TMI Blog2014 (3) TMI 1158X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was having its own interest free fund for making investment in securities. As regards the disallowance of operating/ administrative expenses, by following earlier order of this Tribunal, we restrict disallowance at 2% of exempt income. Taxability of the profit arising on revaluation of the unmatured forward forex contracts - HELD THAT:- . Having regard to the facts that the loss on revaluation of unmatured forward forex contracts has been allowed by this tribunal in the earlier years i.e. 1998-99 then the natural corollary would be that the profit arising on revaluation of the unmatured forward forex contract is liable to be taxed as income. Accordingly, we dismiss this ground of the assessee. Disallowance of the data processing charges by the AO by classifying them to be royalty and invoking provision of section 40(a)(i) - HELD THAT:- Following the earlier orders of this tribunal, we set aside this issue to the record of the Assessing Officer to consider deductibility of this amount as per the provisions of the Act including section 44C. Addition of TP adjustment in respect of interest received on call placement - HELD THAT:- In identical issue has been consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was covered against the Revenue. TP adjustment on account of interest received on call placements - HELD THAT:- The rate of interest received by the assessee was found by the CIT(A), within the tolerance limit of +/- 5% of arms length price determination by the TPO and accordingly the benefit of proviso to section 92C(2) was given to assessee. We found no error in the order of the CIT(A) qua this issue when the interest charged by the assessee is within the tolerance range of the arms length price determined by TPO. Disallowance of provision toward country risk - AO disallowed the claim of deduction as this was not an actual return of bad debts, but only a provision was made as per the guidelines of the RBI therefore, in view of the first proviso to section 36(1)(viia)(a) of the Act no deduction is allowable to a foreign banking company - HELD THAT:- CIT(A) has confirmed disallowance made by the AO, when the assessee itself has fairly conceded that this issue is now covered against the assessee by the decision of special bench of this Tribunal in case of NEW INDIA INDUSTRIES LIMITED. VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX. [ 2007 (10) TMI 325 - ITAT DELHI-F] and Ahm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the payment has been made towards the dedicated exclusive service rendered by the Head Office to the assessee. Accordingly this ground is allowed for statistical purpose. Chargeability of interest under section 234D - HELD THAT:- We have heard learned DR as well as learned AR and considered relevant material on record. At the outset, we note that this issue is now covered against the assessee by the decision of Hon ble Bombay High Court in case of CIT vs. IOC [ 2012 (9) TMI 517 - BOMBAY HIGH COURT] . Accordingly, this issue is decided in favour of the Revenue against the assessee. - I.T.A. No. 4474/Mum/2009, I.T.A. 4649/Mum/2009, CO No. 218/Mum/2013, I.T.A. No. 723/Mum/2011, I.T.A. No. 1134/Mum/2011, CO No. 221/Mum/2013 - - - Dated:- 21-3-2014 - SHRI R.C. SHARMA AM AND VIJAY PAL RAO, JM For the Appellant : Shri Madhur Agarwal For the Respondent : Shri Ajeet Kumar Jain (DR) ORDER PER BENCH, These two set off Cross Appeals and Cross Objection of the Revenue are directed against the orders dated 29.09.2009 19.11.2010 of Commissioner of Income Tax(Appeals) for the assessment years 2002-03 2003-04 respectively. 2. For the Assessment Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) The CIT(A) ought to have held that as the investments were made in the earlier years, where it has been held that no expenditure was incurred in relation to exempt income as the investments were out of own funds, no interest / administrative expenditure could be held to have been incurred during the year under appeal in relation to such exempt income. (d) The CIT(A) ought to have held that no administrative expenditure was incurred in relation to exempt income as: i. only four interest warrants have been received during the year (i.e. two interest warrants for each of the two bonds) and ii. there is no movement in the investments in the last several years. Your appellants pray that the AO be directed to delete the disallowance of ₹ 50,04,624. 5.The CIT(A) erred in upholding the AO s action of charging to tax, profit of ₹ 1,98,42,490, arising on revaluation of unmatured forward forex contracts. Your appellants submit that based on his stand in the earlier assessment years that a loss on revaluation of forex contracts being a notional loss, is not deductible in arriving at the taxable income, the CIT(A) ought to have directed the AO, not to charge to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable to a non-resident company. Your appellants submit that on the facts and in the circumstances of their case, the CIT(A) ought to have held that in accordance with the provisions of Article 26 of the DTAA, tax on income is leviable at the rate applicable to a domestic company or the maximum marginal rate applicable to a co-operative bank. Your appellants pray that the AO be directed to re-compute their tax liability in accordance with the provisions of Article 26 of the DTAA. Your appellants crave leave to add to, amend, alter, vary, omit or substitute the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as they may be advised. 3. Ground No.1 regarding taxability of interest received from Head Office/overseas branches. At the time of hearing the learned counsel for the assessee has stated that the assessee does not want to press this ground and therefore ready to pay the tax on the interest received from Head Office/overseas branches. He has prayed that this ground may be dismissed as not pressed. Learned DR has raised no objection it this ground of the assessee s appeal is dismis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xempt income. The learned DR has not disputed the fact that an identical issue has been considered and decided by the Tribunal in assessee s own case for the earlier assessment years. 10. Having considered the rival submissions as well as relevant record, we note that for the Assessment Year 2001-02, the Tribunal has decided an identical issue in para 31 as under: 31. After considering the rival submissions and perusing the relevant material on record we find that the question of allowing exemption under section 10(15) and (33) on gross basis is no more res integra in view of the order passed by the tribunal in assessee s own case for earlier years. As regards the contention of the DR for making disallowance under section 14A, we find that the same is also a settled issue. In principle, it is held that disallowance under section 14A is called for. However, the amount disallowable under section 14A has been adjudicated in earlier years. After noticing that the funds for investment in securities fetching exempt income were out of own funds, it has been held that no disallowance under section 14A on account of interest is called for. As regards the amount of other expenses di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of royalty and hence not allowable under section 40(a)(i) cannot be allowed. The obvious reason is that the assessee made the payment on account of data processing costs to its head office. By no standard this amount can be considered as royalty as a consideration for the use of the assets specified under Explanation 2 to section 9(1)(vi). This amount is in the nature of head office expenses. The assessee did not include this amount in the ambit of head office expenses to be considered on the touchstone of section 44C of the Act. Since AO made disallowance by treating it as royalty, he had no occasion to consider the deductibility or otherwise of the amount as per the prescription of section 44A. Under such circumstances, we are of the considered opinion that it would be in the interest of justice if the impugned order on this issue is set aside and the matter is restored to the file of the AO. We order accordingly and direct the AO to consider the deductibility or otherwise of such amount by treating it as head office expenses. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. 17. Accordingly, by following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e natural consequential effect would be the claim of assessee regarding interest paid to the head office/overseas branches, is allowable deduction. Accordingly, ground o.2 is dismissed as not pressed and ground No.3 is allowed. 22. Accordingly, following earlier orders of this Tribunal, we decide this issue against the assessee. 23. Ground No.9 disallowance of interest and commission by the TPO in respect to ECB advance to Indian borrowers. 24. We have heard learned AR as well as learned DR and considered the relevant material on record. The TPO made an adjustment of 25% of interest and commission received by overseas branches in respect of ECB advance to Indian borrowers. The CIT(A) granted relief of 5% and restricted the adjustment to 20% of interest and commission. At the outset, we note that an identical issue has been considered by the Tribunal in case of M/s. Credit Lyonnais (through their successors Calyong Bank) in vide order dated 31st September 2013 in para 8.7 to 8.8 as under: 8.7 We have considered the rival submissions as well as relevant material on record. The assessee being Indian branch has helped the foreign currency loan syndication in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 of the Protocol. 8.8 Having held that para 4 of the Protocol does not apply to the case of the assessee, now, the question arises as to whether the adjustment made by the authorities below is justified. For making the adjustment, the authorities below have taken into consideration, the income towards interest as well as the fee charged by the foreign branch from the clients. It is pertinent to note that when the loan is provided by the syndicate and the assessee has not contributed to the loan amount then as regards the income of interest, the same cannot be attributed to the assessee for providing the services of the financial analysis of the borrowers, market condition and regulatory environment in India. Since the assessee has provided certain services for that arms length charges can be determined as per the provisions of transfer pricing regulation. The TPO as well as C)T(A) has not brought out any comparable for determination of the arms length price but took the total income comprising interest as well as other fees charged by the foreign branches for allocation/attribution to the assessee. In this case, the ALP has not been determined by taking into consideration unco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the coordinate Bench of Kolkata has dealt with the issue and for the reasons mentioned therein, the AR accepts the rate as applied by the AO. We also find that there is no infirmity in the order of the revenue authorities, which we sustain. 28. We further note that even in the case of M/s. Credit Lyonnais (through their successors Calyong Bank), the issue has been considered and decided by the tribunal against the assessee. Accordingly, following the order of this tribunal, we decide this issue against the assessee that the rate of tax applicable on the assessee s income is 48%. 29. In the Cross Appeal, the revenue has raised the following grounds. 1. On the facts and in the circumstances of the case and in law, the ld.CIT(A) erred in directing the AO to allow deduction for expenses of ₹ 1,08,12,701/- incurred by the Head Office. 2. On the facts and in the circumstances of the case and in law, the ld.CIT(A) erred in deleting the addition of ₹ 1,51,7441- out of the addition of ₹ 4,29,169/- in respect of the transfer pricing adjustment on account of interest received on call placements. Margin of 5% under proviso to section 92C(2) is not al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arms length price determination by the TPO and accordingly the benefit of proviso to section 92C(2) was given to assessee. We found no error in the order of the CIT(A) qua this issue when the interest charged by the assessee is within the tolerance range of the arms length price determined by TPO. 35. Ground No.3 regarding reducing 5% interest and fee out of the addition made by the TPO with respect to ECB advance to Indian borrowers. 36. We have heard learned DR as well as learned AR and considered the relevant material on record. This issue is common to the issue involved in the Ground No.9 of the assessee s appeal. In view of our finding in ground no.9 of the assessee s appeal, this ground of the revenue s appeal is dismissed. CO No.218/M/2013 37. In the Cross Objection the revenue has raised the only ground as under: Without prejudice to the stand of Revenue that the interest of ₹ 3,48,S9,282/- received from HO/Overseas Branches is taxable in India as the branch and HO are separate entities for the purpose of taxation, if the interest income is held to be exempt by treating the HO and Branch as one entity necessary disallowance may be made u/s 14A o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputing its income. 5. The CIT(A) erred in enhancing the assessment by holding that the interest of ₹ 80,00,944 paid on FCNR(B) deposits is disallowable under section MA as it was incurred in relation to the exempted interest income of ₹ 18,71,711 on balances held in nostro accounts. The appellant prays that the AO be directed to delete the disallowance of ₹ 80,00,944. 6. The CIT(A) erred in confirming that the provision of ₹ 11,91,663 in respect of Non Performing Assets is not deductible under section 37(1) of the Act. The appellant prays that the AO be directed to allow a deduction for the said provision under section 37(1) of the Act. 7. The CIT (A) erred in upholding that the expenditure incurred in relation to the Voluntary Separation Plan / Voluntary Retirement Scheme is deductible in accordance with the provisions of section 35DDA of the Act. The appellant prays that the AO be directed to allow a deduction for the said expenditure under section 37(1) of the Act. 8. The CIT(A) erred in confirming that the India Branch and the HO are associated enterprises and the transactions between them are covered under section 92 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessment year 2002-03 on this issue in para 12 of this order, this ground of the assessee s appeal is dismissed. 44. Gound No.4 regarding disallowance of provision toward country risk. The assessee made a provision of ₹ 41,00,000 towards country risk management as per RBI guidelines vide its Circular No.DBOD.BP.71/21.04.103/2002-03 dated 19th February 2003. The AO disallowed the claim of deduction as this was not an actual return of bed debts, but only a provision was made as per the guidelines of the RBI therefore, in view of the first proviso to section 36(1)(viia)(a) of the Act no deduction is allowable to a foreign banking company. The CIT(A) has confirmed disallowance made by the AO, when the assessee itself has fairly conceded that this issue is now covered against the assessee by the decision of special bench of this Tribunal in case of Net India Industries Ltd. V. ACIT (18 SOT 51) as well as the decision coordinate Bench in case of Ahmedabad and Gujarat Gas Financial Services Ltd. V. ACIT (307 ITR 370). 45. Before us, the learned AR has fairly conceded that this issue is covered against the assessee by the decision of the Special Bench of this Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 166 (SC) and submitted that the Hon ble Supreme Court has held that if an amount is debit to the profit and loss account by creating a provision for a bad and doubtful debt, and further if the assessee has correspondingly/simultaneously obliterated the said provision from its account by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance-sheet, and consequently at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance-sheet is shown as net of the provision for impugned bad debt , the assessee will be entitled to the benefit of deduction under section 36(1)(vii), as there is an actual write off by the assessee in his books. 51. We note that the AO has disallowed the claim of the assessee because it was found as a provision for NPA. As far as the allowbility of the claim for the provision for NPA is concern, it is settle proposition that the same cannot be allowed. The ld. AR has relied upon the decision of Hon ble Supreme Court in case of Vijaya Bank (supra) however, when the provision in question is for NPA and not for Bad debts then in view of the decision of Hon ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal ground no.1 for disallowance u/s.14A, we note that the CIT(A) has made disallowance of ₹ 2,00,000/- on ad-hoc basis. The learned AR of the assessee has submitted that in the earlier years the tribunal has examined this issue and found that the assessee has urged its own interest free fund for the investment in the securities and therefore, no disallowance can be made u/s.14A on account of expenditure. He urged that 2% of the dividend income can be disallowance on account of operating expenditure . The DR has relied upon the orders of the authorities below. At the outset, we note that this ground is common to the ground no.4 of the assessee s appeal for assessment year 2002-03. In view of our findings for assessment year 2002-03, we restrict disallowance u/s.14A to 2% of the exempt income. 60. The additional ground No.2 regarding non allowbility of deduction u/s.36(1)(viia)(b). 61. We note that this issue is connected with the issue of disallowance of provision for non performing asset. As the issue of disallowance of non performing asset has been decided against the assessee, therefore, this issue is also decided against the assessee. 62. For the Assessment Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for assessment year 2002-03. In view of our finding ground no.1 for assessment year 2002-03, this ground of the revenue s appeal is dismissed. 66. Ground No.3 regarding taxability of interest on Nostro account balances. 67. We have decided this ground along with ground no.5 of the assessee s appeal Accordingly, this ground is allowed. 68. Ground No.4(a) regarding allowance of 5% interest and fees out of the addition made by the TPO with respect of ECB advances to Indian borrowers. This ground of the revenue s appeal is common to the ground no.3 of the revenue s appeal for assessment year 2002-03. In view of our finding on the ground no.3 of the revenue s appeal is dismissed. 69. Ground no.4(b) regarding TP adjustment in respect of credit risk assistance expense of ₹ 88,99,091/- charged by HO to the Indian Branch for providing assistance in doing credit risk analysis for the Indian entity. The TPO noted that this expenses has been charged to the Indian entity in the same invoices in which the HO has allocated expenses of ₹ 20,391,525/- as Indian s share of HO expenses. Further the TPO has noted that this expenses has not been debited by the assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusively for the service of the assessee. The assessee has also not filed any certificate from the auditor of the Head Office in support of this claim. Accordingly, we set aside this issue to record of the AO/TPO to examine the facts properly and the evidence to be filed by the assessee in support of this claim. The assessee is directed to file relevant evidence and certificate from the auditor of the Head Office to show that the payment has been made towards the dedicated exclusive service rendered by the Head Office to the assessee. Accordingly this ground is allowed for statistical purpose. 72. Ground no.5 regarding chargeability of interest under section 234D. 73. We have heard learned DR as well as learned AR and considered relevant material on record. At the outset, we note that this issue is now covered against the assessee by the decision of Hon ble Bombay High Court in case of CIT vs. IOC (254 CTR 113). Accordingly, this issue is decided in favour of the Revenue against the assessee. CO.No.221/M/2013 74. The revenue has raised the only ground as under: Without prejudice to the stand of Revenue that the interest of ₹ 62,56,364/- received from HO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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