CREDIT AGRICOLE CORPORATE AND INVESTMENT BANK,MUMBAI vs. ACIT (IT) 2 (1)(1), MUMBAI

The assessee is a multinational Bank based in France with branch offices in India. The assessee is a non-resident having Permanent Establishment (PE) in India. For AY 2010-11 the assessee filed the return of income on 11.10.2010 declaring a total income of Rs. 3,49,14,26,218/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. A reference was made & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank to the Transfer Pricing Officer (TPO) who determined the Arm's Length Price (ALP) of certain international transactions of Indian Branch such as back to back guarantee, marketing of ECB loans & derivative transactions to make a Transfer Pricing (TP) adjustment of Rs.51,00,76,850. The AO vide draft order dated 28.03.2014 assessed the income of the assessee at Rs. 470,95,27,240/- (including the TP adjustment) and also assessed the income of the HO, Hongkong Branch and Singapore Branch to the tune of Rs. 131,62,22,653/- in the hands of the assessee. Aggrieved the assessee raised the objections before the Dispute Resolution Panel (DRP). Pursuant to the directions of the DRP, the total income was computed at Rs.404,21,58,617/- and the income of the Branches assessed in the hands of the assessee at Rs.132,78,88,740/- by the AO in the final order of assessment dated 30.01.2015. The assessee is in appeal before the Tribunal against the final order of assessment passed by the AO.

The ld. AR at the outset submitted that the majority of the grounds raised by the assessee for the year under consideration have already been considered by the Co-ordinate Bench in assessee's own case in the preceding AYs. The ld. AR in this regard placed reliance on the various orders of the Tribunal from AYs 1997-98 to 2009-10 submitted in the case law Paper Book. The ld. AR also brought to our attention that some of the issues which are recurring in nature have travelled to the Hon'ble Bombay High Court and that the Hon'ble High Court has upheld the findings of the Tribunal in favour of the assessee.

The ld. DR while supporting the order of the AO fairly conceded that the most of the issues contended in this appeal have already been considered by the Co-ordinate Bench in the preceding AYs in assessee's own case.

The assessee vide letter dated 24.05.2023 raised an additional ground stating that the order passed by the Transfer Pricing Officer (TPO) under section 92CA(3) of the Act dated 30.01.2014 is not passed within the time limit prescribed as per the Act. After hearing both the parties in our considered view, the additional grounds raised are pure legal issue, which does not require investigation of new facts. Hence, placing reliance on the judgment of the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC), we admit the additional grounds.

For the purpose of adjudication, we will first consider the additional ground raised by the assessee. The ld. AR submitted that the order passed by the TPO under section 92CA(3) of the Act is barred by limitation and therefore liable to be quashed. The ld. AR submitted the table with the dates which are relevant for considering the issue of the TPO's order being barred by limitation. The ld. AR in this regard relied on the decision of the Hon'ble Madras High Court in the case of Pfizer Healthcare India Pvt. Ltd. vs. JCIT [2021] 124 taxmann.com 536 (Madras).

We heard the ld. DR and perused the material on record. The relevant extract of the table submitted by the ld. AR with regard to the impugned issue is extracted below:

We notice in this regard that the similar issue have been considered by the Hon'ble Madras High Court in the case of Pfizer (supra) where it has been held that “29. The provisions of section 144C prescribe mandatory time limits both pre and post the stage of passing of a transfer pricing order. Assessments involving transfer pricing issues are different and distinct from regular assessments and the intention of Legislature is to fast track such assessments. Bearing in mind the specialized nature of such assessments, a separate set of Officers attend to the framing of assessments and the DRP has been constituted for redressal of disputes involving TP issues, in a timely fashion. In this scheme of things, I am unable to accept the submission that the period of 60 days stipulated for passing of an order of transfer pricing is only directory or a rough and ready guideline. This argument is rejected. 30. Now, coming to the question of how the 60 day period is to be computed, the critical question would be whether the period of 60 days would be & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank computed including the 31st of December or excluding it. Section 153 states that no order of assessment shall be made at any time after the expiry of 21 months from the end of the assessment year in which the income was first assessable. The submission of the revenue is to the effect that limitation expires only on 12 a m of 1-1-2020. However, this would mean that an order of assessment can be passed at 12 a m on 1-1-2020, whereas, in my view, such an order would be held to be barred by limitation as proceedings for assessment should be completed before 11.59.59 of 31-12-2019. The period of 21 months therefore, expires on 31-12-2019 that must stand excluded since section 92CA(3A) states 'before 60 days prior to the date on which the period of limitation referred to section 153 expires'. Excluding 31-12-2019, the period of 60 days would expire on 1-11-2019 and the transfer pricing orders thus ought to have been passed on 31-10-2019 or any date prior thereto. Incidentally, the Board, in the Central Action Plan also indicates the date by which the Transfer Pricing orders are to be passed as 31-10-2019. The impugned orders are thus, held to be barred by limitation.”

From the perusal of the above table given in assessee's case, we notice that the TPO ought to have passed the transfer pricing order under section 92CA(3) by 29.01.2014 whereas the order is passed on 30.01.2014. Therefore, applying the ratio laid down by the Hon'ble Madras High Court in the above case, we hold that the order passed by the TPO making the TP Adjustment is barred by limitation and accordingly liable to be quashed. Hence, the TP Adjustment made for AY 2010-11 is hereby deleted. The additional ground raised by the assessee in this regard is allowed. In view of our decision with regard to the TP Adjustment, Ground No. 19 to 21 raised contending the TP Adjustment made by the TPO have become infructuous.

Now we will proceed to consider the grounds raised by the assessee with regard to various additional made towards corporate tax & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank Ground No.1 – Disallowance of Bank charges paid to Head Office(HO) / Overseas Branches (OB) by invoking provisions of section 40(a)(i) of the Act.

During the year under consideration the assessee has paid a sum of Rs.6,34,998 towards bank charges to the HO/OB. The AO held that these payments are taxable in India in the hands of HO/OB and therefore tax should have been deducted on the same. The AO further held that since the assessee has not deducted the tax at source, the payment is to be disallowed under section 40(a)(i) of the Act. The contention of the assessee before the lower authorities is that while computing profit attributable to Indian Branches, the bank charges paid to HO/OB is deductible as per Article 7(2) and 7(3) of the DTAA between India and France. The assessee also contended that the said payment is not taxable in the hands of the HO/OB in India since the payment is to self.

We heard the parties and perused the material on record. The ld. AR before us submitted that this is a recurring issue and that the same is covered by the decision of the Special Bench of Tribunal in the case of Sumitomo Mitsui Banking Corporation Ltd. vs. DCTI 136 ITR 66 (Mum-Trib-SB) and that the Co-ordinate Bench in assessee's case has been consistently holding the issue in favour of the assessee. We notice that in the latest decision in assessee's own case for AY 2006- 07 to 2009-10 dated 11.09.2023 the Co-ordinate Bench has considered the similar issue where it has been held that “8. We find that the issue is recurring in nature. The taxability of interest /commission paid to HO/Overseas branches has been considered by the Co- ordinate Bench in assessee's own case in Assessment Year 2004-05. The Co- ordinate Bench in turn placing reliance on the earlier decision of the Tribunal in for Assessment Year 2002-03 dated 21/03/2014 has decided the issue in favour of assessee. We find that the Tribunal has held that the ratio laid down in the case of Sumitomo Mitsui Banking Corporation vs. DCIT(supra) squarely applies to the issue in hand and thus, allowed the payment of interest and bank charges paid to HO/Overseas branches. No & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank contrary material has been placed on record by the Revenue. Respectfully following the decision of Co-ordinate Bench in assessee's own case in the preceding Assessment Years ground No.2 and 3 of the appeal are allowed.”

The issue for the year under consideration being identical respectfully following the above decision of the Co-ordinate Bench, we hold that the AO is not correct in making disallowance of Bank Charges paid to HO/Overseas Branch. Ground No.1 is allowed.

During the year under consideration the Indian Branches have paid the following amounts to HO/OB towards reimbursement of expenses incurred by the HO/OB on behalf of the Indian Branch – (i) Credit risk assistance Rs. 7,90,55,825/- (ii) EDP assistance expenses Rs. 1,26,98,108/-. (iii) Head Office System Implementation charges and information system Asia Pacific charges Rs. 4,03,53,485/- 17. The AO disallowed these expenses on two counts. First the AO held that these expenses are covered under the provisions of section 44C of the Act. The AO did not accept the submissions of the assessee that these expenses are direct expenses pertaining to the Indian Branches and are not HO expenses allocated to the assessee. The second ground for disallowance as held by the AO is that these payments are taxable in the hands of HO in India and accordingly the same is to be disallowed under section 40(a)(i) since the Indian Branch has not deducted tax at source on the impugned payments. The AO in this regard rejected the contention of the assessee that these are cost to cost reimbursements with no income element and therefore not taxable in India. The AO did not consider the contention that the & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank these expenses are to be allowed under section 37(1) of the Act since these are business expenditure pertaining to the Indian Branches.

The assessee during the year under consideration has made provision towards country risk to the tune of Rs. 1,33,81,000/- and has claimed the same as a separate deduction besides the Provision for Bad and doubtful debts. The assessee submitted that the provision towards country risk is made as per the RBI & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank regulations and hence should be allowed as a deduction. The AO held that the provision made is not allowable as a deduction under section 37 for the reason that they are contingent in nature. The AO while arriving at the assessed income included the provision made towards country risk for the purpose of determining the deduction allowable under section 36(1)(viia)(b) i.e. an amount not exceeding 5% of the total income. The DRP confirmed the decision of the AO on both counts that the provision for country risk cannot be allowed as a separate deduction under section 37 and that the same to be considered with other provisions made towards bad and doubtful debts for the purpose of deduction under section 36(1)(viia)(b). The ground raised

The ld. AR fairly conceded that the issue of allowability of provision towards country risk under section 37 has been held against the assessee and in this regard drew our attention to the decision of the Co-ordinate Bench in assessee's own case for Ay 2003-04, 2004-05, 2005-06 and 2008-09.

We heard the parties and perused the material on record. We notice that there is no addition is made to Motor Vehicle by the assessee during the year under consideration and the depreciation is claimed on the written down value. Therefore there is merit in the submission of the ld AR that the issue stands covered by the above decision of the coordinate bench. In any case, with regard to the contention that the motor vehicles are to be considered as commercial vehicles that are eligible for higher depreciation, we notice that the coordinate bench in the case of M/s.Blue Steel Engineers P Ltd., vs DCIT (ITA No.6411/Mum/2010 dated 11.05.2012) has considered a similar issued and held that – “8. We have carefully considered the rival contentions of the parties and also perused the orders of the learned CIT(A) as well as the Assessing Officer. The assessee company had purchased three Hyundai Accent cars on 11-2-2002 which was prior to 1-4-2002. Admittedly, these cars have been purchased in the name of the assessee company and have been used for the purpose of assessee’s business. The short controversy involved whether the depreciation on these cars should be allowed @ 20% or @ 50%. Clause 2 of Part III of Appendix I provides “Motor Cars” acquired or put to use on or after 1st day of April, 1990, the rate of depreciation from the Assessment year 2003-2004 to 2005-2006 was allowable @ 20%. Sub-clause (vi) and (via) of clause 3 of Part III of Appendix I provides that & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank new commercial vehicle, which is acquired on or after 1st day of April, 2001 but before 1st day of April, 2002 or put to use on or after 1st day of April, 2002 for the purpose of business, the rate of depreciation is 50%. The definition of commercial vehicle has been given in Note 6 of the Appendix I, which defines “Commercial Vehicle” as under :-

We heard the parties and perused the material on record. We notice that in assessee's case for earlier years, the Co-ordinate Bench has been holding the issue in favour of the assessee on the ground that the "make available" test to qualify as FTS under Article 12 of the DTAA between India and France fails in assessee's case. We further notice that Article 13 of the India France DTAA does not have the "make available" test, but the same is imported from the other treaties India has with other countries basis the Most Favoured Nation (MFN) clause mentioned in the Protocol of the tax treaty. However the ld. AR during the course of hearing fairly submitted that this view of the coordinate bench will no longer hold good in view of the decision of the Hon'ble Supreme Court in the case of AO (IT) vs. Nestle SA (2023) 155 taxmann.com 384 (SC). We notice in this regard that the Hon'ble Apex Court has ruled that a notification by the competent authorities of both the contracting state to the DTAA is a mandatory condition to give effect to any changes in terms including application of the MFN clause in tax treaties. Accordingly the relief allowed in favour of the assessee in earlier years by the coordinate bench on the ground that the "make available" test fails is not & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank applicable for the year under consideration. In view of this, the claim of the assessee that the income cannot be treated as FTS is not valid and cannot be the ground for seeking relief for the year under consideration.

With regard to the impugned payments the ld. AR, raised an alternate plea that out of the total disallowance made by the AO a sum of Rs. 9,17,63,933/- is claimed by the Indian Branch on the basis of allocation done by the HO and has not been actually paid by the Indian Branch to the HO. Therefore the ld AR argued that the amount is not taxable as per Article-13 of DTAA between India and France the fees for technical services which should be taxed only on actual payment. The ld. AR in this regard placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT (IT) vs. M/s Pramerica ASPF II Cyprus Holding Ltd. (ITA No. 1824 of 2016 dated 12.03.2019). The ld. AR submitted that it is an undisputed fact that the amount has been claimed by the assessee based on provision and not on payment and this fact has been recorded by the AO in the final assessment order (para 6.4.4. in page 16) . Accordingly, the ld. AR made the alternate plea that the sum of Rs. 9,17,63,933/- cannot be treated as income of the assessee.

We heard the parties and perused the material on record. The alternate contention of the ld AR is that credit risk assistance cost and cost of EDP assistance are not actually paid by the Indian Branch to HO and therefore not taxable in the hands of the HO as per Article 13(1) of the DTAA between India and France. In this regard we notice that a similar issue has been considered by the Hon'ble Bombay High Court in the case of DIT(IT) vs. M/s Siemens Aktiengesellschaft (ITA No. 124 of 2010 dated 22.10.2012) where it has been held that – & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank “2. As regards first question is concerned, the Income Tax Appellate Tribunal referring to para-1 to 3 under Article IIX-A of the Double Taxation Avoidance Treaty with the Federal Germany Republic as per Notification dated 26th August 1985 held that the assessment of royalty or any fees for technical services should be made in the year in which the amounts are received and not otherwise. Counsel for the Revenue relied upon the Special Bench decision of the Tribunal in the assessee's own case, which in our opinion, has no relevance to the facts of the present case, as it relates to the period prior to the issuance of Notification dated 26th August 1985. In this view of the matter the decision of the Income Tax Appellate Tribunal in holding that the royalty and fees for technical services should be taxed on receipt basis cannot be faulted.”

We further notice that a similar view has been expressed by the Hon'ble Bombay High Court in the case of M/s Pramerica ASPF II Cyprus Holding Ltd. (supra). In this regard, it is relevant to note that Article-13(1) of the DTAA between India and France reads that "Royalties, fees for technical services and payments for the use of equipment arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State". Further in assessee's case on perusal of AO's order we notice that the AO has recorded the fact that the expenses have been claimed by the Indian Branch on the basis of allocation by the HO and that the payment for these expenses have not been made (refer para 6.4.4 in pg. 16 of AO's order). Therefore, respectfully following the above decisions of the Hon'ble Bombay High Court we hold that the amount of Rs. 9,17,63,933/- which is not been actually paid by the Indian Branch to HO cannot be treated as FTS income in the hands of HO for the year under consideration under Article-13 of DTAA between India and France and therefore cannot be taxed in the hands of the assessee.

The Indian Branches during the year under consideration the paid a sum of Rs. 19,92,60,902/- to HO/OB in India which the AO held as taxable as per the & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank provisions of Article-12 of DTAA between India and France. The ld. AR in this regard submitted that the Co-ordinate Bench in assessee's own case for AY 2005- 06 has held that no income accrues to the HO/OB on the principles of mutuality. The ld. AR further submitted that the Hon'ble Bombay High Court has dismissed the revenue's appeal on the principle of mutuality for AY 1997-98 to 2000-01.

The ld. DR in this regard submitted that the issue needs to be examined in the light of the amendment made to section 9(1)(v) by way of explanation.

We heard the parties and perused the material on record. We notice that the issue of interest paid by Indian Branch to HO has been considered by the Co- ordinate Bench in assessee's own case for AY 2006-07 where it has been held that “18. The Id. Counsel for the assessee submitted that the assessee has paid interest to the tune of Rs.7.20 crores to Head Office and overseas branches. The Assessing Officer has taxed said interest in the hands of Head Office/Overseas Branch under Article-12 of India France DTAA. The short contention of the assessee is that this issue is squarely covered by the decision of Special Bench in the case of Sumitomo Mitsui Banking Corporation vs. DDIT. 136 ITD 66 (Mum-SB). This is a recurring issue in assessee's case. In Assessment Year 2005-06 similar issue had come up, the Tribunal placing reliance on the decision of Hon'ble High Court in the case of Steria India Ltd., 386 ITR 390 dismissed the ground raised in appeal by the Revenue. 18.1 Both sides heard. We find that identical issue has been decided by the Co-ordinate Bench in an appeal by the Revenue in for Assessment Year 2005-06 vide order dated 05/01/2018. The assessee has placed reliance on the decision in the case of Sumitomo Mitsui Banking Corporation vs. DDIT (supra) and Steria India Ltd. (supra). The Co-ordinate Bench dismissed the ground raised in appeal of Revenue. No contrary material has been bought to the notice of Bench to distinguish the decision taken by Co-ordinate Bench in assessee's own case in the preceding Assessment Year. Consequently, ground No.10 of the appeal is allowed for parity of reasons.”

The AO noticed that the Hong Kong Branch of the assessee has earned a commission income of Rs.3,66,77,228/- on the ECB extended to Indian borrowers. The AO held that the since there is no DTAA between India and Hong Kong the & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank commission income has to be examined under the Act. The AO further held that commission income is out of source in India and hence deemed to accrue or arise in India as per section 5(2) of the Act. The AO also held that the commission income is taxable under section 9(1)(i) of the Act since the Hong Kong Branch is having a business connection in India, as the business income and since the assessee is having a PE in India arising in India. Accordingly the AO attributed 50% of the commission of Hong Kong Branch as taxable in India. This addition is made besides the TP adjustment where 25% of the commission income earned by OB is attributed to the Indian Branch and taxed in India accordingly. The ld. AR submitted that the impugned issued is already considered by the Co-ordinate Bench in assessee's own case for AY 2005-06 where it has been held that the same would amount to taxing the income twice for the reason that the TPO has already considered 25% of the commission as ALP. The ld. AR further brought to our attention that assessee in the TP study has already considered 15% of the commission income as taxable in India and that the Co-ordinate Bench while considering the TP Adjustment has enhanced percentage of commission to 20%. The ld. AR accordingly submitted that the issue stands covered by the decision of the Co-ordinate Bench in assessee's own case for earlier AYs. With regard to AO invoking provisions of section 115A, the ld AR argued that the said provisions are not applicable since the Indian Branches are the PE in India. The ld AR also argued that the since the presence in Hong Kong is a Branch of the assessee which is French entity, the impugned income should be examined as per the DTAA between India and France and not as per section 9(1)(i) of the Act.

We in this regard notice that the similar issue has been considered by the Co-ordinate Bench in assessee's own case for AY 2005-06 and that facts for the current year are identical. We further notice that the Hon'ble Bombay High Court & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank has decide the issue in favour of the assessee in the group concern (ITA No. 1781 of 2024 titled DIT vs. Caylon Bank vide order dated 23.03.2017). We have extracted below the relevant findings of the Co-ordinate Bench in assessee's case for AY 2005-06 – “12.1.Aggrieved by the order of the AO the assessee preferred an appeal. The FAA after considering the available material, held that ALP of the international transactions of the PE in India was determined by the TPO, that the AO had made addition of the adjustments arrived at by the TPO, that after such adjustment it would be the position that the Indian PE of the assessee bank had been remunerated at the ALP and that the profit attributable to India PE is based on the functions undertaken, asssets employed and risks assumed. He further observed that remuneration at ALP would extinguish any further attribution of profit to the PE, that 50% of commitment fee(Rs. 5,41,43,714/-) and commission(Rs. 62,11,440/-) received by assessee's Hong Kong branch was not chargeable to tax as income of the assessee by virtue of section 9(1)(i) r.ws 115 A of the Act. 12.2.The DR argued that the disputed amount was not interest, that it consisted of commission and commitment charges, that same was taxable as per the provisions of Article 7 of the DTAA, that it was not a case of double deduction. The AR stated that the commitment fees/commission etc. were clearly effectively connected to the Indian PE, that 20% income was attributed as the ALP for the services performed by the India branch, that the said position was confirmed by the Bombay HC in the assessee's own case in earlier AY.s. that nothing further could be taxed in the hands of the Hong Kong branch, that it would lead to the same amounts being assessed to tax twice. 12.3.We have heard the rival submissions We find that identical issue was dealt by the Hon'ble Bombay HC and was adjudicated in favour of the assessee while deciding the appeals for the earlier years(Income tax Appeal no.1781 of 2014 dtd.23.03.2017 and IT Appeal no.1748 of 2014 dtd 23.03.2017) Respectfully following the judgment of the Bombay HC, we dismiss last ground of appeal

The ground raised by the Revenue pertains to DRP upholding the decision of the AO in considering the provision made towards country risk amounting to Rs. 133,81,000/- for the purpose of deduction under section 36(1)(viia)(b). We have while adjudicating the Ground No.4 have already held the issue against the assessee stating the provision cannot be claimed as deduction merely for the reason that the same made as per RBI regulations. However we see no infirmity in the decision of the DRP in allowing the provision to be considered for the purpose of deduction under section 36(1)(viia)(b) of the Act. Accordingly, the ground raised by the Revenue is dismissed.

From the above table it is clear that the grounds of the assessee and the revenue raised for AY 2011-12 are identical to AY 2010-11. Accordingly in our considered view our decision on above tabulated issues in AY 2010-11 are mutatis mutandis applicable to AY 2011-12 except for Grounds No.14 & 15 which will be decided along with the TP Grounds as listed below.

The TPO noticed that during the year under consideration, the OBs executed inter-bank indemnities against which the Indian Branch issued a back to back guarantee on behalf of the clients of overseas branches and vice-versa. The Indian branche has received a commission towards the said guarantee provided to Indian customers on behalf of OBs as per the agreement entered into in this regard. The compensation is determined based on risk return setting consistently followed by the assessee group. The assessee submitted before the TPO that the Indian branches bear no risk of the bank guarantee given to customers on behalf of the OBs since the same is secured by a back to back indemnity issued by the OBs. The assessee further submitted that it receives a minimum fee of Euros 200 flat on an annual basis and the fee of Euro 75 for amendments and Euro 50 for settlement of & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank claims. The assessee also submitted that the India Branch is further remunerated at the rate of 10 basis points of guarantee amount as per the agreement.

The TPO directed the assessee to bench mark the transaction using CUP method and to show-cause why consequent adjustment could not be made. The assessee submitted before the AO that the assessee renders only support administrative services towards the bank guarantee for which a fixed fees is charged. The assessee further submitted that the CUP method may not be the most appropriate method since the guarantee given by the Indian Branch in this case is supported by a back to back indemnity and therefore cannot be compared with guarantee given by the Indian branch in the normal course of business. TPO did not accept the submissions of the assessee for the reason that –

The TPO obtained information under section 133(6) from SBI and Union Bank of India with regard to rates charged for a counter guarantee given by the said banks. Based on the said information the TPO proposed the guarantee commission rate to be @ 1% for guarantee above USD 1 million and for others the TPO bench marked the commission rate at 1.8%. Accordingly the TPO made an adjustment of Rs.20,79,12,808/-

The ld. AR submitted that with respect to the Back to Back Guarantee given by the Indian Branch, there is no risk and that the branch is rendering on the administrative support. The ld. AR further submitted that the Guarantee is issued by the HO/OB and the guarantee when invoked by the Indian borrower, the branch gets fully reimbursed by the HO/OB. The ld AR also fairly conceded that the assessee has not done any bench marking towards the impugned transactions in its TP study. Before us the ld AR submitted a certificate from an independent Chartered Accountant, certifying the workings of the cost incurred towards the back to back guarantee transactions are accurate and the fees received are reasonable (page 213 to 219 of paper book)

The ld DR on the other hand vehemently argued that the contention that assessee is merely rendering administrative services cannot be accepted since the assessee by giving the guarantee takes the risk and the assets of the assessee are also employed in the process. The ld DR further submitted that the comparables chosen by the TPO of SBI and Union Bank are having identical transactions with its AE and therefore the bench marking done by the TPO is correct.

We heard the parties and perused the material on record. The OBs of the assessee in foreign countries cannot give guarantees to the Indian customers due to regulatory restrictions. Therefore these OBs ask the Indian Branch to give the guarantee and agree to indemnify the Indian Branch by give counter / back to back guarantee. The Indian Branch is receiving fixed fees and also a nominal percentage as commission. The assessee has not done any bench marking of the impugned transaction in the TP study. The TPO was of the view that the compensation received is not at arm's length and accordingly made TP adjustment based on information received under section 133(6) from SBI and Union Bank who provide & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank similar services to its OBs. The argument of the ld AR with regard to TPO's bench marking is that the transaction entered into by SBI and Union Bank are not uncontrolled transactions since the same are entered into with their AEs only. Though we see merit in the said submission of the ld AR that the comparison should be done with an uncontrolled transaction, we are unable to agree with the contention that the price charged by the assessee is at arm's length without proper bench marking. Further the certificate of the Chartered Accountant also needs to be factually examined. We notice that an identical issue has been considered by the coordinate bench in the case of Mizuho Bank Ltd., vs DDIT(IT) [2023] 149 taxmann.com 46 (Mum-Trib) where it has been held that –

In assessee's case also it is an admitted position that the assessee has not done any bench marking in the TP study with regard to the impugned transactions. Therefore respectfully following the above decision of the coordinate bench we remit the issue back to the TPO for a de Novo bench marking of the international transaction of back to back guarantee given by the OBs to the assessee. The TPO is directed consider the certificate of the Chartered Accountant while determining the ALP of the impugned transaction. The assessee is directed to submit the relevant details as may be called for by the TPO in this regard and cooperate with TP proceedings. It is ordered accordingly. The ground of the assessee is allowed for statistical purposes.

The Indian branch of the assessee provides marketing and supporting services in respect of External Commercial Borrowings (ECB) made by the HO of the Bank to third party Indian borrower and receives 15% of the net interest/commission as compensation towards the services rendered. The TPO by relying on the orders of the earlier assessment year held that the amount is not at & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank arm's length and accordinging made an adjustment by applying 25% of the net interest / commission.

We heard the parties and perused the material on record. We notice that the Co-ordinate Bench in assessee's own case for AY 2002-03 has considered the issue of ALP adjustment made towards ECB to Indian borrowers where it has been held that “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 31" 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 of two loans to Reliance Petroleum Limited and Reliance industries Limited to the tune of US$50 million and USDS II million, respectively. There is no dispute that for these two loans, Credit Agricole Indosuez (Asia), Syngapore worked as an agent and Credit Lyonnais worked as lead arrangers/cc- arrangers The ANZ Investment Bank, BA Asia Ltd, as well as ABN Amro Bank were also worked as co-arrangers. The role of the assessee in these transactions of foreign currency loan under ECB was to provide financial analysis of the borrowers, general market conditions and regulatory environment. The learned AR has vehemently argued that as per para 4 of Protocol, profit cannot be attributed to the PE an account of facilitation of conclusion of loan agreement or mere singing thereof, We do not agree with the contention of the learned AR of the assessee because of the fact that the role of the assessee is not merely facilitation of conclusion of loan agreement or signing thereof but the services provided by the assessee are the core-basis for taking the decision of granting the loan by the syndicate. The assessee provided the services regarding clients creditability analysis, its capacity so as to consider the capacity to repay the loan and risk involved in the loan transaction. Therefore, the role of the assessee in providing such a crucial service is inevitable for taking the decision of providing loan and as such cannot be said to be a mere & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank facilitation of conclusion of the loan agreement or signing thereof. At this slage, para 4 of the Protocol between the India and France is quoted for ready reference as under :- "4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. The plain reading of para 4, mentioned above, makes it clear that if the role of the PE is only to facilitate the conclusion of foreign trade or loan agreement or mere signing thereof, then na profit shall be attributed to PE in terms of Article 7(2) of the Indo France DTAA. As we have discussed above that the assessee's role in providing the services is the core-basis of taking the decision of granting loon, therefore, the nature of services provided by the assessee do not fall under the terms facilitation of conclusion of loan agreement or signing thereof as stipulated under para 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 for making adjustment under transfer pricing provisions. Accordingly, we direct the AO/IPO to make adjustment in respect of the services performed by the assessee for foreign currency loan arranged for its existing clients by taking into account only the fee and other charges received by the foreign branches from the borrowers in question. Since none of the parties have come out with the suitable comparables, therefore, we find that the estimation made by the CIT(A) at the rate of 20% is just and proper, however, the some would be only in respect of the & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank fee and charges other than interest received by the foreign branches. Thus, these grounds of the assessee are partly allowed."

The TPO noticed that the Indian Branch has received commission towards marketing of derivatives. The assessee submitted that the Indian branch is merely acting as a selling agent such as identifying the customers, markets and sells derivatives to the customers and performs liaisons and negotiations between trades settled by the AEs and the Indian customers. The assessee further submitted that the commission is received for rendering of these services at the fee equal to 50% of the commercial mark up of each transaction or reimbursement of costs plus 10% whichever is higher. The TPO held that considering the nature of services rendered by the assessee 100% of the commercial mark up should be considered for the & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank purpose determining the ALP of the transaction by placing reliance on the OECD report on Attribution of Profits to Permanent Establishments dated 27 July 2010. The TPO made the TP adjustment accordingly.

We heard the parties and perused the material on record. We notice that the coordinate bench in assessee's own case while considering the issue of TPO making a similar adjustment has relied on the decision of the coordinate bench in the case of Barclays Bank PLC vs ADIT (90 taxmann.com 378 (Mum-Trib)) where it has been held that “ 5.3.We have heard the rival submissions and perused the material before us. We find that one of the divisions of the assessee i.e. Barclays Capital would handle the global derivative operations, that same included foreign exchange, interest rate, equity, commodity and credit derivatives, that the activities of the assessee were limited to marketing activities, that the AE.s were concluding the sale-transaction, that for the year under consideration the assessee was compensated at the rate of 24%(approximately)of the estimated day-1profit/loss from the said deals in accordance with the GTPP of the group, that the TPO had rejected the TNMM applied by the assessee and had used PSM for benchmarking the transaction of marketing of derivative products, that he concluded that risk relating to the derivative business remained partly in India and partly outside India and that the key assets in derivative were its people, that one of the foreign bank branch was being compensated at the rate of 60% for the same derivative business, that he made an addition of Rs.51.12 crores, that the FAA granted relief to the assessee.We find that the TPO had accepted, in principle, that the functional role of the assessee was limited to rendering the marketing services to overseas branches,that rest of the activities were handled by the AE.s. The derivative transaction does not end with marketing. It is a complex process.So,the AE would compensate the assessee for the services rendered to it.There would always be a relation between the compensation paid and availed services.The assessee had adopted the GTPP to determine ALP of the IT.s.In our opinion, there was no defect in its approach.On the other hand,method applied by the TPO and the details of controlled transactions,relied upon by him,were not available in the public domain. The assessee did not have any opportunity to examine the comparability of FAR of the transactions selected by the TPO. In our opinion,use of untested comparables to determine the ALP is against the basic spirit of the TP provisions and the Rule 10 of the Rules The TPO had also violated the principles of natural Justice by not confronting the assessee with the & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank comparables used against it. He proposed an addition of Rs. 51.12 crores to the income of the assessee without affording an opportunity to it,so that it could become aware of the basis for the adjustment.Only on this count the adjustment could be validly deleted. 5.4.But,we would like decide the issue on merits also. It is found that the assessee had followed GTPP for TP purposes, that as per the global policy the Indian branches rendering the services and arranging for the sales of the derivative products for its customers from its foreign branches were to get at 24.40 percent of the INPV. The Appellant had carried out a TP study and had applied TNMM for determining the ALP. We find that the average cost plus margin of the uncontrolled comparables was 19% and in the assessee’s case, cost plus margin was 424%. If we look at these figures, it becomes clear that compensation received by the assessee from its AE for derivative deal was at arm’s length. INPV of a derivative transaction is calibrated based on projection of expected cash flow on a derivative transaction and applying appropriate discounting factor.INPV calculation can be different for different banks because of their functioning. So, in our opinion it would be inappropriate to apply for a uniform multiplier effect on the value of sales credit/INPV of derivative transactions. In other words, the INPV fixed by Indian branch of another foreign bank in India should not have been compared with the assessee case, because the above said branch of the foreign bank itself was dealing with its another AE. In short, we hold that the methodology adopted by the TPO,for determining the ALP of INPV of the derivative transactions,was incorrect from the very beginning and was fundamentally wrong.We would like to refer to the case of Technimont ICB(P.)Ltd.(supra) and it reads as under: "14. What is an 'uncontrolled transaction' has been clearly defined under Rule 10A(a) to mean 'a transaction between enterprises other than associated enterprises whether resident or nonresident'. A plain reading of the meaning given to the expression 'uncontrolled transaction1 leaves no room for any doubt that it is a transaction between two non-associated enterprises. If the transaction is between two associated enterprises, it goes out of the ambit of' uncontrolled transaction' under Rule 10A.When section 92C is read along with Rules 10B(e), and 10A, it becomes abundantly clear that in computing ALP under the transactional net margin method, a comparison of the assessee's net profit margin from international transactions with its AEs has necessarily to be made with that of the net pro fit margin realized by the same enterprise or an unrelated enterprise from a comparable but definitely uncontrolled transaction i.e., a transaction between non-associated enterprises. There is no statutory sanction for roping in a comparable controlled transaction for the purposes of benchmarking. When it has been clearly mandated in all the relevant methods & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank for determining ALP that the comparison has to be made by the enterprise's international transaction with comparable uncontrolled transaction, by no sheer logic a comparable controlled transaction can be employed for the purposes of making comparison. There is no warrant for diluting the prescription given by the statute or rules when such prescription itself serves the ends of justice properly and is infallible. If the view of the Revenue that a controlled transaction should not be shunted out for the purposes of benchmarking is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. If such a contention of making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AEs so that the profit likely to arise from such transactions is not under-reported vis-a-vis from similar transactions with third parties. If the comparison is made again with net profit margin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus it follows that the ALP can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction."

From the perusal of the above findings it is clear that the coordinate bench has deleted the TP adjustment for the reason that the comparables chosen by the TPO are not uncontrolled transactions and that the TPO has not followed one of the methods prescribed under Rule 10B. We also notice that the coordinate bench while following the above decision in the case of Barclays Bank Plc (supra) in assessee's own case for AY 2006-07 to 2009-10 has held that the attribution of more than 50% of the commercial mark up is not justified. In assessee's case we notice that the TPO has relied on the OECD report dated 27.07.2010 on Attribution of profits to PE to conclude that 100% of commercial mark up is to be attributed to the Indian Branch. The ld AR submitted that the OECD commentary provides for sharing of the initial markup with the marketing entity and does not provide for 100% attribution of the initial mark-up. From the perusal of the OECD report (paragraphs 130 and 131 of Part III) relied on by the TPO we notice that the same states that marketing entity is not entitled to the trading markup if the marketing entity is not taking the trading risk of the derivative transaction. In assessee's case it is an admitted fact that the assessee is not taking any trading risk and this fact is substantiated by the observations of TPO that the bad debt of Rs.1,89,38,15,512 with respect to the two transactions are borne by the HO/OB (refer para 8.7(iv) of TPO's order). Therefore we see merit in the submission that the TPO is not right in attributing 100% of commercial mark up and that the reliance placed in this regard on OECD report is not appropriate. It is also relevant note that the TPO for making the adjustment has not followed any specific method as per Rule 10B. In view of these discussions and respectfully following decisions & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank of the coordinate bench we hold that the TP adjustment made by the TPO is not sustainable. The ground raised by the assessee in this regard is allowed.

In result the appeal of the assessee for 2011-12 is partly allowed -Revenue's appeal- AY 2011-12

The revenue's appeal pertain to interest income payable by the Indian Branch to HO/OB being held to be not taxable as income of the HO/OB in India. We have while deciding the identical issue in assessee's appeal for AY 2010-11 (Ground No.7 of assessee's appeal in AY 2010-11) have held that the interest paid by the Indian Branch to HO/OB is not taxable in India by placing reliance on the decision of Special Bench in the case of Sumitomo where it is held that the on the principle of mutuality the interest paid by Indian Branch is not taxable in the hands of the HO. The issue contended by the revenue in the current year being identical, in our view our decision on the said issue for AY 2010-11 in assessee's appeal is & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank mutatis mutandis applicable to revenue's appeal for the year under consideration. Accordingly we dismiss the ground raised by the revenue in this regard.

In result the appeal of the revenue is dismissed.

The issues contended by the assessee in the appeal for AY 2012-13 which are identical to the issues contended in AY 2011-12 are tabulated below – Issue AY 2012-13 AY 2011-12 Disallowance of Bank charges paid to Head Ground No.1 Ground No.1 Office(HO) / Overseas Branches (OB) by invoking provisions of section 40(a)(i) of the Act Disallowance of expenses incurred by Ground No.2 & 3 Ground No.2 & 3 HO/OB towards credit risk assistance, EDP assistance HO-System Implementation Charges, and Information System Asia Pacific charges on behalf of Indian Branch Taxability of Fees for Technical Services Ground No.5 Ground No.4 towards credit risk evaluation and software services paid/payable by Indian Branches to HO Taxability of interest paid by Indian Branch Ground No.4 & 4.1 Departmental to HO/OB appeal Ground No.1 Taxability of interest on external Ground No.12 to Ground No.5 to commercial borrowing (ECB) extended by 22 12 various branches outside India to Indian borrowers Double Taxation of ECB Interest as income Ground No.23 Ground No.13 arising to Overseas branches on ECB to Indian borrowers and by way of Transfer Pricing adjustment income of Indian Branches TP Adjustment towards taxability in India at Ground No.24 & Ground No.14 & 50% of commission earned by Hong Kong 25 15 Branch on ECB to Indian borrowers TP adjustment in the hands of Indian Branch Ground No.8 Ground No.16 towards commission on back to back Bank guarantee extended to AE & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank TP adjustment in the hands of Indian Branch Ground No.9 Ground No.17 of Interest & commission arising to Overseas Branches in respect of ECB to Indian Borrowers TP Adjustment made in respect of Ground No.10 Ground No.18 commission earned by Indian Branch for marketing of derivative products (60% of INPV was attributed) Levy of interest under section 234B Ground No.26 Ground No.19 Levy of penalty under section 271(1)(c) Ground No.27 Ground No.20 Cost incurred by HO/OB towards credit risk Ground No.6 - assistance, EDP assistance HO-System Implementation Charges, on behalf of Indian Branch to be taxed u/s.25(iv) if the expenditure is allowed u/s.37(1) Cost incurred by HO/OB towards credit risk Ground No.7 - assistance, EDP assistance HO-System Implementation Charges, on behalf of Indian Branch claimed in AY 2011-12 to be taxed as deemed income u/s.41(1) in AY 2012-13 TP adjustment with regard to interest on call Ground No.11 - borrowings

From the perusal of the above table, it is clear that all the issues pertaining AY 2012-13 except issues contended through Ground No.6,7 and 11 are common to AY 2011-12. Therefore in our considered view, our decision with respect to these issues in AY 2011-12 are mutatis mutandis applicable to AY 2012-13 also. It is ordered accordingly.

At the outset the Ld.AR submitted that assessee does not wish to press Ground No.11 considering the fact that the smallness of the amount involved. Accordingly ground number 11 is dismissed as not pressed.

With regard to Ground No.7 the Ld.AR submitted that, the issue raised therein need not be considered pursuant to the following observations of the AO in the final order of assessment) that reads as under:

Therefore the ground raised by the assessee has become infructuous and dismissed accordingly.

Ground No.6 pertains to the alternate contention of the AO that if Cost incurred by HO/OB towards credit risk assistance, EDP assistance HO-System Implementation Charges on behalf of Indian branch is allowed as a deduction under section 37 then the same needs to be treated as income under section28(iv) of the Act. We have while deciding the allowability of credit risk assistance, EDP assistance HO-System Implementation Charges (Ground No.2 & 3) have held that the same is allowable under section 37 by following the decision of the coordinate bench in earlier years in assessee's own case. Therefore, for the year under & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank consideration, the alternate ground on which the AO is proposing the addition under section 28(iv) needs to be adjudicated.

The ld AR submitted that the impugned expenditure incurred by the HO on behalf of the branch does not result in any benefit to the assessee as the actual services are rendered by the third parties to enable the Indian branch to carry on the business. The ld AR further submitted that for charging income in the hands of the Indian Branch the income should fall within the purview of the deeming fiction created under Article 7(2) of the DTAA between India and France where the PE and HO are to be treated as distinct and independent entities only for the purpose of calculation of profits attributable to the PE i.e. the PE would have actually earned by virtue of conducting business activities in the country where PE is created. The ld AR also submitted that the provisions of Article 7(2) of the DTAA are distinct from the provisions of section 28(iv) of the Act as the DTAA only attributes actual profits to the PE which has been actually earned by undertaking business activities as against the provisions of section 28(iv) of the Act which notional income in the hands of the assessee. The ld AR also placed reliance on the decision of coordinate bench in the case of Shihan Bank vs DCIT reported in (2022) 144 taxmann.com 182 to submit that the provisions of section 28(iv) cannot be applied in assessee's case.

The ld DR on the other hand relied on the order of the AO and the directions of the DRP.

We heard the parties and perused the material on record. The AO for the year under consideration disallowed the expenditure incurred by the HO on behalf of the Indian Branch towards credit risk assistance, EDP assistance HO-System Implementation Charges by invoking the provisions of section 44C of the Act. The & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank AO also held that alternatively if the expenditure is allowed as a deduction under section 37, then the same should be treated as income under section 28(iv) in the hands of the Indian Branch. It is an admitted fact that the expenditure is incurred towards services rendered by third party service providers and since these are direct expenses pertaining to the Indian Branch, the same is claimed as a deduction under section 37 which we have already held that is allowable. Now the issue is whether any benefit is arising to the Indian Branch due to the fact that HO incurred the expenditure on behalf the Indian Branch within the purview of section 28(iv) in the light of the fact that Indian Branches have not actually made payments towards these expenditures. For the purpose of taxing the income in the hands of Indian Branch (which is the PE of the assessee) it is relevant to look at Article 7(2) of the DTAA between India and France, which provides for how the income of the PE in India should be computed. The relevant extract of Article 7(2) is reproduced below – “2. Subject to the provisions of paragraph 3, where an enterprise of one of the Contracting States carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed that permanent establishment the profits which it might be expected to make, if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on the basis of an apportionment of the total profits of the enterprise to its various parts, provided, however, that the result shall be in accordance with the principles contained in this Article.” (emphasis supplied) 73. From the above it is clear that the PE is to be treated as an independent enterprise and the net income i.e. income earned by virtue of activities carried on in India as reduced by the expenses incurred for earning such income. The & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank impugned expenses towards credit risk and EDP assistance HO-System Implementation Charges are allowed in the hands of the Indian Branch since the same is incurred for the purpose of earning income in India and as per Article 7(2) it is the net income that is taxable. The fact that the expenditure are not paid by the Indian branch to HO in our view, would not change the entire nature of the payment itself. Therefore we see merit in the contention of the ld AR that a transaction cannot be treated as both income and expenditure in the hands of the assessee. Further impugned expenditure in order to be treated as income should be a profit attributable to the Indian Branch. Since the amount is in the nature of expenditure, it cannot be treated as profit attributable as per Article 7(2) of the DTAA between India and France. Section 28(iv) is a deeming provision which deems income towards the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. Therefore fitting the said deeming provision into the provisions of Article 7(2) as profit attributable is not a logical view and accordingly we hold that the contentions of the AO that such income should be taxable under section 28(iv) of the Act is incorrect. We in this regard notice that the coordinate bench in the case of Shihan Bank (supra) has held a similar view while considering the issue of whether expenditure by HO on behalf of Indian Branches towards employee cost would attract addition under section 28(iv).

In view of the above discussion and respectfully following the above decision of the coordinate bench we hold that there cannot be any addition made under section 28(iv) be made in assessee's case towards credit risk assistance, EDP assistance HO-System Implementation Charges paid by HO on behalf of Indian Branch.

From the perusal of the above table, it is clear that all the issues pertaining AY 2013-14 are common to AY 2012-13. Therefore in our considered view, our decision with respect to these issues in AY 2012-13 are mutatis mutandis applicable to AY 2013-14 also. It is ordered accordingly.

The issues contended by the assessee in the appeal for AY 2014-15 which are identical to the issues contended in AY 2013-14 are tabulated below – Issue AY 2014-15 AY 2013-14 Disallowance of Bank charges paid to Head Ground No.1 Ground No.1 Office(HO) / Overseas Branches (OB) by invoking provisions of section 40(a)(i) of the Act Disallowance of expenses incurred by HO/OB Ground No.2,3 Ground No.2 & 3 towards credit risk assistance, EDP assistance HO- & 4 System Implementation Charges, and Information System Asia Pacific charges on behalf of Indian Branch Taxability of Fees for Technical Services towards Ground No.6 Ground No.5 credit risk evaluation and software services paid/payable by Indian Branches to HO Taxability of interest paid by Indian Branch to Ground No.5 Ground No.4 & HO/OB 4.1 Taxability of interest on external commercial Ground No.13 Ground No.12 borrowing (ECB) extended by various branches outside India to Indian borrowers TP adjustment in the hands of Indian Branch Ground No.9 Ground No.8 towards commission on back to back Bank guarantee extended to AE TP adjustment in the hands of Indian Branch of Ground No.10 Ground No.9 Interest & commission arising to Overseas Branches in respect of ECB to Indian Borrowers TP Adjustment made in respect of commission Ground No.11 Ground No.10 & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank earned by Indian Branch for marketing of derivative products (60% of INPV was attributed) Levy of interest under section 234B Ground No.17 Ground No.13 Levy of penalty under section 271(1)(c) Ground No.19 Ground No.14 Cost incurred by HO/OB towards credit risk Ground No.7 Ground No.6 assistance, EDP assistance HO-System Implementation Charges, on behalf of Indian Branch to be taxed u/s.25(iv) if the expenditure is allowed u/s.37(1) Cost incurred by HO/OB towards credit risk Ground No.8 Ground No.7 assistance, EDP assistance HO-System Implementation Charges, on behalf of Indian Branch claimed in AY 2011-12 to be taxed as deemed income u/s.41(1) in AY 2012-13 TP adjustment with regard to interest on call Ground No.12 Ground No.11 borrowings Computation of higher rate of tax Ground No.14 - Lower credit for TDS Ground No.15 - Levy of interest under section 234A when the Ground No.16 - return is filed within the due date Interest under section 234C Ground No.18 -

From the perusal of the above table, it is clear that all the issues pertaining AY 2014-15 are common to AY 2013-14 except issues contended in Ground No.14 to 16 & 18. Therefore in our considered view, our decision with respect to these issues in AY 2013-14 are mutatis mutandis applicable to AY 2014-15 also. It is ordered accordingly.

Ground No.14 pertaining to computing higher rate of tax and Ground No.18 pertaining levy of interest under section 234C are consequential not warranting any separate adjudication. With regard to Ground No.15 on AO allowing short credit of TDS we direct the AO examine the issue based on evidences and allow the credit in accordance with law. On the issue of levy of interest under section 234A contended through Ground No.16, it is submitted that the assessee has filed the return of income within the due dates as prescribed under the Act and therefore no interest is warranted. We in this regard direct the AO to examine the claim of the & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank assessee based on evidences and give relief to the assessee as per law. It is ordered accordingly.

The issues contended by the assessee in the appeal for AY 2015-16 which are identical to the issues contended in AY 2014-15 are tabulated below –

The ld AR at the outset submitted that the facts pertaining to the issue under consideration is identical to earlier years and that the issue is covered by the orders of the coordinate bench and the Hon'ble High Court. However, the ld submitted that the amount considered for arriving at TP adjustment by the TPO is not correct. In this regard the ld AR elaborated the facts pertaining to the year under consideration to submit that the policy pertaining to remuneration received by the assessee for services rendered towards ECB, has under gone change with effect from AY 2015-16. As per the old policy the assessee was remunerated at 15% of the net interest/commission as compensation towards the services rendered and the assessee continue to receive remuneration towards the loans under this policy till AY 2019-20. The ld AR further submitted that from AY 2015-16 the policy has undergone change where by assessee is remunerated at 25% of fees and this is applicable for the fresh ECBs extended from AY 2015-16. The ld AR brought to our attention that the TPO while making the TP adjustment by applying 25% of fees / commission has considered the entire ECB i.e. both under the old and the new policy without taking note of the fact that the assessee is already remunerated for ECBs under new policy at 25%. The ld AR accordingly prayed for appropriate direction to the TPO in this regard.

The TPO is accordingly directed to consider the overall remuneration already received by the assessee and not to make any TP adjustments if the amount already offered by the assessee is more than amount arrived at by the TPO as per the directions given in this order.

The issues contended by the assessee in the appeal for AY 2016-17 which are identical to the issues contended in AY 2015-16 are tabulated below –

From the perusal of the above table, it is clear that all the issues pertaining AY 2016-17 are common to AY 2015-16. However the issue contended through & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank Ground No.3 have to be examined afresh considering the amendment brought in the Act in section 9(1)(v). Therefore the said ground is adjudicated separately for the year under consideration in the ensuing paragraphs. Having said so, with respect to other grounds the facts being identical we are of the considered view that our decision with respect to these issues in AY 2015-16 are mutatis mutandis applicable to AY 2016-17 also. It is ordered accordingly.

Ground No.3 is with regard to taxability of interest paid by the Indian Branch to HO in India. We while adjudicating the issue up to AY 2015-16, have held that the interest is not taxable in the hands of the HO for the reason that the principle mutuality is applicable to the said receipt by placing reliance on the decision of the Special Bench in the case of Sumitomo Mitsui Banking Corporation Ltd.(supra). However the issue needs to be examined in the light of the amendment brought in section 9(1)(v) by which the following explanation is inserted in the said section with effect from 01.04.2016 – Explanation.—For the purposes of this clause,— (a) it is hereby declared that in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery shall apply accordingly;

The ld AR in this regard submitted that though the interest income paid by the Indian Branch to the HO would become taxable under the Act interms of the explanation inserted to section 9(1)(v), the taxability under DTAA also needs to be considered. The ld AR further submitted that the taxability of interest normally & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank covered under the provisions of Article 12 of the DTAA between India and France but since the HO has a PE i.e. Indian Branch then the interest earned would be governed under Article 7 as has been stated in Article 12(5). In this regard the ld AR drew our attention to the relevant Articles of the DTAA between India and France which read as under – “1.Interest arising in a contracting state and paid to a resident of the other contracting state may be taxed in that other contracting state.”

However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10 per cent of the gross amount of the interest. 3 & 4 **** 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt- claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 15, as the case may be, shall apply.”

The ld AR submitted that as per article 7(1) of the DTAA, the profit of an enterprise is taxable in the other contracting state to the extent it is attributable to the PE and as per Article 7(2) the profit attributed to the PE shall be the profit which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. The ld AR argued that deeming fiction of hypothetical independence or a separate entity approach (i.e. the PE being separate from the HO), as stated in this Article, is limited to the extent of computing the profit attributable to the PE under Article 7. The ld AR further argued that the interest paid by the Indian Branch to HO is not a & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank profit attributable to Indian Branch and therefore not taxable in India under Article 7 of the DTAA. The ld AR in this regard placed reliance on the decision of the coordinate bench in the case of BNP Paribas [2023] 149 taxmann.com 56 (Mumbai - Trib.).

The heard the parties and perused the material on record. The explanation is inserted in section 9(1)(v) w.e.f. 01.04.2016 which provides that the interest payable by the PE i.e. Indian Branch to the HO shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to the income attributable to the PE in India. Therefore for the year under consideration, there is no ambiguity that the interest paid by the Indian Branch to the HO is taxable in the hands of HO as per the Act. Now coming to the question of whether the income earned by the HO by way of interest from the Indian Branch is taxable under DTAA, it is relevant to examine Article 12 and Article 7 as extracted herein above. Article 12 which deals with the taxation of interest provides under clause 5 that if the beneficial owner of the interest (i.e. HO) carries on business in the other contracting state (i.e.India) through a PE (i.e. Indian Branch) and the interest paid is effectively connected with the PE (i.e.Indian Branch) then provisions of Article 7 would apply. As per article 7(1) of the DTAA, the profit of an enterprise is taxable in the other contracting state to the extent it is attributable to the PE and as per Article 7(2) the profit attributed to the PE shall be the profit which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. The argument of the ld AR is that the hypothetical independence provided by the deeming fiction of Article 7 is limited only to the profit attributable to the Indian Branch and the same cannot be extended to the income of the HO towards the interest received to which the principle of mutuality will still & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank be applicable. We notice in this regard that the coordinate bench has considered a similar issue for AY 2018-19 in the case of BNP Paribas (supra) where it has been held that –

The facts in assessee's case being identical, respectfully following the above decision, we hold that the interest received by the HO from the Indian Branch is not taxable and accordingly direct the AO to delete the addition made in this regard. This ground of the assessee is allowed.

The issues contended by the assessee in the appeal for AY 2017-18 which are identical to the issues contended in AY 2016-17 are tabulated below – & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank Issue AY 2017-18 AY 2016-17 Disallowance of expenses incurred by HO/OB Ground No.1 & 2 Ground No.1 & 2 towards credit risk assistance, EDP assistance HO-System Implementation Charges, and Information System Asia Pacific charges on behalf of Indian Branch Taxability of Fees for Technical Services Ground No.4 Ground No.4 towards credit risk evaluation and software services paid/payable by Indian Branches to HO Taxability of interest paid by Indian Branch to Ground No.3 Ground No.3 HO/OB Taxability of interest on external commercial Ground No.9 Ground No.9 borrowing (ECB) extended by various branches outside India to Indian borrowers TP adjustment in the hands of Indian Branch Ground No.7 Ground No.7 towards commission on back to back Bank guarantee extended to AE TP adjustment in the hands of Indian Branch Ground No.6 Ground No.6 of Interest & commission arising to Overseas Branches in respect of ECB to Indian Borrowers TP Adjustment made in respect of Ground No.5 Ground No.5 commission earned by Indian Branch for marketing of derivative products (60% of INPV was attributed) TP adjustment with regard to interest on call Ground No.8 Ground No.8 borrowings Lower credit for TDS Ground No.10 Ground No.10 Computing lower interest under section 244A Ground No.11 due to non-grant of tax credit in ECB interest income Levy of interest under section 234D Ground No.12 Initiating penalty proceedings under section Ground No.13 274 r.w.s.270A

From the perusal of the above table, it is clear that all the issues pertaining AY 2017-18 are common to AY 2016-17. Since the facts are identical we are of the considered view that our decision with respect to these issues in AY 2016-17 are mutatis mutandis applicable to AY 2017-18 also. It is ordered accordingly.

The issues contended by the assessee in the appeal for AY 2018-19 which are identical to the issues contended in AY 2017-18 are tabulated below –

From the perusal of the above table, it is clear that all the issues pertaining AY 2018-19 are common to AY 2017-18 except for Ground No.11 to 14. Since the facts pertaining to rest of the grounds are identical we are of the considered view that our decision with respect to these issues in AY 2017-18 are mutatis mutandis applicable to AY 2018-19 also. It is ordered accordingly.

The Ld.AR submitted that ground number 10,11 and 12 pertains to taxability of interest received by the assessee under section 244 A of the Act. The Ld.AR submitted the said interest is taxable in the hands of the assessee at the rates prescribed in the Article 10 of DTAA between India and France as against Article 7 pertaining to the business profits attributable to the PE. In support of the claim the ld AR placed reliance on the decision of Hon’ble Bombay High Court in assessee’s own case for assessment year 1997-98 in of 2013 vide order dated 17/06/2015. The ld AR also placed reliance on the decision of Special bench of Hon’ble Delhi Tribunal in case of ACIT vs. Clough Engineering Ltd., reported in 130 ITD 137 and coordinate of this Tribunal in case of DHL Operations BV vs DDIT in ITA No.183/MUM/2010. The ld AR submitted that this decision of coordinate bench has been upheld by Hon’ble Bombay High Court in ITA number 431 of 2012 in an appeal filed by the revenue.

On the contrary the Ld.AR relied on the orders passed by the authorities below.

With regard to Ground No.13 on the issue of TDS credit towards the tax deducted on the income tax refund, we direct the AO to examine and allow the credit in accordance with law.

Ground No. 14 pertaining to interest under section 234B is consequential and therefore does not warrant a separate adjudication.

The issues contended by the assessee in the appeal for AY 2019-20 which are identical to the issues contended in AY 2018-19 are tabulated below –

From the perusal of the above table, it is clear that all the issues pertaining AY 2019-20 are common to AY 2018-19 except for Ground No.1, 10, 15, 19, 18 & 20. Since the facts pertaining to rest of the grounds are identical we are of the considered view that our decision with respect to these issues in AY 2018-19 are mutatis mutandis applicable to AY 2019-20 also. It is ordered accordingly.

During the course of hearing the ld AR submitted that Ground No.1 pertaining to the legal issue of validity of the DRP order and Ground No.15 on setoff of business are not pressed. The ld AR further submitted that Ground No.10 & Ors / Mum/2015 Credit Agricole Corporate and Investment Bank on addition towards interest on deposits is also not pressed due to the smallness of the amount. Accordingly these grounds are dismissed as not pressed.

Ground No.13 and 18 to 20 are consequential and do not warrant separate adjudication.

In result appeal for AY 2010-11 to AY 2019-20 filed by the assessee are partly allowed and appeal filed by the revenue for AY 2010-11 and 2011-12 are dismissed.