TMI Blog2024 (3) TMI 1222X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the expatriate was in the nature of head office expenditure, therefore, same was disallowed u/s 44C of the Act - HELD THAT:- We find that the lower authorities has not contrary disproved the material fact that both these employees have continually worked for the Indian branches of the assessee bank and both have offered their global income in India for tax. The assessee has also provided copy of document showing that necessary approval as per Sec. 35B of the Banking Regulation Act, 1949 for appointment of Mr. Danis Vaz as Chief Executive Officer of the India branches was obtained. The assessee has demonstrated from the return of income filed in the case of both these employees that their global income has been offered to tax in India for the assessment year 2005-06 to the amount of Rs.60,43,321/- in respect of Mr. Denis Vaz and amount of Rs.45,65,652/- in the case of Mr. Terry Watkins. The assessee has brought on record the relevant return of income of both the employees showing that global income was offered to tax in India in accordance with provision of Sec. 5 and Sec. 6 of the Income Tax Act for remaining present in India on secondment with Indian Branch of BNS. The revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lients of BNS overseas branches, the assessee did not fall under any default/credit risk as it is secured by a back to back inter-bank indemnity issued by overseas BNS branches to the assessee. In a reverse scenario where the associated enterprises of the assessee issues guarantees on behalf of the assessee, the remuneration charges by them to the assessee was only the administrative services provided by them and not based on the rates that would have been charged to third parties. We find in the case of BNS India no public information on third party to third party transaction of similar or identical services was found that reflects the characterstics of the services provided by BNS India. Further as per provision of Rule 10B of the I.T Rules comparables for provision of interbank indemnity services would have to be companies which provide same or similar services as BNS India, and are comparable in terms of function performed, risk assumed and asset utilized. As per the information provided by BNS India it had earned operating margin of 25.41% on operating cost which was higher than the arm s length margin of 15.28% on operating cost. The lower authority has not brought on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in contradiction of Article 7(3) of the Double Taxation Avoidance Agreement between India and Canada. 5. In upholding the inclusion of comparable companies selected by the learned TPO in determining the arm's length price in respect of transactions relating to the provision of correspondent banking services rendered by the Appellant to its HO/ overseas branches. 6. In upholding that the margin range of 38.74% to 78.94% of the comparable companies selected by the learned TPO cannot be considered to be wide and it proves that the companies engaged in these financial spaces have generally returned better profits during the financial year 7. In upholding the use of data pertaining to the financial year 2004-05 in determining the arm's length price, which was not available in the public domain at the time when the Appellant was required to comply with the requirements under the Act and the relevant Rules. 8. In disregarding the margin analysis undertaken by the Appellant using the financial data of the comparable companies for the financial year 2004-05 which was submitted with the learned TPO as well as during the course of the Appeal hearing. 9. In wrongly computing the bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m)] 2. ITAT Order in the Appellants own case for AY 2002-03 [ITA No 6818/MUM/2006(Mum)] 3. ITAT Order in the Appellants own Case for AY 1998-99 [ITA 5351/M/2001 (Mum.)] 6. Heard both the sides and perused the material on record. We have considered the decisions of the ITAT in the case of the assessee as referred by the ld. Counsel. With the assistance of ld. Representative we have perused the decision of ITAT Mumbai for A.Y. 2004-05 vide ITA No. 3530/Mum/2009. The relevant operating part of the decision is reproduced as under: 5. We have heard the submissions made by rival sides and have examined the orders of authorities below. The ground No.1 and 2 of appeal by the assessee are against disallowance made u/s 14A of the Act. We find that the manner and reasons for disallowance u/s. 14A of the Act in the impugned assessment year is similar to the one in Assessment Year 2002-03. The Coordinate Bench deleted the disallowance by observing as under: 6.2 We have heard the submissions made by rival sides and have examined the orders of authorities below. The CIT(A) in the impugned order has given finding of fact that the assessee has surplus interest free funds in the form of capital and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been incurred as overseas salaries of the expatriate was in the nature of head office expenditure, therefore, same was disallowed u/s 44C of the Act. 9. The assesse filed the appeal before the ld. CIT(A). The ld. CIT(A) held that expenditure so claimed on the salary of expatriate employees is found to be deductible and allowable only to the extent of the evidence produced in respect of presence of Shri Denis Vaz till 30.10.2014. Therefore, 7/12 of the salary pertaining to M/s Danis Vaz which comes to Rs.35,25,270/- was allowed and the remaining amount of Rs.70,83,703/- was disallowed. 10. During the course of appellate proceedings before us the ld. Counsel submitted that two employees Mr. Danis Vaz and Mr. Tery Watkins were the Canadian nationals who were on secondment to Indian operations of BNS and during the year under consideration relevant to assessment year 2005-06 have continually rendered services exclusively for the assessee company. The ld. Counsel further submitted that in the case of both the employees their global income were offered to tax in India, therefore, disallowance of claim of deduction of the salary paid to these employees is not justified. The ld. Counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that decision of ld. CIT(A) in sustaining the disallowance is not justified. Accordingly, this ground of appeal of the assessee is allowed. ITA No. 5634/Mum/2011 (Revenue s Appeal) 1. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in holding that the interest under section 115A has to be computed on the gross interest income and not on the net interest income and accordingly directing the Assessing Officer to levy tax on interest of Rs. 83,714,078/- as per section 115A and not as per normal rates. 2. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in holding that an amount of Rs. 59,128,408/- is deductible as per Article 7(2) and Article 7(3) of the India- Canada Double Taxation Avoidance Agreement (IC Treaty) in respect of interest paid by the Assessee's Indian branch to its Head Office/Overseas Branch. 3. On the facts and in the circumstances of the case and in law the Id. CIT(A) erred in deleting the addition made by the Assessing Officer of Rs.35,25,270/- in respect of salary paid to expartriate employees working in India on the ground that expenditure is not covered by section 44c of the Act. Ground No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espectively relied upon the order of A.O and CIT(A). Since the introduction of section 115A certain changes have been made and with the passage of time the Finance Act 1994 has also carried out certain amendments in the said section w.e.f. 1/4/95 the scope and effect of the amendments was explained by CBDT in Circular No.684 dated 6/6/94(208 ITR 08(St.), relevant page-43. This CBDT circular and related provisions of IT Act has been elaborately discussed by the first appellate authority. On careful examination of the entire issue it is abundantly clear that the legislature has intended to tax the interest only on gross basis. Further in support of his arguments ld. A.R has also cited Article 10 11 of DTAA with Canada. Notification No.10503(F No.505/2/87-FTD) reference 229 ITR 44(St.) Further it has also been mentioned that section 90(2) of IT Act also provides that the provisions of this Act shall apply to the extent they are more beneficial to that assessee. The order of the first appellate authority is quite elaborate on this subject and needs no interference, therefore, under the totality of the circumstances and in view of the specific provisions of the Act we hereby dismiss thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 44C of the Act: 19. During the course of appellate proceedings before us at the outset the ld. Counsel submitted that similar issue on identical facts has been adjudicated by the ITAT in the case of the assessee itself for the earlier years in favour of the assessee. He referred the following judicial pronouncements made by the ITAT on similar issue: 1. ITAT Order in the Appellants own case for AY 04-05 [ITA No.3530/MUM/2009 (Mum)] 2. ITAT Order in the Appellants own case for AY 02-03 [ITA No.6818/MUM/2006 (Mum)G 3. PCIT vs The Bank of Mitsubishi UFJ Ltd. ITA 604 of 2015(Del.) 20. Heard both the sides and perused the material on record. We have perused the decision of ITAT for A.Y. 2004-05. The relevant part of the decision is reproduced as under: 13. In ground No.2 of appeal, the Revenue has assailed deletion of addition in respect of salary paid to expatriate employees working in India. We find that the issue in the impugned assessment year is similar to the one considered by the Co-ordinate Bench in Assessment Year 2002-03. The Tribunal decided the issue against the Revenue holding as under: 11.3 Both sides heard. Undisputedly, the salary expenditure of expatriate employees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee as per the ground no. 1 of appeal of the assessee for assessment year 2005-06 vide ITA No. 5740/Mum/2011 as above in this order. Applying the finding of the aforesaid decision as mutatis mutandis this ground of appeal of the revenue is dismissed. Ground No. 2: Applicability of S.115A to interest income from Foreign Currency Loan: 23. We have dismissed the ground of appeal of the Revenue on the similar issue and identical facts as per ground no. 1 of appeal of the revenue for assessment year 2005-06 vide ITA No. 5634/Mum/2011 as above in this order. Applying the finding of the aforesaid decision as mutatis mutandis this ground of appeal of the revenue is dismissed. Ground No.3: Interest paid by Indian branch to Head office of Rs.84,05,943/- taxed as income in the hands of Head office: 24. We have dismissed the similar ground of appeal on identical facts as per ground no. 2 of appeal of the revenue for assessment year 2005- 06 vide ITA No. 5634/Mum/2011 as above in this order. Applying the finding of the aforesaid decision as mutatis mutandis this ground of appeal of the revenue is dismissed. Ground No.4: Restriction of Claim of bad debts in terms of the proviso to Sec. 36(1)(vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) of the India-Canada DTAA: 28. All these grounds of the assessee are not pressed therefore the same stand dismissed. Ground Nos. 9 to 13: (Transfer Pricing adjustment for administrative support services in relation to inter bank indemnities: 29. During the course of assessment the assessing officer noticed that assessee s overseas branches have executed interbank indemnities against which assessee has issued guarantees on behalf of the clients of overseas branches and vice versa. Bank of Nova Scotia India received a commission of USD 125 per transaction for guarantees issued by it on behalf of its overseas branches and paid a commission of USD 100 for the guarantees issued by the overseas branches on its behalf. The assessee also submitted that the guarantee issued by the assessee bank branch was fully secured by a back to back interbank indemnity issued by overseas branches. The assessee has benchmarked the above transaction of interbank indemnities by using TNMM method. The comparability analysis made by the assessee Nova Scotia India Branch showed an arithmetic mean margin (operating profit to operating cost) of 15.28%. 30. However, the TPO has not agreed with the submission o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion provided to related parties. The ld. Counsel further submitted that identical issue on similar fact has been adjudicated by the ITAT, Mumbai in the case of Australia New Zealand Banking Group Ltd. Vs. DCIT (2022) 140 taxmann.com 574 (Mum Trib) in favour of the assessee. He further submitted that vide letter dated 11.10.2011 the assessee has brought to the information of the transfer pricing officer that CUP method cannot be applied in the case of the assessee as no public information is available with regard to the similar transaction with the third parties. He also referred page no. 21 and page 22 of the paper book pertaining to The Transfer Pricing Report where especifically mentioned that entire risk of discharging the bank guarantees was borne by the overseas branches issuing the bank guarantee and BNS India only provides support services in connection with the processing of the bank guarantee. On the other hand, the ld. D.R supported the order of lower authorities. 34. Heard both the sides and perused the material on record. During the year BNS Overseas Branches executed interbank indemnities against which the BNS India issued guarantee on behalf of the clients of the ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The lower authority has not brought on record any relevant material to contrary to the material facts as discussed supra in this order. We have gone through the decision of ITAT in the case of Australia New Zealand Banking Group Ltd. Vs. DCIT (2022) 140 taxmann.com 574 (Mum Trib) wherein it is held that where TPO observed that assessee had earned processing fees for issuing guarantees on behalf of its associated enterprises and rejected TNMM adopted by the assessee and proceeded to benchmark guarantee transaction using external CUP method, since data under CUP method was not available and data margins under TNMM was readily available and held that it would be appropriate to apply TNMM as most appropriate method. In the aforesaid decision it is held that TNMM method would be the most appropriate method in the facts and circumstances of the case and CUP could not be applied because of non-availability of data. The relevant operating part of the decision is reproduced as under: 3.6 Hence, from the aforesaid modus operandi, it could be concluded that assessee acts as a beneficiary bank Je issue guarantee in India on behalf of clients of overseas branches of ANZ based on the counter gua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Net Margin Method. For this purpose, the assessee had taken the third party comparables which are engaged in providing liasoning services, managerial services, marketing services, administrative services and information services. Effectively all these services could be loosely termed as business support services. Hence, when the data under CUP method is not available and data of margins under TNMM is readily available, then it would be appropriate to apply TNMM method as the Most Appropriate Method (MAM) in the facts and circumstances of the instant case. 3.7 We find that assessee had explained the entire transactions and the modus operandı applied by it in respect of the guarantee transactions before the Id TPO which are evident vide letter dated 9-10-2015 together with the fee charged for each type of services tendered by it. These details are enclosed in pages 316 to 322 of the paper book filed before us. We also find the assessee vide its letter dated 28-10-2015 had filed a detailed annexure enclosed in pages 328-331 of the paper book listing the guarantees issued by it based on counter guarantee received from overseas branches of ANZ The assessee also furnished the sampl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent to note that the same transactions were accepted by the Id. TPO upto A Y2012-13 in the case of the assessee Hence, even going by the rule of consistency as has been held by the Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT [1992] 60 Taxman 248/193 ITR 321, there is no need for the Id. TPO to take a divergent stand when there is no change in the facts and circumstances during the year with that of earlier years Hence, we direct the Id TPO to delete the adjustment made in respect of guarantee fees in the sum of Rs. 10,94,55,035/. Accordingly, the ground Nos 1 2 raised by the assessee are allowed. We have also perused the decision of ITAT Delhi in the case of Bank of Tokyo Mitsubishi UFJ Ltd. Vs. The DDIT (IT), Circle 1(1) vide ITA No.1162/Del/2014 wherein identical issue on similar fact was decided in favour of the assessee. Considering the facts and judicial pronouncements as discussed supra in this order the issue in the appeal is squarely covered by the decision of the ITAT Mumbai therefore, the decision of ld. CIT(A) in sustaining the arm s length price addition made by the assessing officer is not justified. Accordingly, ground nos. 9 to 13 are allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utatis mutandis this ground of appeal of the assessee is allowed. ITA No.4036/Mum/2012 (Assessee s Appeal) AY: 2007-08 Ground No. 1 to 6: (Transfer pricing adjustment in respect of Correspondent banking services and Upholding the use of single year data in determining arm s length price in respect of correspondent banking service and Disregarding margin analysis using the financial data of comparable companies for FY. 2006-06 and Correspondent Banking Charges whether to be excluded in view of Article 7(3) of the India Canada DTAA: 42. All these grounds of appeal are not pressed, therefore, the same stand dismissed. Ground No.7 to 9: Transfer pricing adjustment for administrative services in relation to guarantee transaction and Transfer pricing adjustment in respect of Inter-bank Indemnity and TPO s action of selecting CUP as the most appropriate method to benchmark the international transaction of issue of back to back guarantee and by selecting domestic guarantees issued by the Appellant as comparable transaction. 43. On similar issue and identical fact we have decided the ground nos. 9 to 13 of appeal of the assessee in favour of the assessee for assessment year 2008-09 vide ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X
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