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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI RAJENDRA, & SHRI C.N. PRASAD
आदेश / O R D E R PER C.N. PRASAD, JM:
These appeals by the Revenue and the assessee against the orders of the Ld. CIT(A)-XXXI, Mumbai pertaining to assessment years 2002-03 & 2003-04. All these appeals were heard together and disposed of by this common order for the sake of convenience.
The first issue in the Revenue’s appeal for the Assessment Year 2002-03 is that the Ld. CIT(A) erred in holding that Assessing Officer has incorrectly made the disallowance of proportionate amount of interest expenditure amounting to Rs. 23,81,374/- and accordingly directing to tax the interest income of Rs. 29,89,272/- u/s. 115A on gross basis.
Brief facts are that the assessee-company received interest of Rs. 29,89,272/- from foreign currency loans given to Indian Corporates, which is taxable at special rate u/s. 115A of the I.T. Act. The Assessing Officer held that from the perusal of the provisions of Section 115A(1)(B) and 115A(1)(a)(ii) it is clear that the lower rate of tax of 20% is to be applied to the amount of income arising to the assessee from interest received as covered under 115A(i)(a)(ii) because if this lower rate of tax is not applied to the net income of the assessee then effectively the assessee would be
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reducing its tax liability by claiming set off of the expenditures in earning income covered u/s. 115A against the remaining income which is chargeable to tax at higher rate. Therefore, he held that it is not the gross interest income on which tax is to be levied u/s. 115A of the Act but on the net interest income. The Assessing Officer has accordingly computed interest attributable at Rs. 23,81,374/- and after deducting this amount from the gross interest income of Rs. 29,89,272/-, he held that only an amount of Rs. 6,07,898/- is eligible for special rate of tax under 115A of the Act.
On appeal, the Ld. CIT(A) following the decision of the Mumbai Bench in the case of Bank of Nova Scotia held that the interest is taxable on gross basis. The Ld. Departmental Representative places reliance on the order of the Assessing Officer.
The Ld. Counsel for the assessee supported the order of the Ld. CIT(A).
We have heard the parties and perused the orders of the authorities below. Here the question is whether special rate of tax u/s. 115A of the Act is to be applied on gross interest or net interest? It was held by the Co-ordinate Bench in the case of Bank of Nova Scotia in ITA No. 306 of 2001 dated 21.4.2004 that gross interest income which has to be the basis for application of concessional rate of interest and not the net interest income. This decision of the Co- ordinate Bench was followed by the Ld. CIT(A) observing as under:
“ I have considered the arguments of the AR and I have also examined the facts. Section 115A provides special rate of tax in respect of income from dividend interest received from Government or any Indian concern on moneys borrowed or debt
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incurred by Government or the Indian concern in foreign currency. Tax rate applicable is 20% on the amount of income by way of interest received by the non-resident. Sub Section (3) of Sec-115A very clearly provides that no deduction in respect of any expenditure or allowance shall be allowed to assessee u/s. 28 to 44C and Sec. 57 in computing his income referred to in Sec. 115A(1). It is therefore obvious that it is the gross interest income which has to be the basis for application of concessional rate of interest and not the net interest income. This issue was examined by ITAT in the case of Bank of Nova Scotia in A.Y. 1997-98 in their order dated 21.4.2004. The ITAT has held that it is the gross interest on which tax rate u/s. 115A is to be applied. Accordingly, following this decision, it is held that the Assessing Officer has incorrectly made the disallowance of interest of Rs. 23,81,374/-. It is held that the tax rate of 20% u/s. 115A shall be applied to the gross interest income of Rs. 29,89,272/-. Appeal on this ground is allowed.”
Since the Ld. CIT(A) followed the decision of the Co-ordinate Bench and decided the issue holding that tax rate under 115A shall be applied to the gross interest, we do not find any infirmity in the order passed by the Ld. CIT(A). This ground is therefore dismissed.
Next issue in the appeal of the revenue is that the Ld. CIT(A) erred in deleting the addition made by the Assessing Officer on account of broken period interest.
The Ld. Counsel for the assessee submits that this issue has been decided in assessee’s own case in its favour by the Co-ordinate Bench of ITAT for Assessment Year 1991-92 and 1993-94 in ITA Nos. 3823 and 3824 of 1998 dated 3.7.2003, copy of which is placed on record. He further submits that the Hon’ble Bombay High Court in the case of American Express International Banking Corporation Vs CIT (125 Taxman 488) held that broken period interest paid should
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be allowed as deduction. The Ld. Counsel for the assessee submits that SLP of the department was also dismissed by the Supreme Court.
The Ld. Departmental Representative submits that in the case of Vijaya Bank Ltd Vs ACIT (187 ITR 541), it was held that broken period interest is not allowable as deduction and this decision of the Hon’ble Supreme Court was not considered in American Express International Banking Corpn. (supra). In reply the Ld. Counsel for the assessee bringing our attention to para-12 of the judgement in the case of American Express International Banking Corpn., submits that the High Court has infact considered the decision of Vijaya Bank and submits that the decision of the Hon’ble Supreme Court in Vijaya Bank has no application to the facts of the case. He submits that the facts and circumstances of the assessee being identical to the decision of American Express International Banking Corpn.(supra), broken period interest has to be allowed as deduction. The Ld. Counsel for the assessee further submits that the ratio of the decision in the case of American Express International Banking Corpn., was also affirmed by the Supreme Court in the case of CIT Vs City Bank N.A. in Civil Appeal No. 1549 of 2006, copy of which is placed on record.
We have heard the rival contentions and perused the orders of the lower authorities and the decisions relied on. The issue in question has been decided in the case of American Express International Banking Corpn. (supra) holding that the broken period interest has to be allowed as deduction considering the decision of the Hon’ble Supreme Court in the case of Vijaya Bank (supra). The Hon’ble Bombay High Court in the case of American Express
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International Banking Corpn. has infact considered the decision of the Hon’ble Supreme Court in the case of Vijaya Bank (supra) and held that having assessed the income u/s. 28, the department ought to have taxed interest on broken period interest received and the department ought to have allowed deduction for broken period interest paid observing as under:
The assessee-Bank, like several other banks, were consistently following the practice of valuing the securities/interest held by it at the end of each year and offer for taxation, the appreciation in their value by way of profit/interest earned due to efflux of time. The Bank also claimed deduction for broken period interest payments. However, the department did not accept the assessee's method in the Assessment Year in question in view of the judgment of the Karnataka High Court in the case of Vijaya Bank Ltd. (supra). This judgment has been subsequently upheld by the Supreme Court in Vijaya Bank Ltd. 's case (supra). In view of the judgment of the Karnataka High Court, the department took the view that broken period interest payment cannot be allowed as a deduction because it came within the ambit of interest on securities under Section 18 of the Income-tax Act. It is the contention of the department that the assessee-Bank received interest on Dated Government Securities from RBI on half-yearly basis. That, the assessee-Bank also traded in such securities. That the assessee- Bank bought Dated Government Securities during the intervening period between two due dates. That, on purchase of the Dated Government Security, the assessee became the holder of the security and accordingly, the assessee received half-yearly interest on the due dates from RBI on purchase. Therefore, according to the department, the income which the assessee-bank received came under section 18 of the Income-tax Act - Interest on Securities. Under the circumstances, it was not open to the assessee-Bank to claim deduction for broken period interest payment made to the selling/transferor-Bank. That, it was not open to the assessee to claim deduction as revenue expenditure for broken period interest Payment as no such deduction was permissible under sections 19 and 20 of the Income-tax Act. That, it was not a sum expended by the assessee for realising interest under section 19 and, therefore, the assessee was not entitled to claim deduction for broken period interest payment as a revenue expenditure under section 28 of the
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Income-tax Act. In this connection, the department followed the judgment of the Karnataka High Court in Vijaya Bank Ltd.'s case (supra). Therefore, the point which we are required to consider in this case is : Whether the judgment of the Karnataka High Court in Vijaya Bank Ltd. 's case (supra) was applicable to the facts of the present case. 11. Before going further we may mention at the very outset that the security in this case was of the face value of Rs. 5 lakhs. It was bought for a lesser amount of Rs. 4,92,000. The difference was of Rs. 8,000. The assessee has revalued the security. The assessee offered the notional profit for taxation, as explained hereinabove, on accrual basis in the appropriate assessment year during which the assessee held the security. This difference could have been treated by the department as interest on securities under section 18. However, in the instant case, the department has assessed the said difference under section 28 under the head "Business" and not under the head "Interest on Securities". Having treated the difference under the head "Business", the Assessing Officer disallowed the broken period interest payment, which gave rise to the dispute. It was open to the department to assess the above difference under the head "Interest on Securities" under section 18. However, they chose to assess the interest under the head "Business" and, while doing so, the department taxed broken period interest received, but disallowed broken period interest payment. It is in this light that one has to read the judgment of the Karnataka High Court and the Supreme Court in Vijaya Bank Ltd’s case (supra). In that case, the facts were as follows. During the Assessment Year under consideration, Vijaya Bank entered into an Agreement with Jayalakshmi Bank Limited, whereby Vijaya Bank took over the liabilities of Jayalakshmi Bank. They also took over assets belonging to Jayalakshmi Bank. These assets consisted of two items viz. Rs. 58,568 and Rs. 11,630. The said amount of Rs. 58,568 represented interest, which accrued on securities taken over by Vijaya Bank from Jayalakshmi Bank and Rs. 11,630 was the interest which accrued upto the date of purchase of securities by the assessee-Bank from the open market. These two amounts were brought to tax by the Assessing Officer under section 18 of the Income-tax Act. The assessee-Bank claimed that these amounts were deductible under sections 19 and 20. This was on the footing that the department had brought to tax, the aforestated two amounts as interest on securities under section 18. It is in the light of these facts that one has to read the judgment in Vijaya Bank Ltd.
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's case (supra). In the light of the above facts, it was held that outlay on purchase of income bearing asset was in the nature of capital outlay and no part of the capital outlay can be set-off as expenditure against income accruing from the asset in question. In our case, the amount which the assessee received has been brought to tax under the head "Business" under section 28. The amount is not brought to tax under section 18 of the Income-tax Act. After bringing the amount to tax under the head "Business", the department taxed the broken period interest received on sale, but at the same time, disallowed broken period interest payment at the time of purchase and this led to the dispute. Having assessed the amount received by the assessee under section 28, the only limited dispute was - whether the impugned adjustments in the method of accounting adopted by the assessee-Bank should be discarded. Therefore, the judgment in Vijaya Bank Ltd.'s case (supra) has no application to the facts of the present case. If the department had brought to tax, the amounts received by the assessee-Bank under section 18, then Vijaya Bank Ltd.'s case (supra) was applicable. But, in the present case, the department brought to tax such amounts under section 28 right from the inception. Therefore, the Tribunal was right in coming to the conclusion that the judgment in Vijaya Bank Ltd.'s case (supra) did not apply to the facts of the present case. However, before us, it was argued on behalf of the revenue that in view of the judgment in Vijaya Bank Ltd.'s case (supra), even if the securities were treated as part of the trading assets, the income therefrom had to be assessed under section 18 of the Act and not under section 28 of the Act as income from securities can only come within section 18 and not under section 28. We do not find any merit in this argument. Firstly, as stated above, Vijaya Bank Ltd.'s case (supra) has no application to the facts of this case. Secondly, in the present case, the Tribunal has found that the securities were held as trading assets. Thirdly, it has been held by the Supreme Court in the subsequent decision in the case of Cocanada Radhaswami Bank Ltd. 's case (supra) that income from securities can also come under section 28 as income from business. This judgment is very important. It analyzes the judgment of the Supreme Court in United Commercial Bank Ltd.'s case (supra), which has been followed by the Supreme Court in Vijaya Bank Ltd.'s case (supra). It is true that once an income falls under section 18, it cannot come under section 28. However as laid down by the Supreme Court in Cocanada Radhaswami Bank Ltd.'s case (supra), income from securities treated as trading assets can come under section 28. In the present case, the department has
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treated income from securities under section 28. Lastly, the facts in the case of United Commercial Bank Ltd. 's case (supra) also support our view in the present case. In United Commercial Bank Ltd.'s case (supra), the assessee-Bank claimed a set-off under section 24(2) of the Income-tax Act, 1922 [Section 71 (1) of the present Act) against its income from interest on securities under section 8 of the 1922 Act [similar to section 18 of the present Act). It was held that UCO Bank was not entitled to such a set-off as the income from interest on securities came under section 8 of the 1922 Act. Therefore, even in United Commercial Bank Ltd.'s case (supra), the department had assessed income from Interest on Securities right from the inception under section 8 of the 1922 Act and, therefore, the set-off was not allowed under section 24(2) of the Act. Therefore, United Commercial Bank Ltd. 's case (supra) has also no application to the facts of the present case in which the assessee's income from Interest on Securities is assessed under section 28 right from inception. In fact, in United Commercial Bank Ltd.'s case (supra), the matter was remitted back as it was contended on behalf of UCO Bank that the securities in question were a part of trading assets held by the assessee in the course of its business and the income by way of interest on such securities was assessable under section 10 of the Income-tax Act, 1922 [similar to section 28 of the present Act). It is for this reason that in the subsequent judgment of the Supreme Court in the case of Cocanada Radhaswami Bank Ltd. (supra), that the Supreme Court has observed, after reading United Commercial Bank Ltd.'s case (supra), that where securities were part of trading assets, income by way of interest on such securities could come under section 10 of the Income-tax Act, 1922.
In the light of what we have discussed hereinabove, we find that the assessee's method of accounting does not result in loss of tax/revenue for the department. That, there was no need to interfere with the method of accounting adopted by the assessee- Bank. That, the judgment in the case of Vijaya Bank Ltd. (supra) had no application to the facts of the case. That, having assessed the income under section 28, the department ought to have taxed interest for broken period interest received and the department ought to have allowed deduction for broken period interest paid.
This decision of the American Express International Banking Corpn., has been affirmed by the Hon’ble Supreme Court in the case
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of CIT Vs City Bank N.A. by dismissing the Civil Appeal No. 1549 of 2006 filed by the Revenue observing as under: “ The facts in the present case are similar to the facts in American Express (supra). Agreeing with this view and accepting the distinction pointed out by the Bombay High Court, this Court dismissed the two special leave petitions filed by the Revenue, one of which was dismissed by a three Judge Bench.
After going through the facts which are similar to the facts in American Express (supra), since the tax effect is neutral, the method of computation adopted by the assessee and accepted by the Revenue cannot be interfered with. We agree with the view expressed by the Bombay High Court in American Express (supra) that on the facts of the present case, the judgment in Vijaya Bank Ltd (supra) would have no application.
For the reasons given above, the question posed before us is answered in the affirmative i.e. in favour of the assessee and against the revenue.
The appeal is dismissed accordingly. Parties to bear their own”.
Respectfully following the above said decision, we reject the ground raised by the Revenue on this issue.
In the result, the appeal filed by the Revenue is dismissed.
ITA No. 1728/M/07 – A.Y. 2002-03- Assessee’s appeal
The first issue in the appeal of the assessee is that the Ld. CIT(A) erred in upholding the order of the Assessing Officer in charging to tax guarantee commission on cash basis and disregarding the method of accounting followed by the assessee.
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The Ld. Counsel for the assessee submits that the issue is as to whether the upfront guarantee commission received by the assessee is to be taxed in the year in which guarantee had actually given or whether to be spread over for the period for which guarantee was given and fairly submits that this issue is decided against the assessee by the Special Bench, Mumbai in the case of DCIT Vs Bank of Bahrain & Kuwait reported in 41 SOT 290.
We have perused the decision of the Special Bench in the case of Bank of Bahrain & Kuwait (supra) and find that the issue has been decided against the assessee holding that the guarantee commission received by the assessee is to be taxed in the year in which the guarantee had actually been given irrespective of the period for which it was spread over observing as under:
We have considered the rival submissions and perused the record of the case. The fundamental principle of taxing the income under the mercantile system of accounting is time of its accrual. It is not material whether the amount has been received at the time of accrual or not. The income is said to accrue when the assessee acquires the right to receive the same. Therefore, the basic question to be answered is as to at what stage the assessee acquired the absolute right to receive the income. The principle has been succinctly enunciated by the Hon’ble Supreme Court in the case of E.D.Sasoon & Co. and others (supra), wherein, after considering the observations of Hon’ble Justice Mukerji,J in the case of Rogers Pyatt Shellac & Co. v Secretary of State for India(1925) 1 ITC 363 at page 371 considered the term “accrues, arises and is received” and also the observations of Lord Justice Fry quoted by Hon’ble Justice Mukerji, J in Colquhoun v Brooks and others decisions, observed as under:-
“It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though
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it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody.”
In the light of above decision, the issue needs to be examined. Ld CIT (DR) has pointed out that the deciding factor would be whether the guarantee commission is refundable or not. If the guarantee commission was refundable then it cannot be said that absolute right to the commission had accrued in favour of the assessee at the time of execution of contract for furnishing guarantee by it but if the guarantee commission was not depended upon the period of guarantee and, thus, had accrued in favour of the assessee on the date of execution of contract for furnishing guarantee then the same has to be taxed in the year in which the guarantee was furnished irrespective of the period to which guarantee remained alive. This is so because the guarantee commission cannot be apportioned with reference to the period over which the guarantee extended. Even in the case of Bank of Tokyo Ltd (supra) heavily relied upon by ld Counsel for the assessee, this principle has been accepted, which is evident from the observations noted in para 22 above. We, therefore, restore this matter back to the file of the AO to examine the issue in the light of above discussion and if he finds that as per the term, the commission was refundable on the revocation of guarantee, then the guarantee commission is to be spread over the period for which the guarantee is given else it is to be taxed in the year the guarantee had actually been given irrespective of the period for which it spread. This ground is allowed for statistical purposes.
Respectfully following the said decision of the Special Bench, we dismiss the ground of appeal of the assessee on this issue.
The next issue in the appeal of the assessee is that the Ld. CIT(A) erred in upholding the order of the Assessing Officer in disallowing the interest paid to RBI for maintaining inadequate Cash Reserve Ratio on balances.
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The Ld. Counsel for the assessee submits that this issue has been decided in favour of the assessee in the case of Bank of America N.A. in ITA No. 4408 of 2000 dated 27.11.2013 following the decision of the Hon’ble Bombay High Court in the case of CIT Vs Bank of Baroda in Income Tax Appeal No. 4169 of 2009 dated 15.2.2011 wherein it was held that interest paid by the assessee to RBI for not keeping CRR reserves on balances is not for infraction of law and therefore such interest is to be allowed as deduction.
The Ld. Departmental Representative places reliance on the orders of the authorities below.
Heard both the parties, perused the orders of the lower authorities and the decision relied on. In the case of Bank of America NA, the Co-ordinate Bench following the decision of the Jurisdictional High Court in the case of CIT Vs Bank of Baroda held that interest paid to RBI for shortfall in maintenance of CRR and SLR is to be allowed as deduction observing as under:
“7. Ground No.7 and 8 are regarding disallowance in respect of amount paid to RBI for shortfall in maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Reserve (SLR). The AO disallowed a sum of Rs.3,74,704/- paid to RBI for shortfall in maintenance of CRR as well as an amount of Rs.9,30,377/- paid to RBI for not complying with the SLR requirements. These disallowances were made by AO on the ground that the payments are infraction of law and therefore, cannot be allowed u/s. 36(1). The ld. CIT(A) has confirmed the disallowance made by Assessing Officer. 7.1 We have heard the ld. Sr. Counsel as well as the ld. DR and considered the relevant material on record. The ld. Sr. Counsel has submitted that this issue has been considered and
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decided by the Tribunal in Assessee’s own case for the assessment year 1992-93 in ITA No.141/Bom/96 in favour of assessee. He has further submitted that an identical issue has been decided by the Hon'ble Jurisdictional High Court in case of Bank of Baroda vide order dated 15.02.2011 in Income Tax appeal No.4169 of 2009. On the other hand the ld. DR has relied upon the orders of authorities below.
7.2 Having considered the rival submissions and careful perusal of record we note that this issue is covered by the decision of Hon'ble Jurisdictional High Court in the case of CIT vs. Bank of Baroda (supra), wherein the Hon'ble High Court has held as under:- “The only question raised by the revenue in this appeal is, whether the interest paid by the assessee for non maintenance of the cash reserve ratio/ statutory liquidity ratio as per Section 24 of the Banking Regulation Act, 1949 and Section 42 of the Reserve Bank of India Act, 1934 constitute penalty so as to disallow the interest claim. The Tribunal following the decision in the case of DCIT V/s. Dhanalakshmi Bank Ltd. (Cochin) reported in 76 TTJ 439 held that the interest paid to the RBI was not penalty and accordingly the interest expenditure is allowable. SLP filed by the revenue against similar decision of the Tribunal in the case of Dhanalakshmi Bank Ltd. (supra) has been dismissed by the Apex Court as reported in [2005] 277 ITR (ST) 3. In this view of the matter, we find no merit in the appeal and the same is dismissed with no order as to costs.” 7.3 Following the decision of the Hon'ble High Court we decide this issue in favour of the Assessee and against the Revenue.
Respectfully following the decision of the Jurisdictional High Court and Co-ordinate Bench, we allow the ground of appeal of the assessee on this issue.
The third issue in the appeal of the assessee is relating to the Transfer Pricing Adjustment. The assessee challenged the order of
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the Ld. CIT(A) in confirming the addition made by the Assessing Officer in respect of intra-group services rendered by the assessee to External Commercial Borrowings (ECBs).
20.1. Brief facts are that assessee is a bank incorporated in the United Kingdom carrying on banking activities in India through its branches. The assessee filed its return of income originally on 31.10.2002 reporting income of Rs. 19,87,01,880/-. The return was revised declaring income of Rs. 42,43,43,740/-. Assessment proceedings u/s. 143(2) were initiated calling for various details and simultaneously Transfer Pricing proceedings were initiated u/s. 92CA of the Act. The Transfer Pricing Officer in the course of proceedings based on TP report of the assessee issued letter to the assessee requiring to file information as to whether the bank has rendered any marketing services to overseas branches/HO in respect of any correspondent banking activities which opening of nostro accounts, letters of credit, export bill collections, remittance facilities, credit view/due diligence of the customers to ascertain the credit worthiness and monitoring the risk profile of the customers, assistance in executing foreign currency loan/ECB transactions, debts syndication etc., for which the benefit is derived by the overseas branches/head office. The assessee bank made its submission stating that assessee did not render any marketing services to overseas branches/head office in respect of the banking activities mentioned by the Assessing Officer. It was further submitted by the assessee that instances may arise wherein assessee would render incidental services in the normal course of its Indian Banking business. Further it was submitted that such services are necessary to present a complete portfolio of products/services to the
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customer base in India and such incidental services do not result in any incremental cost to the assessee bank in India. The assessee also furnished the information in respect of External Commercial borrowings stating that only one instance had occurred in financial year 2001-02 wherein an Indian customer i.e. HDFC due to its requirement of a Yen denominated External Commercial borrowing, approached the assessee bank. It was submitted that HDFC bank was given the contact of Barclays Hong kong Bank pursuant to negotiation and finalization was done by HDFC and Barclays Hongkong independently, without any involvement by the assessee. Therefore, it was the contention of the assessee that assessee was involved only in referring its overseas contact on a requisition made by HDFC and was not engaged in monitoring activities for the said ECB loan and therefore such referral services do not result in any incremental cost to the assessee.
20.2. Later on survey was conducted in the premises of the assessee on 28.1.2005 and in the course of survey, various documents, E-mails relating to ECB transaction found with the bank. The TPO confronted with all these documents to the assessee and stated that assessee has rendered services to its AE and proposed an adjustment of 50% of agency fees as attributable to Barclays Bank PLC i.e. assessee. He also proposed to make adjustments by adopting 40% of interest margin income earned by Barclays Bank PLC as attributable to the assessee Barclays India. The TPO concluded that Indian Branch played an active role deals with Reliance Industries Ltd, IDBI and also HDFC Bank. The TPO by using the data available with him in the case of other foreign banks, 25% of the amounts received by the foreign branches in the transactions consisting of both fee and
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net interest was considered as compensation not at Arm’s length by making adjustment of Rs. 12,04,035/-. The Assessing Officer passed an order u/s. 143(3) adopting the adjustment made by the Transfer Pricing Officer.
For the above said adjustment, assessee preferred an appeal before the Ld. CIT(A) contenting that the Assessing Officer is not justified in:
1) Computing the arm’s length price for the transaction in relation to short term deposits without considering the 5% variation from the arm’s length price permitted to the appellant under the provisions of Sec. 92C(2) of the Act.
2) Computing the arm’s length price for the transaction in relation to services provided by the appellant to its associated enterprises.
3) Effectively using the revenue split method for computing the arm’s length price for the transaction in relation to services provided by the appellant to its associated enterprises.
4) Not providing appropriate description of the comparables used and the method adopted to identify the comparables for the transaction in relation to services provided by the appellant to its associated enterprises.
5) Not providing the reasons in terms of comparability of functions performed, risks assumed and assets utilized with respect to the transactions considered as comparable vis-à- vis the appellants services provided to its associated enterprises. 6) Selecting comparables which themselves are related party transactions.
7) Selecting comparables not available in the public domain for determining the arm’s length price for the transaction in
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relation to services provided by the appellant to its associated enterprises.
21.1. In so far as the TP adjustment in respect of agency fee on the ECB loan is concerned, the Ld. CIT(A) accepted the view of the Assessing Officer that assessee bank has rendered services to the overseas AEs. He also accepted the view of the Assessing Officer that Profit Split Method can also be used and further observed that he is in agreement with the TPO that in the absence of details of services rendered by the assessee and also in the absence of details of expenses incurred by the assessee cost plus and transactional net marginal method are not applicable. He also observed that uncontrolled transactions are also not available, therefore, controlled transactions between related parties can be used. The Ld. CIT(A) finally concluded that it is appropriate to apply a rate of 20% to the amount of interest and agency fee earned from such loans during the year to compute the arm’s length price of the service rendered by the assessee to the overseas branches.
21.2. The Ld. Counsel for the assessee submits that TPO adopted Profit Split Method (PSM) in bench marking international transaction in respect of services provided by the assessee to its AEs ignoring the fact that assessee has played a very limited role in identification and execution of the ECB deals. The Ld. Counsel for the assessee submits that the TPO in determining arm’s length price stated that CUP method is applied using controlled transactions as comparable. He further submitted that the TPO has determined the revenue split of 25% based on the data of other foreign banks available with him. In this regard, the Ld. Counsel drew our attention to the definition of 'arm's length price' under section 92F of the I.T Act and submitted
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that arm's length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.
Ld. Counsel further submitted that Rule l0B of the Income Tax Rules, 1962 ('IT Rules'), dealing with applicability of CUP method, states that the first step in applying the CUP method is to identify the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such- transactions.
Further Rule l0A defines the term 'uncontrolled transactions' and submitted that uncontrolled transaction means a transaction between enterprises other than associated enterprises, whether resident or non-resident.
He submitted that the TPO has used the data of other foreign banks available with him. Most of the foreign banks operate in India through a branch structure. The branch and its head office would be treated as associated enterprises, within the meaning the Section 92A of the IT Act. Accordingly, the data of other foreign banks used by the TPO as comparable data, would not qualify as 'comparable uncontrolled transaction' for the purposes of determining the arm's length price under Sec. 92 of the IT Act. Hence, he submits that the learned TPO has erred in using controlled transactions for the purpose of applying the CUP method.
He submits that based on the India regulations as well as international best practices, Ld. TPO has erred in using the data of
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other foreign banks as comparable data for determining the arm's length price.
The Ld. Counsel for the assessee referring to Rule 10B the definition of CUP submits that the TPO did not follow any appropriate method therefore there cannot be any TP adjustment at all. He places reliance on the decision of Mumbai Bench in the case of Kodak India Pvt. Ltd Vs ACIT in ITA No. 7349/M/2012 dated 30.4.2013 and submits that if the TPO has not adopted the most appropriate method and he adopts method which is not prescribed in Sec. 92C(1) there cannot be any TP adjustment at all. Therefore, he submits that the adhoc adjustment of 25% made by the TPO which was reduced to 25% of the Ld. CIT(A) has no leg to stand. The Ld. Counsel for the assessee further submits that even if the assessee has charged for the services, still the same is exempt as per Article-7 of the Treaty with UK and Northern Ireland. The Ld. Counsel for the assessee in respect of interest margin income submits that:
“The funding for the assets is done through borrowings or internal accruals at the booking location i.e. the overseas branch and not the assessee.
All risks on the loan including the risk of forex fluctuation, are borne by the overseas branch.
The assessee is not subject to maintenance of any reserve requirements in accordance with the Capital Adequacy norms for banking companies while the branch booking the loan would be as per the local regulatory requirements of that jurisdiction.
Since all ongoing management of assets & liabilities are met by the overseas branch, no part of the interest margin is attributable to the appellant. Further, since the entire capital (i.e. loan amount) is funded by the overseas branch and no
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capital is contributed by the appellant in respect of ECB deals, any interest attribution to the appellant is not warranted.
In view of the above arguments, it is submitted that neither the interest margin nor the agency/one-time income are attributable to the appellant, as the appellant had a very limited role to play in these transactions, and it has been benefited out this activity by way of subsequent deals from these clients, which have been booked in India. Therefore, the assessee prays that the attribution of income made by the TPO be rejected.”
21.3. The Ld. Counsel for the assessee alternatively submits that interest cannot be taken into consideration for TP adjustment in view of the decision of the Co-ordinate Bench in the case of M/s. Credit Lyonnais in ITA No. 1935/M/07 dated 30th September, 2013 wherein it was held that interest received from foreign branches should be excluded for TP adjustment. He further placing reliance on the said decision submits that in respect of service charges at the rate of 20% of agency fee only can be attributable for the assessee and in this case the Ld. Counsel for the assessee referring to the notification dated 28.3.2000 at page 136 of the paper book issued by the Govt. of India, Ministry of Finance, Department of Economic Affairs to IDBI in respect of ECB loan arranged by Barclays Asia Ltd., submits that the agency fees was fixed at 15,000 USD per annum therefore at best 20% of this amount only can be considered for TP adjustment.
The Ld. Departmental Representative referring to para-3.1 of the TPO’s order submit that assessee has failed to discharge its onus to submit all the details in respect of TP study before the Assessing Officer to adopt appropriate method for bench marking the international transactions. The Ld. Departmental Representative further submits that assessee did not contest rendering of services to
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its AE in finalizing the ECB loans by its AEs. He also submits that based on available materials, TPO arrived at ALP by adopting the Profits Split Method in bench marking the international transactions though assessee did not co-operate with the Assessing Officer in adopting the appropriate method for bench marking the transactions. Thus, the Ld. Departmental Representative submit that the matter may be sent back to the Assessing Officer to find appropriate method for bench marking the transactions with its AEs.
We have heard the rival contentions, perused the orders of the authorities below and the case laws relied on. The Ld. CIT(A) decided this issue of Transfer Pricing adjustment in a very cryptic manner as under: “I have considered the arguments of The AR and I have also perused on the records. Arguments of the AR that in view of the interest and agency fee income being exempt from tax in the hands of overseas branch, no attribution should be made for the service rendered by the Indian branch is not acceptable. Income being exempt in the hands of overseas branch is not at all relevant criterion to judge the arm’s length price of the services rendered by the appellant to the overseas branches. I agree with the TPO that in the absence of details of expenses incurred by the appellant cost plus and transactional net marginal method are inapplicable. Uncontrolled transactions are also under available. Controlled transactions between related parties can be used in these circumstances. Further profit split method can also be used. The TPO has actually used the profit split method. The total income being generated on the DCB loan by way of agency fee or interest income is being shared between the overseas branch and the Indian branch. It is therefore held that even though the TPO has mentioned that he has followed the CUP method. However, in fact the TPO followed profit split method because of the profit in the transactions is fairly known.
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Considering the role played by the appellant Indian branch in providing the ECB loans, I considered it appropriate to apply a rate of 20% to the total amount of interest and agency fee earned from such loans during the year, to compute the arm’s length price of the service rendered by the appellant to the overseas branches. The total income earned is Rs. 48,16,141/-. 20% of this amount comes to Rs. 9,63,228/-. Addition of this amount is confirmed. Balance addition of Rs. 2,40,807/- (Rs. 12,04,035 – Rs. 9,63,228) is deleted. Appeal on this ground is partly allowed”.
23.1 .On going through the above order of the Ld. CIT(A) , we find that the CIT(A) has not dealt with the issues raised by the assessee in detail. None of the issues raised by the assessee have been dealt with in detail but the Ld. CIT(A) in a cryptic manner disposed of the appeal without considering all these submissions of the assessee and simply accepting the contentions of the Assessing Officer in adopting the Profit Split Method and simply reducing the rate adopted by the Assessing Officer to 20% of the total amount of interest and agency fees earned as against 25% adopted by the Assessing Officer. In view of the assessee raising various contentions, as we have discussed in the earlier paragraphs, in our considered view, the matter has to go back to Ld. CIT(A) for passing a speaking order on all these contentions which were raised by the assessee before the Ld. CIT(A) and also before us as none of these contentions have been dealt with the Ld. CIT(A) though raised before him. Thus, we restore this issue to the file of the Ld. CIT(A) for fresh adjudication in accordance with law after giving adequate opportunity of being heard to the assessee. This ground of the assessee is allowed for statistical purpose.
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In the result, the appeal filed by the assessee is partly allowed for statistical purpose.
ITA No. 4654/Mum/2007 – A.Y. 2003-04 – Revenue’s appeal
The only issue in the appeal of the revenue is that the Ld. CIT(A) erred in deleting the addition made by the Assessing Officer on account of broken period interest.
This issue is identical with the issue in Ground No.2 in ITA No. 2050/M/07 for assessment year 2002-03 from para 8 to 12. Therefore, on similar lines and for similar reasons, the ground raised by the Revenue in ITA No. 4654/M/07 for assessment year 2003-04 is dismissed.
ITA No. 4668/Mum/2007 – A.Y. 2003-04
The first issue in the appeal of the assessee is that the Ld. CIT(A) erred in upholding the order of the Assessing Officer in charging to tax guarantee commission on cash basis and disregarding the method of accounting followed by the assessee.
This issue is identical with the issue in Ground No.1 in ITA No. 1728/M/07 for assessment year 2002-03 at para 14 & 15. Therefore, on similar lines and for similar reasons, the ground raised by the assessee in ITA No. 4668/M/07 for assessment year 2003-04 is dismissed.
The next issue in the appeal of the assessee is that the Ld. CIT(A) erred in upholding the order of the Assessing Officer in
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disallowing the interest paid to RBI for maintaining inadequate Cash Reserve Ratio on balances.
This issue is identical with the issue in Ground No.2 in ITA No. 1728/M/07 for assessment year 2002-03 from para 17 to 19. Therefore, on similar lines and for similar reasons, the ground raised by the assessee in ITA No. 4668/M/07 for assessment year 2003-04 is allowed.
The third issue in the appeal of the assessee is relating to the Transfer Pricing Adjustment. The assessee challenged the order of the Ld. CIT(A) in confirming the addition made by the Assessing Officer in respect of intra-group services rendered by the assessee to External Commercial Borrowings (ECBs).
This issue is identical with the issue in Ground No.3 in ITA No. 1728/M/07 for assessment year 2002-03 from para 20 to 23. Therefore, on similar lines and for similar reasons, the ground raised by the assessee in ITA No. 4668/M/07 for assessment year 2003-04 is partly allowed for statistical purpose.
To sum up, the appeals filed by the Revenue are dismissed and the appeals filed by the assessee are partly allowed for statistical purpose.
Order pronounced in the open court on 22nd June, 2016. Sd/- Sd/- (RAJENDRA) (C.N. PRASAD ) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER मुंबई Mumbai; �दनांक Dated :22nd June , 2016 व.�न.स./ Rj , Sr. PS
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आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT(A)- 4. आयकर आयु�त / CIT 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai