FIRSTRAND BANK LIMITED,MUMBAI vs. THE ASSISTANT COMM. OF INCOME TAX-CIRCLE-2(3)(1), MUMBAI

FirstRand Bank Limited AY 2018-19 2:5 The AO/DRP erred in not appreciating the fact that no structured search process has been adopted by the TPO thus, resulting into cherry picking of comparable data; 2:6 The AD/TPO/DRP has erred in determining arm's length guarantee rate at 1.55% for benchmarking guarantee transaction. 3:0 Re.: Disallowance under section 40(a)(i) of the Act of payments amounting to Rs. 10,20,187 made to VISA/Mastercard On the facts and the circumstances of the case and in law: 3:1 The AO erred in classifying the payments made to M/s. VISA Worldwide Ptd. Ltd., Singapore ('VISA')/M/s. MasterCard Asia Pacific Pte. Ltd ('Mastercard") as 'Royalty under section 9(1)(vi) of the Act or Article 12(3) of the DTAA between India and Singapore. 3:2 The AO erred in in disallowing the payments made to M/s. VISA Worldwide Ptd. Ltd., Singapore ('VISA') / M/s. MasterCard Asia Pacific Pte. Ltd ('Mastercard") under section 40(a)(i) of the Act without appreciating that tax is not required to be deducted at source. 3:3 The AO erred in not accepting the contentions and details submitted by the appellant on non-applicability of withholding tax provisions on payment made to VISA and Mastercard. 4:0 Re: Non-reduction of income taxed in earlier year On the facts and the circumstances of the case and in law: 4:1 The AD erred in not allowing the consequential reduction of income taxed in AY 2017-18, in respect of Loan processing fee and income earned on Bank Guarantee and Letter of Credit (LC). 4:2 The AO erred in subjecting to tax twice a sum of Rs. 69,43,728 offered to tax in earlier year.”

FirstRand Bank Limited AY 2018-19 supporting South African clients in India and vice versa. Assessee filed its return of income on 30.11.2018, reporting total loss at Rs.7,75,13,708/-. Assessee had entered into several international transactions with its Associated Enterprises (AEs) duly reported in Form 3CEB. Reference was made to ld. Transfer Pricing Officer (TPO) against which order u/s.92CA(3) was received by the ld. Assessing Officer proposing the following objections for the arm’s length price (ALP) of the international transactions entered into by the assesse.

Sr. Nature of Transaction Adjustment (INR) No. 1. Receipt of Guarantee Commission 3,53,39,503/- 2. Provision of Investment Advisory 88,13,907/- Services 3. Total 4,41,53,410/- 3.1. The above tabulated proposed adjustments had certain factual errors which were rectified u/s.154 which resulted into change in the proposed adjustment and is also tabulated below:

Sr. Nature of Transaction Adjustment (INR) No. 1. Receipt of Guarantee Commission 3,53,39,503/- 2. Provision of Investment Advisory 73,44,923/- Services 3. Total 4,26,84,426/-

FirstRand Bank Limited AY 2018-19 the ld. Assessing Officer to complete the assessment as proposed in the draft assessment order. Pursuant to the said directions, final assessment order was passed determining total loss at Rs.3,38,09,095/-. Aggrieved, assessee is in appeal before the Tribunal.

FirstRand Bank Limited AY 2018-19 assessee arrived at arm’s length margin range of 3.34% to 4.39% with the median at 3.86%. For the year under consideration, return on total cost for the assessee is 20% and hence, was stated to be at arm’s length.

5.1. In the course of transfer pricing assessment by the ld. TPO, he arrived at final set of comparables with three comparables which included one selected by the assessee. The same are tabulated below:

Company Name OP/OC Hasham Investment & Trading Co Pvt Ltd (Investment 4.39% Advisory Segment) [comparable by assessee] India Life Capital Pvt. Ltd. [comparable by ld. TPO] 15.68% Ivycap Ventures Advisors Pvt. Ltd. [comparable by ld. 82.80% TPO] Mean 34.39% 5.2. While arriving at this final set of three comparables, ld. TPO rejected three of the comparables of the assessee by applying turnover filter of 1/10th to 10 times of the assessee’s turnover. The comparables which were rejected owing to turnover filter are: i) Everstone Capital Advisors Pvt. Ltd. ii) Piramal Fund Management Pvt. Ltd. iii) SG Analytics Pvt. Ltd.

5.3. He also rejected the other two comparables of the assessee on account of difference between Functions, Assets and Risks (FAR) which were Crisil Risk and Infrastructure Solutions Ltd. and ICRA Management Consulting Services. It is also noted that Crisil Risk and 5.4. Based on the final set of three comparables as tabulated above, ld. TPO arrived at arm’s length mean margin (OP/OC) at 34.29% and thus, made an upward adjustment for the difference of 14.29%. In the course of proceedings before the ld. DRP, it observed that ld. TPO had not disturbed the FAR study carried out by the assessee and had accepted TNMM as the most appropriate method for determining the ALP and PLI has OP/OC. It was observed that ld. TPO accepted the study conducted by the assessee up to the point of its Accept Reject Matrix and has proceeded from that point for the purpose of arriving at upward adjustment.

7.1. Claim of the assessee in regard to this comparable is that it is functionally dis-similar in addition to its initial submission before the ld. TPO that it is a high margin comparable. By referring to the annual report of Ivycap placed in the paper book, it is contended that Ivycap is into venture capital and private equity which holds investments and earns out of such investments. When compared with the assessee, it

FirstRand Bank Limited AY 2018-19 does not earn out of investment per se rather renders investment advisory services. Assessee does not hold any asset under its management but only provides non-binding investment advisory services in respect of Indian market to support the investment done by its AE wherein the risk undertaken and the risks attributable to the assessee are low and limited.

7.2. Assessee raised other two aspects also in respect of Ivycap by submitting that it has high percentage of related party transactions which comes to 26%, higher than the 25% filter applied by ld. TPO. Details in this respect is tabulated below:

Calculation of related party transaction ("RPT") for Ivycap Ventures Advisors Private Limited Remuneration to managing director, whole-time 1,92,68,539 director and manager which includes salary, perquisites and profit in lieu of salary under section 17 of the Income-tax Act, 1961 Total RPT expense 1,92,68,539 Total expense 7,37,11,882 RPT expense/Total expense 26% 7.3. According to the assessee, since RPT filter breaches the threshold considered by ld. TPO himself, Ivycap as a comparable is ought to be excluded.

7.4. Second aspect raised by the assessee is that Ivycap follows an outsourcing based business model. It has high percentage of outsourcing expenses constituting approximately 25% of its total expenses. Its outsourcing fees amounts to 108.48% of its employee cost excluding Director’s remuneration. According to the assessee, this data

FirstRand Bank Limited AY 2018-19 evidently demonstrates that Ivycap operates on a substantially different functional model having extensive outsourcing of its own functions. This is contrary to the model of the assessee whereby it does not incur any expenditure towards outsourcing and performs all of its advisory functions in-house. Details in this regard are tabulated below:

Calculation of outsourcing fees paid by Ivycap Ventures Advisors Private Limited Professional fees (overseas) 1,73,68,530 Professional fees (domestic) 10,65,611 Total Outsourcing Fees 1,84,34,141 Total expense 7,37,11,882 Outsourcing Fees/Total expense 25% Employee Cost (excluding director remuneration) 1,69,93,668 Outsourcing Fees/Employee Cost (excluding director 108.48% remuneration)

7.5. Thus, assessee strongly canvassed difference in the FAR of Ivycap with that of the assessee making it liable to be excluded from the final list of comparables. Ld. CIT DR on the above submissions strongly submitted that the stance taken by the assessee by resorting to RPT filter and high percentage of outsourcing expenses in respect of Ivycap comparable, these have been taken for the first time at the appellate stage which remained to be examined by the ld. TPO/AO and therefore ought to be rejected or be remanded back to the file of ld. TPO/AO for the purpose of verification and examination as to their correctness and appropriateness.

8.1. For the other two comparables namely CRISIL Risk and Infrastructure Solutions Ltd. and ICRA Management Consulting Services Ltd. which were excluded on account of functional dissimilarity, case of the assessee is that CRISIL is engaged in the business of providing advisory and risk management services. It is recognised as a leading advisor to Governments, multilateral agencies and Public and Private sector enterprises. Its Annual Report states that it is engaged in a single segment of providing advisory services. Also, its website lists down services which are broadly similar to those rendered by the assessee. In respect of ICRA Management Consulting Services Ltd., it is engaged in the business of providing consultancy services in the areas of strategy, risk management, process consulting, transaction advisory, policy and regulation and development consulting. It also has single segment of providing consultancy services. Furthermore, this comparable has been accepted by ld. CIT(A) in first appellate proceeding for Assessment Year 2011-12 in assessee’s own case. There is no change in the functional profile of the assessee or in the nature of services rendered and therefore, ICRA Management Consulting Services Ltd. ought to be accepted as a valid comparable in the year under consideration. For inclusion of these two comparables also, assessee submitted that TNMM having been adopted as most appropriate method, exact comparability of functions is not required rather certain

FirstRand Bank Limited AY 2018-19 degree of functional dilution of tolerance is permissible given broader nature of benchmarking analysis under this method. We also note in respect of CRISIL that ld. TPO had applied turnover filter of more than 10 times for which assessee claims that it lacks any rational objective basis since TNMM has been adopted. Ld. CIT DR had placed reliance on the order of ld. DRP.

FirstRand Bank Limited AY 2018-19 10. Ground no.2 along with its sub-grounds refers to determination of guarantee commission on the guarantee furnished by the assessee to an Indian party on behalf of the customer of FRB-SA for which an upward adjustment of Rs.3,53,39,503/- was made by the ld. TPO. The underlying transaction in respect of guarantee commission as explained by the assessee is that Airports Company South Africa ("ACSA"), a customer of FRB-SA, was required to furnish a performance guarantee of Rs 300 crore in favour of Mumbai International Airport Limited ("MIAL"). The said guarantee to MIAL was further directed to the Airports Authority of India ("AAI") as proof of ACSA's capital commitment to MIAL. As a requirement of the beneficiary, the guarantee was supposed to be from a local commercial bank in India. FRB-SA reached out to its correspondent banks in India including FRB India and requested for feasibility of reissuance of the guarantee. The pricing quoted by FRB India was based on the rating and risk associated with FRB-SA and was at par with the market pricing for a similarly rated and similar value transaction. Basis the response time, ease of doing business and pricing provided, FRB-SA awarded the reissuance to FRB India.

10.1. In this regard, assessee received a counter-guarantee from FRB- SA and reissued the guarantee locally in favour of MIAL. The fee arrangement was structured in line with market practice, as per which assessee raised quarterly fee claims on FRB-SA, which in turn recovered the same from ACSA and remitted the amount to the assessee. In this regard, assessee received 0.40% p.a. of the guarantee as commission, over and above the mark-up charged for provision of marketing support services. Ld. TPO rejected the benchmarking done by the assessee and Bank Name Rate State Bank of India 2.30% HDFC 1.80% Average 2.05% 10.2. Ld. TPO thus, applied the external CUP method for benchmarking by adopting the average bank guarantee fee rate charged by third-party banks of 2.05%. After allowing a downward adjustment of 0.50%, ld. TPO determined the arm's length guarantee commission rate at 1.55%, resulting in an upward adjustment of Rs.3,53,39,503/-.

Calculation of guarantee % Quarterly Annually Proportion FirstRand South Africa 0.07456% 0.29824% 42.71% FirstRand India 0.10000% 0.40000% 57.29% Total 0.17456% 0.69824% 100.00%

FirstRand Bank Limited AY 2018-19 11.1. For the above computation, assessee placed on record a sample copy of invoice for one quarter of the relevant year, which is also extracted below for ready reference:

FirstRand Bank Limited AY 2018-19 11.2. Assessee thus, contented that when the total commission earned on the entire transaction is only 0.69%, ad hoc rate of 1.55% adopted by the ld. TPO is untenable and is far beyond the reality. It is important to take note of the fact that the entire risk exposure of the assessee is solely on its AE., i.e., FRB-SA. What assessee performed is only a limited function of executing and processing of guarantee. Assessee is fully protected by the counter guarantee issued by its AE, i.e., FRB-SA and all associated risks and costs are passed on to it on a back-to-back basis. Furthermore, any default on the part of ACSA is entirely assumed by FRB-SA and assessee does not have to bear any credit or performance risk for the same. Also, the external credit rating of FRB- SA was considered while quoting the bank guarantee rate and did not undertake any independent valuation of ACSA.

11.3. In the above factual matrix, corroborated by documentary evidence, as well as agreement placed on record, we hold that the allocation of guarantee commission which constitutes about 57% in the hands of assessee, finds favour for the assessee by taking into account its FAR. Accordingly, the guarantee commission rate arrived at by ld. TPO/DRP at 1.55% and upward adjustment made based thereon, is deleted. Ground no.2 is thus, allowed.

FirstRand Bank Limited AY 2018-19 was held that MasterCard had a permanent establishment (PE) in India and that payments received were taxable as business income in India. According to the ld. Assessing Officer, VISA and MasterCard function as payment network processors between issuing and acquiring banks and card holders. Payments made by banks represent consideration for the use of payment network which falls within the definition of ‘Royalty’ under Article 12(3) of India-Singapore Double Taxation Avoidance Agreement (DTAA) taxable in India at the rate of 10% under its Article 12(2).

12.1. The sole emphasis of the assessee is that in the relevant point of time, i.e., as on 31.03.2018, which is prior to the rendering of the AAR Ruling in the case of MasterCard Asia Pacific Pte. Ltd. (supra), Hon'ble Jurisdictional High Court of Bombay in the case of DIT vs. Citibank N.A. in of 2013, dated 11.03.2015 had upheld the order of the Tribunal holding that payments made to the MasterCard International and VISA International without deduction of tax at source were not disallowable u/s.40(a)(i) in view of provisions of India-US DTAA. On the strength of this decision of the Hon'ble Jurisdictional High Court which carried a force of binding in nature, assessee took its stance that the obligation to deduct tax at source must be determined with reference to the legal provisions prevailing at the time of payment. Assessee cannot be held liable to deduct tax by relying on subsequent amendment or interpretation of law. According to the assessee, AAR Ruling (supra) was rendered after the end of the previous year relevant to the assessment year under consideration and appeal against the same is pending before the Hon'ble High Court of Delhi which has not attained finality.

FirstRand Bank Limited AY 2018-19 12.2. Section 40(a)(i) provides that, inter alia, notwithstanding anything to the contrary in sections 30 to 38, any amount payable outside India, or payable in India to a non-resident, shall not be deducted in computing the income chargeable under the head 'profits and gains of business or profession’ on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted. The disallowance under section 40(a)(i) is not for the payments made to non-residents, which are taxable in India, but for the payments on which tax was deductible at source but tax has not been deducted, and such deductibility of tax at source has to be in the light of the legal position as it stood at the point of time when payment was made or credited, whichever is earlier. Clearly, therefore, the disallowance under section 40(a)(i) can come into play only when the assessee had an obligation to deduct tax at source from payments to non-residents and assessee fails to comply with such an obligation.

12.3. In view of the above, as well as decision of binding nature by the Hon'ble Jurisdictional High Court of Bombay in the case of Citibank N.A. (supra), assessee did not have any tax withholding liability on payments made to VISA and MasterCard in the relevant point of time. Assessee cannot be held to be liable to deduct tax at source by placing reliance on the subsequent development of jurisprudence. Reliance placed by ld. Assessing Officer on the AAR Ruling (supra) leads to impossibility of performance at the end of the assessee, since AAR Ruling was delivered on 06.06.2018, whereas the previous year wherein the TDS ought to have been done as warranted by ld. Assessing Officer was on or before 31.03.2018. It was impossible for the assessee to deduct tax in the financial year 2017-18, relevant to Assessment Year 2018-19 when the Ruling by the Hon'ble Jurisdictional High Court of FirstRand Bank Limited AY 2018-19 Bombay in the case of Citibank N.A.(supra) was holding the fort, carrying the binding force in nature, in favour of the assessee. The legal maxim lex non cogit ad impossibilia comes into play to support the case of the assessee, according to which law cannot be possibly compel a person to do something which is impossible to perform.

15.1. Based on the above impact of ICDS, the following action was carried out: a. During AY 2017-18, out of the total income of Rs. 1,41,01,753/- recognised in the books, income amounting to Rs. 79,14,358/- was apportioned and offered to tax in AY 2018-19. b. During AY 2018-19, out of the total income of Rs.2,47,76,206 /- recognised in the books, income amounting to Rs.9,70,630/- was apportioned and offered to tax in AY 2019-20.

15.2. However, ld. Assessing Officer, while passing the assessment order for Assessment Year 2017-18, taxed the entire income of Rs.79,14,358/- in the year of receipt itself (AY 2017-18) instead of apportioning it over subsequent years. While assessee had filed its objections before ld. DRP, they were later settled under Vivad Se Vishwas Scheme since the issue represented only a timing difference.

FirstRand Bank Limited AY 2018-19 Consequently, to prevent double taxation of the same income, assessee claimed a corresponding reduction in Assessment Year 2018-19. Ld. Assessing Officer, however, disallowed the reduction in Assessment Year 2018-19 on the ground that there was no provision in the Act permitting such adjustment otherwise than by filing a revised return of income. Ld. Assessing Officer relied upon the Supreme Court's decision in Goetze (India) Ltd. v. CIT 284 ITR 323 (SC) to hold that the claim could not be entertained during assessment under section 143(3) of the Act.

15.3. Assessee submitted that while computing its total income, it had duly considered the impact of Income Computation and Disclosure Standard (ICDS) IV-Revenue Recognition in relation to loan processing fees and commission income earned on bank guarantees and letters of credit (LC) in bill discounting arrangements. According to the assessee, necessity of making the aforesaid claim arose only because the appeal for Assessment Year 2017-18 was subsequently settled under the Vivad se Vishwas Scheme (VSV), and hence, the corresponding adjustment had to be made in Assessment Year 2018-19 to avoid double taxation. Assessee submits that its claim is, therefore, legitimate and should not have been rejected merely on a technical ground.

15.4. To avoid any future dispute and for the sake of consistency, assessee, from Assessment Year 2018-19 onwards, adopted a revised method of recognising such income, offering the entire amount of loan processing fees and commission on bank guarantees and LCs on bill discounting to tax in the year of receipt itself. The details are summarised below:

FirstRand Bank Limited AY 2018-19 Particulars AY 2017-1 8 AY 2018-19 Amount offered to tax in original Rs.61,87,394 Rs.3,17,19,934 return Add/Less: Adjustment made to remove ICDS's impact on loan processing and commission income -Year 1 Rs.79, 14,358 Rs.79, 14,358 -Year 2 Rs.9,70,630 Amount offered to tax (represents the Rs.2,46,76,206 amount recognised in P&L pertaining Rs.1,41,01,752 to 15.5. Accordingly, assessee offered the entire income of ₹2.47 crores (including 19,70,630) recognised in the Profit and Loss Account for Assessment Year 2018-19 towards loan processing fees and commission on bank guarantee and LC on bill discounting in that year itself. While filing the statement of computation of income for Assessment Year 2018-19, assessee: i) excluded any income pertaining to AY 2017-18, as the entire amount had already been offered to tax and accepted by the Department under the VSV declaration for AY 2017-18; and ii) included additional Rs 9,70,630 (originally apportioned to AY 2019-20) in AY 2018-19 consistent with the revised method of offering such income in the year of receipt.

Order is pronounced in the open court on 12 February, 2026

Sd/- Sd/- (Saktijit Dey) (Girish Agrawal) Vice President Accountant Member

Dated: 12 February, 2026 MP, Sr.P.S. Copy to : 1 The Appellant 2 The Respondent 3 DR, ITAT, Mumbai 4 Guard File 5 CIT

BY ORDER,

(Dy./Asstt. Registrar) ITAT, Mumbai