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TMI Blog2023 (3) TMI 1030X X X X Extracts X X X X X X X X Extracts X X X X ..... out appreciating the fact that the PE in India has to be treated as separate entity and the interest payable by the said PE is to be taxed in India in the hands of PE as income. 3. Whether on facts and in circumstances of the case and in law, the Ld CIT(A) is correct in holding that the provisions of section 40(a)() of the Act do not apply without appreciating that the interest was chargeable to income. 4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing to re-compute the ALP rate of commission in respect of the guarantees by making an addition of 10% increase in the rate of commission in respect of the guarantees by making an addition of 10% increase in the rate of commission currently being charged by the assessee to arrive at the arm's length rate without citing any basis for arriving at this ALP rate determination and applying to the facts of the case. 5. Whether on the facts and circumstances of the case and in law, the Ld CIT(A) erred in directing to re-compute the ALP rate of commission in respect of the guarantees by making an addition of 10% increase in the rate of commission currently being charged by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d carries out banking operation in India through branches situated at Mumbai & Delhi. These branches were a permanent establishment within the meaning of DTAA between India & Japan. The assessment u/s 143(3) r.w.s 144C(3) of the Act was finalized on 17.05.2016 and total income was assessed at Rs.307,81,84,271/-. Further facts are discussed while adjudicating the grounds of appeal filed by the Revenue as follows: Ground No. 1 to 3: 3. During the year under consideration, the head office of the bank in Japan has received interest on borrowing made by the Indian branch to the amount of Rs.165,09,402/- net of tax in which tax has been deducted at source. However, the A.O was of the view that interest income received by overseas office from the branch office in India was deemed to accrue or arise in India. The A.O observed that since the interest had been paid by the branch office, therefore the branch office was representative assesse/agent as per Section 163(1)(c) of the Act and interest paid to head office was taxable in India. Therefore the AO taxed the interest payment of Rs.165,09,402/- to tax at 10% as per the DTAA between India and Japan in the hands of the assesse. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax in India. It was further held that the provisions of Section 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 Section 40(a)(ia) does not arise Respectfully following the said decision of the Special Bench, we upheld the impugned order of CIT(A) for deleting the disallowance of interest made under Section 40(a) (ia) of the IT. Act. Similarly, on the issue of amount of interest received by the HQ, the Hon'ble ITAT has held as under- The Ld. DR, however, has fairly and frankly conceded that both the issues involved in this appeal of the revenue are squarely covered by the recent decision of Special Bench of the Tribunal in the case of Sumitomo Mitsu Banking Corp. Vs. DDIT 136 ITD 66 (Mum) (SB) wherein it has been held that interest paid 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 Respectfully following the said decision of the Special Bench of this Tribunal, we uphold the impugned order of the Ld. CIT(A) gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "16. The issue with regard to addition of interest income earned by the head office from the branch office had already been decided by the Tribunal in assessee‟s own case in favour of the assessee by relying on the decision of the ITAT Special Bench in the case of Sumitomo Mitsu Banking Corp. 136 ITD 66 (Mum)(SB), wherein it was held that interest paid by Indian branch of the assessee bank to its overseas head office is not chargeable to tax in India. The Tribunal in assessee‟s own case in ITA No.7479/Mum/2007, vide order dated 25-7-2012, has held as under:- "The Ld. DR, however, has fairly and frankly conceded that both the issues involved in this appeal of the revenue are squarely covered by the recent decision of Special Bench of the Tribunal in the case of Sumitomo Mitsu Banking Corp. vs. DDIT 136 ITD 66 (Mum)(SB) wherein it has been held that interest paid by the Indian Branch of the assessee bank to its overseas head office is not chargeable to tax in India. As further held by the Special Bench in the said case, the 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 q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o arrive at the arm's length rate. 4. Therefore, the ld. CIT(A) directed the assessing officer to re-compute the commission for guarantee by making an addition of 10% increase in the rate of commission being charge by the assesse to arrive at the arm's length rate. The relevant part of the finding of the ld. CIT(A)is reproduced as under: "4.2 Issuance of Bank guarantees to the clients against counter guarantee issued by overseas AE's:- Rate of guarantee commission depends on several following factors: Charging of Guarantee commission varies from transaction to transaction and depends on following factors. * Term and condition of issuance of bank guarantee * Risk undertaken by the bank on issuance of bank guarantee * Cost of issuance of bank guarantee * Credit rating of customer * Relationship with the customer * Security Involved in issuance of bank guarantee * Quantum of guarantee * Period of guarantee * Economic and business Interests Nature and terms of International transactions Certain overseas branches of Mizuho Corporate Bank Ltd and Mizuho Bank Ltd have clients who require guarantees to be issued in India. Given that these clients are locate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk on MHCB, India Branch. Further, MHCB, India Branch would receive processing fees from its AEs in foreign currency. As there could be differences in the USD, Yen and Indian rupee conversion rates as on the date of receipt of remittances and the Booking date there is an element of foreign exchange risk on MHCB, India Branch. The risk profile for the entities in respect of the said transaction has been summarized below. Typo of Function MHCB, India Branch AEs Credit Risk NO Yes Foreign exchange risk - Discharging of guarantees NO Yes Foreign exchange risk Processing fees Yes No Using the CUP method, MHCB, India Branch is transacting with its overseas AEs at arm's length in respect of bank guarantee Commission (as defined in Section 92F of the Act). In view of the above contention, the entire risk of discharging the bank guarantees is borne by the overseas branches issuing the Counter bank guarantees and MHCB, India Branch provides support services in connection with the processing of the bank guarantees. The Learned AO has erred in considering the guarantee fees charged by the Indian Bank as comparable, without considering the fact that Funding cost is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overseas branch would make the payment to Indian branch, which would then onward make the payment to the beneficiary in India. In this regard, it is also the submission that Indian branch provide support services towards processing of these guarantees such as receiving swift instructions, issuing the guarantee on stamp paper and couriering the same to the party in India, maintenance of log of original documents, sending reports on project basis, reconciliation of transactions received versus those processed etc. Thus, as per the assessee the entire risk of discharging the bank guarantee is borne by the overseas branches issuing the counter bank guarantee. As per the assessee, Indian branch only faces element of foreign exchange risk as it would receive processing fee from its associated enterprise in foreign currency and there could be difference in USD, Yen and Indian rupee conversion rates as on the date of receipt of remittance and the booking date. As per Form No. 3CEB, forming part of the paper book, the assessee claimed to have applied CUP method for determining the arm's length price of the international transaction of issuing bank guarantee against counter guarantee issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same. The coordinate bench further noted in the aforesaid decision that the assessee received the processing fee from the associated enterprise in foreign currency and the said fees is received immediately after the invoices are raised for the same, thereby the risk of exchange fluctuation would be very negligible due to reduce time span involved therein. We find that the coordinate bench of the Tribunal in para 3.7 of the aforesaid decision also considered the details of fee charged by the taxpayer for each type of services rendered by it. Further, in the aforesaid decision, as noted by the coordinate bench in para 3.7, the taxpayer also filed details of guarantees. 19. However, in the present case, apart from the claim of the assessee that guarantees have been issued to the clients of the overseas branches, in respect of which counter/inter-bank indemnity was executed by the overseas branches, the assessee in the factual paper book has filed the details of commission earned from the bank guarantee issued on behalf of the overseas branches. We find that there is no detail/ document with regard to the counter guarantee/indemnity executed by the overseas branch. Also there is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tistical purpose." 7. As discussed the fact of the assessment year 2012-13 as well as the issue involved are identical to the assessment year 2010-11 except with variation of amount which has been adjudicated by the ITAT vide decision dated 24.08.2022 as discussed supra. Therefore, 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. ITA Nos. 2868 /Mum/2022 Ground No. 1 to 3: 8. As the facts and the issue involved in these grounds of appeals are the same as grounds no. 1 to 3 vide supra in ITA No. 2867/Mum/2022 therefore, applying the same findings mutatis mutandis, these grounds of appeal of the revenue are also dismissed. ITA No. 2869/Mum/2022 Ground No. 1 to 3: 9. As the facts and the issue involved in these grounds of appeals are the same as grounds no. 1 to 3 vide supra in ITA No. 2867/Mum/2022 therefore, applying the same findings mutatis mutandis, these grounds of appeal of the revenue are also dismissed. Ground No. 4 to 8: 10. As the facts and the issue involved in these grounds of appeals a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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