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Issues: (i) Whether the transfer-pricing adjustment for back-office support services and the Letter of Comfort was sustainable; (ii) Whether mark-to-market losses on derivative transactions were deductible; (iii) Whether disallowance under Section 14A in respect of interest and administrative expenditure was sustainable; (iv) Whether depreciation on leased assets was allowable; (v) Whether depreciation on goodwill and business or commercial rights arising on amalgamation was allowable; (vi) Whether employee stock-option expenditure was deductible; (vii) Whether amortised expenditure on issue and discount of rupee and foreign-currency bonds was allowable; (viii) Whether club-membership expenditure was revenue expenditure; (ix) Whether broken-period interest paid on securities was deductible; (x) Whether year-end provisions for expenses were deductible; (xi) Whether additional claims relating to foreign taxes, relief and tax deducted at source required examination by the Assessing Officer.
Issue (i): Whether the transfer-pricing adjustment for back-office support services and the Letter of Comfort was sustainable.
Analysis: The selected back-office comparables were consistently excluded in earlier years because of functional dissimilarity, while Infosys BPO Ltd. was excluded because of its substantially higher turnover. No change in the functional profile or relevant facts was established. Issuance of the Letter of Comfort constituted an international transaction; however, the benchmark guarantee commission was governed by the consistently applied rate of 0.04%.
Conclusion: The back-office support-services adjustment is deleted in favour of the assessee. The Letter of Comfort is an international transaction, but the adjustment is restricted to commission at 0.04%, partly in favour of the assessee.
Issue (ii): Whether mark-to-market losses on derivative transactions were deductible.
Analysis: The losses arose from derivative transactions undertaken in the ordinary banking and treasury business, accounted for consistently under the applicable accounting standards and regulatory guidelines. The issue was covered by decisions in the assessee's own earlier years accepting such mark-to-market losses as non-contingent business expenditure.
Conclusion: Mark-to-market losses on derivatives are deductible, in favour of the assessee.
Issue (iii): Whether disallowance under Section 14A in respect of interest and administrative expenditure was sustainable.
Analysis: As the assessee possessed sufficient interest-free funds, investments generating exempt income were presumed to have been made from those funds; consequently, no interest-expenditure disallowance was warranted. For administrative expenditure, the assessee's revised computation under Rule 8D(2)(iii) required factual verification, including the inclusion or exclusion of relevant investments.
Conclusion: Deletion of the interest-expenditure disallowance is sustained in favour of the assessee. Computation of administrative-expenditure disallowance is remitted to the Assessing Officer for verification.
Issue (iv): Whether depreciation on leased assets was allowable.
Analysis: The claim was covered by the settled treatment in the assessee's own earlier years and the governing principle that a lessor in a bona fide leasing transaction is entitled to depreciation. No distinguishing facts were shown.
Conclusion: Depreciation on leased assets is allowable, in favour of the assessee.
Issue (v): Whether depreciation on goodwill and business or commercial rights arising on amalgamation was allowable.
Analysis: Excess consideration paid over net assets on amalgamation represented goodwill and commercial rights associated with the acquired going concern, including its branch network. Goodwill falls within intangible assets comprising business or commercial rights of similar nature, and the Revenue's further factual objections did not displace the basis of the claim.
Conclusion: Depreciation on goodwill and the acquired intangible business or commercial rights is allowable, in favour of the assessee.
Issue (vi): Whether employee stock-option expenditure was deductible.
Analysis: The discount represented by the difference between the exercise price and market price of options granted to employees was treated as employee compensation incurred for business purposes. The appellate authority could admit the claim despite its not having been made through a revised return.
Conclusion: Employee stock-option expenditure is deductible, in favour of the assessee.
Issue (vii): Whether amortised expenditure on issue and discount of rupee and foreign-currency bonds was allowable.
Analysis: The assessee's claim represented proportionate bond-discount expenditure in accordance with the treatment consistently directed in its earlier years. No contrary material justified departure from that treatment.
Conclusion: The proportionate expenditure on issue and discount of bonds is allowable, in favour of the assessee.
Issue (viii): Whether club-membership expenditure was revenue expenditure.
Analysis: The claim was governed by the consistent treatment in the assessee's earlier years, under which club-membership fees incurred to promote business interests were allowed as business expenditure.
Conclusion: Club-membership expenditure is revenue expenditure and is deductible, in favour of the assessee.
Issue (ix): Whether broken-period interest paid on securities was deductible.
Analysis: Securities held by a bank in the course of its banking business could constitute stock-in-trade, and the assessee consistently offered corresponding broken-period interest received to tax. Treating the receipt as taxable while disallowing the payment was inconsistent with the accepted accounting treatment and established treatment of banking securities.
Conclusion: Broken-period interest paid on securities is deductible as revenue expenditure, in favour of the assessee.
Issue (x): Whether year-end provisions for expenses were deductible.
Analysis: The provisions were created under the regularly followed mercantile accounting system for expenses incurred during the year and were reversed and settled subsequently. A liability that has accrued and can be estimated with reasonable certainty is not disallowable merely because final quantification or payment occurs later.
Conclusion: The disallowance of year-end provisions for expenses is deleted, in favour of the assessee.
Issue (xi): Whether additional claims relating to foreign taxes, relief and tax deducted at source required examination by the Assessing Officer.
Analysis: The appellate authority was competent to admit claims raised otherwise than through a revised return. The claims concerning State and city taxes paid by the foreign branch, relief for foreign taxes, and revised tax deducted at source required examination under the applicable statutory provisions.
Conclusion: The directions to the Assessing Officer to examine and adjudicate the additional claims in accordance with law are sustained; the issue is remitted for fresh consideration.
Final Conclusion: The transfer-pricing and recurring business-deduction claims are substantially governed by the assessee's consistently accepted earlier-year treatment, while the computation of administrative disallowance and foreign-tax-related claims remains open for verification and lawful adjudication.
Ratio Decidendi: Consistent earlier-year findings must be followed where the functional profile and material facts remain unchanged; accrued business liabilities and expenditure incurred in the ordinary course are deductible when supported by a regularly followed accounting method and applicable legal principles.
Consistent tax treatment supports business deductions, while administrative disallowance and foreign-tax claims remain subject to factual verification.
Consistent earlier-year treatment applies where the functional profile and material facts remain unchanged, supporting deletion of the back-office transfer-pricing adjustment and limiting the Letter of Comfort adjustment to a 0.04% commission. Derivative mark-to-market losses, leased-asset depreciation, amortised bond-discount expenditure, club fees, broken-period interest and accrued year-end provisions are treated as deductible business expenditure under the stated facts. Goodwill and acquired business or commercial rights arising on amalgamation qualify for depreciation, while employee stock-option discount is employee compensation deductible despite being raised without a revised return. Sufficient interest-free funds preclude interest disallowance under Section 14A; administrative expenditure and foreign-tax, relief and tax-deducted-at-source claims require Assessing Officer verification.
TP comparability of back-office support services - Letter of comfort as international transaction - Disallowance of expenditure relating to exempt income - Depreciation on goodwill acquired on amalgamation - Deductibility of employee stock option discount - Deductibility of year-end expense provisions Transfer pricing comparability of back-office support services - Arm's length pricing of treasury and technology back-office support services provided by the bank to its overseas associated enterprises - HELD THAT: - The comparables excluded in the assessee's own preceding years remained functionally dissimilar, and the Revenue did not establish any change in the functional profile of either the assessee or those companies (i.e. Accentia Technologies Limited, Acropetal Technologies Limited, Cosmic Global, and Eclerx Services Limited). Infosys BPO Ltd. was also excluded because the facts regarding its high turnover remained unchanged. The transfer-pricing adjustment was therefore to be recomputed after excluding the five comparables. [Paras 12, 27] The assessee's ground was allowed for both assessment years. Letter of comfort as international transaction - Arm's length guarantee commission - Transfer-pricing treatment of a letter of comfort issued for the benefit of an associated enterprise - HELD THAT: - Following the decision in the assessee's preceding year [2026 (2) TMI 1459 - ITAT MUMBAI] and the decision of the Mumbai Bench of the Tribunal in the case of Asian Paints Ltd. [2024 (3) TMI 484 - ITAT MUMBAI], issuance of the letter of comfort constituted an international transaction. In the absence of distinguishing material, the arm's length commission for the transaction was restricted to 0.04%. [Paras 13, 27] The Revenue's challenge was partly allowed, with the transfer-pricing adjustment restricted to commission at 0.04%. Disallowance of expenditure relating to exempt income - Interest-free funds presumption - Administrative expenditure under Rule 8D - Disallowance of interest and administrative expenditure in relation to exempt income earned from investments - HELD THAT: - As the assessee possessed sufficient interest-free funds, its investments yielding exempt income were presumed to have been made from those funds; consequently, no interest disallowance was warranted. The computation of administrative expenditure required verification of the assessee's working, including the inclusion or exclusion of investments, and was remitted without adjudication on merits. [Paras 15, 28] The deletion of interest disallowance was upheld; the administrative-expense computation was remitted to the Assessing Officer for verification for both assessment years. Mark-to-market loss on forex derivatives - Deductibility of mark-to-market losses on derivative transactions undertaken in the banking and treasury business - HELD THAT: - The issue stood covered by the Tribunal's decision in the assessee's own preceding year [2026 (2) TMI 1459 - ITAT MUMBAI] which had accepted that the mark-to-market loss was allowable under the Act. The Revenue did not demonstrate any factual or legal distinction. [Paras 14] The Revenue's ground was dismissed. Depreciation on leased assets - Depreciation claimed by the lessor on assets deployed in its leasing business - HELD THAT: - The claim had consistently been allowed in the assessee's own earlier years, following the judgment of I.C.D.S. Ltd. [2013 (1) TMI 344 - SUPREME COURT] following the principle that depreciation is available to the lessor in a bona fide lease transaction. The Revenue did not show any distinguishing facts or law. [Paras 16, 31] The depreciation claim was upheld and the Revenue's grounds were dismissed for both assessment years. Depreciation on goodwill acquired on amalgamation - Business or commercial rights of similar nature - Depreciation on goodwill and intangible commercial rights arising on amalgamation with banking and finance entities - HELD THAT: - Hon’ble Supreme Court in Smifs Securities Ltd. [2012 (8) TMI 713 - SUPREME COURT] had held that goodwill is an asset falling under Explanation 3(b) of the Section 32(1) of the Act. Goodwill falls within the expression 'any other business or commercial rights of similar nature' and is a depreciable intangible asset. The goodwill represented the excess consideration over net assets acquired in a going-concern amalgamation, and the Revenue's contention that no intangible asset existed had not formed the basis of the assessment disallowance and lacked merit on the facts. [Paras 17, 34] The allowance of depreciation on goodwill and intangible rights was upheld and the Revenue's grounds were dismissed for both assessment years. Deductibility of employee stock option discount - Additional claim before appellate authority - Deduction of the discount arising from employee stock options and the entertainability of the claim made during assessment proceedings - HELD THAT: - The difference between the exercise price and market price of employee stock options constituted allowable business expenditure. Although the Assessing Officer could not entertain the claim otherwise than through a revised return, the appellate authority was competent to allow it. [Paras 18, 36] The deduction for employee stock option expenses was upheld and the Revenue's grounds were dismissed for both assessment years. Amortisation of bond issue discount - Deduction of proportionate expenditure on issue and discount of rupee and foreign currency bonds. - HELD THAT: - The claim was covered by the assessee's own earlier-year decisions directing allowance of the proportionate bond-discount expenditure over the tenure of the bonds. No contrary material was produced by the Revenue. [Paras 19, 35] The Revenue's grounds were dismissed for both assessment years. Club membership fees as business expenditure - Deductibility of club membership fees incurred for business purposes - HELD THAT: - The issue was consistently decided in favour of the assessee in earlier years, treating club membership fees as revenue expenditure incurred to promote its business interests. The Revenue did not bring any new fact or authority warranting departure. [Paras 20, 33] The Revenue's grounds were dismissed for both assessment years. Broken period interest on bank securities - Deductibility of broken period interest paid on securities held by the bank - HELD THAT: - The securities formed part of the banking business, and the Assessing Officer's disallowance of broken-period interest paid while taxing broken-period interest received was inconsistent. The claim was supported by binding and consistently followed decisions recognising such interest as a revenue outgo in the computation of banking business income. [Paras 21, 32] The deduction was upheld and the Revenue's grounds were dismissed for both assessment years. Additional claim for foreign tax relief - Additional claim for deduction or relief in respect of state and city taxes paid by the overseas branch, and revised foreign-tax and tax-deducted-at-source claims - HELD THAT: - The appellate authority was competent to admit an additional claim notwithstanding its non-inclusion in a revised return. As the claims were directed to be examined under the applicable statutory provisions, the Assessing Officer retained liberty to adjudicate them in accordance with law. [Paras 22, 37] The remand directions were upheld; the Revenue's grounds were partly allowed only to the extent of the Assessing Officer's examination according to law. Deductibility of year-end expense provisions - Mercantile system of accounting - Deduction of year-end provisions for business expenses where tax was deducted on subsequent actual payments - HELD THAT: - Under the consistently followed mercantile system, a liability incurred during the accounting year is deductible if capable of reasonable estimation, although its precise quantification and discharge occur later. The provisions were integral to the banking business and could not be denied merely because they were estimated at year-end or because tax was not deducted at the stage of provision. [Paras 24, 29] The disallowance was deleted and the assessee's grounds were allowed for both assessment years. Final Conclusion: The cross-appeals for Assessment Years 2011-2012 and 2012-2013 were partly allowed. The Tribunal upheld the principal reliefs granted to the assessee, directed transfer-pricing and section 14A consequences as stated, and remitted the foreign-tax claims for examination in accordance with law.