Bank branch taxation issues: expatriate salary, inter-office interest, deferred commission, MAT, and transfer pricing all favoured the assessee.

The commentary notes that, for an Indian branch of a bank, expatriate salary expenses incurred wholly for the branch were treated as deductible and section 44C was held inapplicable on the stated facts. It also records that inter-office interest paid to head office and received from other branches was not brought to tax or disallowed where prior decisions had already accepted that treatment under the applicable tax and treaty framework. Deferred bank guarantee commission for the unexpired period was regarded as contingent and not accrued income. The note further states that section 115JB was held inapplicable to banking profits prepared under the Banking Regulation Act, and that the counter guarantee commission transfer pricing adjustment was deleted on TNMM and consistency grounds.

---

---

Issues: (i) Whether the disallowance of expatriate salary expenses incurred by the Indian branch was justified; (ii) whether interest paid by the Indian branch to the head office and interest received from the Indian branches were taxable or deductible; (iii) whether deferred bank guarantee commission accrued as income in the relevant year; (iv) whether section 115JB of the Income-tax Act, 1961 applied to the assessee's banking profits; and (v) whether the transfer pricing adjustment on counter guarantee commission was sustainable.

Issue (i): Whether the disallowance of expatriate salary expenses incurred by the Indian branch was justified.

Analysis: The expenditure was incurred wholly and exclusively for the Indian branch. The issue was already covered by the assessee's own earlier years and by the High Court, and section 44C was held inapplicable on those facts.

Conclusion: The disallowance was not justified and the issue was decided in favour of the assessee.

Issue (ii): Whether interest paid by the Indian branch to the head office and interest received from the Indian branches were taxable or deductible.

Analysis: The issue was covered by prior decisions in the assessee's own case. The Court had already accepted the assessee's position on the treatment of such inter-branch interest in the context of the applicable tax framework and treaty provisions.

Conclusion: The additions on account of inter-office interest were deleted and the issue was decided in favour of the assessee.

Issue (iii): Whether deferred bank guarantee commission accrued as income in the relevant year.

Analysis: The commission for the unexpired period was treated as contingent and refundable in nature, following the consistent view taken in the assessee's own case and affirmed in earlier judicial decisions. The right to receive was not treated as crystallised for the unexpired period.

Conclusion: The deferred bank guarantee commission was not taxable on accrual for the unexpired period and the issue was decided in favour of the assessee.

Issue (iv): Whether section 115JB of the Income-tax Act, 1961 applied to the assessee's banking profits.

Analysis: The assessee prepared accounts under the Banking Regulation Act and not under Parts II and III of Schedule VI to the Companies Act. The Tribunal followed binding precedent holding that, for the relevant year, the MAT provision did not apply to such banking entities and that the later amendment was prospective.

Conclusion: Section 115JB was held inapplicable and the issue was decided in favour of the assessee.

Issue (v): Whether the transfer pricing adjustment on counter guarantee commission was sustainable.

Analysis: The assessee's counter guarantee activity involved limited functions and negligible risk compared with third-party bank guarantees. Internal bank guarantee comparables were not appropriate on the facts. The Tribunal accepted the assessee's bundled benchmarking under TNMM and applied the rule of consistency, noting that there was no change in the functional profile.

Conclusion: The transfer pricing adjustment was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's appeal failed on all contested grounds, while the assessee succeeded on the transfer pricing challenge to the extent recorded. The overall result was a partial success for the assessee and final disposal of the proceedings.

Ratio Decidendi: Where the assessee's banking branch accounts are maintained under a special statute and not under Schedule VI of the Companies Act, and where prior binding decisions have settled identical issues on expatriate salary, inter-branch interest, deferred commission, and counter guarantee benchmarking, consistency and the applicable legal framework require the same treatment to be followed for the year in question.

---