2014 (12) TMI 558 - AT - Income Tax

Tribunal Rules on Tax Appeals: Mixed Decisions on Deductions, Profit Taxation

Credit Agricole Corporate and Investment Bank Versus The Assistant Commissioner of Income Tax (International Taxation)

The Tribunal partly allowed the appeals, with the quantum appeal of the assessee and the revenue's appeal being partly allowed. The penalty appeal of the ... Invocation of section 40(a)(i) - Deductability of interest/commission paid to HO/overseas branches – Held that:- As decided in assessee’s own case and following the decision in Sumitomo Mitsui Banking Corporation Versus Deputy Director of Income-tax, (IT), Rg. 2(1), Mumbai [2012 (4) TMI 80 - ITAT MUMBAI] - taxing the interest income received from HO/Overseas branches, the interest paid by the assessee to its HO/Overseas branches would become deductible - the amount of interest disallowed has been wrongly taken in this ground - Decided in favour of assessee. Profit arising on revaluation of unmatured forward forex contracts taxed – Held that:- Assessee rightly submitted that the loss on revaluation was disallowed by the AO, in the previous AY but has been allowed by the tribunal therefore on the same analogy the profit arising on revaluation has to be taxed - the loss on revaluation of unmatured forward forex contracts has been allowed by this tribunal in the earlier years, thus, then the natural corollary would be that the profit arising on revaluation of the unmatured forward forex contract is liable to be taxed as income – Decided against revenue. Disallowance u/s 14A on interest expenses – Expenses paid on FCNR(B) in relation to the exempt income on balance of Nostro Accounts – Held that:- As decided in assessee’s own case the assessment order needs to be approved in preference over the view taken by the learned CIT(A) - CIT(A) made enhancement of income to the tune of ₹ 32.79 crore by computing disallowance under section 14A in respect of such interest income on NOSTRO account, which was held by him to be not chargeable to tax as against the AO’s decision as to the chargeability of this amount - once the income itself is chargeable to tax, there can be no question of computing any disallowance u/s 14A, the mandate of which operates to disallow deduction for expenses incurred in relation to income which does not form part of the total income – no disallowance u/s 14A can be made – Decided in favour of assessee. Provisions for non-performing assets u/s 37(1) disallowed – Held that:- As decided in assessee’s own case, AO has disallowed the claim of the assessee because it was found as a provision for NPA - it is settle proposition that the it cannot be allowed - when the provision is for NPA and not for Bad debts then as held in Southern Technology Ltd. Vs. JCIT [2010 (1) TMI 5 - SUPREME COURT OF INDIA] provision for NPA is not an allowable claim – decided against assessee. Netting off interest received u/s 244A – Held that:- Following the decision in DIT (International Tax.) Vs. Bank of America [2014 (12) TMI 551 - BOMBAY HIGH COURT] - the assessee bank received interest on refund of taxes paid - It also paid interest on the taxes which were payable - The assessee sought to set off the interest paid against the interest received and offered the net interest received to tax - assessee claimed that this was business expenditure and this should have been allowed - the amount of interest paid by the assessee should have been allowed to be set off against the interest deposited with the Department and taxed in the hands of the Assessee – Decided in favour of assessee. Disallowance of provision toward country risk - Held that:- Assessee made a provision towards country risk management as per RBI guidelines vide its Circular No.DBOD.BP.71/21.04.103/2002-03 dated 19thFebruary 2003 - The AO disallowed the claim of deduction as this was not an actual return of bed debts, but only a provision was made as per the guidelines of the RBI therefore, in view of the first proviso to section 36(1)(viia)(a) of the Act no deduction is allowable to a foreign banking company - same amount of ₹ 41 lac was disallowed for AY 2003-04 and the assessee has accepted the same, therefore, no double disallowance can be made in the year – the order of the CIT(A) is upheld – Decided against revenue. TP adjustment on account of credit risk – Held that:- As decided in assessee’s own case, no material has been product to show that this expenditure as claimed by the assessee separately is for the exclusive and dedicated work/service done by the HO to the assessee - there is no explanation by the assessee as on what basis this expenditure is charged by HO – the issue cannot be decided in the absence of complete fact as whether the Head Office has charged this expenditure on the basis of man hour or dedicated desk was assigned for this purpose exclusively for the service of the assessee - The assessee has also not filed any certificate from the auditor of the Head Office in support of this claim – thus, the order is set aside and the matter is remitted back to the AO for examination of claim of assessee – Decided in favour of revenue. Levy of penalty u/s 271(1)(c) – Held that:- The penalty has been levied against the disallowance of claim of netting of the interest received u/s 244A against the interest paid by the assessee u/s 220(2) of the Income Tax Act – as decided in quantum appeal the netting is permissible and thereby the claim of the assessee is allowed – thus, the penalty levied u/s 271(1)(c) against the said addition is not sustainable – Decided in favour of assessee. Issues Involved:1. Taxability of interest received by the Indian Branch from the Head Office/overseas branches.2. Deductibility of interest/commission paid to Head Office/overseas branches under section 40(a)(i).3. Taxation of profit arising on revaluation of unmatured forward forex contracts.4. Disallowance under section 14A related to interest expenditure on FCNR(B) deposits.5. Deductibility of provision for Non-Performing Assets (NPA) under section 37(1).6. Deductibility of expenditure incurred on Voluntary Separation Plan/Voluntary Retirement Scheme under section 35DDA.7. Classification of Head Office and Indian Branch as 'associated enterprises' under section 92.8. Adjustment of arm's length price of interest paid on call borrowings.9. Netting off interest received under section 244A against interest paid under section 220(2).10. Applicability of tax rate for non-resident companies.11. Additional grounds related to section 115JB applicability and ad-hoc disallowance under section 14A.12. Revenue's grounds on disallowance under section 14A, expenses related to credit risk assistance, write-back of country risk provision, taxability of interest on Nostro balances, and TP adjustment on credit risk.Issue-wise Detailed Analysis:1. Taxability of Interest Received by Indian Branch:The assessee conceded to the taxability of interest received from the Head Office/overseas branches, and this ground was dismissed as not pressed.2. Deductibility of Interest/Commission Paid:The Tribunal followed its earlier decision in the assessee's own case and the Special Bench decision in Sumitomo Mitsui Banking Corpn., concluding that the interest paid to the Head Office/overseas branches is deductible. This issue was decided in favor of the assessee.3. Taxation of Profit on Revaluation of Forex Contracts:The Tribunal referred to its previous order for A.Y. 2003-04, where it was held that profit arising on revaluation of unmatured forward forex contracts is taxable. This ground was decided against the assessee.4. Disallowance under Section 14A:Since the assessee conceded to the taxability of interest received from the Head Office/overseas branches, the Tribunal ruled that no disallowance under section 14A could be made. This issue was decided in favor of the assessee.5. Deductibility of Provision for NPA:The Tribunal followed its earlier decision, holding that provision for NPA is not deductible under section 37(1) as per the Supreme Court's decision in Southern Technology Ltd. This issue was decided against the assessee.6. Deductibility of VRS/VSP Expenditure:The assessee did not press this ground, and it was dismissed accordingly.7. Classification as 'Associated Enterprises':The assessee did not press this ground, and it was dismissed accordingly.8. Adjustment of Arm's Length Price:Due to the smallness of the amount involved, the assessee did not press this ground, and it was dismissed.9. Netting Off Interest Received under Section 244A:The Tribunal followed the Jurisdictional High Court's decision in Bank of America, allowing netting off interest received under section 244A against interest paid under section 220(2). This issue was decided in favor of the assessee.10. Applicability of Tax Rate for Non-Resident Companies:This ground was not explicitly discussed in the judgment provided.11. Additional Grounds:- Section 115JB Applicability: The Tribunal ruled that the un-amended provisions of section 115JB are not applicable to banking companies, deciding this issue in favor of the assessee.- Ad-hoc Disallowance under Section 14A: The Tribunal restricted the disallowance under section 14A to 2% of the exempt income, following its earlier decision.12. Revenue's Grounds:- Disallowance under Section 14A: The Tribunal dismissed this ground, aligning with its decision on the assessee's additional ground.- Expenses Related to Credit Risk Assistance: The Tribunal followed its earlier decision, ruling in favor of the assessee.- Write-back of Country Risk Provision: The Tribunal noted that the same amount was disallowed for A.Y. 2003-04, and no double disallowance can be made. This issue was decided against the revenue.- Taxability of Interest on Nostro Balances: The assessee admitted the taxability of this income, and this ground was allowed for the revenue.- TP Adjustment on Credit Risk: The Tribunal set aside this issue to the Assessing Officer/TPO for examination of facts and evidence, allowing it for statistical purposes.Cross Objection by Revenue:Since the assessee admitted the interest received from the Head Office/overseas branches as taxable, the ground raised in the Cross Objection became infructuous and was dismissed.Penalty under Section 271(1)(c):The Tribunal deleted the penalty, as the claim of netting of interest was allowed in the quantum appeal.Conclusion:The appeals were partly allowed, with the quantum appeal of the assessee and the revenue's appeal being partly allowed, the penalty appeal of the assessee being allowed, and the Cross Objection by the revenue being dismissed.