THE HONG KONG & SHANGHAI BANKING CORPORATION LTD.,MUMBAI vs. JT. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) - RANGE -3, MUMBAI

The Supreme Court of India in the case of South Indian Bank Ltd. Vs. Commissioner of Income-tax [2021] 130 taxmann.com 178 (SC) has upheld the contention that if the Assessee has sufficient interest free funds, no disallowance under 14A can be made. The relevant extracts of the said order are reproduced below: "17. Where the assessee has mixed fund made up partly of interest free funds and partly of interest-bearing funds and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the revenue to make an estimation of a proportionate figure…. 20….The disallowance would be legally impermissible for the investment made by the assessees in bonds/shares using interest free funds, under section 14A. In other words, if investments in securities is made out of common funds and the assessee has 5 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. available, non-interest-bearing funds larger than the investments made in tax-free securities then in such cases, disallowance under section 14A cannot be made.

We find that the ITAT, in Assessee's own case for AYs 1997- 98 to 2001-02 has decided this issue in the Assessee's favor. Relevant extracts of the ITAT's order dated February 15, 2007, for the assessment year 1997-98 are reproduced below: "67. We have given a careful consideration to the arguments placed before us by both the sides vis-a-vis the factual position as mentioned above. It is true that various Benches of the Mumbai Tribunal have held that exemption is available on gross income and not on net income. However, insertion of section 14A in the Income-tax Act with retrospective effect from 01.04.1962 makes a material departure. As per the new provision no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of the total income. It is, therefore, clear that if there is any direct nexus between the expenditure incurred by the assesses and the earning of income which does not form port of the total income, no deduction is permissible for such expenditure. However, in the present case there is no material to indicate that the assessee had incurred any expenditure which is directly referable to earning of interest income on tax free bonds. During the year the investment is of about Rs. 219 crores. As against this during the year itself the assessee's own funds by way of capital and reserves and profits increased by more than Rs. 1,319 crores. In these circumstances, there can be no presumption that the assessee borrowed interest bearing funds for investing in tax-free

Moreover, in subsequent AYs 2005-06 to 2007-08 (i.e., until Rule 8D: Method for determining amount of expenditure in relation to income not includible in total income of the Rules was introduced), the CIT(A) deleted the ad hoc disallowance under section 14A of the Act made by the learned AO and held in favour of the Assessee (that no disallowance is warranted under section 14A of the Act), and the AO has not filed an appeal against the CIT(A) order on this ground. Without prejudice, the Assessee submitted that the disallowance cannot exceed 1% of the total exempt income earned during the year, as determined by the Tribunal in AY 2002-03 and 2003-04.

Thus, consistent with the past precedence, we hold that disallowance of 1% of the total exempt income is justified for the purpose of disallowance u/s 14A. Accordingly, this ground is partly allowed. Ground No. 2: Depreciation of Rs 11,80,900 – GESCO 9. The Ld. AR submitted before the ITAT that this ground has become infructuous as the ITAT has already granted relief in respect of the amounts paid to the erstwhile tenant GESCO as revenue expenditure in its order for AY 1999-2000 (i.e., in the year of payment to GESCO) and, accordingly, the depreciation claim has become infructuous. Accordingly, this ground is dismissed as infructuous.

The AO and CIT denied the depreciation of Rs 1,50,000/- towards the compensation of Rs 30,00,000/- for vacating the premises towards Gillanders.

While the Assessee before the learned AO and CIT (A) had requested a tax depreciation claim on the amount paid to Gillanders, based on the ITAT's judgement in the Assessee's own case for AY 1999-2000 (in the case of GESCO) the Assessee vide letter dated September 29, 2022 filed an additional ground before the ITAT to request that the Assessee be allowed a tax deduction for the payment made to Gillanders to vacate and hand over peaceful possession of premises as revenue expenditure.

It is seen that the facts of this ground are similar to ground 2 of Assessee's appeal before the ITAT, i.e., payment to another tenant, GESCO, wherein the ITAT vide its order for AY 1999- 2000 had already allowed a claim of a similar nature as revenue expenditure. The relevant extracts of the ITAT's order dated November 20, 2015, for AY 1999-2000 are reproduced below: "69. After hearing the contentions of both the parties and on perusal of records including the decisions relied upon by the assessee, we are of the considered opinion that the expenditure incurred by the assessee for vacating the premises given to the tenant is a business expenditure and allowable as revenue expenditure, Therefore, we allow Ground 4 in part.

Accordingly, the Assessee prayed that the additional ground raised

The learned AO held that the guarantee commission is taxable in the year of receipt and cannot be spread over the period of the guarantee. The CIT (A) confirmed the additions by relying on the decision of their predecessor's order for earlier AYs.

We agree with the contention of the assessee that no adjustment is required to be made to the total income in respect of the guarantee commission received in advance, which has 11 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. been rightly recognized as income over the life of the guarantee and not at the time when the guarantee is issued. The sample copies of the guarantees placed before us evidence that, with respect to big relationship customers, the Bank refunds a portion of the guarantee commission relating to the unexpired period after obtaining special internal approvals if a guarantee were to be revoked before its maturity date. The deferred guarantee commission did not accrue or arise in the year in which guarantee agreements were entered. Accordingly, we hold that the guarantee commission should be spread over the period to which it relates and should not be taxed upfront in the year of receipt.

We find that the Tribunal has held this issue in favor of the Assessee in respect of previous A.ys. 2001-02 to 2003-04. The relevant extracts of the ITAT’s order for the assessment year 2001-02, dated November 20, 2015, which has relied on the decision of the Calcutta High Court in the case of CIT v/s Bank of Tokyo (71 Taxman 85), are reproduced below: “After hearing both the parties on the issue and perusal of the records including the case relied upon by the parties, we find that the Ld. CIT(A) has passed well reasoned order and directed the AO to delete the addition. For the sake of convenience, we also reproduce the relevant findings of the Hon’ble Calcutta high court viz CIT(A) Bank of Tokyo Ltd as under: “The Revenue contends that the right to receive the commission being a one-time right, its accrual shall coincide with the commencement of the service rendered by way of guaranteeing the debt repayment; it is immaterial that the repayment covers more than on previous year. Therefore the entirety of commission accrues at a time. The assessee bank on the other hand submits, 12 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. that the service having a spread of years over the accrual should be year by year. The Revenue’s contention that the accrual of the entire commission is a point of time accrual is not tenable. The contesting submissions boils down to one question, whether accrual is co-eval with the pay ability, the same may be payable but may not be apportionable until the happening of an event; in the present case, the expiry of the period, for, the guarantee beyond the expiry date of the previous year remains in suspense. It may or may not fructify into an actual right to revive for the subsequent period of the term of the guarantee as the sooner determination of the guarantee is a contingency not ruled out by the agreement. It Is only upon certain conditions being fulfilled, viz, the guarantee running the full course or the period if the debt guaranteed, that the right to entirety of the commission can be said to have accrued… Accordingly, we dismiss ground no 7 taken by the revenue.”

This proposition has also been upheld by the Bombay High Court in the case of BNP Paribas SA (32 taxmann.com 276). Relevant extracts of the said order are reproduced below: “4. So far as question © is concerned, the issue is whether the commission received by the respondent from its client to provide Guarantee is to be taxed in the year of the agreement (the year of the receipt) to provide the guarantee or to be spread over the period for which the guarantee is provided. In the present facts, CIT(A) has come to a finding of fact that the guarantee which has been issued for a certain period of time are cancelled by the client before the expiry of the tenure of the guarantee, resulting into the respondent- assessee returning to its clients the part of the guarantee commission attributable to the unexpired period of the guarantee. This finding of fact was upheld by the Tribunal while following the decision of the Calcutta High Court in the matter of CIT v. Bank of Tokyo Ltd. [1993] 71 Taxman 85 wherein it has been held that the income earned from deferred guarantee commission did not accrue or arise to an assessee in the year in which the guarantee agreements were entered into but should be spread over the period of the guarantee proportionally. In these circumstances, the decision of the Tribunal in upholding the order 13 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. of the CIT(A) is a conclusion based on a finding of fact and hence, we do not see any reason to entertain question (c).”

Thus we hold that no adjustment can be be made to its total Income in respect of the guarantee commission received in advance, which is rightly recognized as income over the tenure of the guarantee and not in the year in which the guarantee is issued. This ground is thus allowed. Ground No. 5: Expenditure incurred on separation/ termination of employees-Rs 19,19,64,640.

Facts in brief qua this issue are that, as part of the rationalization of operations and workforce, some employees of the Assessee were terminated from bank services during AY 2004-05. Such employees were either redundant, and hence, their employment contract was terminated by the Assessee, or they resigned from the services on account of redundancy. The Assessee made a provision of Rs. 33,00,00,000 towards such separation costs during the subject year. As against this, an amount of Rs.19,19,64,640 was actually paid to the separating employees. Tax under section 192 of the Act has been withheld from the same and paid into the Government treasury. The Learned AO and CIT(A) treated the expenditure as falling within section 35DDA of the Act.

It is not disputed that the payments made to the redundant / separating employees have been incurred wholly and exclusively in relation to the Assessee's business and are deductible under 14 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. section 37 of the Act. Further, tax was deducted at source from such employees and deposited in relation to the said payments.

It has been stated that, the Assessee operated a separate VRS scheme from July 7, 2003, to July 31, 2003, which was considered for section 35DDA of the Act. The said VRS scheme is included on page 17 of the factual paper book filed by the assessee before us. The said scheme applied to the clerical and subordinate staff of Assessee that had attained 40 years of age or completed 10 years of service with the Assessee. The specific scope and eligibility enunciated in the said VRS scheme was in accordance with Rule 2BA of the Rules. The payments made to the redundant / separating employees did not conform to the VRS scheme of the Assessee / guidelines laid down under Rule 2BA of the Rules. Since the said payment is not pursuant to a VRS scheme, section 35DDA of the Act should not apply.

The Assessee has submitted the statement showing details of severance cost paid to the employees. It has submitted the method of computation of expenses in code on separation and termination of employees. Additionally, as directed during the course of the hearing, assessee has attached sample copies of letters of termination/separation of employees. It has been further submitted that the method of computation for payments to redundant employees per the sample letters of separation / termination of employees is different than the manner contained in the VRS scheme.

The said proposition has also been upheld by the Mumbai ITAT in the case of Warner Lambert (India)(P.) Ltd (143 TTJ 571), which has identical facts to the Assessee's. The relevant extracts of the said order are reproduced below (emphasis supplied): "17. We have considered the submissions of both the parties. Sec. 35DDA (1) of the Act reads as under : "35DDA. (1) Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee at the time of his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, 1/5th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal instalments for each of the four immediately succeeding previous years." 18. A bare perusal of this section would reveal that the applicability of this section is attracted only when the payment has been made to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement. Since the payment reduces the burden on the assessee relatable to subsequent years, the legislature inserted this section in order to allow only 1/5th of the total sum paid by the assessee to its employees. This amount in the hands of the employee has been exempted under s. 10(10C) of the Act to the extent of Rs. 5 lacs. The relevant part of s. 10(10C) reads as under :…” 19. The submission of the learned Departmental Representative is that the provisions of s. 35DDA are applicable because the payment has been made in pursuance to scheme of voluntary retirement and it is not necessary that the said scheme should comply with guidelines as per s. 10 (10C). We are not inclined to accept the plea of the learned Departmental Representative. In the present circumstances, in order to resolve the dispute, we are of the opinion that principles of harmonious construction of statute have to be applied. As per these principles a statute must be received as a whole and one provision of the Act should be 16 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. conformed with reference to other provisions in the same Act so as to make a consistent enactment of the whole statute. The provisions relating to voluntary retirement scheme are contained in s. 10(10C) and all the conditions laid down therein have to be fulfilled before exemption can be availed under the said section. The income and expenditure go together and it is difficult to appreciate that while considering the expenditure part any kind of claim could be taken into consideration whereas while allowing exemption only those claims are to be taken into consideration which conform to the guidelines under r. 2BA. The language in s. 35DDA and s. 10(10C), as noted above, clearly refers to scheme or schemes of voluntary retirement. It is true that s. 35DDA does not specifically refer to s. 10(10C) but principles of harmonious construction have to be applied here and it is to be held that the requirements as laid down under r. 2BA have to be met before deduction under s. 35DDA could be allowed. There is no dispute that the scheme adopted by the assessee did not conform to the guidelines laid down under r. 2BA. Therefore, it cannot be held that provisions of s. 35DDA are applicable in the present case. We are in agreement with the pleading of the learned Departmental Representative that deduction of tax under s. 192 out of sum of Rs. 17 lacs without allowing any exemption is not of much relevance, because that does not determine the correct tax liability of the assessee. However, it is an important factor to be taken into consideration in deciding the issue since the assessee has deducted the tax from the entire sum of Rs. 17 lacs. Therefore, the plea of the assessee that the claim of the assessee is not in conformity with r. 2BA, cannot be disputed. It has not been brought on record by the Department that in the assessment order Ms. Chitra Dhoke was allowed exemption as contemplated under s. 10(10C). In view of the above we confirm the order of the learned CIT(A). In the result, this ground is dismissed."

Thus, following the aforesaid decision, we hold that expenditure of Rs 19,19,64,640/- is fully deductible under section 37 of the Act, since the expenditure is incurred wholly and exclusively for its business and the rationalization was not a part of voluntary separation scheme and, as such, was not 17 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. covered by the provisions of Section 35DDA of the Act. Accordingly, this ground is allowed. Ground No. 6: Salary of Mr. C Trench (3 days of salary and perquisites), Mr. Peter E. Davies – 12 days of salary 29. This is ground is similar to ground No 1 of the department and same shall be decided while deciding the appeal of the department. Ground No. 7: Salary of Mr. Ashok Bhatia – 50 per cent of total salary and perquisites.

Brief facts qua this issue is that, Mr. Ashok Bhatia was employed by HSBC Asia Holdings BV as the Chief Information Officer of India, Middle East and Africa located in the HSBC Software Development Centre, India. He had been deputed to the Indian branch of the Assessee for three years. As a part of his global role, Mr. Ashok Bhatia spent 50 per cent of his time rendering services to the Indian branch of the Assessee and the balance of 50 per cent of time was spent rendering services to the overseas associated enterprise ("AE') of the Assessee. The salary paid to Ashok Bhatia has following three components: Sr Particula Amount Deduction Remarks No rs claimed by the Assessee in its income- tax return 1. Onshore Rs Rs 74,45,620 Debited to the profit salary 74,45,620 & loss account of the Assessee and paid by the Assessee. 2 Cash Rs Rs Paid by the overseas

The total salary has been taken into account by Mr. Ashok Bhatia in computing his income from salary, and due tax on the 19 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. total salary has been deducted at source and deposited by the Assessee. Our attention was drawn to Form 16 issues to Mr. Ashok Bhatia at page 125 of the factual paper book which contains income-tax return form filed by Mr. Ashok Bhatia.

The learned AO held that the cash component of the offshore salary cannot be allowed as a deduction under section 37 of the Act and should be considered part of the head office expenditure. While the CIT (A), in the case of Mr Ashok Bhatia, directed the learned AO that 50 percent of the total salary and perquisites be disallowed since it is not related to the business of the Indian branches. Reference was also made to the appointment letter issued to Mr. Ashok Bhatia for his employment with HSBC Asia Holdings BV in relation to his global role as the Chief Information Officer of India, Middle East and Africa located in HSBC Software Development Centre, India. The letter indicates that Mr. Ashok Bhatia has been seconded to the Assessee's office in India for three years. Further, point 7.0: Duties of the letter indicates that: "You will perform such duties as are in the opinion of the Group IT director appropriate to the Chief Information Officer India, Middle East and Africa and will perform such other duties and exercise such powers in HBAP or any HSBC. Group company as may from time to time be delegated to you by, or with the authority of the Group IT director. The Group's earning Ratings will be determined by group Finance. Your personal rating will be determined by the Group IT Director."

At the time of hearing, assessee without prejudice claimed that the cash component of the offshore salary cannot be 20 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. considered as head office expenditure as it is a direct cost of the Indian branch of the Assessee. Further, in order to avoid further litigation, the Assessee has restricted its claim to the following two contentions: (a) Though the CIT(A) directed the learned AO to disallow 50 per cent of the total salary and perquisite, in respect of the perquisite component of the offshore salary, no disallowance should be made as the said amount has not been claimed as a deduction in the return of income and thus, there is no question of a disallowance. Moreover, even the learned AO had also not disallowed the perquisite component of the offshore salary.

Thus, in view of the fact that Ld. CIT (A) has directed the AO to disallow 50 per cent of the total salary and perquisite, in respect of the perquisite component of the offshore salary, therefore, no disallowance can be made as the said amount has not been claimed as a deduction in the return of income; and secondly we agree with the contention of the Ld AR that the disallowance of 50 per cent of both onshore salary and offshore salary (cash component) should be restricted proportionately to 11 months only and not the entire year. Accordingly, this ground is allowed partly.

The learned AO held that the cash component of the offshore salary, which is paid by the overseas branch, cannot be allowed as a deduction under section 37 of the Act and should be considered part of the head office expenditure as defined in section 44C of the Act. While the CIT(A) held that the salary paid to the expatriate officers could not be considered as a head office expense, since it is not covered by section 44C(iv)(b) of the Act

Before us, the details of expatriate officers employed in India together with their designation and remuneration, copies of Form no 16 issued to the expatriate employees, the income-tax return forms filed by the expatriate employees, and secondment letters / posting letters justifying the aforesaid facts have been filed which was already been filed before the learned AO / CIT(A). It has been submitted that these employees were deputed to the Indian branch of the Assessee and worked exclusively for the India operations; the cash component of their offshore salary, which the overseas entity has paid, is an expenditure incurred exclusively for the Assessee's Indian branch, and hence, cannot be covered by section 44C of the Act, as it is not a part of the head office cost but a direct cost of the Indian branch.

We find that the Tribunal, in Assessee's own case (including that of the British Bank of Middle East now merged / amalgamated with the Assessee) for AYs 1992-93 to 2003-04, has decided this issue in the Assessee's favor. Relevant extracts

In relation to the disallowance of 50 percent of the total salary and perquisites in the case of Mr. Ashok Bhatia, we have already discussed in assessee’s appeal in Ground No. 7 above.

Now in relation to the disallowance of salary pertaining to Mr. C. Trench and Mr. Peter E. Davies, it is not in dispute that a nominal time of 3 days and 12 days, respectively, was spent on internal audit work for overseas branches. As a part of their global role in a multinational group, these expatriate employees were required to undertake certain co-ordination work for overseas branches. The Tribunal in the Assessee own case for AY 2002-03 and 2003-04 has held that; “These are mere incidental activities carried out by the employees, which acquire group wise liaising and coordination and the same need not be required to be compensated.” Given the nominal amount of time spent on the same, the portion of the salary paid to these employees continues to relate to the Assessee's India operations, 24 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. and that has been claimed as a deduction by the Assessee in its books of accounts, in our opinion ought not to be disallowed. Accordingly this ground of the revenue is dismissed. Ground No. 2: Expenses incurred for mobilization of deposits from Non-resident Indians (NRIs) – Rs 8,88,50,535.

Brief background qua this issue are that, NRIs form a large resource pool with potential sources for foreign currency funds for India both in terms of deposits and investment, and the large extensive network of HSBC's branches and offices, particularly in countries in the Middle East, is of great assistance to the Assessee in their marketing efforts. To persuade NRIs to invest in India, it is not merely enough to offer financial incentives; considerable selling efforts are also required. To mobilize and garner deposits, the Assessee has NRI desks in the Middle East, UK, USA, Singapore and Hong Kong 'desks'. The expenditure is in respect to activities exclusively related to the marketing for NRI deposits and to provide personalized and expert service to the NRIs. The expenses incurred toward these NRI desks are in the nature of salaries, travelling, advertising and other incidental expenses. Though the relevant offices outside India have debited this expenditure to the Assessee's head office in Hong Kong, it must be noted that the expenditure has been incurred wholly and exclusively for the purpose of the Assessee's Indian operations and is allowable as a deduction in computing the Assessee's income in respect of its Indian operations. The Indian branch of the Assessee alone benefits from the NRI deposits collected. The income generated forms part of the taxable income

The learned AO held that the expenditure could not be allowed under section 37 of the Act and should be considered part of head office expenditure under section 44C of the Act. While the CIT(A) held that the NRI mobilisation expenses cannot be considered as a head office expense since it is not covered by section 44C of the Act, based on the favourable judgements of (a) the ITAT in Assessee's own case (including that of the British Bank of Middle East now merged / amalgamated with the Assessee) from AY 1992-93 to AY 2003-04), and (b) Bombay High Court in Assessee's own case in respect of AY 2000-01 and directed the learned AO to allow the expenditure fully since it is related to the Indian operations of the Assessee.

The expenditure incurred is specifically for the purpose of deposit mobilization of the Indian branch of the Assessee and rendering related services to customers. It is not in the nature of general administration expenses and is also not in the nature of common expenditures allocable to the branches. The expenses incurred and the benefit derived is directly attributable to the Indian branch of the Assessee, and therefore, such expenditure cannot be held to be covered under section 44C of the Act. The Assessee has also furnished the details of expenditure incurred which is duly supported by Independent accountants’ certificates

Further, the Hon’ble Bombay High Court has held in favour of the Assessee in respect of AY 2000-01 by dismissing department's appeal on this ground on the basis that the department had not challenged the ITAT's order on this ground for earlier years. Accordingly ground no.2 raised by the revenue is dismissed. Ground No. 3: Disallowance on payments towards canteen subsidy, holiday home subsidy, contribution to staff cultural committee and payment to recreation club – Rs 1,10,66,662. Ground No. 4: Disallowance on payments for membership and subscription fees – 50 percent of Rs 41,56,860 Ground No. 5: Disallowance for guest house expenses – Rs 1,11,65,404 Ground No. 6: Disallowance of entertainment expenses – Rs 2,80,43,079 28 and others M/s. Hongkong & Shanghai Banking Corporation Ltd.

In relation to the department's ground numbers 3 to 6 above, before the ITAT, the AR states that the expenses incurred by the Assessee are wholly and exclusively for its business and, therefore, deductible under section 37 of the Act. Accordingly, the question of any disallowance does not arise.

We find that the ITAT, in Assessee's own case in previous AYs, has decided these issues in the Assessee's favor and before us detail chart on department's grounds has been given enclosed which contains the list of decisions of the ITAT in the Assessee's own case as well as other rulings on which the Assessee has placed reliance.

Since the grounds No.3-6 have been dismissed and allowed in favour of the assessee and therefore, following the same we hold that ld. CIT(A) has rightly deleted the said disallowance and consequently, these grounds raised

On perusal of the relevant provision, it is een that the term "contribution" is defined in Rule 2(c) of Part A of the Fourth Schedule to the Act read with Rule 1 of Part B thereof to mean "any sum credited by or on behalf of any employee out of his salary, or by an employer out of his own moneys, to the individual account of an employee, but does not include any sum credited as interest'. In the present case, the payment is not credited to the individual account of an employee but paid to the pension fund to enable it to fund the overall deficit as determined by an independent actuary.

The learned AO held that the payment made to the pension fund is covered under section 36(1)(iv) of the Act; that the amount paid exceeds the prescribed limit of 27 per cent and accordingly disallowed the said amount. The CIT (A) has held in favour of the Assessee and directed the AO to allow the expenditure of Rs 30,67,20,000.

As indicated in aforesaid para, the payment was not credited to the individual account of the employee but paid to the pension fund to enable it to fund an overall deficit. Moreover, it has been pointed before us that the said payment was based on 30 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. an actuarial valuation report. Consequently, the question of applying the provisions of section 43B read with section 36(1)(iv) of the Act does not arise and the payment is deductible under section 37 of the Act.

It has been stated that the said contention of the Assessee has been upheld by the Surat ITAT in case of Surat District Coop. Bank Ltd. Vs ACIT (152 taxmann.com 549)which has similar facts as that of the Assessee. The relevant extracts of the said order are reproduced below: "15. We have heard both the parties. Learned DR for the Revenue submitted that on the facts and circumstances of the case and in Law, the Ld. CIT(A) has erred in deleting the disallowance of expenses towards Employees contribution to provident fund/shortfall Rs. 29,00,000/- without appreciating the fact that the assessee is using this fund to cover up shortfall and pay employees contribution which is in fact to be collected from its employees and hence not an allowable expenses in the hands of the assessee. On the other hand, Ld. Counsel submitted that the assessee bank has made the contribution towards the shortfall in Provident Fund's Statutory Interest Rate of 9.5%. This shortfall has been made good from the Fund created namely, "Staff Provident Fund (Interest)", specifically for this sole purpose. The fund has been created from Profit remained after payment of income tax. Hence, in the year of actual expenditure (i.e. Contribution towards Shortfall in maintaining the Statutory Rate of Interest of Provident Fund) the expenditure claimed under section 37(1) of the Act is allowable. The expenditure made from the Fund does not change its nomenclature. It is an expense. If the actual expenditure made by the assessee is not allowable than there is certainly double taxation in the hands of the assessee. It is the statutory requirement under the Provident Fund Rules notified by the Central Government. As per Rule 17, any deficiency/shortfall in the maintenance of Provident Fund Interest Rate shall be made 31 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. good by the Employer. The Statutory Provisions of the Rules are reproduced as under:…" "16. Thus, ld Counsel submitted that from the above, it is very much evident that in case of any Shortfall in maintaining the Interest Rate in the Provident fund of the employees, it is the responsibility of the Employer. Further, the creation of Employees Provident Fund Trust is Statutory Duty of the employer. The assessee co-operative bank has fulfilled all its statutory liability towards the Employees Provident Funds Act and hence, the payment made towards maintenance of Statutory Interest Rate is allowable expenditure u/s 37(1) of the Act. The CIT(A) in his order rightly allowed the same. However, the assessing officer in his order without verifying the records available with him i.e. the computation of income that amount contributed to the "Staff Provident Fund (Interest)" is tax paid amount and held that the expenditure made from such fund is not allowable u/s 37(1) of the Act.

Following the above decision, we allow that a deduction of the said expenditure of Rs 30,67,20,000 under section 37 of the Act as it is not a 'contribution credited to any individual account of any employee', and hence, not covered under the provisions of section 36(1)(iv) of the Act but allowable under section 37 of the Act.

Brief facts are that, the Assessee is engaged in providing banking services and is part of an international banking company that provides services around the globe. The Assessee has a Correspondent Banking Division ('INM IB'), which manages relationships with Indian Banks / Financial Institutions operating in India ('Indian FIs'). The Assessee sells financial products to the Indian FIs, and the revenue earned is booked by the Assessee and offered to tax in India. During the year under consideration, the INM IB division of the Assessee earned 246.89 million. Further, the Assessee has earned a floating income of INR 18.805 million from the Nostro Account.

Further, Indian banks have to establish relations with overseas banks as they do not have a network of branches outside India. The Assessee, while dealing with the Indian bank/FIs would also acquaint its customers of the financial products available with the Assessee globally. This would encourage the FIs to bank with the Assessee considering its global reach. Separately, the overseas branches of HSBC would acquaint their customers of global financial products/ global reach of the Assessee (including the Indian branch). No payment is made by the Assessee for such incidental services as primary benefit of FIs choosing to bank with the Assessee in India is obtained by the Assessee. As a result of such services of overseas HSBC branches, the Assessee has earned income from banks domiciled outside India. The details of the income earned were provided in the submission made by the assessee to the TPO vide dated September 1, 2006.

It has been submitted that, the Assessee's marketing activities and HSBC's overseas branches were purely incidental and reciprocal. The benefit that the Assessee receives from marketing its products by its AEs was ignored by the TPO while making a unilateral one-way adjustment. The Ld. TPO rejected the Assessee's arguments and adopted the Transactional Net Margin Method ('TNMM') as the most appropriate method. While applying TNMM, the TPO aggregated the entire direct and indirect cost of the correspondent banking department of the Assessee along with Head office ('HO') expenses to calculate the

The CIT (A) provided an ad hoc relief by restricting the cost base to only 75%.

Further he submitted that, the global network of the Assessee is a direct asset and mainly benefits the Assessee by having global reach and the ability to offer services under its network. The Assessee has earned revenue from the sale of products to Indian FIs, which has been offered to tax. Overseas branches of HSBC also provide incidental and services that benefit the Assessee, and the Assessee makes no payment for such services. Hence, services provided are incidental and derive reciprocal benefits. The total Cost of the INM IB division for AY 2004-05 is only 20.75 million, whereas income earned from the activity performed by the INM IB division is 246.89 million. The profit margin that arrived at 1090 per cent is for higher than the margin reached by the Ld. TPO of 20.59 per cent. Thus, the Assessee's is adequately compensated, assuming.

More importantly, Ld. Counsel submitted that the Assessee has reported more than 100 transactions in Form 3CEB, and the same were accepted to be at ALP by the Ld. TPO. Admittedly these transactions include items which are marketed by INM IB division such as custodian charges, guarantee commission charges etc. as evident from Form 3CEB. Once the primary business transactions are found to be at ALP, one cannot separately treat incidental benefits as a separate transaction unless it is shown that it is separate from the main transaction.

Without prejudice to the above, Ld. Counsel submitted that there is no international transaction identified by the Ld. TPO, no Associated Enterprises identified by the Ld. TPO, no search process identified by the Ld. TPO, and no comparable identified by the Ld. TPO. Hence, the Assessee contends that no adjustment on account of corresponding banking activity is warranted.

He also drew our attention to the order from the Hon'ble Tribunal in the Assessee's own case for AY 2002-03 & 2003-04 with respect to such activities wherein the entire adjustment has been deleted, and it has been held: “14.12.1….The INM IB division does not use any additional facility, and the employees providing this support do not have any special marketing skills or knowledge of the products provided by the overseas HSBC branches. It is important to emphasize that the global network of the assessee is a direct asset and mainly benefit the assessee to have global reach and the 36 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. ability to offer services under its network. This directly encourages FI's to approach the assessee for the services as compared to others who may not have such global reach. It may also be noted that the overseas HSBC branches also provide services that benefit the assessee, i.e., in selling INR Vostro accounts of HSBC India to banks domiciled outside India, The assessee does not pay any amount to overseas HSBC branches for such marketing services. It is also pertinent to note that as a result of various services of overseas HSBC branches, as above, assessee had earned float income of Rs.1.97 Crores on the interest free balances maintained by the Indian banks which have maintained Nostro account with the assessee. This fact is not disputed by the revenue before us. Hence, it could be safely concluded that the assessee and the overseas HSBC offices being a part of the HSBC group derived reciprocal benefits and thus the non-charging of costs for providing the incidental marketing support services to overseas HSBC entities would not cause any prejudice to the interest of the assessee as well as the revenue. 14.12.2…Further, the total cost of INM IB division is only Rs 1.55 Crores, whereas the income earned from the activity performed by INM IB division is Rs 4.48 Crores (including income from Indian FI and Rs 1.97 Crores float income from Vostro account). Even if only the float income from Vostro Account is considered, still the assessee has earned a profit of Rs. 42 Lakhs (1.97-1.55 cr) resulting in profit margin of 27%, which has been already offered to tax. The profit margin arrived is much higher than the margin of 22 percent arrived at by the LD. TPO. If both the income (income from Indian FI and Float income) are considered, the profit margin stands at 189 percent. This shows that the assessee is adequately compensated for the activities carried out by INM IB division. Hence the allegation of the revenue that the assessee has not been adequately compensated has no merits. 14.13 In view of the aforesaid observations in the peculiar facts and circumstances of the case herein and respectfully following the aforesaid decision of this Tribunal, we hold that the assessee had considerably benefitted out of earning income from Indian Fis and float income pursuant to correspondent

Since similar issue has been discussed and decided by the Tribunal in assesse’s own case for the earlier years, therefore, following the same reasoning, we hold that the TP adjustment made by the ld. TPO is deleted.

Thus, respectfully following the above order of the Tribunal in assessee’s case, we delete the adjustment made by the TPO. Furthermore, the Assessee has voluntarily disallowed a proportionate salary for certain employees in relation to services rendered to foreign AEs. Given the fact that the primary banking transactions have been accepted at ALP, then separately benchmarking the incidental activities is not feasible. As held by 40 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. the Tribunal, the oversight role provided by the employees at the group level is part of the functions of the employees in a multinational group. These employees (other than Mr Bhatia, who has been dealt with separately) are not functioning on a day-to-day basis for any group entity. Hence, it cannot be considered as a separate international transaction as the liaison and coordination services provided by the employees at the group level cannot be regarded as distinct transactions. Accordingly, this ground is decided in favour of the assessee following the past precedent.

From the records it is seen that the marketing/ support services of ECB transactions, the Assessee performs the following functions:-  Engaging in discussions with the Indian customer to understand their requirements.

The Assessee does not assume any risks in the transaction; all risks lie solely with the overseas lender AE. The charging of fees by the Assessee is based on commercial parameters such as the relationship with Indian Corporate, the efforts required by the Assessee, the overall cost of borrowing of the client, etc. During the year under consideration, the Assessee earned INR 1,33,70,278 on the ECB transaction. These ECB transactions were transfer priced between the Assessee and AE in the year in which the ECB was given by the AE, and the transaction was accepted as an arm's length price.

Regarding the ECB transactions entered during the year under consideration, the Ld. TPO accepted the transaction at arm's length. However, for the old continuing transaction, the Ld. TPO, based on his predecessor's findings, concluded that compensation at 25% of the total income received on ECBs by foreign branches was also to be paid in subsequent years. 77. The CIT (A), noting that the transaction was continuous from earlier years and in the absence of risks assumed and considering the nature of the services provided, deleted the 42 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. addition made by the Ld. TPO. Since there were no changes in the facts of the case for the years under consideration, the CIT (A) relied on his predecessor's findings for AY 2002-03 and AY 2003-04. In those years, the CIT (A) held as follows: "…I have carefully considered the appellants submissions. The appellant's contention is that in respect of ECBs given by HSBC foreign branches in earlier years, it is undertaking normal monitoring of accounts and follow up with the customers and that no compensation is received from the foreign branches. The appellant's contention appears to be justified since even the services enumerated at page 13 of the Ld. TPO order would show that the work is of normal monitoring and follow up….

In respect of ECBs given by HSBC foreign branches in earlier years, in the absence of risks assumed and taking into consideration the nature of the services provided, the appellant's contention that no adjustment is to be made in respect of the services is accepted…"

Ld. Counsel submitted that the original ECB transactions with the associated enterprise have been transfer-priced and accepted at arm's length. Therefore, there cannot be any further attribution towards the said transaction. This finding has not been contradicted by the Revenue. In the subsequent years, the Assessee does not assume any risk nor conduct any services except for the credit appraisals, which the Assessee conducts from time to time for their local business. Based on the said facts, the Hon'ble Tribunal in the preceding years held as follows: "…We find that the Ld. CIT (A) had categorically observed that HSBC India does not assume any risk in respect of continuing ECBs compared to the nature of service rendered by them. This categorical finding has not been controverted by the 43 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. Revenue before us. Hence, we hold that no transfer pricing adjustment in respect of the services rendered by HSBC India in respect of continuing ECBs more so when the entire commission income / Debt Syndication Fee income received by the Assessee have already been accepted to be at arm's length. Accordingly, ground no. 6 raised by the Revenue is dismissed."

The CIT (A), based on the case's facts, concluded that the Ld. TPO selected secret comparables and failed to disclose the details to the Assessee. These secret comparables were engaged in controlled transactions with group entities and were not independent transactions. In previous years (2002-03 and 2003- 04), the Ld. TPO accepted the ALP without making any adjustments, and there have been no changes in the facts.

We have gone through the order of the Tribunal and the relevant finding given by the ld. CIT(A) and the arguments from both the parties. The manner in which TPO has made the adjustment cannot be accepted for the reasons that- (a) The TPO has utilized "controlled" data of foreign banks that had engaged in transactions with Indian branches. Rule 10B of the Rules stipulates that the comparability of an international transaction should be judged with an uncontrolled transaction. Therefore, the use of controlled transactions by the TPO as 46 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. comparables is not in accordance with the prescribed rules and is contrary to law. (b) The TPO failed to furnish details of the comparables used in the assessment. Furthermore, no information regarding the foreign banks or the functions, assets, and roles of the Indian branch office was provided. Consequently, the use of "secret comparables," inaccessible in the public domain, cannot be deemed appropriate for comparison purposes. Therefore, the adjustment made based on such secret comparables is unjustified. (c) In previous years (2002-03 and 2003-04), the Ld. TPO accepted the Arm's Length Price (ALP) without making any adjustments, and there have been no changes in the facts. Furthermore, the Ld. TPO disregarded the Assessee's global transfer pricing policy, which remunerates 30% of the NNBV from derivative transactions. (d) The TPO rejected all prescribed methods under the Act and arbitrarily adopted a 60% of NNBV allocation without adhering to any prescribed methods and even country to his own show cause notice. Thus, this approach is wholly flawed, ad-hoc and contrary to the Act. (e) Despite assessee provided the requisite details during the assessment proceedings, including the global policy and a theoretical comparison between the two methods, i.e., 30% of NNBV vs. 60% of INBV, the TPO disregarded the entire 47 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. submissions, his own showcase notice and details provided during the proceedings.

Before us Ld. Counsel has submitted the following difference in the application of the two methods:- As per 30 per cent of the Net New Business Value (NNBV) method Notional: USD 11,000,000 Tenor of the deal: 3.5 years Value on the deal per annum: 10 basis points per annum (say) Credit Risk: 3.5 basis points per annum (say) Net New Business Value (NNBV) on the deal: PV of (USD11 mio * 6.5bps * 3.5years) equals USD 22599 (i.e., Present Value of USD 25025) 30% of this is USD 6,780 /- As per 60 per cent of the INPV method Notional: USD 11,000,000 Tenor of the deal: 3.5 years Value on the deal per annum: 10 basis points per annum (say) Credit risk on the deal: 3.5 basis points per annum (say) Other event risk/uncertainty, etc.: 4 basis points per annum (say) INPV on the deal: PV of (USD11 mio * 2.5bps * 3.5 years) equals USD 8692 (i.e., Present Value of USD 9625) 60% of the above: USD 5215/- 86. From the working of the difference in the application of two methods as given by the ld. Counsel, we do not find any 48 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. justification given by the ld.TPO to adopt 60% of NNBV allocation so as to take a contrary stand from the facts of the case presented by the assessee and the transaction of marketing of derivative services. Specially looking to the fact that derivative contract is solely between derivative contract is solely between the Indian customer and the overseas AE; and all risks associated with the derivative contract, including credit risk, market risk, liquidity risk, and country risk, are borne entirely by the overseas AE and the Assessee does not assume any risks in these transactions. For the activities performed, the Assessee has already earned a marketing fee from the AE, amounting to 30% NNBV and the AE is earning the remaining 70% to manage the transaction over its life and assumes all the risk associated with the transaction. Nowhere, ld. TPO has done any analysis of the comparable data as to why it should be adopted at 60%. Thus, we agree with the observation and finding of the ld. CIT(A) and adjustment made by the ld.TPO is deleted.

Brief facts are that, as a part of the rationalization of operations and the workforce, the Assessee terminated the employment contracts of some employees, or they resigned from the services on account of redundancy. During the captioned year, the amount of Rs. 32,00,46,478 has been paid by the Assessee to such employees, representing lump sum compensation on account of separation. Appropriate taxes have been deducted on such amounts paid to employees, and the taxes were deposited to the central government. The details of employees, along with sample copies of the termination letter, were handed over to the Bench during the course of the hearing. 90. The said termination was not part of any Voluntary Retirement Scheme (VRS); hence, the provisions of section 35DDA of the Income-tax Act, 1961 (the Act) are not applicable. 91. We have already given our finding in A.Y.2004-05 and accordingly, in the finding given above, this issue is allowed in favour of the assessee.

This issue has already been dealt by us in A.Y.2004-05 wherein we have allowed this issue treating it as ‘Revenue expenditure’. Accordingly, ground No.2 raised by the assessee is allowed. – Department Appeal Ground No. 1: Expenses incurred for mobilization of deposits from Non-resident Indians (NRIs) – Rs 9,29,19,828 94. Again this issue is similar to the ground raised in Revenue appeal for A.Y.2004-05 and accordingly, in view of the finding given hereinabove, the ground raised by the Revenue is dismissed. Ground No. 2: Addition of Rs. 10,70,000 on account of overfunding of Employees Gratuity Fund (Income Tax Approved Fund)

The facts are that the Assessee makes a contribution to the approved gratuity fund. The Assessee has contributed to the employee's gratuity fund in excess of the amount required to meet the accrued liability for the current year. The details of the same are as under: Particulars Amount (in Rs.)

The relevant para of Ld. CIT (A) order allowing the ground in favour of Assessee is as under: "I have considered the facts of the case, AO's contention and the Appellant submission. I find that the aforesaid issue is covered in the Appellants' favour by the Supreme Court decision in the case of Sugauli Sugar Works (P) Ltd. (1999) (236 ITR 518). Thus, on the basis of the factual submissions and the above decision, the addition of Rs.10,70,000/- made by the AO on account of Overfunding of Employees Gratuity Fund is deleted. Accordingly, this ground of appeal is allowed."

We have considered the relevant finding and facts of the case. It has been submitted that oonce the payment has been made to the employees' gratuity fund and there is no provision in the Trust Deed for refunds, the Assessee neither obtained nor received any amount from the Trust nor has the Trust agreed to refund any amount to the Assessee. Furthermore, by making these payments, the Assessee did not obtain any benefit regarding liability remission or cessation, nor did it write off any liabilities in its accounts. Hence, the unilateral credit to the Profit & Loss A/c. did not amount to any cessation of liability that could be taxed. The Supreme Court of India in case of Sugauli Sugar Works (P) Ltd. (1999) (236 ITR 518) has held as under: "The principle that expiry of period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt, has been well-settled. It is enough to refer to the decision of this Court in Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay 1958 SCR 1122. If that principle is applied, it is clear that mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the section"

Further, it has been submitted that the excess funds have been adjusted against the contribution of liability payable to the gratuity fund in AY 2006-07. The Ld.CIT(A) in AY 2006-07 has not allowed the deduction of Rs. 10,70,000, as the same has been allowed in AY 2005-06. If assessee has recongnised the excess contribution as asset in its books and credited to profit and loss account amounting to Rs.10,70,000/- and has been 53 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. reduced their contribution payable for A.Y.2006-07 as it was already discharged in A.Y.2005-06. Then it has been allowed in this year because in A.Y.2006-07 ld. CIT(A) has not allowed deduction of this amount on the ground that same has been allowed in A.Y.2005-06. Even if we agree with the ld. AO that it should be disallowed in this year, then the same has to be allowed in A.Y.2006-07. Thus, no prejudice is cost to the department and accordingly, there is no point tinkering with the finding of the ld. CIT(A) and same is confirmed.

In the result, ground No.2 raised by the Revenue is dismissed Ground No. 3: Addition of Rs. 40,27,00,000 on account of overfunding of Employees defined benefit pension fund (Income Tax Approved Fund) 101. Brief facts are that, the Assessee makes a contribution to the approved pension fund. The Assessee has contributed to the employee's Pension fund in excess of the amount required to meet the accrued liability for the current year. The details of the same are as under: Particulars Amount (in Rs.) Net Surplus as on 31 March 165.84 million (504.04 – 2005 (as per actuarial valuation 338.20) report enclosed as Annexure 2) Net Actuarial Gain as on 31 403.41 million December 2004 (as per actuarial

The pension liability was short funded to the extent of Rs. 306.72 million as on 31 March 2004. This deficit was replenished by the Assessee by crediting a sum of Rs. 75 million on 7 July 2004 and a sum of Rs. 231.72 million on 12 August 2004. Subsequent to this, the Assessee moved to new terms by the freezing of pensions at the time of conversion, effective from 1st April 2004, in respect of certain categories of employees. As on 31 March 2005 the fund showed a surplus to the tune of Rs. 504.04 million primarily driven by the freezing of pension under the new terms. Since the fund was over funded, it was decided to discontinue the contribution of the Assessee with effect from 1st January 2005 till the time a deficit arose. The financial statements of the Hong Kong and Shanghai Banking Corporation Pension Fund as on 31 March 2005 have been enclosed before us.

The Assessee has recognized the over funding/excess contribution as an asset in its books and credited the Profit & 55 and others M/s. Hongkong & Shanghai Banking Corporation Ltd. Loss A/c. by an aggregate amount of Rs. 40,27,00,000. This amount has been reduced from the contribution payable for AY 2008-09, 2009-10, 2011-12 and 2012-13 as it was already discharged in AY 2005-06.

The Assessee has contributed in excess of the required amount. The Assessee cannot claim deduction for expenses over and above what is required for the particular purpose as determined by the actuary for the previous year. As the Assessee has itself credited the same to the Profit & Loss A/c., it is taxed.

The relevant para of CIT (A) order allowing the ground in favour of Assessee is as under: "I have considered the facts of the case, AO's contention and the Appellant submission. I find that the aforesaid issue is covered in the Appellants' favour by the Supreme Court decision in the case of Sugauli Sugar Works (P) Ltd. (1999) (236 ITR 518). Thus, on the basis of the factual submissions and the above decision, the addition of Rs.40,27,00,000/- made by the AO on account of Overfunding of Employees Defined Benefit Pension Fund be deleted. Accordingly, this ground of appeal is allowed."

Here again once the payment has been made to the employees' pension fund, there is no provision in the Trust Deed for refunds. The Assessee neither obtained nor received any amount from the Trust nor has the Trust agreed to refund any amount to the Assessee. Furthermore, by making these payments, the Assessee did not obtain any benefit regarding liability remission or cessation, nor did it write off any liabilities in its accounts. Hence, the unilateral credit to the Profit & Loss A/c. did not amount to any cessation of liability that could be

Further, the excess funds have been adjusted against the contribution of liability payable to the defined benefit pension fund in the AY 2008-09, AY 2009-10, AY 2011-12 and AY 2012- 13. The ld. CIT (A) in AY 2008-09, AY 2009-10, AY 2011-12 and AY 2012-13 have not allowed the deduction of provision, as the same has been allowed in AY 2005-06. Since we have already made similar observation with regard to ground No.2 that even if deduction has to be denied, then direction has to be given for the allowance of expenses AY 2008-09, AY 2009-10, AY 2011-12, and AY 2012-13 wherein, the ld. CIT(A) has not allowed deduction of the provision on the ground that same has been allowed in A.Y.2005-06.

If the Tribunal intends to deny the deduction, appropriate directions should be given for the allowance of expenses AY 2008-09, AY 2009-10, AY 2011-12, and AY 2012-13 as under Assessment Amount in Rs Page no year of CIT(A) order 2008-09 3,31,69,000 43 2009-10 21,29,21,000 29 2011-12 8,80,21,830 29 2012-13 2,80,61,000 25 57 and others M/s. Hongkong & Shanghai Banking Corporation Ltd.

Instead of tinkering with the allowability and disallowability in the subsequent year, we are of the opinion that the order of the ld. CIT(A) dealing the addition here is justified instead of giving direction to the ld. AO for allowing it for A.Y.2008-09 to 2012-13.

In the result, this ground raised by the Revenue is dismissed. Ground No. 4: Addition of Rs. 16,64,97,286 on account of reversal of provision towards unfunded pension liability in respect of ex-employees 109. Brief facts qua this issue are that, provision made in AY 2004-05 of Rs. 37,42,55,286 has been suo moto offered and taxed in AY 2004-05. During the current year, in the books out of Rs. 37,42,55,286 an amount of Rs. 16,64,97,286 has been credited to the Profit & Loss A/c.

Before us Assessee submitted that as this have already been offered and taxed in AY 2004-05 and therefore, taxing the same would amount to double addition. Since, this amount has already been offered in tax in A.Y.2004-05 and therefore, same cannot be taxed in this year. Accordingly, the said reversal is excluded while computing income of the assessee.

The Canbank Financial Services Limited had filed suit against the Assessee for default in honoring the said transaction. The summary of the court proceedings is as under: Date Remarks Order dated 30 Special Court (Trial of offences relating to June 2004 transactions in securities) at Bombay – refer para 16 (page no. 31) of the order directed to pay the amount of Rs. 18,59,71,808 along with interest at 15 per cent from 24 June 1991 – refer page 185 of the factual paper book. Hence, the Assessee lost the suit at Bombay Special Court. Order dated 31 The Assessee challenged the order the August 2004 Bombay Special Court before the Supreme Court of India. Supreme Court of India admitted the appeal subject to Assessee depositing the entire amount in Canbank in a fixed deposit account - refer page 187 of the factual paper book. Orders dated 15 Supreme Court of India dismissed the July 2013 and 5 Assessee's appeal as having no merits. August 2013 The amount deposited was directly disbursed to Canbank Financial Services

AO held that, since the liability of the Assessee has not been crystallized during the captioned year, the claim of the Assessee cannot be allowed.

The Assessee submitted before us that the liability to pay has accrued and quantified in current year pursuant to order dated 30 June 2004 passed by the Bombay Special Court. Reliance was also placed on the following decisions:  Supreme Court in the case of Bharat Earth Movers vs CIT (245 ITR 428)  Supreme Court in the case of Rotork Controls India (P) Ltd Vs CIT (180 Taxman 422)  Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd vs CIT (82 ITR 363)  Supreme Court in the case of CIT vs Bharat Carbon & Ribbon Mfg. Co. (P) Ltd (239 ITR 505)  Gujarat High Court in the case of Gujarat Steel Tubes Ltd vs CIT (210 ITR 358) 116. We find that the decision of the ITAT Delhi Special Bench in the case of NAFED (ITA No. 1999 & 2000/Del/2008) dated 16.10.2015 which has been relied upon by the income-tax department has been reversed by the Delhi High Court vide order dated 19 April 2017 (393 ITR 666). Further, the Special Leave Petition filed by the income tax department has also been dismissed by the Supreme Court of India. The relevant para of the Delhi High Court decision is as under:

Accordingly, we held that the liability to pay has accrued and quantified in current year and hence the deduction of Rs. 55,45,78,123 is allowed in this year. Ground No. 7,8 and 9: Addition of Rs. 41,33,021 on account of interchange income received by the offshore (non-India) branches of the Assessee 118. This issue is covered in Assessee's own case for AY 2000- 01, 2001-02 and 2003-04 (3688/Mum/09, 3689/Mum/09, 2358/Mum/14) – the relevant para of the decision is reproduced as under: "We have heard the rival submissions and perused the material before us. We find that in the matter of Standard Chartered Grindlays Bank Ltd.(supra), the issue of taxability of commission with regard to Credit Cards was deliberated upon and decided by the Tribunal. We would like to re-produce the relevant portion of the order that deals with the facts as well as the reasoning, given

First of all, as per section 44C, the deduction of head office expenses is allowed in the following manner:  An amount equal to 5 per cent of adjusted total income; or  Amount of so much of the expenditure in the nature of head office expenditure incurred by the Assessee as is attributable to the business or profession of the Assessee in India whichever is the least.

From perusal of the computation of income along with notes to return of income, wherein the details of Head Office expenses incurred and claimed are mentioned. The same is summarized as under: Particulars Amount in Rs. Head Office expenses incurred 98,98,69,000 Head Office expenses debited to the 35,36,04,000 Profit & Loss A/c Deduction claimed under section 44C 32,62,39,678

Thus, for the purpose of allowing deduction under section 44C, the amount equal to 5 per cent of adjusted total income or the expenditure or the amount incurred and attributable to the India branch (i.e., 98,98,69,000) is to be considered. The amount of Rs. 35,36,04,000 debited to the Profit & Loss A/c is irrelevant. We do not find any infirmity in the order of the ld. CIT(A)

Since AO has grossed up the amount while computing the deduction under section 44C. Section 44C does not provide for grossing up. Hence, grossing up is not required. Accordingly, this ground is dismissed. B. Transfer Pricing Grounds 123. Since transfer pricing grounds are similar to the grounds raised in the earlier year and same are covered by the Tribunal orders for A.Y.2002-03 and 2003-04, the same are dealt herein as per the grounds raised in both the appeals.