TaxTMI 
TaxTMI 
2023 (3) TMI 1030
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....ct in holding that the addition has been wrongly made without appreciating the fact that the PE in India has to be treated as separate entity and the interest payable by the said PE is to be taxed in India in the hands of PE as income. 3. Whether on facts and in circumstances of the case and in law, the Ld CIT(A) is correct in holding that the provisions of section 40(a)() of the Act do not apply without appreciating that the interest was chargeable to income. 4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing to re-compute the ALP rate of commission in respect of the guarantees by making an addition of 10% increase in the rate of commission in respect of the guarantees by making an addition of 10% increase in the rate of commission currently being charged by the assessee to arrive at the arm's length rate without citing any basis for arriving at this ALP rate determination and applying to the facts of the case. 5. Whether on the facts and circumstances of the case and in law, the Ld CIT(A) erred in directing to re-compute the ALP rate of commission in respect of the guarantees by making an addition of ....
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....ing total income of Rs.3,03,57,44,858/- was filed 30.11.2011. The assesse is a foreign bank incorporated in Japan and carries out banking operation in India through branches situated at Mumbai & Delhi. These branches were a permanent establishment within the meaning of DTAA between India & Japan. The assessment u/s 143(3) r.w.s 144C(3) of the Act was finalized on 17.05.2016 and total income was assessed at Rs.307,81,84,271/-. Further facts are discussed while adjudicating the grounds of appeal filed by the Revenue as follows: Ground No. 1 to 3: 3. During the year under consideration, the head office of the bank in Japan has received interest on borrowing made by the Indian branch to the amount of Rs.165,09,402/- net of tax in which tax has been deducted at source. However, the A.O was of the view that interest income received by overseas office from the branch office in India was deemed to accrue or arise in India. The A.O observed that since the interest had been paid by the branch office, therefore the branch office was representative assesse/agent as per Section 163(1)(c) of the Act and interest paid to head office was taxable in India. Therefore the AO taxed the interest ....
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.... Corp. 136 ITD 66 (Mum)(SB), wherein it has been held interest paid by the Indian Branch of the assessee bank to its overseas head office is not chargeable to tax in India. It was further held that the provisions of Section 195 consequently would not be attracted in case of such payment of interest by the Indian Branch to overseas Head Office and the question of disallowance of the said interest by invoking the provisions of Section 40(a)(ia) does not arise Respectfully following the said decision of the Special Bench, we upheld the impugned order of CIT(A) for deleting the disallowance of interest made under Section 40(a) (ia) of the IT. Act. Similarly, on the issue of amount of interest received by the HQ, the Hon'ble ITAT has held as under- The Ld. DR, however, has fairly and frankly conceded that both the issues involved in this appeal of the revenue are squarely covered by the recent decision of Special Bench of the Tribunal in the case of Sumitomo Mitsu Banking Corp. Vs. DDIT 136 ITD 66 (Mum) (SB) wherein it has been held that interest paid by the Indian Branch to overseas Head office and the question of disallowance of the said interest by invoking the ....
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....ion) vs M/s Mizuho Corporation Bank Ltd., in ITA No. 3282/Mum./2009 etc., vide order dated 26/03/2014, for assessment year 2005-06, while deciding similar issue in favour of assessee, observed as under: "16. The issue with regard to addition of interest income earned by the head office from the branch office had already been decided by the Tribunal in assessee‟s own case in favour of the assessee by relying on the decision of the ITAT Special Bench in the case of Sumitomo Mitsu Banking Corp. 136 ITD 66 (Mum)(SB), wherein it was held that interest paid by Indian branch of the assessee bank to its overseas head office is not chargeable to tax in India. The Tribunal in assessee‟s own case in ITA No.7479/Mum/2007, vide order dated 25-7-2012, has held as under:- "The Ld. DR, however, has fairly and frankly conceded that both the issues involved in this appeal of the revenue are squarely covered by the recent decision of Special Bench of the Tribunal in the case of Sumitomo Mitsu Banking Corp. vs. DDIT 136 ITD 66 (Mum)(SB) wherein it has been held that interest paid by the Indian Branch of the assessee bank to its overseas head office is not chargeable to ta....
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....he funding cost was lower than the nationlised bank, in India, the ld. CIT(A) has recomputed the commission for guarantee by making an addition of 10% increase in the rate of commission which has been charged by the assesse to arrive at the arm's length rate. 4. Therefore, the ld. CIT(A) directed the assessing officer to re-compute the commission for guarantee by making an addition of 10% increase in the rate of commission being charge by the assesse to arrive at the arm's length rate. The relevant part of the finding of the ld. CIT(A)is reproduced as under: "4.2 Issuance of Bank guarantees to the clients against counter guarantee issued by overseas AE's:- Rate of guarantee commission depends on several following factors: Charging of Guarantee commission varies from transaction to transaction and depends on following factors. • Term and condition of issuance of bank guarantee • Risk undertaken by the bank on issuance of bank guarantee • Cost of issuance of bank guarantee • Credit rating of customer • Relationship with the customer • Security Involved in issuance of bank g....
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....f these guarantees • Credit risk Guarantees issued by MHCB, India Branch are covered by a counter-bank guarantee issued by the overseas branches and accordingly, MHCB, India Branch carries no risk in its books. • Foreign exchange risk Where MHCB, India Branch is called to discharge a guarantee on behalf of the overseas branches, it would first receive the monies and then discharge the same and accordingly, there is no foreign exchange risk on MHCB, India Branch. Further, MHCB, India Branch would receive processing fees from its AEs in foreign currency. As there could be differences in the USD, Yen and Indian rupee conversion rates as on the date of receipt of remittances and the Booking date there is an element of foreign exchange risk on MHCB, India Branch. The risk profile for the entities in respect of the said transaction has been summarized below. Typo of Function MHCB, India Branch AEs Credit Risk NO Yes Foreign exchange risk - Discharging of guarantees NO Yes Foreign exchange risk Processing fees Yes No Using the CUP method, MHCB, India Branch is transacting with its ov....
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....ndian branch to provide such guarantees to the beneficiary and provide a back-to-back counter bank guarantee to the Indian branch. It is the plea of the assessee that such back-to-back counter bank guarantee is to cover any financial liability that Indian branch would incur on behalf of these overseas branches in connection with the guarantees issued to Indian clients on their behalf. It is further submitted that where the client of the overseas branch defaults and the guarantee would be invoked then under the back-to-back guarantee issued to Indian branch, the overseas branch would make the payment to Indian branch, which would then onward make the payment to the beneficiary in India. In this regard, it is also the submission that Indian branch provide support services towards processing of these guarantees such as receiving swift instructions, issuing the guarantee on stamp paper and couriering the same to the party in India, maintenance of log of original documents, sending reports on project basis, reconciliation of transactions received versus those processed etc. Thus, as per the assessee the entire risk of discharging the bank guarantee is borne by the overseas branches issu....
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.... payments to assessee which would onward then make the payment to the beneficiary in India." 18. The coordinate bench of the Tribunal, in the aforesaid decision, noted that the taxpayer does not bear any risk in its books as it is fully protected by overseas counter guarantee/indemnity and there is also no foreign exchange risk as whenever the taxpayer is called upon to discharge the guarantee on behalf of the overseas branches, the taxpayer would first receive the money from overseas branches because of the existing counter guarantee, and then it would discharge the same. The coordinate bench further noted in the aforesaid decision that the assessee received the processing fee from the associated enterprise in foreign currency and the said fees is received immediately after the invoices are raised for the same, thereby the risk of exchange fluctuation would be very negligible due to reduce time span involved therein. We find that the coordinate bench of the Tribunal in para 3.7 of the aforesaid decision also considered the details of fee charged by the taxpayer for each type of services rendered by it. Further, in the aforesaid decision, as noted by the coordinate bench i....
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....f impugned international transaction of issuing bank guarantee against counter guarantee issued by the associated enterprise. The assessee is directed to produce all the documents before the TPO in support of its claim. Further, the TPO shall be at liberty to call for any details or documents for proper benchmarking of the impugned international transaction. In the remand proceedings, the assessee shall have the liberty to file any alternative benchmarking in respect of the aforesaid impugned transaction. As a result, grounds no. 5 to 9 raised in Revenue's appeal are allowed for statistical purpose." 7. As discussed the fact of the assessment year 2012-13 as well as the issue involved are identical to the assessment year 2010-11 except with variation of amount which has been adjudicated by the ITAT vide decision dated 24.08.2022 as discussed supra. Therefore, following the decision of ITAT we restore this issue to the file of TPO for adjudicating de novo as directed by the ITAT in the decision as referred supra, therefore, the appeal of the revenue is allowed for statistical purposes. ITA Nos. 2868 /Mum/2022 Ground No. 1 to 3: 8. As the facts and the issue involved in t....