DDIT (IT) 1(2), MUMBAI vs. CREDIT LYONNAIS (THROUGH THERI SUCCESSOR CREDIT AGRICOLE CORPORATE AND INVESTMENT BANK ( FORMERLY CALYON BANK), MUMBAI

In this background, the rival Counsels have been heard.

In so far as the first issue regarding the addition of Rs.1,46,69,611/- on account of interest paid/received from Head office is concerned, brief facts are that in the return of income, the assessee added back the interest paid on Nostro Account/Overseas borrowings of Rs.3,47,821/- being interest paid to self and also excluded interest received on NOSTRO Accounts/Overseas branches of Rs.1,46,69,611/- being interest received from self. In the assessment proceedings, the Assessing Officer held that the interest earned by the assessee branch from Head office/Overseas branches could not be excluded from the total income because the Indian branch and Head office/ Overseas

Ld. Departmental Representative appearing for the Revenue, however, referred to the discussion made by the Assessing Officer in the penalty order by pointing out that the claim made by the assessee in the return of income in respect of the addition of Rs.1,46,69,611/- as interest received on NOSTRO Accounts was wrong and, therefore, penalty under section 271(1)(c) of the Act was justifiably levied.

We have considered the rival submissions on this aspect, and find no reason to distract from the conclusion arrived at by the CIT(A). Ostensibly, with regard to the assessability of interest earned by the assessee branch from its Head office/Overseas branches is concerned, the stand of the assessee has not been found tenable by the Assessing Officer in the assessment proceedings, but that by itself, cannot be a ground to justify the levy of penalty under section 271(1)(c) of the Act. In fact, the cleavage of judicial opinion brought out by the CIT(A) on the subject clearly suggests that the issue is not free from debate. A claim made by the assessee in the return of income, which is not 6 CO 180/M/2011 (Assessment Year : 2003-04) accepted in the assessment proceedings, cannot ipso-facto lead to levy of penalty under section 271(1)(c) of the Act as laid down by the Hon’ble Supreme Court in the case of CIT vs. Reliance Petro-products Pvt. Ltd., 322 ITR 158 (SC) . Notably, in so far as the particulars and details of such income is concerned, there is no charge against the assessee that the same were found to be incorrect or false. Therefore, in our considered opinion the CIT(A) has rightly deleted the penalty on this aspect.

The second issue on which penalty has been levied is Transfer Pricing adjustment of Rs.40,74,327/- sustained by the CIT(A) on account of determination of Arm's Length Price of the international transactions entered into by the assessee with its Associated Enterprises. In order to understand the background of the said dispute, it would suffice to note that the income tax authorities noted that the assessee being Indian branch of a foreign the bank, help syndication of foreign currency loans to two Indian entities namely Reliance Petroleum Ltd. and Reliance Industries Ltd., For such loan of syndication the Overseas Associated Enterprise of the assessee namely, Credit Agricole Indosuez (Asia), Singapore worked as lead arrangers/co-arrangers. The ANZ Investment Bank, BA Asia Ltd. as well as ABN Amro Bank also worked as co-arrangers. The role of the assessee in these transactions of foreign currency loan under ECB routo was to provide financial anaylsis of the borrowers. The income tax authorities formulated that assessee ought to have received certain portion of fee or commission for such services performed. The assessee has not accounted for any income on this aspect in the return of income. However, in the course of Transfer Pricing proceedings before the Transfer Pricing Officer an 7 CO 180/M/2011 (Assessment Year : 2003-04) addition of Rs.49,63,456/- was quantified, which has later been scaled down to Rs.40,74,327/- by the CIT(A). Be that as it may, in order to understand the bonafides of the assessee’s claim made in the return of income, it would be appropriate to understand the stand of the assessee in the quantum proceedings. The assessee contended that on the basis of the Indo-France DTAA, particularly Para-4 of the Protocol between India and France, no of profits were liable to be attributed to the Indian Branch by reason of “facilitation” of the conclusion of any loan or trade agreement. On the strength of Para-4 of the Protocol between India and France, the assessee contended that it was only facilitating syndication of the foreign currency loans and, therefore, no profits could be attributed to such activity. The aforesaid assertion of the assessee did not find favour with the income tax authorities, and such stand has also affirmed by the Tribunal in its order dated 30/09/2013(supra). On this aspect, the income tax authorities inferred that the role of assessee branch, inter-alia, included providing a ‘core basis’ for taking the decision of granting loans and, therefore, such nature of services did not fall within the expression “facilitation” of loan agreement as understood for the purpose of para-4 of the Protocol between India and France. In this manner, the stand of the assessee was not found tenable and instead addition was made determining the arm's length price of such activities.

On this aspect, we have perused the relevant material and find that it is a case were arguments of the assessee have not been accepted and it is not a case where assessee can be said to have concealed any income or furnished inaccurate particulars of such income. The assessee had set up its case based on para-4 of the Protocol between India and France, which has not found to be acceptable under and facts and circumstances of the case. On this aspect also, we find that the ratio of the judgment of Hon’ble Supreme Court in the case of Reliance Petro-chemicals (supra) supports the conclusion of the CIT(A) that no penalty under section 271(1)(c) is leviable. Notably, the CIT(A) found that the claim made in the return of income was bonafide in as much as the Transfer Pricing study was carried out by a reputed firm of Chartered Accountants, which did not envisage any Transfer Pricing adjustment with regard to the activities in question. Ld. Representative for the assessee also made a statement at Bar that in the earlier assessment year of 2002-03 also such adjustment was made to the returned income, but the Assessing Officer did not levy any penalty under section 271(1)(c) of the Act. It was, therefore, canvassed before us that under the circumstances the penalty has been rightly set-aside by the CIT(A). We are in agreement with the conclusion of the CIT(A) that the impugned addition is a result of a mere difference of opinion between the assessee and Revenue and is not a case where the claim made by the assessee in the return of income was found to be non-bonafide or false. In the result, we hereby affirm the stand of the CIT(A) on this aspect also.

In the Cross Objection preferred by the assessee, it is contended that the assessee’s claim for deduction under section 80G of the Act on the basis of donation paid to eligible entities was disallowed on the ground that the relevant evidence was not on record. The assessee had claimed that the donations paid of Rs.1,56,000/- were eligible for deduction under section 80G of the Act to the extent of Rs.78,000/-. In the absence of relevant evidence, namely, recognition of the recipients under section 80G of the Act, the claim of the assessee was disallowed.

On this aspect, the Ld. Representative for the assessee submitted that in the course of the quantum assessment proceedings, the assessee could not produce the relevant receipts in as much as donation of Rs.1,56,000/- was paid to the following three parties:-

Missionaries of Charity(Brothers), Calcutta - Rs. 75,000/-

MA-Niketan Society, Thane - Rs.75,000/-

S. Vabodhini Charitable E Trust, Chennai - Rs.6,000/- By referring to the acknowledgement receipts placed in the Paper Book at pages 51 to 52, it was sought to be pointed out that all the three recipients are recognized under section 80G of the Act and, therefore, the claim of the assessee for deduction under section 80G of the Act was rightly made. The aforesaid evidence could not be produced in the course of assessment proceedings and, therefore, for such reason the deduction was denied, otherwise the disallowance itself was not merited.

We have carefully considered the rival submissions and find that the payments for donations have been made through account payee cheques and genuineness of the same have not been doubted during the assessment proceedings, though the deduction u/s.80G was not allowed for want of the evidence of the recognition under section 80G of the Act. Be that as it may, it is quite clear that the disallowance was on account of failure to substantiate a claim of deduction and not for the reason that the claim was clinchingly found to be untrue or false, so as to warrant levy of penalty u/s.271(1)(c) of the Act. Therefore, we set-aside the order of the CIT(A) on this aspect and direct the Assessing Officer to delete the penalty levied in relation to the disallowance of deduction under section 80G of the Act of Rs.78,000/-.

As a consequence, the Cross Objection filed by the assessee is allowed.

Resultantly, whereas the appeal of the Revenue is dismissed, the Cross Objection filed by the assessee is allowed.