2020 (1) TMI 443 - AT - Income Tax

Tribunal rules in favor of assessee, overturning multiple disallowances under Income Tax Act.

The Tribunal partly allowed the appeals filed by the assessee, dismissing the appeals filed by the revenue. Various disallowances made by the Assessing ... Disallowance of salaries paid to expatriate employees of the assessee - “head office expenses” within the meaning of Section 44C - AO observed that the said expenditure was not debited by the assessee to the profit and loss account and the expatriate employees were not on the pay roll of the Indian branch. - Held that:- the issue raised by the revenue in this appeal stands covered in favour of the assessee by the various cited decisions. Therefore, following the principal of consistency, claim of deduction allowed. Expenses incurred for mobilization of deposits from non-resident Indian - The assessee submitted that these expenses were incurred by their head office and since the deposits were retained in the books of Indian branch, the related expenses incurred thereon are also debited to the Indian branch. The assessee has specifically submitted that these expenses are in the nature of salaries, travelling, advertisement and other incidental expenses - Held that:- following the earlier decision [2015 (11) TMI 1792 - ITAT MUMBAI], decided in favor of assessee. Exchange Gain/Loss in valuation of outstanding Foreign Exchange Forward Contracts - Held that:- The ld. CIT(A) appreciated the contentions of the assessee and directed that this sum should be taxed only in the year in which the said forward contracts gets matured i.e. in A.Y.2003-04. The ld. CIT(A) also directed the ld. AO to grant deduction, being the loss arising on account of valuation of outstanding forward contracts as on 31/03/2001 as the same is to be allowed even as per analogy of the ld. AO. - Order of CIT(A) sustained. Transfer pricing adjustment - Correspondent Banking Activities - Held that:- when services are rendered free of charge to the AE by the assessee and similarly AE also provided reciprocal services free of charge to the assessee, there cannot be any reason for doubting the said transaction or make any transfer pricing adjustment thereon as both the assessee as well as the AEs are part of global conglomerate. The assessee had considerably benefitted out of earning income from Indian FIs and float income pursuant to correspondent banking activities and the said benefit directly flows to the assessee. The main business transactions have been accepted to be at arm’s length and hence, the ld. TPO cannot separately treat the incidental benefit as a separate transaction unless it is shown that they are separate from the main business activities. Allocation of cost and mark up thereon - Held that:- Though we find lot of force in the aforesaid argument of the ld. AR, in any case, the nature of services are such that they are reciprocal in nature and hence, there cannot be any attribution of mark up on the same. Hence, we hold that no mark up should be loaded on the attribution of costs towards incidental marketing activities undertaken by the assessee in connection with the correspondent banking activities. No transfer pricing adjustment on account of correspondent banking activity is warranted in the instant case. - Decided in favor of assessee. Services provided by employees of the bank to overseas AEs - TPO applied TNMM as the MAM with net cost plus as the profit level indicator. - Held that:- in case of certain employees, the assessee had suo-moto not claimed deduction of proportionate salary pertaining to services provided to foreign AEs. Hence, the same cannot be subject matter of consideration while making TP adjustment as it would lead to double disallowance. In any case, these employees render liasoning and coordination of services at group level as a mere incidental activity and the same need not be even considered as separate international transaction warranting any benchmarking thereon. - Additions deleted. TP adjustments in relation to support services in relation to External Commercial Borrowings (ECBs). - The ld. TPO observed that the arm’s length price in respect of services rendered for continuing ECB transactions is required to be worked out because the overseas branch is helped by a local branch for the documentation, collecting fees, ensuring smooth and timely payment of interest etc., and credit review and monitoring of performance, monitoring of breach of covenants, monitoring of assets, co-ordination with other banks, lenders to clients under syndication and preparation of watch list report. - Held that:- The said receipt of fee / commission income has been accepted to be at arm’s length. Hence, there is no question of further fee that is required for the assessee in respect of continuing ECBs. We find that the ld. CIT(A) had categorically observed that HSBC India does not assume any risk in respect of continuing ECBs compared to the nature of service rendered by them.- No additions. Issues Involved:1. Disallowance of salaries paid to expatriate employees.2. Disallowance of expenses incurred for mobilization of deposits from non-resident Indians.3. Taxation of exchange gain/loss in valuation of outstanding foreign exchange forward contracts.4. Disallowance under Section 14A of the Income Tax Act.5. Disallowance of payments made to clubs.6. Disallowance of provision for liability on account of bonus points accrued on credit cards.7. Disallowance of depreciation on payment to Great Eastern Shipping Company Ltd. (GESCO).8. Addition towards deferred guarantee commission.9. Disallowance of payments towards canteen subsidy, holiday home subsidy contribution, staff cultural committee, and payments to recreation club.10. Disallowance of guest house expenses.11. Disallowance of entertainment expenses.12. Transfer pricing issues related to correspondent banking activities and services provided by employees to overseas AEs.13. Charging of interest under Section 234D of the Income Tax Act.14. Transfer pricing issue regarding support services in relation to External Commercial Borrowings (ECBs).15. Interest under Section 244A of the Income Tax Act.Detailed Analysis:1. Disallowance of Salaries Paid to Expatriate Employees:The first issue was whether the CIT(A) was justified in upholding the disallowance of Rs. 14,09,77,991/- being salaries paid to expatriate employees. The assessee argued that these salaries were for services rendered in India and were duly taxed in India. The AO treated these expenses as head office expenses under Section 44C and disallowed them. The CIT(A) upheld the AO's decision, but the Tribunal found that this issue had been decided in favor of the assessee in earlier years and allowed the assessee's appeal.2. Disallowance of Expenses for Mobilization of NRI Deposits:The assessee claimed expenses of Rs. 4,54,65,934/- for mobilizing deposits from NRIs, arguing these were for the Indian operations. The AO disallowed these expenses, treating them as head office expenses under Section 44C. The CIT(A) upheld the AO's decision, but the Tribunal found that this issue had been decided in favor of the assessee in earlier years and allowed the assessee's appeal.3. Taxation of Exchange Gain/Loss on Foreign Exchange Forward Contracts:The AO taxed Rs. 14,46,27,000/- as exchange fluctuation gain on outstanding forward contracts, while disallowing a loss of Rs. 15,16,14,000/- from the previous year. The CIT(A) directed that the gain should be taxed in the year the contracts matured and allowed the loss from the previous year. The Tribunal upheld the CIT(A)'s decision, ensuring no double taxation or deduction.4. Disallowance under Section 14A:The AO disallowed Rs. 5,77,15,485/- under Section 14A, assuming an average cost of funds at 6.45%. The CIT(A) upheld this, but the Tribunal found that the assessee had substantial interest-free funds and directed the AO to disallow only 1% of the total exempt income as administrative expenses.5. Disallowance of Payments to Clubs:The AO disallowed 50% of Rs. 84,83,457/- spent on clubs. The CIT(A) allowed membership, subscription, and entrance fees as business expenses but disallowed 20% of other payments. The Tribunal found this issue had been decided in favor of the assessee in earlier years and allowed the assessee's appeal.6. Disallowance of Provision for Liability on Bonus Points:The AO disallowed Rs. 3,91,61,437/- for bonus points on credit cards, treating it as a contingent liability. The CIT(A) upheld this, but the Tribunal found that this issue had been decided in favor of the assessee in earlier years and allowed the assessee's appeal.7. Disallowance of Depreciation on Payment to GESCO:The assessee's alternative ground for depreciation on Rs. 20 Crores paid to GESCO was dismissed as the assessee had already received relief in earlier years.8. Addition towards Deferred Guarantee Commission:The AO added Rs. 24 Lakhs as deferred guarantee commission. The CIT(A) upheld this, but the Tribunal found that this issue had been decided in favor of the assessee in earlier years and allowed the assessee's appeal.9. Disallowance of Payments towards Canteen Subsidy, Holiday Home Subsidy Contribution, Staff Cultural Committee, and Payments to Recreation Club:The AO disallowed these expenses under Section 40A(9). The CIT(A) deleted the disallowance, following earlier orders. The Tribunal upheld the CIT(A)'s decision.10. Disallowance of Guest House Expenses:The AO disallowed Rs. 60,42,262/- for guest house expenses. The CIT(A) deleted the disallowance, following earlier orders. The Tribunal upheld the CIT(A)'s decision.11. Disallowance of Entertainment Expenses:The AO disallowed Rs. 2,26,79,485/- for entertainment expenses. The CIT(A) restricted the disallowance to Rs. 1 Lakh, following earlier orders. The Tribunal upheld the CIT(A)'s decision.12. Transfer Pricing Issues:a. Correspondent Banking Activities:The TPO made an upward adjustment of Rs. 1,90,76,528/- for correspondent banking activities. The CIT(A) provided partial relief, but the Tribunal found that the assessee had adequately compensated for these activities and deleted the adjustment.b. Services Provided by Employees to Overseas AEs:The TPO made an upward adjustment for services provided by employees to overseas AEs. The Tribunal found that these were incidental activities and deleted the adjustment.13. Charging of Interest under Section 234D:The Tribunal directed the AO to re-compute the interest based on actual refunds granted to the assessee.14. Transfer Pricing Issue Regarding Support Services in Relation to ECBs:The TPO made an adjustment of Rs. 10,80,225/- for support services in relation to ECBs. The CIT(A) deleted the adjustment, and the Tribunal upheld the CIT(A)'s decision.15. Interest under Section 244A:The Tribunal directed the AO to re-compute the interest under Section 244A based on the outcome of the other issues.Conclusion:The appeals filed by the assessee were partly allowed, and the appeals filed by the revenue were dismissed.