2023 (6) TMI 915 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on interest, transfer pricing adjustments

DDIT (International Taxation) -1 (2), MUMBAI Versus M/s. Commerzbank A.G.

The tribunal dismissed the revenue's appeal and the assessee's cross-objection, upholding the CIT(A)'s decisions on all grounds, including disallowance of ... Computation of profits of the appellant’s branch in India - interest payment made by the Indian branch of the appellant to its head office abroad - TDS u/s 195 - Assessee in Rule 27 has challenged the Ld. CIT(A)’s action of confirming the addition made by the AO in relation to the interest income earned by the HO in the hands of the assessee Branch - HELD THAT:- As assessee Branch was under no obligation to deduct tax at source u/s 195 of the Act while remitting interest to its Head Office and therefore the Ld. CIT(A) had rightly deleted the disallowance made by the AO u/s 40(a)(i) of the Act. Also, in terms of Article 7 of the DTAA between India and Germany (which is akin to the Article 7 between India & Netherlands), the interest income earned by the HO from the assessee Branch was not liable to tax in India. See ABN AMRO Bank [2010 (12) TMI 340 - CALCUTTA HIGH COURT] The ground raised by the assessee in Rule 27 of the Rules is allowed and the AO is directed to delete the addition of interest income. TP adjustment made to the interest expense paid to the HO - HELD THAT:- DR was unable to controvert the above findings of the Ld. CIT(A) holding that the Reuter/LIBOR rates represented the arithmetical mean of the rates of the interest offered and accepted in transaction between unrelated parties during the day, and therefore the assessee was entitled to benefit of +/-5% in terms of proviso to Section 92C(2) - No reason to interfere with the above order of the Ld. CIT(A). Accordingly, Ground No. 2 of the Revenue stands dismissed. TP Adjustment - arm’s length price of the international transaction of Liaison Services rendered to the Head Office and the Overseas Branches - action of the Ld. CIT(A) in rejecting Pioneer Investcorp Ltd as a good comparable - HELD THAT:- As the assessee was providing correspondent banking services to his Head Office and Overseas Branches. These activities consist of marketing Nostro Accounts, Letter of Credit, Cheques for Collection and providing Guarantees. It is noted that the appellant did not bear any risk of loss or deficiency for rendering these services as it was being uniformly compensated for the costs incurred plus mark-up of 8%. CIT(A) however had noted that, Pioneer Investcorp Ltd. was a category-I Merchant Banker with the SEBI which was also engaged in non-fund-based activities like Merchant Banking, Debt Syndication, etc. and therefore rejected Pioneer Investcorp Ltd. as the business profile and activities of this company was not comparable to the assessee. These findings of the Ld. CIT(A) remain uncontroverted before us and therefore we do not see any reason to interfere with the same. Re-computation of profit rates of Centrum Finance Ltd. and Integrated Enterprises India Ltd. worked out by the Ld. CIT(A) - according to Revenue, the interest and other financial income and correspondingly the interest and financial charges was to be excluded as it was ‘non-operating income/expense’, and therefore not includible while computing the operating profit - We find ourselves in agreement with the Ld. CIT(A) that both M/s Centrum Finance Ltd. & M/s Integrated Enterprises India Ltd being engaged in the business of providing financial services viz., financing, brokerage, debt syndication, provision of guarantee etc., both the expenditure on interest and finance charges and also the earning of interest formed integral part of its operating business and therefore the operating profit cannot be computed by excluding the same. No infirmity in the action of the Ld. CIT(A) including both the interest income as well as interest expense & finance charges for computing the operating profit of these companies. TP Adjustment - arm’s length price for the Agency Services for precious metal transactions rendered to its AEs - re-working & re-allocation of personnel cost, administrative cost and support cost by the Ld. CIT(A) - HELD THAT:- TPO added the payment to Vijay Anand as well to the total personnel cost. Before the Ld. CIT(A), the assessee had substantiated with evidences like deal tickets etc., that the two employees, Shri Amit Juneja & Shri Tarun Tandon were indeed engaged in treasury division also. CIT(A) taking note of this fact accepted the contention of the assessee that their entire 100% salary could not be allocated to the agency business but, to meet the ends of justice, he found it appropriate to hold 75% of their salaries to be allocable. We do not see any infirmity in this approach/action of the Ld. CIT(A). As far as the severance pay of Mr. Vijay Anand CIT(A) had rightly held that, as the AO had already separately disallowed the severance pay while assessing income of the assessee, no cost on this account could be allocated to the agency business. DR was also unable to controvert the same. We therefore uphold the Ld. CIT(A)’s calculation of personnel cost attributable to agency business. Allocation of administrative expenses & staff support expenses - As we already upheld the manner of allocation of personnel cost viz., allocation of 75% of salaries of Amit Juneja & Tarun Tandon, we see no reason to interfere with their time allocation by the CIT(A) for the purposes of attribution of administrative & support costs. Also, having regard to the fact that Mr. Vijay Anand had left the job in the first month of the FY 2001-02 i.e., April 2001 and his severance pay was also disallowed by the AO, we hold that the Ld. CIT(A) had rightly considered his time allocation at NIL. Consequently, the re-working of the allocation of administrative costs and support expenses by the Ld. CIT(A) does not warrant any interference. No infirmity in the order of Ld. CIT(A) determining the arm’s length price of the operations of agency business at Rs. 77,39,372/-. Therefore, the Ld. CIT(A)’s action of granting relief in relation to the transfer pricing adjustment made by the TPO in relation to the agency services rendered by the assessee to its AE is upheld. Ground No. 4 is accordingly dismissed. Issues Involved:1. Delay in filing cross-objection by the assessee.2. Disallowance of interest expenditure and addition of interest income.3. Transfer pricing adjustment related to interest expense.4. Transfer pricing adjustment related to Liaison Services.5. Transfer pricing adjustment related to Agency Services for precious metal transactions.Detailed Analysis:1. Delay in Filing Cross-Objection by the Assessee:The cross-objection filed by the assessee was delayed by more than 1212 days. The assessee expressed its inability to file an affidavit due to the closure of its business activity in India and sought withdrawal of the cross-objection. The revenue opposed the admission of the cross-objection due to the inordinate delay and lack of affidavit. The tribunal noted the inability to justify the delay and dismissed the cross-objection as barred by limitation. However, the tribunal admitted the ground raised by the assessee under Rule 27 of the ITAT Rules for adjudication, allowing the assessee to support the impugned order on any grounds decided against it.2. Disallowance of Interest Expenditure and Addition of Interest Income:The assessee, a branch of a foreign bank, paid interest to its Head Office (HO) in Germany and claimed it as a deduction. The AO disallowed this deduction under Section 40(a)(i) of the Act due to non-withholding of tax under Section 195 and added the interest income to the total income of the assessee branch. The CIT(A) deleted the disallowance but upheld the addition of interest income. The tribunal referred to the Hon'ble Calcutta High Court's decision in ABN AMRO Bank Vs CIT, which held that the Indian branch was not obligated to deduct tax at source on interest paid to the HO and that the interest income of the HO was not taxable in India under Article 7 of the DTAA. Consequently, the tribunal dismissed the revenue's appeal and allowed the assessee's ground under Rule 27, directing the AO to delete the addition of interest income.3. Transfer Pricing Adjustment Related to Interest Expense:The TPO made a transfer pricing adjustment to the interest expense paid to the HO, determining the arm's length interest rate based on Reuters data. The CIT(A) deleted the addition, noting that Reuters/LIBOR rates represent the arithmetic mean of interest rates and thus the assessee was entitled to a variation of 5% as per the proviso to Section 92C(2) of the Act. The tribunal upheld the CIT(A)'s decision, dismissing the revenue's ground.4. Transfer Pricing Adjustment Related to Liaison Services:The assessee charged an 8% mark-up on costs incurred for liaison services rendered to the HO and Overseas Branches. The TPO identified three comparables with higher profit rates and made a transfer pricing adjustment. The CIT(A) rejected one comparable and re-computed the profit rates for the remaining two, determining an appropriate mark-up rate of 15%. The tribunal upheld the CIT(A)'s decision, dismissing the revenue's ground.5. Transfer Pricing Adjustment Related to Agency Services for Precious Metal Transactions:The assessee provided agency services for precious metal transactions and charged an 8% mark-up on costs. The TPO disputed the cost allocation and made a transfer pricing adjustment. The CIT(A) re-worked the allocation of personnel, administrative, and support costs, partially allowing the assessee's claim. The tribunal upheld the CIT(A)'s re-allocation and determination of the arm's length price, dismissing the revenue's ground.Conclusion:The tribunal dismissed both the revenue's appeal and the assessee's cross-objection, upholding the CIT(A)'s decisions on all grounds. The order was pronounced in the open court on 27/02/2023.