TaxTMI 
TaxTMI 
2025 (3) TMI 1652
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....missioner of Income Tax (International Tax)-2(1)(1), Mumbai [for short 'the AO'] under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) dated 30.01.2015 for the AY 2010-11. 3. The assessee is a multinational Bank based in France with branch offices in India. The assessee is a non-resident having Permanent Establishment (PE) in India. For AY 2010-11 the assessee filed the return of income on 11.10.2010 declaring a total income of Rs. 3,49,14,26,218/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. A reference was made to the Transfer Pricing Officer (TPO) who determined the Arm's Length Price (ALP) of certain international transactions of Indian Branch such as back to back guarantee, marketing of ECB loans & derivative transactions to make a Transfer Pricing (TP) adjustment of Rs. 51,00,76,850. The AO vide draft order dated 28.03.2014 assessed the income of the assessee at Rs. 470,95,27,240/- (including the TP adjustment) and also assessed the income of the HO, Hongkong Branch and Singapore Branch to the tune of Rs. 131,62,22,653/- in the hands of the assessee. Aggrieved the assessee raised the object....
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....ssue, which does not require investigation of new facts. Hence, placing reliance on the judgment of the Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC), we admit the additional grounds. 8. For the purpose of adjudication, we will first consider the additional ground raised by the assessee. The ld. AR submitted that the order passed by the TPO under section 92CA(3) of the Act is barred by limitation and therefore liable to be quashed. The ld. AR submitted the table with the dates which are relevant for considering the issue of the TPO's order being barred by limitation. The ld. AR in this regard relied on the decision of the Hon'ble Madras High Court in the case of Pfizer Healthcare India Pvt. Ltd. vs. JCIT [2021] 124 taxmann.com 536 (Madras). 9. We heard the ld. DR and perused the material on record. The relevant extract of the table submitted by the ld. AR with regard to the impugned issue is extracted below: Sr. No. Particulars Relevant Dates Pfizer Healthcare India Pvt. Ltd. (Madras High Court) Appellant A Assessment Year 2016-17 2010-11 B Period of limi....
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....eld to be barred by limitation as proceedings for assessment should be completed before 11.59.59 of 31-12-2019. The period of 21 months therefore, expires on 31-12-2019 that must stand excluded since section 92CA(3A) states 'before 60 days prior to the date on which the period of limitation referred to section 153 expires'. Excluding 31-12-2019, the period of 60 days would expire on 1-11-2019 and the transfer pricing orders thus ought to have been passed on 31-10-2019 or any date prior thereto. Incidentally, the Board, in the Central Action Plan also indicates the date by which the Transfer Pricing orders are to be passed as 31-10-2019. The impugned orders are thus, held to be barred by limitation." 11. From the perusal of the above table given in assessee's case, we notice that the TPO ought to have passed the transfer pricing order under section 92CA(3) by 29.01.2014 whereas the order is passed on 30.01.2014. Therefore, applying the ratio laid down by the Hon'ble Madras High Court in the above case, we hold that the order passed by the TPO making the TP Adjustment is barred by limitation and accordingly liable to be quashed. Hence, the TP Adjustment made for AY....
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....wn in the case of Sumitomo Mitsui Banking Corporation vs. DCIT(supra) squarely applies to the issue in hand and thus, allowed the payment of interest and bank charges paid to HO/Overseas branches. No contrary material has been placed on record by the Revenue. Respectfully following the decision of Co-ordinate Bench in assessee's own case in the preceding Assessment Years ground No.2 and 3 of the appeal are allowed." 15. The issue for the year under consideration being identical respectfully following the above decision of the Co-ordinate Bench, we hold that the AO is not correct in making disallowance of Bank Charges paid to HO/Overseas Branch. Ground No.1 is allowed. Ground No.2 & 3 - Disallowance of expenses incurred by HO/OB towards credit risk assistance, EDP assistance HO-System Implementation Charges, and Information System Asia Pacific charges on behalf of Indian Branch. 16. During the year under consideration the Indian Branches have paid the following amounts to HO/OB towards reimbursement of expenses incurred by the HO/OB on behalf of the Indian Branch - (i) Credit risk assistance Rs. 7,90,55,825/- (ii) EDP assistance expenses Rs. 1,26,98,108/-. ....
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....ue did not bring anything on record for us to take a contrary view and therefore respectfully following the above decision, we hold that the AO is not correct in making the disallowance of these expenses in the hands of Indian Branches. Ground No. 2 & 3 raised by the assessee are allowed. Ground No.4 - Disallowance of provision towards country risk. 20. The assessee during the year under consideration has made provision towards country risk to the tune of Rs. 1,33,81,000/- and has claimed the same as a separate deduction besides the Provision for Bad and doubtful debts. The assessee submitted that the provision towards country risk is made as per the RBI regulations and hence should be allowed as a deduction. The AO held that the provision made is not allowable as a deduction under section 37 for the reason that they are contingent in nature. The AO while arriving at the assessed income included the provision made towards country risk for the purpose of determining the deduction allowable under section 36(1)(viia)(b) i.e. an amount not exceeding 5% of the total income. The DRP confirmed the decision of the AO on both counts that the provision for country risk cannot be allowe....
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.... 45. Before us, the learned AR has fairly conceded that this issue is covered against the assessee by the decision of the Special Bench of this Tribunal. Accordingly, we decide this issue against the assessee and in favour of the revenue." 23. The facts for the year under consideration being identical, respectfully following the decision of the Special Bench in the case of New India Industries Ltd (supra) and the decision of the coordinate bench we hold that the provision towards country risk cannot be claimed as deduction merely on the ground that the same is made as per RBI regulation. Accordingly the ground raised by the assessee is dismissed. Ground No.5 - Disallowance of depreciation on light motor vehicle 24. During the year under consideration the assessee has claimed depreciation of Rs. 2,89,886/- @ 40% on motor vehicles. The AO held that as per the provisions of Income Tax Rules depreciation on motor vehicle shall be allowable at 15% only. Accordingly, the AO disallowed the difference. 25. The ld AR submitted that the motor vehicles would fall within the definition of Commercial Vehicle and accordingly eligible for higher depreciation. The ld AR since there ....
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.... purpose of business, the rate of depreciation is 50%. The definition of commercial vehicle has been given in Note 6 of the Appendix I, which defines "Commercial Vehicle" as under :- "6. "Commercial vehicle" means heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle", and "medium passenger motor vehicle" but does not include "maxi-cab", motor-cab, "tractor" and "road-roller". The expressions "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle", "medium passenger motor vehicle", "maxi-cab", "motor-cab", "tractor" and "road-roller" shall have the meanings respectively as assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988)." 8.1 The assessee's cars being light motor vehicles and the definition of light motor vehicle has been given in Section 2 of the "Motor Vehicles Act, 1988", which defines as under :- "2(21)- "light motor vehicle" means a transport vehicle or omnibus the gross vehicle weight of either of motor car or tractor or road roller, unladen weight of any of which, does not exceed [7500] kgs. Thus, the definition of "co....
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....ght of the car as per the RC Book placed on record is 2170KG and therefore, it is a light motor vehicle as per the definition under the Motor Vehicle Act. There is also no dispute that the vehicle had been used in the profession of the assessee. The commercial vehicle has been specifically defined in the Appendix and the said definition does not require that the vehicle should be registered as a commercial vehicle under the Motor Vehicle Act. The BMW car purchased by the assessee is covered by the definition of commercial vehicle and had been purchased between 1.4.2001 to 1.4.2002 and used before 1.4.2002 in the profession of the assessee. It thus satisfies all the conditions for allowance of depreciation @ 50%. In our view it would be entitled to depreciation @ 50%. The order of CIT(A) denying the claim of the assessee for higher rate of depreciation cannot be sustained and the same is set aside and the claim of the assessee is allowed." Thus, respectfully following the aforesaid judgment, we direct the Assessing Officer to allow the depreciation @ 50%. Accordingly, the ground of appeal No.1 as raised by the assessee is allowed." 27. We also notice that a similar view ....
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....at out of the total disallowance made by the AO a sum of Rs. 9,17,63,933/- is claimed by the Indian Branch on the basis of allocation done by the HO and has not been actually paid by the Indian Branch to the HO. Therefore the ld AR argued that the amount is not taxable as per Article-13 of DTAA between India and France the fees for technical services which should be taxed only on actual payment. The ld. AR in this regard placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT (IT) vs. M/s Pramerica ASPF II Cyprus Holding Ltd. (ITA No. 1824 of 2016 dated 12.03.2019). The ld. AR submitted that it is an undisputed fact that the amount has been claimed by the assessee based on provision and not on payment and this fact has been recorded by the AO in the final assessment order (para 6.4.4. in page 16) . Accordingly, the ld. AR made the alternate plea that the sum of Rs. 9,17,63,933/- cannot be treated as income of the assessee. 31. We heard the parties and perused the material on record. The alternate contention of the ld AR is that credit risk assistance cost and cost of EDP assistance are not actually paid by the Indian Branch to HO and therefore not....
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.... paid by Indian Branch to HO/OB 33. The Indian Branches during the year under consideration the paid a sum of Rs. 19,92,60,902/- to HO/OB in India which the AO held as taxable as per the provisions of Article-12 of DTAA between India and France. The ld. AR in this regard submitted that the Co-ordinate Bench in assessee's own case for AY 2005-06 has held that no income accrues to the HO/OB on the principles of mutuality. The ld. AR further submitted that the Hon'ble Bombay High Court has dismissed the revenue's appeal on the principle of mutuality for AY 1997-98 to 2000-01. 34. The ld. DR in this regard submitted that the issue needs to be examined in the light of the amendment made to section 9(1)(v) by way of explanation. 35. We heard the parties and perused the material on record. We notice that the issue of interest paid by Indian Branch to HO has been considered by the Co-ordinate Bench in assessee's own case for AY 2006-07 where it has been held that "18. The Id. Counsel for the assessee submitted that the assessee has paid interest to the tune of Rs.7.20 crores to Head Office and overseas branches. The Assessing Officer has taxed said interes....
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....rs. Accordingly, these grounds are dismissed as not pressed. 38. Ground No. 16 pertains to the AO making addition of 100% of the interest income arising to OB in respect of ECB extended to Indian borrowers. Considering that the assessee is not pressing Ground No.1 to 15 which we have dismissed as not pressed, this ground has become infructuous. Ground No. 17 & 18- Taxability in India at 50% of commission earned by Hong Kong Branch on ECB to Indian borrowers. 39. The AO noticed that the Hong Kong Branch of the assessee has earned a commission income of Rs. 3,66,77,228/- on the ECB extended to Indian borrowers. The AO held that the since there is no DTAA between India and Hong Kong the commission income has to be examined under the Act. The AO further held that commission income is out of source in India and hence deemed to accrue or arise in India as per section 5(2) of the Act. The AO also held that the commission income is taxable under section 9(1)(i) of the Act since the Hong Kong Branch is having a business connection in India, as the business income and since the assessee is having a PE in India arising in India. Accordingly the AO attributed 50% of the commission of ....
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....d extinguish any further attribution of profit to the PE, that 50% of commitment fee(Rs. 5,41,43,714/-) and commission(Rs. 62,11,440/-) received by assessee's Hong Kong branch was not chargeable to tax as income of the assessee by virtue of section 9(1)(i) r.ws 115 A of the Act. 12.2. The DR argued that the disputed amount was not interest, that it consisted of commission and commitment charges, that same was taxable as per the provisions of Article 7 of the DTAA, that it was not a case of double deduction. The AR stated that the commitment fees/commission etc. were clearly effectively connected to the Indian PE, that 20% income was attributed as the ALP for the services performed by the India branch, that the said position was confirmed by the Bombay HC in the assessee's own case in earlier AY.s. that nothing further could be taxed in the hands of the Hong Kong branch, that it would lead to the same amounts being assessed to tax twice. 12.3. We have heard the rival submissions We find that identical issue was dealt by the Hon'ble Bombay HC and was adjudicated in favour of the assessee while deciding the appeals for the earlier years (Income tax Appeal....
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....of section 40(a)(i) of the Act Ground No.1 Ground No.1 Disallowance of expenses incurred by HO/OB towards credit risk assistance, EDP assistance HO-System Implementation Charges, and Information System Asia Pacific charges on behalf of Indian Branch Ground No.2 & 3 Ground No.2 & 3 Taxability of Fees for Technical Services towards credit risk evaluation and software services paid/payable by Indian Branches to HO Ground No.4 Ground No.6 Taxability of interest on external commercial borrowing (ECB) extended by various branches outside India to Indian borrowers Ground No.5 to 12 Ground No.8 to 15 Double Taxation of ECB Interest as income arising to Overseas branches on ECB to Indian borrowers and by way of Transfer Pricing adjustment income of Indian Branches Ground No.13 Ground No.16 Taxability in India at 50% of commission earned by Hong Kong Branch on ECB to Indian borrowers Ground No.14 & 15 Ground No.17 & 18 Levy of interest under section 234B Ground No.19 Ground No.22 Levy of penalty under section 271(1)(c) Ground No.20 Ground No.23 45. From....
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.... mark the transaction using CUP method and to show-cause why consequent adjustment could not be made. The assessee submitted before the AO that the assessee renders only support administrative services towards the bank guarantee for which a fixed fees is charged. The assessee further submitted that the CUP method may not be the most appropriate method since the guarantee given by the Indian Branch in this case is supported by a back to back indemnity and therefore cannot be compared with guarantee given by the Indian branch in the normal course of business. TPO did not accept the submissions of the assessee for the reason that - "(i) The contention is not acceptable because the functions performed, assets used and risk undertaken by the assessee for both transactions i.e. for inter-bank indemnity transaction with its AEs and for the guarantee issued to third party customers without any back-to-back guarantee is the same. (ii) Even for the similar third-party transactions the bank always secures itself fully with collateral security to cover against the risk. Therefore, the contention of the assessee that it is merely providing administrative support in issuing the....
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....his point stands rejected. (vii) The last contention taken by the Assessee is that, as a reciprocal measure, such services are also provided by its AE at the similar rates. Hence the rates paid by the AE to the assessee should also be accepted. This contention cannot be accepted in principle as the transfer pricing regulations in India will consider and examine only one end of the transaction. Without prejudice to the above, it is to be noted that there are no details whatsoever regarding the transaction with the AE. Hence, this contention cannot form the basis for accepting substantial transactions executed by the assessee for the AE." 49. The TPO obtained information under section 133(6) from SBI and Union Bank of India with regard to rates charged for a counter guarantee given by the said banks. Based on the said information the TPO proposed the guarantee commission rate to be @ 1% for guarantee above USD 1 million and for others the TPO bench marked the commission rate at 1.8%. Accordingly the TPO made an adjustment of Rs. 20,79,12,808/- 50. The ld. AR submitted that with respect to the Back to Back Guarantee given by the Indian Branch, there is no risk and that ....
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....e that an identical issue has been considered by the coordinate bench in the case of Mizuho Bank Ltd., vs DDIT(IT) [2023] 149 taxmann.com 46 (Mum-Trib) where it has been held that - "17. We have considered the rival submissions and perused the material available on record. In the present case, certain overseas branches of Mizuho Corporate Bank Ltd and Mizuho Bank Ltd have clients who require guarantees to be issued in India. Given that these clients are located in India, the overseas branches of Mizuho Corporate Bank Ltd and Mizuho Bank Ltd request the Indian 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....
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.... such guarantees to the beneficiaries and inturn provide a back to back inter-bank guarantee/indemnity to assessee to cover any financial liability that assessee may incur in connection with guarantees issued to Indian beneficiaries on behalf of overseas ANZ branches. This is the prime function/activity carried out by the assessee with regard to the impugned international transaction. In case where the client of the overseas branch defaults and the guarantee would be invoked then, under the back to back guarantee issued to assessee, the overseas branch would make 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 ....
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....see has claimed to determine the arm's length price of international transaction of issuing bank guarantee against the counter guarantee issued by the associated enterprise by applying CUP method, however, there are no details available on record as to how such benchmarking has been carried out by the assessee. On the other hand, we find that the TPO, by considering the rate charged by Bank of Baroda for issuance of guarantee against 100% counter guarantee by reputed international banks, has made the transfer pricing adjustment by considering it to be an appropriate CUP. However, there is no further analysis as to how the said transaction is an appropriate CUP to the transaction undertaken by the assessee's Indian branch considering the FAR in both the transactions and whether any adjustment for differences as per Rule 10B(1) (a) of the Income-tax Rules is possible. We find that the learned CIT(A) vide impugned order on an ad hoc basis directed computation of commission for guarantee by making addition of 10% increase in the rate of commission charged by the assessee to arrive at the arm's length rate. Thus, in view of the above, we deem it appropriate to remand this is....
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....ved by overseas branches in respect of ECB advance to Indian borrowers. The CIT(A) granted relief of 5% and restricted the adjustment to 20% of interest and commission. At the outset, we note that an identical issue has been considered by the Tribunal in case of M/s. Credit Lyonnais (through their successors Calyong Bank) in vide order dated 31" September 2013 in para 8.7 to 8.8 as under: "8.7 We have considered the rival submissions as well as relevant material on record The assessee being Indian branch has helped the foreign currency loan syndication in respect of two loans to Reliance Petroleum Limited and Reliance industries Limited to the tune of US$50 million and USDS II million, respectively. There is no dispute that for these two loans, Credit Agricole Indosuez (Asia), Syngapore worked as an agent and Credit Lyonnais worked as lead arrangers/cc- arrangers The ANZ Investment Bank, BA Asia Ltd, as well as ABN Amro Bank were also worked as co-arrangers. The role of the assessee in these transactions of foreign currency loan under ECB was to provide financial analysis of the borrowers, general market conditions and regulatory environment. The learned AR has vehemently ....
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....roviding the services of the financial analysis of the borrowers, market condition and regulatory Environment in India. Since the assessee has provided certain services for that arms length charges can be determined as per the provisions of transfer pricing regulation. The TPO as well as CIT(A) has not brought out any comparable for determination of the arms length price but took the total income comprising interest as well as other fees charged by the foreign branches for allocation/attribution to the assessee. In this case, the ALP has not been determined by taking into consideration for making adjustment under transfer pricing provisions. Accordingly, we direct the AO/IPO to make adjustment in respect of the services performed by the assessee for foreign currency loan arranged for its existing clients by taking into account only the fee and other charges received by the foreign branches from the borrowers in question. Since none of the parties have come out with the suitable comparables, therefore, we find that the estimation made by the CIT(A) at the rate of 20% is just and proper, however, the some would be only in respect of the fee and charges other than interest received by....
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....hat the coordinate bench in assessee's own case while considering the issue of TPO making a similar adjustment has relied on the decision of the coordinate bench in the case of Barclays Bank PLC vs ADIT (90 taxmann.com 378 (Mum-Trib)) where it has been held that " 5.3. We have heard the rival submissions and perused the material before us. We find that one of the divisions of the assessee i.e. Barclays Capital would handle the global derivative operations, that same included foreign exchange, interest rate, equity, commodity and credit derivatives, that the activities of the assessee were limited to marketing activities, that the AE.s were concluding the sale-transaction, that for the year under consideration the assessee was compensated at the rate of 24% (approximately)of the estimated day-1 profit/loss from the said deals in accordance with the GTPP of the group, that the TPO had rejected the TNMM applied by the assessee and had used PSM for benchmarking the transaction of marketing of derivative products, that he concluded that risk relating to the derivative business remained partly in India and partly outside India and that the key assets in derivative were its p....
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....pplying appropriate discounting factor. INPV calculation can be different for different banks because of their functioning. So, in our opinion it would be inappropriate to apply for a uniform multiplier effect on the value of sales credit/INPV of derivative transactions. In other words, the INPV fixed by Indian branch of another foreign bank in India should not have been compared with the assessee case, because the above said branch of the foreign bank itself was dealing with its another AE. In short, we hold that the methodology adopted by the TPO, for determining the ALP of INPV of the derivative transactions, was incorrect from the very beginning and was fundamentally wrong. We would like to refer to the case of Technimont ICB(P.) Ltd. (supra) and it reads as under: "14. What is an 'uncontrolled transaction' has been clearly defined under Rule 10A(a) to mean 'a transaction between enterprises other than associated enterprises whether resident or non-resident'. A plain reading of the meaning given to the expression 'uncontrolled transaction1 leaves no room for any doubt that it is a transaction between two non-associated enterprises. If the transactio....
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....t the TPO was not justified in considering JP Morgan Chase Bank and Bank of America, NA having similar arrangements with their AEs as appropriate comparables for the aforesaid transaction. 5.5. We also find that the method applied by the TPO is not PSM as defined under the Rules. Rule 10B of the Rules stipulates that the for the purpose of applying PSM the Net Profit derived by the AE from the international transactions is to be considered. However, the TPO has made the adjustment by taking 60% of Day 1 INPV, which is a hypothetical value representing the gross surplus cash. In the matter of Johnson & Johnson Ltd. (247 Taxman 136) the Hon'ble Bombay High Court has held that the TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in Section 92C(1) of the Act, that the determination of the ALP has to be done only by following one of the method prescribed under the Act. We are also agreeable to the argument submitted by the assessee that the PSM can never be applied for benchmarking marketing support service functions. As per Rule 10B(d),PSM is applicable "mainly in IT.s involving transfer of ....
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.... notice that the coordinate bench in assessee's own case for AY 2005-06 while considering the identical issue held that since the TP adjustment is confirmed at 20% of the commission income by the Hon'ble High Court that making addition towards the same commission would amount to double taxation. The relevant observations of the coordinate bench are extracted in the earlier part of this order. Accordingly we hold that the addition made by the AO by attributing 50% of the commission earned by the Hong Kong Branch towards ECB extended to Indian Borrowers is not sustainable and liable to be deleted. 61. In result the appeal of the assessee for 2011-12 is partly allowed ITA No. 1165/Mum/2016-Revenue's appeal- AY 2011-12 62. The revenue's appeal pertain to interest income payable by the Indian Branch to HO/OB being held to be not taxable as income of the HO/OB in India. We have while deciding the identical issue in assessee's appeal for AY 2010-11 (Ground No.7 of assessee's appeal in AY 2010-11) have held that the interest paid by the Indian Branch to HO/OB is not taxable in India by placing reliance on the decision of Special Bench in the case of Sumitom....
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....espect of commission earned by Indian Branch for marketing of derivative products (60% of INPV was attributed) Ground No.10 Ground No. 18 Levy of interest under section 234B Ground No.26 Ground No.19 Levy of penalty under section 271(1)(c) Ground No.27 Ground No.20 Cost incurred by HO/OB towards credit risk assistance, EDP assistance HO-System Implementation Charges, on behalf of Indian Branch to be taxed u/s.25(iv) if the expenditure is allowed u/s.37(1) Ground No.6 - Cost incurred by HO/OB towards credit risk assistance, EDP assistance HO-System Implementation Charges, on behalf of Indian Branch claimed in AY 2011-12 to be taxed as deemed income u/s.41(1) in AY 2012-13 Ground No.7 - TP adjustment with regard to interest on call borrowings Ground No.11 - 65. From the perusal of the above table, it is clear that all the issues pertaining AY 2012-13 except issues contended through Ground No.6,7 and 11 are common to AY 2011-12. Therefore in our considered view, our decision with respect to these issues in AY 2011-12 are mutatis mutandis applicable to AY 2012-13 also. It is ordered....
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....t the same is allowable under section 37 by following the decision of the coordinate bench in earlier years in assessee's own case. Therefore, for the year under consideration, the alternate ground on which the AO is proposing the addition under section 28(iv) needs to be adjudicated. 70. The ld AR submitted that the impugned expenditure incurred by the HO on behalf of the branch does not result in any benefit to the assessee as the actual services are rendered by the third parties to enable the Indian branch to carry on the business. The ld AR further submitted that for charging income in the hands of the Indian Branch the income should fall within the purview of the deeming fiction created under Article 7(2) of the DTAA between India and France where the PE and HO are to be treated as distinct and independent entities only for the purpose of calculation of profits attributable to the PE i.e. the PE would have actually earned by virtue of conducting business activities in the country where PE is created. The ld AR also submitted that the provisions of Article 7(2) of the DTAA are distinct from the provisions of section 28(iv) of the Act as the DTAA only attributes actual pr....
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....dently with the enterprise of which it is a permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on the basis of an apportionment of the total profits of the enterprise to its various parts, provided, however, that the result shall be in accordance with the principles contained in this Article. " (emphasis supplied) 73. From the above it is clear that the PE is to be treated as an independent enterprise and the net income i.e. income earned by virtue of activities carried on in India as reduced by the expenses incurred for earning such income. The impugned expenses towards credit risk and EDP assistance HO-System Implementation Charges are allowed in the hands of the Indian Branch since the same is incurred for the purpose of earning income in India and as per Article 7(2) it is the net income that is taxable. The fact that the expenditure are not paid by the Indian branch to HO in our view, would not change the entire nature of the payment itself. Th....
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.... Ground No.4 & 4.1 Taxability of interest on external commercial borrowing (ECB) extended by various branches outside India to Indian borrowers Ground No.12 Ground No.12 to 22 TP adjustment in the hands of Indian Branch towards commission on back to back Bank guarantee extended to AE Ground No.8 Ground No.8 TP adjustment in the hands of Indian Branch of Interest & commission arising to Overseas Branches in respect of ECB to Indian Borrowers Ground No.9 Ground No.9 TP Adjustment made in respect of commission earned by Indian Branch for marketing of derivative products (60% of INPV was attributed) Ground No.10 Ground No.10 Levy of interest under section 234B Ground No.13 Ground No.26 Levy of penalty under section 271(1)(c) Ground No.14 Ground No.27 Cost incurred by HO/OB towards credit risk assistance, EDP assistance HO-System Implementation Charges, on behalf of Indian Branch to be taxed u/s.25(iv) if the expenditure is allowed u/s.37(1) Ground No.6 Ground No.6 Cost incurred by HO/OB towards credit risk assistance, EDP assistance HO-System Gro....
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....risk assistance, EDP assistance HO-System Implementation Charges, on behalf of Indian Branch to be taxed u/s.25(iv) if the expenditure is allowed u/s.37(1) Ground No.7 Ground No.6 Cost incurred by HO/OB towards credit risk assistance, EDP assistance HO-System Implementation Charges, on behalf of Indian Branch claimed in AY 2011-12 to be taxed as deemed income u/s.41(1) in AY 2012-13 Ground No.8 Ground No.7 TP adjustment with regard to interest on call borrowings Ground No.12 Ground No.11 Computation of higher rate of tax Ground No.14 - Lower credit for TDS Ground No.15 - Levy of interest under section 234A when the return is filed within the due date Ground No.16 - Interest under section 234C Ground No.18 - 78. From the perusal of the above table, it is clear that all the issues pertaining AY 2014-15 are common to AY 2013-14 except issues contended in Ground No.14 to 16 & 18. Therefore in our considered view, our decision with respect to these issues in AY 2013-14 are mutatis mutandis applicable to AY 2014-15 also. It is ordered accordingly. 79. Ground No.14....
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....o.8 Ground No.12 Computation of higher rate of tax Ground No.10 Ground No.14 Lower credit for TDS Ground No.11 Ground No.15 81. From the perusal of the above table, it is clear that all the issues pertaining AY 2015-16 are common to AY 2014-15 except issue contended in Ground No.6. Therefore in our considered view, our decision with respect to these issues in AY 2014-15 are mutatis mutandis applicable to AY 2015-16 also. It is ordered accordingly. Ground No.17 - TP adjustment towards Foreign Currency Loans (ECB) 82. The ld AR at the outset submitted that the facts pertaining to the issue under consideration is identical to earlier years and that the issue is covered by the orders of the coordinate bench and the Hon'ble High Court. However, the ld submitted that the amount considered for arriving at TP adjustment by the TPO is not correct. In this regard the ld AR elaborated the facts pertaining to the year under consideration to submit that the policy pertaining to remuneration received by the assessee for services rendered towards ECB, has under gone change with effect from AY 2015-16. As per the old policy the assessee was re....
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....ved by the assessee and not to make any TP adjustments if the amount already offered by the assessee is more than amount arrived at by the TPO as per the directions given in this order. ITA. No. 1027/Mum/2021 - AY 2016-17 85. The issues contended by the assessee in the appeal for AY 2016-17 which are identical to the issues contended in AY 2015-16 are tabulated below - Issue AY 2016-17 AY 2015-16 Disallowance of expenses incurred by HO/OB towards credit risk assistance, EDP assistance HO-System Implementation Charges, and Information System Asia Pacific charges on behalf of Indian Branch Ground No.1 & 2 Ground No.1 & 2 Taxability of Fees for Technical Services towards credit risk evaluation and software services paid/payable by Indian Branches to HO Ground No.4 Ground No.4 Taxability of interest paid by Indian Branch to HO/OB Ground No.3 Ground No.3 Taxability of interest on external commercial borrowing (ECB) extended by various branches outside India to Indian borrowers Ground No.9 Ground No.9 TP adjustment in the hands of Indian Branch towards commission on back to back Bank gua....
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....e to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery shall apply accordingly; 88. The ld AR in this regard submitted that though the interest income paid by the Indian Branch to the HO would become taxable under the Act interms of the explanation inserted to section 9(1)(v), the taxability under DTAA also needs to be considered. The ld AR further submitted that the taxability of interest normally covered under the provisions of Article 12 of the DTAA between India and France but since the HO has a PE i.e. Indian Branch then the interest earned would be governed under Article 7 as has been stated in Article 12(5). In this regard the ld AR drew our attention to the relevant Articles of the DTAA between India and France which read as under - "1. Interest arising in a contracting state and paid to a resident of the other contracting state may be taxed in that ....
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....consideration, there is no ambiguity that the interest paid by the Indian Branch to the HO is taxable in the hands of HO as per the Act. Now coming to the question of whether the income earned by the HO by way of interest from the Indian Branch is taxable under DTAA, it is relevant to examine Article 12 and Article 7 as extracted herein above. Article 12 which deals with the taxation of interest provides under clause 5 that if the beneficial owner of the interest (i.e. HO) carries on business in the other contracting state (i.e. India) through a PE (i.e. Indian Branch) and the interest paid is effectively connected with the PE (i.e. Indian Branch) then provisions of Article 7 would apply. As per article 7(1) of the DTAA, the profit of an enterprise is taxable in the other contracting state to the extent it is attributable to the PE and as per Article 7(2) the profit attributed to the PE shall be the profit which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. The argument of the ld AR is that the hypothet....
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...., being a resident of a contracting state (i.e. say France), carries on the business in the other contracting state (i.e. say India) in which interest arises, through a PE situated therein, or performs in that other contracting state independent personal services from a fixed base situated therein, and the debt claim in respect of which the interest is paid is effectively connected with such PE or fixed base. Para 5 further provides that in such a case, the provisions of article 7 or article 15 as the case may be shall apply. Article 15 deals with independent personal services, which is not relevant to the present case. Since the assessee has PE in India, therefore, article 7 which deals with business profits, becomes relevant for consideration in the present case. As per article 7(1) of the DTA the profit of an enterprise is taxable in the other contracting state to the extent it is attributable to the PE Further, article 7(2) of the DTAA provides that the profit attributed to the PE shall be the profit which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly i....
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....into play for the limited purpose of computing the profit attributable to the PE. However, extended this fiction of hypothetical independence also for the computation of profit of the head office, for bringing to tax the interest received from the Indian branch office under the provisions of the Act. We are of the considered opinion that the latter approach is flawed. This aspect was extensively dealt with by the coordinate bench of the Tribunal in assessee's own case in BNP Paribas SA v. Asstt. DIT (International Taxation) [2016] 69 taxmann.com 6 (Mum. Trib.). In the aforesaid decision, the coordinate bench held that the principles for determining the profits of the PE and GE/head office are not the same, and the fiction of hypothetical independence does not extend to the computation of the profit of the GE/head office. The relevant findings of the coordinate bench of the Tribunal, in the aforesaid decision, are as under: "22. Clearly, the principles for determining the profits of the PE and GE are not the same, and the fiction of hypothetical independence does not extend to computation of profit of the GE. The principles of computing separate profits for the PE and t....
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....961 itself, and, as such, treaty provisions are not really relevant. We humbly bow before the conclusions arrived at in this judicial precedent. Of course, we have reached the same destination by following a different path but then as long as reach the same destination, our traversing through a different path does not really matter at all. For this reason also, the grievance of the assessee deserves to be upheld." 25. From the aforesaid findings, it is also relevant to note that the coordinate bench of the Tribunal came to the conclusion that the interest paid by the Indian branch/PE to the head office/GE is not taxable in India independent of the decision of the Special Bench of the Tribunal in Sumitomo Mitsui Banking Corporation (supra). Thus, in view of the above, even though the submission of the Revenue that the amendment by Finance Act 2015, whereby Explanation to section 9(1)(v) of the Act was inserted specifically to overcome the decision in Sumitomo Mitsui Banking Corporation (supro), is accepted, the same would still not lead to taxation of the interest paid to the head office/overseas branches under the provisions of the DTAA Accordingly, in view of aforesaid fi....
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....alty proceedings under section 274 r.w.s.270A Ground No.13 93. From the perusal of the above table, it is clear that all the issues pertaining AY 2017-18 are common to AY 2016-17. Since the facts are identical we are of the considered view that our decision with respect to these issues in AY 2016-17 are mutatis mutandis applicable to AY 2017-18 also. It is ordered accordingly. 94. Ground no. 11 to 13 raised for AY 2017-18 are consequential not warranting a separate adjudication. ITA. No. 1234/Mum/2022 - AY 2018-19 95. The issues contended by the assessee in the appeal for AY 2018-19 which are identical to the issues contended in AY 2017-18 are tabulated below - Issue AY 2018-19 AY 2017-18 Disallowance of expenses incurred by HO/OB towards credit risk assistance, EDP assistance HO-System Implementation Charges, and Information System Asia Pacific charges on behalf of Indian Branch Ground No.1 & 2 Ground No.1 & 2 Taxability of Fees for Technical Services towards credit risk evaluation and software services paid/payable by Indian Branches to HO Ground No.4 Ground No.4 Taxability of interest paid....
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.... this Tribunal in case of DHL Operations BV vs DDIT in ITA No. 183/MUM/2010. The ld AR submitted that this decision of coordinate bench has been upheld by Hon'ble Bombay High Court in ITA number 431 of 2012 in an appeal filed by the revenue. 98. On the contrary the Ld.AR relied on the orders passed by the authorities below. 99. We heard the parties and perused the material on record. We notice that the issue of taxability of the interest under section 244A by the assessee has been considered by the Hon'ble Bombay High Court in assessee's own case for AY 1997-98 (supra). The question of law and the relevant findings of the Hon'ble High Court are extracted below - "(4) Whether, on the facts and in the circumstances of the case and in law, the ITAT has erred in directing the A.O. to tax the interest received u/s 244A at the rate prescribed in Article 12 of DTAA between India and France? 6. Regarding Question 4 - (a) The Tribunal by the impugned order restored the issue of the rate at which interest is to be charged to tax on income-tax refund received under Section 244A of the Act to the Assessing Officer to be decided in the light of I....
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.... are tabulated below - Issue AY 2019-20 AY 2018-19 Disallowance of expenses incurred by HO/OB towards credit risk assistance, EDP assistance HO-System Implementation Charges, and Information System Asia Pacific charges on behalf of Indian Branch Ground No.2 & 3 Ground No.1 & 2 Taxability of Fees for Technical Services towards credit risk evaluation and software services paid/payable by Indian Branches to HO Ground No.5 Ground No.4 Taxability of interest paid by Indian Branch to HO/OB Ground No.4 Ground No.3 Taxability of interest on external commercial borrowing (ECB) extended by various branches outside India to Indian borrowers Ground No.11 & 12 Ground No.9 TP adjustment in the hands of Indian Branch towards commission on back to back Bank guarantee extended to AE Ground No.8 Ground No.7 TP adjustment in the hands of Indian Branch of Interest & commission arising to Overseas Branches in respect of ECB to Indian Borrowers Ground No.7 Ground No.6 TP Adjustment made in respect of commission earned by Indian Branch for marketing of derivative products (6....