutta High Court in the case of CIT vs. R.R. Sen Brothers P Ltd in GA No. 3019/2012 in ITA No. 243/2012 dated 04/01/2013 had held as under:- The assessee did not show any expenditure incurred by him for the purpose of earning the money which is exempted under income tax. The Tribunal has computed the expenditure at 1% of such dividend income, according to them, as the thumb rule applied consistently. We find no reason to interfere. The appeal is dismissed. 5.3. Respectfully following the aforesaid decision of Hon'ble Calcutta High Court, we direct the Ld. AO to disallow 1% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation claim on the amount paid to Gillanders, based on the ITAT's judgement in the Assessee s own case for AY 1999-2000 (in the case of GESCO) the Assessee vide letter dated September 29, 2022 filed an additional ground before the ITAT to request that the Assessee be allowed a tax deduction for the payment made to Gillanders to vacate and hand over peaceful possession of premises as revenue expenditure. 13. It is seen that the facts of this ground are similar to ground 2 of Assessee's appeal before the ITAT, i.e., payment to another tenant, GESCO, where in the ITAT vide its order for AY 1999- 2000 had already allowed a claim of a similar nature as revenue expenditure. The relevant extracts of the ITAT's order dated November 20, 2015, for AY 1999-2000 are reproduced below: 69. After hearing the contentions of both the parties and on perusal of records including the decisions relied upon by the assessee, we are of the considered opinion that the expenditure incurred by the assessee for vacating the premises given to the tenant is a business expenditure and allowable as revenue expenditure, Therefore, we allow Ground 4 in part. 70. Since we allow the main claim taken b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship customers, the Bank refunds a portion of the guarantee commission relating to the unexpired period after obtaining special internal approvals if a guarantee were to be revoked before its maturity date. The deferred guarantee commission did not accrue or arise in the year in which guarantee agreements were entered. Accordingly, we hold that the guarantee commission should be spread over the period to which it relates and should not be taxed upfront in the year of receipt. 19. We find that the Tribunal has held this issue in favor of the Assessee in respect of previous A.ys. 2001-02 to 2003-04. The relevant extracts of the ITAT s order for the assessment year 2001-02, dated November 20, 2015, which has relied on the decision of the Calcutta High Court in the case of CIT v/s Bank of Tokyo (71 Taxman 85), are reproduced below: After hearing both the parties on the issue and perusal of the records including the case relied upon by the parties, we find that the Ld. CIT(A) has passed well reasoned order and directed the AO to delete the addition. For the sake of convenience, we also reproduce the relevant findings of the Hon ble Calcutta high court viz CIT(A) Bank of Tokyo Ltd as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income earned from deferred guarantee commission did not accrue or arise to an assessee in the year in which the guarantee agreements were entered into but should be spread over the period of the guarantee proportionally. In these circumstances, the decision of the Tribunal in upholding the order of the CIT(A) is a conclusion based on a finding of fact and hence, we do not see any reason to entertain question (c). 21. Thus we hold that no adjustment can be be made to its total Income in respect of the guarantee commission received in advance, which is rightly recognized as income over the tenure of the guarantee and not in the year in which the guarantee is issued. This ground is thus allowed. Ground No. 5: Expenditure incurred on separation/ termination of employees-Rs 19,19,64,640. 22. Facts in brief qua this issue are that, as part of the rationalization of operations and workforce, some employees of the Assessee were terminated from bank services during AY 2004-05. Such employees were either redundant, and hence, their employment contract was terminated by the Assessee, or they resigned from the services on account of redundancy. The Assessee made a provision of Rs. 33,00, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under : 35DDA. (1) Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee at the time of his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, 1/5th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal instalments for each of the four immediately succeeding previous years. 18. A bare perusal of this section would reveal that the applicability of this section is attracted only when the payment has been made to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement. Since the payment reduces the burden on the assessee relatable to subsequent years, the legislature inserted this section in order to allow only 1/5th of the total sum paid by the assessee to its employees. This amount in the hands of the employee has been exempted under s. 10(10C) of the Act to the extent of Rs. 5 lacs. The relevant part of s. 10(10C) reads as under : 19. The submission of the learned Departmental Representative is that the provisions of s. 35DDA a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Dhoke was allowed exemption as contemplated under s. 10(10C). In view of the above we confirm the order of the learned CIT(A). In the result, this ground is dismissed. 28. Thus, following the aforesaid decision, we hold that expenditure of Rs 19,19,64,640/- 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. Ground No. 6: Salary of Mr. C Trench (3 days of salary and perquisites), Mr. Peter E. Davies 12 days of salary 29. This is ground is similar to ground No 1 of the department and same shall be decided while deciding the appeal of the department. Ground No. 7: Salary of Mr. Ashok Bhatia 50 per cent of total salary and perquisites. 30. Brief facts qua this issue is that, Mr. Ashok Bhatia was employed by HSBC Asia Holdings BV as the Chief Information Officer of India, Middle East and Africa located in the HSBC Software Development Centre, India. He had been deputed to the Indian branch of the Assessee for three years. As a part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Centre, India. The letter indicates that Mr. Ashok Bhatia has been seconded to the Assessee's office in India for three years. Further, point 7.0: Duties of the letter indicates that: You will perform such duties as are in the opinion of the Group IT director appropriate to the Chief Information Officer India, Middle East and Africa and will perform such other duties and exercise such powers in HBAP or any HSBC. Group company as may from time to time be delegated to you by, or with the authority of the Group IT director. The Group's earning Ratings will be determined by group Finance. Your personal rating will be determined by the Group IT Director. 35. At the time of hearing, assessee without prejudice claimed that the cash component of the offshore salary cannot be considered as head office expenditure as it is a direct cost of the Indian branch of the Assessee. Further, in order to avoid further litigation, the Assessee has restricted its claim to the following two contentions: (a) Though the CIT(A) directed the learned AO to disallow 50 per cent of the total salary and perquisite, in respect of the perquisite component of the offshore salary, no disallowance should b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the salary paid to the expatriate officers could not be considered as a head office expense, since it is not covered by section 44C(iv)(b) of the Act (based on the favourable judgements of the ITAT in Assessee's own case from AY 1992-93 to AY 2003-04), and to allow the expenditure fully, since it is related to the Indian operations of the Assessee, except in case of Mr Ashok Bhatia, Mr C Trench and Mr Peter E Davies, where the CIT(A) directed the learned AO to disallow 50 per cent of 3 days and 12 days of the total salary and perquisites respectively since it is not related to the business of the Indian branches. 39. Before us, the details of expatriate officers employed in India together with their designation and remuneration, copies of Form no 16 issued to the expatriate employees, the income-tax return forms filed by the expatriate employees, and secondment letters / posting letters justifying the aforesaid facts have been filed which was already been filed before the learned AO / CIT(A). It has been submitted that these employees were deputed to the Indian branch of the Assessee and worked exclusively for the India operations; the cash component of their offshore sala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowed. Accordingly this ground of the revenue is dismissed. Ground No. 2: Expenses incurred for mobilization of deposits from Non-resident Indians (NRIs) Rs 8,88,50,535. 45. Brief background qua this issue are that, NRIs form a large resource pool with potential sources for foreign currency funds for India both in terms of deposits and investment, and the large extensive network of HSBC's branches and offices, particularly in countries in the Middle East, is of great assistance to the Assessee in their marketing efforts. To persuade NRIs to invest in India, it is not merely enough to offer financial incentives; considerable selling efforts are also required. To mobilize and garner deposits, the Assessee has NRI desks in the Middle East, UK, USA, Singapore and Hong Kong 'desks'. The expenditure is in respect to activities exclusively related to the marketing for NRI deposits and to provide personalized and expert service to the NRIs. The expenses incurred toward these NRI desks are in the nature of salaries, travelling, advertising and other incidental expenses. Though the relevant offices outside India have debited this expenditure to the Assessee's head offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction of the said expenditure are devoid of legally sustainable reasons. As far as the question of the expenses incurred abroad being hit by the provisions of section 44C is concerned the law is not settled by the hon'ble Bombay High court in the case of CIT Vs Emirates Commercial bank limited ( 265 ITR 55) wherein Their lordship have held that 'the expenditure which is covered by Section 44C is of a common nature, which is incurred for various branches or which is incurred for the purpose of head office and the branch'. Their Lordship held that the expenditure incurred exclusively for the purposes of the branch cannot be covered under section 44C. It would thus follow that the provision of section 44C will hit only such expenditure which are not being capable of being allocable to any particular profit centre and which are required to be allocated on some general basis. The expenses on mobilisation of NRI deposit can not be said to fall in this category because these expenses are for the purpose of India specific operations where non resident Indian deposits are of relevance. These expenses, therefore cannot be allocated to operations in other countries or to the he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses incurred by the Assessee are wholly and exclusively for its business and, therefore, deductible under section 37 of the Act. Accordingly, the question of any disallowance does not arise. 51. We find that the ITAT, in Assessee's own case in previous AYs, has decided these issues in the Assessee's favor and before us detail chart on department's grounds has been given enclosed which contains the list of decisions of the ITAT in the Assessee's own case as well as other rulings on which the Assessee has placed reliance. 52. Since the grounds No.3-6 have been dismissed and allowed in favour of the assessee and therefore, following the same we hold that ld. CIT(A) has rightly deleted the said disallowance and consequently, these grounds raised by the Revenue are dismissed. Ground No. 7: Disallowance on increased provision made towards pension fund Rs 30,67,20,000. 52. Brief facts are that during the year ended March 31, 2004 (relevant to AY 2004-05), the Assessee had made a provision of Rs. 30,67,20,000/- towards funding of overall deficit in the pension fund, which has arisen on account of changes in annuity rates. The said provision was based on an independent act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing this fund to cover up shortfall and pay employees contribution which is in fact to be collected from its employees and hence not an allow able expenses in the hands of the assessee. On the other hand, Ld. Counsel submitted that the assessee bank has made the contribution towards the shortfall in Provident Fund's Statutory Interest Rate of 9.5%. This shortfall has been made good from the Fund created namely, Staff Provident Fund (Interest) , specifically for this sole purpose. The fund has been created from Profit remained after payment of income tax. Hence, in the year of actual expenditure (i.e. Contribution towards Shortfall in maintaining the Statutory Rate of Interest of Provident Fund) the expenditure claimed under section 37(1) of the Act is allowable. The expenditure made from the Fund does not change its nomenclature. It is an expense. If the actual expenditure made by the assessee is not allowable than there is certainly double taxation in the hands of the assessee. It is the statutory requirement under the Provident Fund Rules notified by the Central Government. As per Rule 17, any deficiency/shortfall in the maintenance of Provident Fund Interest Rate shall be ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;ble Tribunal in the Assessee's own case for AY 2002-03 and 2003-04 ('the order'), wherein the Hon'ble Tribunal has deleted the TP adjustment. Our attention was drawn to paras 14.12.1 to 14.15 of the order for the findings of the Hon'ble Tribunal. 60. Brief facts are that, the Assessee is engaged in providing banking services and is part of an international banking company that provides services around the globe. The Assessee has a Correspondent Banking Division ('INM IB'), which manages relationships with Indian Banks / Financial Institutions operating in India ('Indian FIs'). The Assessee sells financial products to the Indian FIs, and the revenue earned is booked by the Assessee and offered to tax in India. During the year under consideration, the INM IB division of the Assessee earned 246.89 million. Further, the Assessee has earned a floating income of INR 18.805 million from the Nostro Account. 62. Further, Indian banks have to establish relations with overseas banks as they do not have a network of branches outside India. The Assessee, while dealing with the Indian bank/FIs would also acquaint its customers of the financial products ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. The profit margin that arrived at 1090 per cent is for higher than the margin reached by the Ld. TPO of 20.59 per cent. Thus, the Assessee's is adequately compensated, assuming. 68. More importantly, Ld. Counsel submitted that the Assessee has reported more than 100 transactions in Form 3CEB, and the same were accepted to be at ALP by the Ld. TPO. Admittedly these transactions include items which are marketed by INM IB division such as custodian charges, guarantee commission charges etc. as evident from Form 3CEB. Once the primary business transactions are found to be at ALP, one cannot separately treat incidental benefits as a separate transaction unless it is shown that it is separate from the main transaction. 69. Without prejudice to the above, Ld. Counsel submitted that there is no international transaction identified by the Ld. TPO, no Associated Enterprises identified by the Ld. TPO, no search process identified by the Ld. TPO, and no comparable identified by the Ld. TPO. Hence, the Assessee contends that no adjustment on account of corresponding banking activity is warranted. 70. He also drew our attention to the order from the Hon'ble Tribunal in the Assessee&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M IB division. Hence the allegation of the revenue that the assessee has not been adequately compensated has no merits. 14.13 In view of the aforesaid observations in the peculiar facts and circumstances of the case herein and respectfully following the aforesaid decision of this Tribunal, we 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. 14.14 It would be crucial to note that assessee had reflected more than 100 international transactions in form No.3CEB filed along with the return of income and the same were accepted to be at arm's length by the Ld. TPO. Admittedly these transactions include items which are marketed by INM IB division such as custodian charges, guarantee commission charges etc. as is evident from Annexure' C to form 3CEB. Hence, it could be seen that the main transactions were found to be at arm's length and the incidental benefit arising out of such transaction has been considered as a separate transaction. We find in the instant case that the main business transactions have been accepted to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n applied markup on this cost to arrive at the adjustment. Since the facts were identical to AY 2003-04, the CIT (A) has relied upon the decision given by his predecessor and directed the AO to disallow 50% of Mr. Ashok Bhatia's salary and perquisites (paid in India abroad). In the case of Mr. Peter Trench and Mr. C. Davis, he directed the AO to disallow only a certain portion of the salary and perquisites not related to the business of Indian branches. In the earlier assessment years 2002-03 and 2003-04, the Hon'ble Tribunal held that the roles played by the employees are merely an oversight on account of their functions and roles. These employees are primarily engaged in the day-to-day operations of the Assessee's business and predominantly provide services to the Assessee. These activities cannot be viewed as separate international transactions by segregating them from routine functions. The Hon'ble Tribunal in the preceding years held as follows: .generally in a multinational group, several oversight roles would arise within one's functions as an employee. These are mere incidental activities carried out by the employees, which acquire groupwise liaising and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the issue is covered in favor of the Assessee by order of the Hon'ble Tribunal in the Assessee's own case for AY 2002-03 and 2003-04, wherein the Hon'ble Tribunal has deleted the Transfer Pricing adjustment relating to the aforesaid issue. Our attention was drawn to para 17.12 of the order for the findings of the Hon'ble Tribunal. 74. From the records it is seen that the marketing/ support services of ECB transactions, the Assessee performs the following functions:- Engaging in discussions with the Indian customer to understand their requirements. Providing the requirements to the overseas lender AE Providing credit data to overseas lender AE. Since Indian corporates are customers of the Indian Branch, the credit appraisals are, in any case, done by the Bank from time to time for their local business. Accordingly, the credit data provided to overseas AE does not require additional effort from the Bank. Liaising between Indian corporate and overseas AE. 75. The Assessee does not assume any risks in the transaction; all risks lie solely with the overseas lender AE. The charging of fees by the Assessee is based on commercial parameters such as the relationship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time to time for their local business. Based on the said facts, the Hon'ble Tribunal in the preceding years held as follows: 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. Accordingly, ground no. 6 raised by the Revenue is dismissed. Furthermore, the Ld.TPO relied on secret comparables not available in the public domain, engaged in controlled transactions between foreign banks and Indian branches, and adopted an ad hoc 25% as compensation. It is asserted that using secret comparables not available in the public domain is arbitrary and contrary to the law. Additionally and wholly contrary to the Transfer Pricing Rules, the Ld. TPO utilized controlled data of foreign banks that had engaged in tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. TPO selected secret comparables and failed to disclose the details to the Assessee. These secret comparables were engaged in controlled transactions with group entities and were not independent transactions. In previous years (2002-03 and 2003- 04), the Ld. TPO accepted the ALP without making any adjustments, and there have been no changes in the facts. Moreover, the application of INPV would result in a lower value compared to NNBV. The relevant finding of the Ld. CIT (A), deleting the addition is below:- .The Ld. TPO's order suffers from various infirmities. He has picked up secret comparables and not made available the details to the appellant for its reply. Secondly, the secret comparable is in respect of a controlled transaction and hence not independent and not liable to be used as sole benchmark. Thirdly, no prescribed method has been followed to determine the ALP. On the other hand, the appellant has been adopting a remuneration (Transfer) policy consistently followed by HSBC group entities across the globe. The Ld. TPO in the earlier year (2002-03 and 2003-04) have accepted the Arm's Length Price and no adjustments was made. There is no material change in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the application of the two methods:- As per 30 per cent of the Net New Business Value (NNBV) method Notional: USD 11,000,000 Tenor of the deal: 3.5 years Value on the deal per annum: 10 basis points per annum (say) Credit Risk: 3.5 basis points per annum (say) Net New Business Value (NNBV) on the deal: PV of (USD11 mio * 6.5bps * 3.5 years) equals USD 22599 (i.e., Present Value of USD 25025) 30% of this is USD 6,780 /- As per 60 per cent of the INPV method Notional: USD 11,000,000 Tenor of the deal: 3.5 years Value on the deal per annum: 10 basis points per annum (say) Credit risk on the deal: 3.5 basis points per annum (say) Other event risk/uncertainty, etc.: 4 basis points per annum (say) INPV on the deal: PV of (USD11 mio * 2.5bps * 3.5 years) equals USD 8692 (i.e., Present Value of USD 9625) 60% of the above: USD 5215/- 86. From the working of the difference in the application of two methods as given by the ld. Counsel, we do not find any justification given by the ld.TPO to adopt 60% of NNBV allocation so as to take a contrary stand from the facts of the case presented by the assessee and the transaction of marketing of derivative services. Specially looking to the fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of any Voluntary Retirement Scheme (VRS); hence, the provisions of section 35DDA of the Income-tax Act, 1961 (the Act) are not applicable. 91. We have already given our finding in A.Y. 2004-05 and accordingly, in the finding given above, this issue is allowed in favour of the assessee. Ground No. 2: Depreciation of Rs 2,85,000 on amount paid to Gillanders Arbuthnot and Company Ltd ('Gillanders') 92. This issue has already been dealt by us in A.Y. 2004-05 wherein we have allowed this issue treating it as Revenue expenditure . Accordingly, ground No.2 raised by the assessee is allowed. ITA No 4786/MUM/2016 Department Appeal Ground No. 1: Expenses incurred for mobilization of deposits from Non-resident Indians (NRIs) Rs 9,29,19,828 94. Again this issue is similar to the ground raised in Revenue appeal for A.Y. 2004-05 and accordingly, in view of the finding given hereinabove, the ground raised by the Revenue is dismissed. Ground No. 2: Addition of Rs. 10,70,000 on account of overfunding of Employees Gratuity Fund (Income Tax Approved Fund) 95. The facts are that the Assessee makes a contribution to the approved gratuity fund. The Assessee has contributed to the employee&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not extinguish the debt but it would only prevent the creditor from enforcing the debt, has been well-settled. It is enough to refer to the decision of this Court in Bombay Dyeing Mfg. Co. Ltd. v. State of Bombay 1958 SCR 1122. If that principle is applied, it is clear that mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the section 100. Further, it has been submitted that the excess funds have been adjusted against the contribution of liability payable to the gratuity fund in AY 2006-07. The Ld.CIT(A) in AY 2006-07 has not allowed the deduction of Rs. 10,70,000, as the same has been allowed in AY 2005-06. If assessee has recongnised the excess contribution as asset in its books and credited to profit and loss account amounting to Rs. 10,70,000/- and has been reduced their contribution payable for A.Y. 2006-07 as it was already discharged in A.Y. 2005-06. Then it has been allowed in this year because in A.Y. 2006-07 ld. CIT(A) has not allowed deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has contributed in excess of the required amount. The Assessee cannot claim deduction for expenses over and above what is required for the particular purpose as determined by the actuary for the previous year. As the Assessee has itself credited the same to the Profit Loss A/c., it is taxed. 105. The relevant para of CIT (A) order allowing the ground in favour of Assessee is as under: I have considered the facts of the case, AO's contention and the Appellant submission. I find that the aforesaid issue is covered in the Appellants' favour by the Supreme Court decision in the case of Sugauli Sugar Works (P) Ltd. (1999) (236 ITR 518). Thus, on the basis of the factual submissions and the above decision, the addition of Rs. 40,27,00,000/- made by the AO on account of Overfunding of Employees Defined Benefit Pension Fund be deleted. Accordingly, this ground of appeal is allowed. 106. Here again once the payment has been made to the employees' pension fund, there is no provision in the Trust Deed for refunds. The Assessee neither obtained nor received any amount from the Trust nor has the Trust agreed to refund any amount to the Assessee. Furthermore, by making these paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his have already been offered and taxed in AY 2004-05 and therefore, taxing the same would amount to double addition. Since, this amount has already been offered in tax in A.Y. 2004-05 and therefore, same cannot be taxed in this year. Accordingly, the said reversal is excluded while computing income of the assessee. Ground No. 5 6: Addition of Rs. 55,45,78,123 on account of loss on certain security transactions undertaken by the Assessee 112. Brief facts are that, the Assessee had undertaken certain security transactions with Canbank Financial Services Limited (Canbank). The Assessee had to deliver certain securities to Canbank. However, Canbank stated that the securities were never delivered to them. 113. The Canbank Financial Services Limited had filed suit against the Assessee for default in honoring the said transaction. The summary of the court proceedings is as under: Date Remarks Order dated 30 June 2004 Special Court (Trial of offences relating to transactions in securities) at Bombay refer para 16 (page no. 31) of the order directed to pay the amount of Rs. 18,59,71,808 along with interest at 15 per cent from 24 June 1991 refer page 185 of the factual paper book. Hence, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dge has been wiped out from existence. For the aforementioned reasons, this Court is unable to sustain the impugned order of the Special Bench of the ITAT. Accordingly, the question framed is answered in the negative i.e., in favour of the Assessee NAFED and against the Revenue. (emphasis applied) 117. Accordingly, we held that the liability to pay has accrued and quantified in current year and hence the deduction of Rs. 55,45,78,123 is allowed in this year. Ground No. 7,8 and 9: Addition of Rs. 41,33,021 on account of interchange income received by the offshore (non-India) branches of the Assessee 118. This issue is covered in Assessee's own case for AY 2000- 01, 2001-02 and 2003-04 (3688/Mum/09, 3689/Mum/09, 2358/Mum/14) the relevant para of the decision is reproduced as under: We have heard the rival submissions and perused the material before us. We find that in the matter of Standard Chartered Grindlays Bank Ltd.(supra), the issue of taxability of commission with regard to Credit Cards was deliberated upon and decided by the Tribunal. We would like to re-produce the relevant portion of the order that deals with the facts as well as the reasoning, given by the FAA and the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly held that the income arising in India from transaction in India by using credit cards of foreign branches should be taxed in India. This income can only be the income received by the Indian branch and such commission income being already included as an acquiring bank. The income to the foreign branch from the credit given to its card holders outside India cannot be taxed in the hands of the Indian branch since it is not arising in India and also it cannot be attributed to the assets and activities of the Indian branch as is required under art. 7 of DTAA. Therefore, there is no need to further estimate any income. He accordingly deleted the addition. XXXXXXXXXX 48. We have considered the rival submissions. We are in agreement with the finding of the learned CIT(A). Where the foreign branch has issued credit card and even if the transaction takes place in India, the credit is given to the customer outside India and the debt has also arisen outside India. The merchant shipments in India may receive the payment but the merchant shipments do not incur any debt. They merely receive charges for the goods sold or services rendered. However, the charges are received by the foreign bra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, ground No.10 raised by the Revenue is dismissed. Ground No. 11: CIT(A) is correct in directing to allow the expenditure to an extent of 5 per cent and computing deduction under section 44C @ 5/100 times of average adjusted total income against @5/105 times of average adjusted total income as worked out by the AO without giving any reasons. 122. Since AO has grossed up the amount while computing the deduction under section 44C. Section 44C does not provide for grossing up. Hence, grossing up is not required. Accordingly, this ground is dismissed. B. Transfer Pricing Grounds 123. Since transfer pricing grounds are similar to the grounds raised in the earlier year and same are covered by the Tribunal orders for A.Y.2002-03 and 2003-04, the same are dealt herein as per the grounds raised in both the appeals. ITA No: 4765/MUM/2016 Assessee's Appeal Ground No 3: Correspondent Banking Activity 124. At the outset, this issue is covered in favor of the Assessee by order of the Tribunal in the assessee s own case for AY 2002- 03 and 2003-04, wherein the Hon'ble Tribunal has deleted the TP adjustment relating to the aforesaid issue. 125. Further, facts pertaining to the correspond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red into an Investment Service Agreement with HSBC USA. 132. Under this agreement, the credit balance in the bank account exceeding USD 2.5 lac is invested by HSBC USA in approved securities on behalf of HSBC India on an overnight basis. The interest earned by the Assessee from HSBC USA on the deployment of the surplus fund is at the following rates: Balance Interest Rate Up to USD 100,000,000 Generally, 37 basis points below the Overnight Fed Fund Rate Above USD 100,000,000 Best Efforts 133. The Assessee benchmarked the transaction using the CUP method. Various Indian banks avail similar services from HSBC USA. The rate of interest earned by some of the third-party Indian banks from HSBC USA on the overnight placement of dollar funds was as follows: Sr. No Name of the Bank Balances Interest Rates 1 Bank of Maharashtra Up to USD 15,000,000 Effective Fed Fund Rate (-) 35 basis points Over USD 15,000,000 Best Efforts 2 State Bank of Travancore Up to USD 15,000,000 Effective Fed Fund Rate (-) 35 basis points Over USD 15,000,000 Best Efforts 3 Vysya Bank Ltd Up to USD 5,000,000 Effective Fed Fund Rate (-) 50 basis points USD 5,000,000 to USD 15,000,000 Effective Fed Fund Rate (-) 50 ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r benchmarking, as LIBOR is calculated as an average of the submissions made by the major banks to the market intelligence agency - Thomas Reuters, which then calculates and publishes the rates for the British Bankers association every day. 142. The calculation of the US Dollar LIBOR is based on data submitted daily from a panel of 16 major financial institutions. This means that the LIBOR is based on the rates bank reports and not actual rates on real loans. 143. Further, there have been allegations that the rate was manipulated by some major banks for their own benefit by submitting falsified numbers to the pool used for computing LIBOR. In view of the above, the LIBOR rates cannot be considered an appropriate benchmarking rate for international transactions during the assessment years under consideration. 144. Ld. Counsel further submitted that, the Assessee is not disadvantaged as the best effort rate has been lower than the generally committed rates compared to transactions between HSBC USA and unrelated banks. Hence, the transaction between the Assessee and HSBC USA is at an arm's length price. 145. The use of Fed Fund rates has been accepted by the LD. TPO and Ld. CIT (A ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
