Own funds, seconded expatriate salary, branch interest deduction, and TNMM prevailed in transfer pricing and exempt-income disputes.

Tax-free bond investments funded by sufficient own funds did not attract a proportionate disallowance under section 14A read with rule 8D, and salary paid to expatriate employees seconded to Indian branches was not treated as head office expenditure under section 44C because the services were rendered wholly for Indian operations. Interest income from foreign currency loans followed the assessee's earlier-year treatment, interest paid by the Indian branch to head office/overseas branches remained deductible on the same facts, and the transfer pricing adjustment for inter-bank indemnity or guarantee services was deleted because CUP benchmarking lacked reliable comparables and TNMM was accepted as the appropriate method.

---

---

Issues: (i) Whether disallowance under section 14A read with rule 8D was sustainable in respect of exempt interest income from tax-free bonds; (ii) whether salary paid to expatriate employees deputed to Indian branches was disallowable under section 44C; (iii) whether interest income from foreign currency loans was liable to be taxed under section 115A on a gross basis; (iv) whether interest paid by the Indian branch to the head office/overseas branches was deductible; (v) whether the transfer pricing adjustment in relation to inter-bank indemnity / guarantee services was justified.

Issue (i): Whether disallowance under section 14A read with rule 8D was sustainable in respect of exempt interest income from tax-free bonds.

Analysis: The assessee had sufficient tax-free funds and the investment yielding exempt income was already covered by such funds. The record also showed that the issue had been consistently decided in the assessee's own favour in earlier years on identical facts. In that situation, no proportionate disallowance of expenditure could be sustained against the exempt income.

Conclusion: The disallowance under section 14A read with rule 8D was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether salary paid to expatriate employees deputed to Indian branches was disallowable under section 44C.

Analysis: The employees were found to have worked continuously for the Indian operations on secondment, their global income had been offered to tax in India, and the material on record did not justify treating the salary as head office expenditure. The claim was also supported by the statutory and factual position that the expenditure was incurred for services rendered wholly for the Indian branches.

Conclusion: The salary expenditure was held allowable and the disallowance under section 44C was deleted in favour of the assessee.

Issue (iii): Whether interest income from foreign currency loans was liable to be taxed under section 115A on a gross basis.

Analysis: The issue was treated as covered by earlier decisions in the assessee's own case. The Tribunal followed the settled view that the relevant interest income was to be dealt with on the basis already accepted in the earlier round, and no distinguishing feature was shown for the year under appeal.

Conclusion: The Revenue's challenge failed and the matter was decided in favour of the assessee.

Issue (iv): Whether interest paid by the Indian branch to the head office/overseas branches was deductible.

Analysis: On identical facts in earlier years, the Tribunal had accepted the deductibility of such interest payment. The present year involved no material change, and the reasoning adopted in the earlier orders was applied again.

Conclusion: The deduction was allowed and the issue was decided in favour of the assessee.

Issue (v): Whether the transfer pricing adjustment in relation to inter-bank indemnity / guarantee services was justified.

Analysis: The transaction was found to be a support-service arrangement protected by back-to-back indemnity, with no comparable third-party data justifying the CUP approach adopted by the TPO. The Tribunal accepted that TNMM was the appropriate method on the facts and that the adjustment was not sustainable.

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

Final Conclusion: The appeals were disposed of with mixed success, with substantive relief granted on the principal issues concerning exempt-income disallowance, expatriate salary, interest taxation, interest deduction to the head office, and transfer pricing for indemnity services.

Ratio Decidendi: Where the assessee's own funds cover the investment yielding exempt income, no proportionate disallowance under section 14A is warranted; salary paid for services rendered by expatriate employees exclusively for the Indian branch is not hit by section 44C; and in the absence of reliable CUP data, TNMM may be the appropriate method for benchmarking protected inter-bank indemnity services.

---