DEPUTY COMMISSIONER OF INCOME TAX (IT)-3(2)(2), MUMBAI vs. M/S MIZUHO BANK LIMITED, MUMBAI

Whether on facts and in circumstances of the case and in law, the Ld. CIT(A) is correct in holding that the addition has been wrongly made without appreciating the fact that the PE in India has to be treated as P a g e | 2 6 Appeals DCIT (IT)-3(2)(2) Vs. M/s Mizuho Bank Ltd. separate entity and the interest payable by the said PE is to be taxed in India in the hands of PE as income.

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.

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.

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 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, when, such adhoc method is not a prescribed method for determination of ALP w's 92C of the IT Act, 1961. 6. 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 to arrive at the arm's length rate, as against the ALP rate computed by the TPO in his order based on the rate chart of State Bank of India @ 1% where amount of loan was more than 1 million U and @ 18% for rest amount of loan, to issue guarantee against 100% counter guarantee by reputed international Banks, without adjudicating as to how the rate applied by the TPO is not comparable with the relevant international transaction.

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was correct 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 to arrive at the arm's length rate without analysing the functions performed, assets used and risks undertaken by the assessee bank.

Whether on the facts and circumstances of the case and in law the Ld CIT(A) was night in the allowing relief to the assessee based on the decision of the Bombay High Court in Everest Kento Cylinder Limited (378 ITR 57 (Bom), which clearly stated that no comparison (for transfer pricing purposes) can be made between guarantees issued by commercial banks (like the assessee) with corporate guarantee issued by a holding company for benefit of its AE (subsidiary company) and the commission to be charged in the case of bank guarantees necessarily has to be higher than that of corporate guarantees.

The appellant prays that the order of the Ld CIT(A) on the ground(s) be set aside and that of the Assessing Officer be restored

The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

The fact in brief is that return of income declaring total income of Rs.3,03,57,44,858/- was filed 30.11.2011. The assesse is a foreign bank incorporated in Japan and 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:

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, the ld. CIT(A) has deleted the addition after following the decision of ITAT Mumbai in the case of the assesse itself for A.Y. 2005-

The relevant part of the decision of CIT(A) is reproduced as under: “5.2 Ground No.2: 5.2.1 This ground is against the action of the AO in treating the branch as a representative assessee/agent of its head office u/s 163(1)(c) without according any show cause to the appellant.

2 This issue is covered by my predecessor's decision in appellant's own case in Appeal No CIT(A)-57/Arr.149/2016-17 for AY 2011-12 dated 24.01.2017 For ready reference, the findings given in that order is reproduced below: “I have considered the order of the AO and submissions made by the assessee. During the appellate proceedings, the assessee's AR submitted a copy of order of the Hon'ble ITAT in assessee's own case for the AY 2005-06. Identical case for AY 2005-06 wherein identical issue has been dealt by the Hon'ble ITAT, the relevant portion of the order is as under: The Revenue is in appeal against order of CIT(A) in deleting the disallowance made under Section 40(a)(a). We have considered rival contentions and found that disallowance has been made by the AO on the plea that branch office in India has been treated as permanent establishment and has filed return of income as per IT Act The AO observed that although the branch office is an extension of head office, but it is located in India, tax juri iction, as per Article 5 of DTAA between India and Japan PE includes the branch office. The AO further observed that assessee has permanent establishment in the form of branch office, therefore, as per Article 7 of DTAA, provides permanent establishment will be taxable in India finally the AO treated the head office and branch office as two different entities as per the domestic law as well as DTAA, therefore, disallowed the interest payment for non-deduction of tax under Section 40(a) (ia). We found that issue is squarely covered by the decision of the ITAT Special Bench in the case of ABN Amro Bank, 97 ITD 89. Recently the issue is also dealt by the ITA No.3282/09, CO46/13 & ITA No 602/2013 7 ITAT Special Bench at Mumbai in the case of Sumitomo Mitsu Banking Corp. 136 ITD 66 (Mum)(SB), wherein it has been held interest paid by the Indian Branch of the assessee bank to its overseas head office is not chargeable to 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- P a g e | 5 6 Appeals DCIT (IT)-3(2)(2) Vs. M/s Mizuho Bank Ltd. of the Special Bench of this Tribunal, we uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on both the issues involved in this appeal of the revenue and dismiss the said appeal." The above decisions on interest allowability and interest income of the Hon'ble ITAT in the assessee's own case have been adjudicated in favour of the assessee and in view of this, these parts of ground of appeal are allowed. One more issue which has been raised is that a notice u/s 163(1) of IT. Act. 1961 was not given to the assessee branch before treating it as agent to its head office First of all, even though the branch has been treated as agent to head office. it is not necessary to invoke provisions of section 163 and give notice u/s 163 because branch and the head office are the same entity and only for assessing the income under IT Act, 1961, these two are being treated separately. Hence, it is held that it was necessary to issue notice under section 163 of IT. Act, 1961 to the branch of the bank as agent of the Head Office of the Bank In nutshell, ground of appeal is partly allowed." 5.2.3 Respectfully following the decision of my predecessor, this ground of appeal is partly allowed.”

During the course of appellate proceedings before us the ld. Counsel submitted that identical issue similar facts has been adjudicated in the case of the assesse itself by ITAT vide ITA No. 2711/Mum/2017 for AY. 2010-11 on 24.08.2022. On the other hand, the ld. D.R relied on the order of the A.O.

Heard both the sides and perused the material on record. Without reiterating the facts as discussed supra the A.O treated the interest income received by the Head office from the branch office in India as income deemed to accrue or arise in India and taxed the interest income @ 10% of the gross amount under Article 11(2)(a) of the India, Japan DTAA. We have perused the decision of the ITAT as referred supra for A.Y. 2010-11 wherein identical issue on similar facts has been adjudicated in favour of the assesse. The relevant operating para of the order is reproduced as under:

Following the decisions of the ITAT as supra we don’t find any merit in the grounds of appeals of the Revenue. Further, it is also clear from the findings of the ld. CIT(A) wherein held that it is not necessary to invoke provision of section 163 and give notice u/s 163 because the branch and the head office were the same entity and inadvertently at the concluding part he stated it was necessary to issue notice under section 163 of the Act. Therefore, the grounds of appeals no. 1 to 3 of the revenue stand dismissed. Ground No. 4 to 8:

The TPO has passed order u/s 92CA(3) of the Act on 23.12.2015 where adjustment u/s 92CA(3) of Rs.2,38,66,708/- was made towards compensation received sought by the assesse in the international transaction relevant to issuing of bank guarantee on the strength of P a g e | 7 6 Appeals DCIT (IT)-3(2)(2) Vs. M/s Mizuho Bank Ltd. back to back guarantee by the AEs. Accordingly, the AO has made adjustment of Rs.2,38,66,706/- to the total income of the assesse. The fact in brief pertaining to Transfer Pricing adjustment on account of back to back counter bank guarantee is that during the year certain overseas branches of Mizuho Cooperative Bank ltd. & Mijuho Bank Ltd., having clients who required guarantees to be issued in India, therefore those overseas branches requested MHCB, India branch to provide such guarantees to the beneficiaries and provide back to back counter guarantee to MHCB, India branch to cover any financial liability that MHCB, India Branch would incur on behalf of these overseas branches in connection with guarantees issued to Indian clients on their behalf. The risk of discharging the bank guarantees was taken by the branches issuing counter bank guaranties and MHCB/India branch provides support services in connection with processing of these bank guarantees. After considering that in case of Japanees bank the funding cost was lower than the nationlised bank, in India, the ld. CIT(A) has recomputed the commission for guarantee by making an addition of 10% increase in the rate of commission which has been charged by the assesse to arrive at the arm’s length rate.

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

During the course of appellate proceedings before us the ld. Counsel at the outset submitted that identical issue on similar facts has been decided by the ITAT in the assessment year 2010-11 to 2011-12

Heard both the sides and perused the material on record. With the assistance of the ld. Representatives we have perused the decision of ITAT in the case of 2785/Mum/2017. The relevant part of the decision is reproduced as under:

The coordinate bench of the Tribunal, in the aforesaid decision, noted that the taxpayer does not bear any risk in its books as it is fully protected by overseas counter guarantee/indemnity and there is also no foreign exchange risk as whenever the taxpayer is called upon to discharge the guarantee on behalf of the overseas branches, the taxpayer would first receive the money from overseas branches because of the existing counter guarantee, and then it would discharge the 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.

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 nothing available on record in support of assessee’s claim that money has been charged to the overseas branch and overseas branch recover these amounts from the third-party clients and paid them to the assessee. There are also no details regarding whether the aforesaid process of charging and payment by the overseas branch is prior to or post the discharge of bank guarantee in favour of the beneficiary in India, in case of default. Thus, no details have been furnished to support the claim that no risk was borne by the Indian branch. Further, though in Form No. 3 CEB assessee has claimed to determine the arm’s length price of international transaction of issuing bank guarantee against the counter guarantee issued by the associated enterprise by applying CUP method, however, there are no details available on record as to how such benchmarking

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:

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. P a g e | 13 6 Appeals DCIT (IT)-3(2)(2) Vs. M/s Mizuho Bank Ltd. Ground No. 1 to 3:

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:

As the facts and the issue involved in these grounds of appeals are the same as grounds no. 4 to 8 vide ITA No. 2867/Mum/2022 therefore, applying the same findings mutatis mutandis, these ground of appeal of the revenue are allowed for statistical purpose.

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.

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:

As the facts and the issue involved in these grounds of appeals are the same as grounds no. 4 to 8 vide ITA No. 2867/Mum/2022 therefore, applying the same findings mutatis mutandis, these ground of appeal of the revenue are allowed for statistical purpose. P a g e | 14 6 Appeals DCIT (IT)-3(2)(2) Vs. M/s Mizuho Bank Ltd.

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.

In the result the grounds no. 1 to 3 in all the appeals of the Revenue stand dismissed and grounds no. 4 to 8 in all the appeals of the Revenue are allowed for statistical purposes. Order pronounced in the open court on 17.01.2023 (Aby T Varkey) (Amarjit Singh) Judicial Member Accountant Member Place: Mumbai Date 17.01.2023 Rohit: PS