2023 (4) TMI 1284 - AT - Income Tax

Bank wins on interest expense disallowance under section 14A, foreign exchange taxation, and transfer pricing adjustments

The Bank of Nova Scotia Versus Deputy Director of Income Tax (International Taxation) -3 (2), Mumbai AND ADIT (IT) -3 (2), Mumbai Versus The Bank of Nova Scotia

The Bank of Nova Scotia Versus Deputy Director of Income Tax (International Taxation) -3 (2), Mumbai AND ADIT (IT) -3 (2), Mumbai Versus The Bank of Nova ... Issues Involved:1. Disallowance of interest expenses under Section 14A of the Income Tax Act.2. Allocation of interest towards earning income on foreign exchange loans.3. Disallowance under Section 40(a)(ia) for non-deduction of TDS on interest paid to Head Office.4. Disallowance of broken period interest.5. Restricting the claim of bad debts.6. Disallowance of salary paid to expatriate employees.7. Transfer Pricing adjustment.Summary:1. Disallowance of Interest Expenses under Section 14A:The Revenue challenged the deletion of Rs. 91,46,886/- disallowed by the Assessing Officer as interest expenses for earning interest on tax-free bonds. The CIT(A) deleted the disallowance following previous orders and Tribunal decisions. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling in South Indian Bank Ltd. vs. CIT, which stated that proportionate disallowance of interest is not warranted when own funds exceed investments in tax-free bonds.2. Allocation of Interest towards Earning Income on Foreign Exchange Loans:The Revenue contested the deletion of Rs. 82,46,164/- allocated as costs for earning interest income on foreign currency loans. The CIT(A) deleted the disallowance following the Tribunal's decision in the assessee's case for previous assessment years. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue failed to distinguish the earlier order.3. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Interest Paid to Head Office:The Assessing Officer disallowed Rs. 77,78,947/- for non-deduction of TDS on interest paid to the Head Office. The CIT(A) upheld the disallowance but for a different reason, following the Special Bench decision in ABN AMRO Bank NV vs. ADIT. The Tribunal, relying on the Special Bench decision in Sumitomo Mitsui Banking Corporation vs. DCIT, held that interest paid to the Head Office is neither deductible nor chargeable to tax in India, thus dismissing the Revenue's ground and allowing the assessee's ground.4. Disallowance of Broken Period Interest:The Revenue challenged the deletion of Rs. 9,32,48,681/- disallowed by the Assessing Officer as broken period interest. The CIT(A) deleted the disallowance based on the decision in American Express International Banking Corporation vs. CIT. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's dismissal of the SLP in CIT vs. State Bank of India, which allowed broken period interest as a permissible deduction.5. Restricting the Claim of Bad Debts:The Revenue contested the deletion of the restriction on the claim of bad debts. The CIT(A) allowed the deduction following the Tribunal's decisions in Oman International Ltd. vs. DCIT and Vijaya Bank vs. CIT. The Tribunal upheld the CIT(A)'s decision, also referring to CBDT Instruction No.17/2008.6. Disallowance of Salary Paid to Expatriate Employees:The Revenue challenged the deletion of Rs. 1,35,35,218/- disallowed by the Assessing Officer as salary paid to expatriate employees. The CIT(A) deleted the disallowance following the decision in CIT vs. Emirates Commercial Bank. The Tribunal upheld the CIT(A)'s decision, noting that the salary expenses were for services rendered wholly and exclusively in India and were allowable under Article 7(3) of the DTAA and Section 37 of the Act.7. Transfer Pricing Adjustment:The Revenue contested the CIT(A)'s reduction of the transfer pricing adjustment from 42.73% to 20%. The CIT(A) rejected the comparables selected by the TPO due to functional disparity and made an estimated TP addition. The Tribunal upheld the CIT(A)'s decision, noting that the TPO's comparables were not functionally similar to the assessee's activities.Conclusion:The appeal of the Revenue is dismissed, and the appeal of the assessee is partly allowed.