TaxTMI 
TaxTMI 
2024 (6) TMI 460
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....e extent of Rs. 48.66 lacs as prior period expense. 1.2. It is submitted that the expenditure relates to amount payable to Infosys and no part of the amount was claimed as expenditure at any time in the earlier years. The expenditure was debited pursuant to receipt of invoices from Infosys during the previous year. The amount was not debited in the earlier yean since the claim was raised for the first time during the year. 1.3 The learned DRP and AO erred in not considering favourable decision of Hon'ble Ahmedabad Bench of Tribunal upto AY 2015-16 Bank's own case." 3. The issue relates to disallowance of claim of Annual Technical Service (ATS) fees by the assessee to the tune of Rs. 48,66,726/-, disallowed for the reason that they were found to be prior period expenses. The assessment order reveals the nature of these expenses as the amount paid by the assessee towards annual fee for the maintenance of its core banking software named "Finacle" developed by Infosys Technologies Limited. Infosys charged an annual fee per user for the maintenance of this software, and in substance these charges were paid in the context of technical support provided to the ....
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....een passed by the Assessing officer and the issues are still at large before the DRP the same could be urged before the DRP.................................... ........ ... ...................... . The process before the DRP is a continuation of the assessment proceedings as only thereafter would a final appealable assessment order be passed. Till date there is no appealable assessment order. The proceeding before the DRP is not an appeal proceeding but a correcting mechanism in the nature of a second look at the proposed assessment order by high functionaries of the revenue keeping in mind the interest of the assessee. It is a continuation of the Assessment proceedings till such time a final order of assessment which is appealable is passed by the Assessing Officer. This also finds support from Section 144C(6) which enables the DRP to collect evidence or cause any enquiry to be made before giving directions to the Assessing Officer under Section 144C(5) The DRP procedure can only be initiated by an assessee objecting to the draft assessment order. This would enable correction in the proposed order (draft assessment order) before a final assessment order is passed. Therefore, we ar....
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.... "2. Disallowance u/s 14A read with Rule 8D of the Income-tax Act, 1961 (Tax effect Rs. 15,08,58,427) 2.1 The learned DRP has erred in upholding action of AO in further disallowing Rs. 43.59 crores under section 14A read with Rule 8D. The learned DRP and AO has failed to appreciate that suo-moto disallowance made by the Bank under section 14A of the Act is made on a scientific basis by proportionately allocating all the operating expenses incurred towards earning tax-free income. Hence, there is no basis or reason for any further disallowance under Rule 8D of the Income-tax Rules. 2.2 The learned AO has erred in appreciating the fact that all the operating expenses based on proportion of salary of employees engaged in investment business have been allocated. The contention that only some expenses were allocated as mentioned on the page no. 10 of the assessment order by the learned AO is therefore incorrect. 2.3 The learned DRP and AO erred in not appreciating that Rule 8D is neither charging provision nor automatic and Rule 8D(2)(ii) cannot supersede favourable judgements of Hon'ble Tribunal and Gujarat HC upto AY 2009-10 in the Bank's own ....
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....expenses for the purpose of working disallowance u/s 14A of the Act since the salary of the employees involved in the investment portfolio was 0.20% of the salary of the total employees of the assessee. That thereafter these expenses, i.e 0.20% of the total operating expenses, had been bifurcated between 'tax-free income earned from securities' and 'taxable trading income from securities' in the ratio in which they were earned, being 3.72% and 96.28% respectively. That, accordingly, operating expenses of Rs. 1,03,08,336/- were worked out as allocable to the earning of exempt income and suo moto disallowance of the same made while computing the income of the assessee for the purpose of taxation. He pointed out that the assessee had sufficient own interest-free funds by way of capitals and reserves amounting to Rs. 63,445.25 crores for the purpose of making tax-free investments of Rs. 5,421.46 crores, warranting no disallowance of interest expenses. All the above, he stated, was demonstrated to the Assessing Officer during assessment proceedings, but the AO went on to reject the same without assigning any proper reasons. He drew our attention to paragraph no.21 of the assessment orde....
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....nbsp; November 5,048 4,845 4,947 December 4,845 4,682 4,764 January 4,682 4,721 4,702 February 4,721 5,286 5,004 March 5,286 5,421 5,354 Total 53,546 Annual Average of Monthly Average tax free investments (April 17 to March 18 (5,35,45,74,74,780/12) 4,442 Amount as per section 14A r.w.r. 8D (under New Rule 8D) (1 % of Annual Average of Monthly Average investment yielding tax free return) 44.42 3.4 Accordingly, a further disallowance under Rule 8D of Rs. (44,62,14,562.32-1,03,08,336)/-is being made. After considering the nature of addition, penalty u/s. 270A for misreporting of income is separately initiated. (Disallowance of Rs 43,59,06,226.32/-)" He further referred to paragraph no. 6 of the AO's order as under:- "6. It may be mentioned that the assessee had disallowed as sum of Rs. 1,03,08,336/- in its computation of income. No basis of arriving at this figure was offered. A statement showing allocation of expenses for rent, salary, depreciation on computers, telephone and reuters was filed.....
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....e Act while holding so. 14. Having said so, we find that in the facts of the present case, the AO has failed to fulfil this necessary prerequisite for invoking Rule 8D of the Rules. We have noted from the documents filed before us that the assessee had demonstrated to the AO that the suo moto disallowance made by it had been calculated on a scientific basis. The entire basis of calculating the same had been explained to the AO, pointing out that out of the operating expenses only that portion was considered for the purpose of disallowance which was in proportion to the salary of employee, involved in the investment activity to the salary of the total employees of the assessee being 0.20%; that thereafter, these operating expenses incurred for earning exempt income was determined by bifurcating these expenses in the ratio of tax free income earned from securities and taxable earned income therefrom, which came to 3.72% of the expenses. And accordingly an amount of Rs. 1,03,08,336/- was determined suo moto by the assessee as disallowable under section 14A of the Act, and disallowed while computing its taxable income. Thus, the assessee had demonstrated a reasonable basis for calcu....
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....a so prescribed in law he can take up the matter at the appropriate judicial forum. These findings of the AO, no doubt are contrary to the provision of law as interpreted by the jurisdictional High court itself in CIMS(supra) that the formula provided in Rule 8D of the Rules is to be applied only in the circumstance that the assesses calculation of disallowance appears to the AO to be incorrect having regard to its books of accounts. 17. In view of the same, we are in agreement with the ld. Counsel for the assessee that invocation of Rule 8D by the AO was against the provisions of law, and the disallowance therefore made of expenses by the AO amounting to Rs. 43.59 crores u/s 14A of the Act in accordance with Rule 8D of the Rules is not sustainable in law, and is directed to be deleted. Ground No.2 is accordingly allowed in above terms. 18. Ground No.3 raised by the assessee reads as under :- "3. Bank guarantee commission (Tax effect - Rs. 65,17,58,043) 3.1 The learned DRP has erred in upholding addition made by AO in respect of Bark Guarantee commission income of Rs. 188.32 crores being the sum relatable to unexpired period of the guarantee contract. Thi....
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.... had been preferred to the High Court against the same. To keep the issue alive therefore to protect the interest of the Revenue, the DRP directed the AO to make the addition of commission income to the tune of Rs. 188.32 Crs. Relevant para 7.3.1 of the DRP order. 21. The contention of the learned Counsel for the assessee before us was that identical disallowance made in the case of the assessee in preceding years, right from Assessment Year 2010-11 to Assessment Year 2014-15, had been deleted by the ITAT consistently in its orders passed, as noted by the DRP and that even in AY 2015-16 ITAT had deleted identical addition made in its Order passed in ITA No.852/A/2019 dated 30-03-2022 . Copy of all the orders of the ITAT were placed before us. That the issue therefore stood covered in favour of the assessee. The learned DR, though was unable to controvert the contention of the learned Counsel for the assessee that the issue was covered in its favour by orders of the ITAT in the preceding years, however, he relied on the order of the AO. 22. As is evident from the order of the DRP, identical addition of commission income was made in the case of the assessee in the preceding yea....
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....s was not recognized by the assessee, was subjected to tax which amounted in all to Rs. 237.98 crores. 26. Objection to the proposed addition was made to the DRP, who though noted the fact that identical addition of commission income made in preceding years stood deleted by the ITAT, yet directions were given to the AO to make the addition for the reason noted in the order that the DRP had been informed that the decision of the ITAT for A.Y 2010-11 to A.Y 2014-15 had not been accepted by the department and appeal had been preferred to the High Court against the same. To keep the issue alive therefore to protect the interest of the Revenue, the DRP directed the AO to make the addition of commission income to the tune of Rs. 188.32 Crs. Relevant para 8.3.1 of the DRP order. 27. The contention of the learned Counsel for the assessee before us was that identical disallowance made in the case of the assessee in preceding years, right from Assessment Year 2010-11 to Assessment Year 2014-15, had been deleted by the ITAT consistently in its orders passed, as noted by the DRP and that even in AY 2015-16 ITAT had deleted identical addition made in its Order passed in ITA No.852/A/2019 ....
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....t price as on the date of exercise of options and exercise price (i.e., market price on grant date) is an allowable deduction for computing income under the head 'profit and gains from business and profession' in the year of allotment of options to the employee (such amount being equal to the amount taxable as perquisite in hands of employee). 5.4 The learned DRP and AO have erred in law by emphasizing on the fact that the ESOP cost claimed by the Assessee is not an expenditure per se being a notional loss. As reading down the word "expenditure" as being confined to situation involving outlay of cash, would result in a very narrow inference of the expression, Further, the fact mentioned in the assessment order that Department is in appeal against the decision of Biocon Ltd. (Special Bench) and the issue has not attained finality is not correct as the issue has been decided by the Karnataka High Court against the Revenue. 5.5 The learned DRP and AO have failed to appreciate the fact that benefit has been actually offered to the employees in terms of discount. It has been held in the Biocon Limited that such discounted premium on shares is a substitute to gi....
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.... by the AO i.e. Asst. Year 2013-14 to 2015-16. To this, the ld. Counsel pointed out that the matter had been restored back to the AO for adjudication afresh by the ITAT. 34. In view of the above admission of the ld. Counsel for the assessee, and to bring consistency on the issue, the impugned issue is also being restored back to the AO to be decided afresh in accordance with prevailing position of law. 35. Ground No.5 is allowed for statistical purpose. 36. Ground No. 6 raised by the assessee reads as under:- "6. TP adjustment (Tax effect - Rs. 25,59,032) 6.1 The learned DRP has erred in partially agreeing with TPO in making transfer pricing adjustment of Rs. 73,94,337 by rejecting the benchmark conducted by the Bank using Other Method as the most appropriate method with respect to international transaction of interest received from AE on the tier II loan of USD 25 million provided to it and applying an arbitrary spread of 50bps. 6.2 Without prejudice to above, the TPO has not computed the amount of adjustment in line with the directions of DRP. Considering DRP directions, we believe that the correct amount should be Rs. 24,94,662. In the order o....
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....he extent of 200 bps. The same resulted in the ALP of interest to be charged determined at 7.76% resulting in quantum of interest determined to be at ALP amount to Rs. 11,52,16,600/-. Thus, in nutshell, * the assessee had charged the interest at 3 months USD LIBOR plus 425 bps, resulting the interest rate of 6.09% and the quantum of interest earned accordingly being Rs. 9,04,50,688/-, while * The TPO held the ALP of interest to be 6 months USD LIBOR plus 625 bps resulting in rate of interest of 7.76% and quantum of interest at ALP being Rs. 11,52,16,600/-. 39. Accordingly, the difference of interest so determined, of Rs. 2,47,65,912/-, was adjusted upward to the interest charged by the assessee resulting in an addition to the said extent to the income of the assessee. The DRP confirmed the order of the TPO and directed the AO to make the impugned adjustment as proposed by the TPO. 40. The contention of the ld. Counsel for the assessee before us primarily was against treating LOC as equivalent to bank guarantee for making adjustment to the ALP of the impugned international transaction and briefly put it was to the effect: * That there was a basic fal....
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....nch of Tribunal in India Hotels Co. Ltd. (supra) on similar ground of appeal by following the decision of Hon'ble Karnataka High Court held that Letter of Comfort does not constitute international transaction. So far as contention of ld. DR for the revenue that after amendment in Explanation to section 92B is concerned, we have noted that co-ordinate bench in SIRO Clinpharm P. Ltd. (supra) held that amendment in Explanation to section 92B by Finance Act, effective from 01.04.2002 is to be treated as effective at the best from A.Y. 2013-14. Thus, in view of the aforesaid discussion, we do not find any illegality or infirmity in the order passed by ld. CIT(A). In the result, Ground No. 6 to 9 (additional ground) of assessee's appeal are allowed and consequently the grounds of appeal raised by revenue are dismissed." * Indian Hotels Company Ltd. Vs. DCIT [2019] 112 taxmann.com 340 (Mumbai - Trib.) TRANSFER PRICING: CUP method is most appropriate method to determine arm's length rate of interest of international transaction involving lending of money by assessee in foreign currency to its AE and LIBOR being inter-bank rate fixed for international transacti....
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....an given to the associate entity of the assessee. Tier-II Loan having been provided by the assessee to Axis Bank, UK- amounting to 25 Million USD i.e. 148.47 crores. The facts relating to the interest charged by the assessee and that determined by the TPO to be ALP of the interest charged is as under: * interest charged by the assessee --- 3 months USD LIBOR plus 425 bps along with upfront fee charged @ 2.5% of the loan amount * ALP of the interest determined by TPO -- interest charged by BOI as per its quotation given to AXIS Bank , UK for the same Tier II Loan of 25 million USD -6 months USD LIBOR plus 425bps + 200bps added by the TPO on account of adjustment made for the letter of comfort (LOC) required by BOI from the assessee before us ,as per its terms and conditions for granting the loan as per the quotation. In effect ALP determined by TPO 6 months USD LIBOR plus 625 bps (425bps + 200bps). The DRP in turn restricted the adjustment made on account of LOC to 0.5% 45. The assessee, before us, has contested this adjustment made to the ALP of interest on account of LOC contending that both the TPO and the DRP have erred in equating LOC to bank guarantee whil....