TaxTMI 
TaxTMI 
2026 (8) TMI 191
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....t the grounds raised by assessee for all the years under consideration are identical and similar and, therefore, for the sake of convenience grounds for AY 2010-11 in appeals filed by assessee as well as revenue are reproduced as under:- Assessee's appeal "1) The Commissioner of Income-tax (Appeals)-55, Mumbai [hereinafter referred to as the CIT(A)] ought to have directed the Addl. Director of Income-tax (International Taxation) - Range 1, Mumbai (hereinafter referred to as the AO) to exclude the interest of Rs. 228,759 received from Head Office, while computing the taxable income for the year under appeal, since this represents payment from self and therefore not taxable. 2) The CIT(A) erred in not appreciating that Transfer pricing provisions cannot be applied for transactions between Head office/overseas branches (General Enterprise (GE)) and Permanent Establishment (PE) as it is one and the same person and not separate legal independent enterprises. 3) The CIT(A) erred in upholding the action of the AO / Transfer Pricing Officer ('TPO') in making addition of Rs. 72,84,851 for alleged short commission received from Head office / overseas branch GE f....
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....s 17,55,90,087/- without appreciating the fact that interest payable by the Indian Permanent Establishment of the Foreign Bank to its HO and other overseas Branches is not deductible expenses in computing total income?" 2. The Appellant prays that the order of the Ld. CIT (A) on the above grounds be set aside and that of the Assessing Officer restored. 3. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 2. Brief facts for AY 2010-11 are as under:- The assessee filed its return of income declaring total income of Rs. 466,34,70,887/- on 29/09/2010. The case was selected for scrutiny by issuing notice u/s 143(2) along with notice u/s 142(1), in response to which representatives of the assessee appeared before Ld.AO and filed requisite details as called for. 2.1. On examination of the details, Ld.AO noted that, assessee is a branch of Non-resident Banking Company situated in Singapore. It was submitted that the Bank is engaged in activities permitted by the RBI which includes corporate and institutional banking, trade finance, transactional and treasury solutions. The Ld.AO noted that during the year under c....
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....m the H.O., and characterization of the gains earned from cancellation of foreign exchange forward contracts under the head income from other sources as capital gains was upheld. Aggrieved by the order of the Ld.CIT(A) assessee as well as revenue are in appeal before this Tribunal. 2.6. At the outset, both sides submitted that Ground No.1 raised by assessee in its appeal is directly linked with the single issue raised by the revenue in its appeal. Accordingly, the revenue appeal is also considered along with Ground No.1 of the assessee. 2.6.1. It is submitted that, the Ld.AO made addition of Rs. 17,55,90,087/- being interest paid to H.O./overseas branches, which was deleted by the Ld.CIT(A). The Ld.AR submitted that, the Ld.CIT(A) relied on the orders passed by this Tribunal in assessee's own case as well as the order passed by his predecessor for AY 2009-10 vide order dated 26/03/2014. He submitted that, the payment of interest constitute income to the self and is, therefore, not chargeable to tax in the hands of the H.O. 2.7. The Ld.Sr.Counsel submitted that, during the assessment proceedings, the assessee had submitted that the interest payment is an allowable expend....
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....ing as under:- "2.3 We have perused the records and considered the matter carefully. The dispute is regarding deduction on account of interest paid by the assessee, being an Indian branch to the head office of the bank. We find that the same issue had been considered by the larger special bench of Tribunal in case of Sumitomo Mitsui Banking Corpn. Vs. DCIT (Supra) and special bench in that case held that under the domestic law the interest paid by the Indian branch to the head office was not allowable as deduction as this was payment to self. Further it was also held that the interest payment was allowable as deduction while determining the profit attributable to the PE being the Indian branch under the provisions of Article 7(2) and 7(3) of Indo Japanese treaty read with paragraph 8 of the protocol. The special bench also held that the said interest cannot be taxed in the hands of the assessee bank in India under the domestic law as it was payment to self. There was no express provisions in the relevant tax treaty which was contrary to the domestic law. Therefore, interest payment was not taxable in the hands of the bank and thus there was no question of any tax deducted ....
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.... Brief facts leading to this issue are that, during the year under consideration the AE issued bank guarantees on behalf of its group entities to parties in India through the assessee, on which it received guarantee commission as per group pricing policy. The Ld.Sr.Counsel submitted that the role performed by the assessee includes functions like liaisoning between the beneficiary in India and group entity, discharge or payments to the beneficiary in case the claim is invoked and recovery of the same from the group entity. He submitted that during the year under consideration assessee received a guarantee commission of Rs. 12,09,324/- which was charged at 0.1% or USD 75 min/USD 150 Max, depending upon the amount of loan. The Ld.Sr.Counsel submitted that assessee acts as a guarantor for a third party transaction which is backed by a counter guarantee given by tis group entity. 6.2. He submitted that the Ld.TPO rejected assessee's benchmarking and called upon assessee to explain as to why the rate charged to unrelated parties on the guarantees issued by the assessee should not be treated as internal CUP. The Ld.Sr.Counsel submitted that the assessee vide letter dated 24/01/2014, su....
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...., once the guarantees issued on behalf of the GE were backed by counter guarantees of the overseas branches/Head Office, the risk profile of the PE stood materially altered and the PE could not be regarded as functionally comparable to a case where it independently issued guarantees to third parties in India on its own account. 6.6. According to the Ld.Sr,Counsel, the conditions prescribed under Rule 10B for application of the Comparable Uncontrolled Price method were not satisfied, as strict comparability between the controlled and uncontrolled transactions was absent. It was also contended that even assuming some degree of comparability, reasonably accurate adjustments ought to have been carried out to neutralise the material differences in functions performed and risks assumed, which had not been done by the Ld.TPO. 6.7. The Ld.Sr.Counsel also submitted that sample copies of guarantees issued to unrelated domestic parties and guarantees issued on behalf of the GE were furnished during the transfer pricing proceedings, but the Ld.TPO failed to appreciate the actual terms governing the two categories of transactions. It was argued that the rate of guarantee commission charge....
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.... the client and the corresponding capital allocation was also made in the country of the instructing branch, whereas the PE, being the issuing branch, merely acted as a processing arm lending its name for issuance of local guarantees backed by a counter-guarantee from the instructing branch. It was further submitted that the text of the counter-guarantee had been standardized to clearly define the role and liabilities of the instructing branch and that, from the group's perspective, the capital for guarantee issuance was assumed only by the instructing branch since it bore the credit risk of the client. The issuing branch's processing fee was stated to be in addition to the risk fee / issuance fee charged by the instructing branch, and a combined price comprising the risk fee and processing fee was quoted to the customer. 6.11. The Ld.Sr.Counsel contended that the Ld.TPO wrongly compared the processing fee received by the PE for issuing guarantees on behalf of the GE with the guarantee commission charged by the PE to independent third parties in India in respect of guarantees issued on its own account. According to the Ld.Sr.Counsel, the two were not comparable since, in the for....
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....R relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of the records placed before us. 7. The Ld.Sr.Counsel primarily contended that, the guarantee commission charged to unrelated third parties in the domestic market cannot be adopted as an internal CUP for benchmarking the corporate guarantee extended to its AE, since the guarantees issued to third parties are backed by adequate collateral security, thereby materially reducing the risk assumed by the assessee. It is, therefore, contended that the transactions are not strictly comparable. 7.1. Though the aforesaid contention merits consideration, we do not consider it necessary to adjudicate the same in the present case in view of the alternate plea raised by the assessee. We find from the material placed on record that the average guarantee commission earned by the assessee from unrelated third parties works out to 0.56% of the guarantee amount. It is also an admitted position that the assessee has already recovered guarantee commission at the rate of 0.10% from its AE. The Revenue has not disputed either the working of the average commission rate or the fa....
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....e DTAA. It was submitted that the forward contracts had been entered into in accordance with RBI Master Circular No. 06/2009-10, whereby Foreign Institutional Investors (FIIs), such as the assessee, were permitted to hedge the market value of their entire investment in equity shares and/or debt securities held as on a particular date. It was contended that since the investments in Indian securities constituted capital assets in the hands of the assessee, any gain arising in relation thereto, including gains on cancellation of the hedging contracts, partook the character of capital gains. 8.3. In support of the above contention, the assessee placed reliance on the decision of the Coordinate Bench of the Tribunal in Citicorp Banking Corporation Bahrain v. ADIT reported in 2011-TII-40-ITAT-MUM- INTL) and also on the decision of the Coordinate Bench in Credit Suisse Singapore vs. ACIT (Intl.Tax) reported in (2012) 24 taxmann.com 66, wherein it was held that income/loss arising on cancellation of foreign exchange forward contracts entered into for hedging investments is assessable under the head "Capital Gains" and not under the head "Income from Other Sources." Accordingly, the asse....
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....le to be assessed under the head "Capital Gains." The Ld.AR submitted that the forward contracts, being integrally connected with and entered into for hedging the capital investments, partook the same character as the underlying capital assets. Accordingly, any gain or loss arising on account of appreciation or depreciation in foreign currency pursuant to cancellation of such forward contracts was also required to be treated as capital in nature. 10.1. In support of the above submissions, the Ld. AR placed reliance on the decisions of the Coordinate Benches of the Tribunal in Citicorp Banking Corporation, Bahrain (supra) and Credit Suisse AG/Singapore (supra), wherein it was held that gains or losses arising on cancellation of foreign exchange forward contracts entered into for hedging capital investments are assessable under the head "Capital Gains." 10.2. Per contra, the Ld.DR relied upon the orders of the authorities below and supported the findings recorded therein. We have considered the submissions advanced by both sides in the light of the material available on record. 11. It is observed that the issue under consideration is no longer res integra. The Coordinate ....
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....ee was for clearly to hedge against the depreciation of the foreign currency and it has direct nexus with the investments made by the assessee. It is also admitted fact that the assessee is not doing any business here and the assessee is FIl and only engaged in the investment and this fact is nowhere denied by both the authorities below. In our opinion, the loss accrued/arose on account of cancellation of foreign exchange forward contract is capital loss having direct nexus with the investment of the assessee and hence the assessee is entitled to set off the same. So far as the reference u/s. 115AD is concerned, in our opinion, the said section decide the quantum of the tax payable by the FIlS on the income from securities or capital gains and it has nothing to do with the determination of the nature of gain or loss, whether same is on account of capital or revenue account. Accordingly, grounds taken by the assessee are allowed." 10. In All India Tea & Trading Co. Ltd. (supra) relied on by the Id. D.R., it has been held (Headnote): "Held, that the assessee used the lands for agricultural purposes and derived agricultural income from the lands at the time of their ....
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....mently argued that the assessee is Foreign Institutional Investor and has no other activity in India. It is argued that forward contracts are entered into by the assessee solely for protecting its investment and it has a direct nexus with the investment made by the assessee. He further argues that the purpose for which the contract was entered into is the determinative whether the forward contract was on account of the capital asset or not account of any trading asset but as the assessee has entered into the forward contract for getting the cover of the risk for depreciation in the value of the foreign currency. Hence, if there is gain or loss the same is to be treated on capital account only. He also argued that the forward contracts are entered into to the extent of the investment made by the assessee, in other word, restricted to the investment cost and not beyond that and any loss in case on cancellation of foreign exchange forward contract; as in the case of the assessee; is to be allowed to be set off u/s. 71 of the Act. Per contra, the Ld. D.R. supported the order of the A.O. So far as the facts are concerned, the same are not in dispute. The Ld. Counsel relied on the decisi....
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....acts since Liberalized Exchange Rate Management System had been introduced by the Government. In the instant case before us, contracts have substantially beer. booked prior to 27-3-1992 and with regard to these contracts profit motive possibly cannot be attributed to the assessee. Even with regard to contracts entered into and cancelled after 27-3-1992, we noticed that the transactions are a few in number and looking to the magnitude of the outstanding Dollar loan, the contracts entered into are only 6 in number out of which 2 have been cancelled during the year. Gains arising from these 2 contracts have been shown by the assessee as revenue receipt since these contracts relate to payment of interest liabilities on Dollar loans. The entire factual matrix of the case concerning the execution and cancellation of forward contracts does not in our opinion stamp the transaction with a business character. Merely because the assessee-company did not choose to roll over the contracts beyond 30-4-1992 would not alter the intrinsic nature of the contracts being in the capital field. If the contracts brought forward from the preceding year are accepted and acknowledged by the revenue authorit....
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.... 2012-13 (Ground Nos) Interest received from H.O. 1 1 1 Applicability of TP provisions for transactions between HO/Overseas branches (General Enterprise) and Permanent Establishment 2 2 3 Global Pricing Policy for issuance of guarantee under the Counter Guarantee by GE 3-5 3-5 4 2 Department's appeal Issue AY 2010-11 (Ground Nos) AY 2011-12 (Ground Nos) AY 2012-13 (Ground Nos) Interest received from H.O. 1 1 1 Guarantee Commission received from third party for extending guarantee. 2-5 3 Levy of surcharge and education cess. 2 12.1. Accordingly, respectfully following the view taken on the issues that are common with Assessment Year 2010-11, as discussed and tabulated hereinabove, the corresponding grounds raised by the assessee for Assessment Years 2011-12 and 2012-13 are decided mutatis mutandis in the same terms. There are some grounds for assessment years 2011-12 & 2012-13 that needs to be considered independently as under Revenue Appeal for Assessment year 2011-12: 13. Ground No.2-5 raised by the revenue is against the view of ....
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....an only be restricted to the differential rate of 0.46%. Consequently, the direction of the Ld.CIT(A) restricting the adjustment by adopting 0.50% as the guarantee commission cannot be sustained to that extent. We accordingly direct the Ld.AO/TPO to recompute the adjustment by applying the differential rate of 0.46% after due verification of the computation. Accordingly, these grounds raised by the Revenue stands partly allowed. Assessee's appeal for AY 2012-13 14. Ground No. 2 raised by the assessee for A.Y. 2012-13 pertains to the dispute of tax rate on interest received from the Department. The grievance of the assessee is against the action of the Ld. AO in taxing such interest at the rate of 42.024%, instead as against 15% in terms of Article 11 of the India-Singapore DTAA. 14.1. The brief facts are that the assessee, a tax resident of Singapore, during the year under consideration received interest of Rs.1,50,75,489 under section 244A of the Act from the Department on refund of income-tax. In the return of income, the assessee offered the said interest to tax at the rate of 15% by invoking Article 11(2)(b) of the India-Singapore DTAA, contending that the receipt c....
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....rofits; therefore, the subsequent refund together with interest cannot be regarded as being effectively connected with the PE either under the asset test or the activity test. 16.2. In support of the above proposition, the Ld.Sr.Counsel placed reliance on the decision of the Hon'ble Special Bench of Delhi Tribunal in Clough Engineering Ltd. v. ACIT reported in 130 ITD 137, which was subsequently approved by the Hon'ble Bombay High Court in DIT (International Taxation)-1 v. Credit Agricole Indosuez reported in (2016) 69 taxmann.com 285. Reliance was also placed on the decision of the Hon'ble Bombay High Court in DHL Operations B.V. v. DDIT and the decisions of the co-ordinate Benches in Bechtel International Inc. v. ADIT, Hapag Lloyd Container Linie GmbH v. ADIT, International Global Networks BV v. DDIT and MSC Mediterranean Shipping Company S.A. v. DDIT, wherein it has been consistently held that interest on income-tax refund is taxable under Article 11 of the applicable DTAA and not as business profits attributable to a PE. It was thus prayed that the interest be directed to be taxed at the treaty rate of 15% under Article 11 of the India-Singapore DTAA. 16.3. On the....
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....at interest on income-tax refund is taxable under Article 11 of the applicable DTAA and not as business profits attributable to the Permanent Establishment. 17.4. In the present case, the Revenue has not brought on record any distinguishing feature so as to warrant a departure from the aforesaid binding precedents. Once it is held that the debt-claim giving rise to the interest on income-tax refund is not effectively connected with the assessee's Permanent Establishment in India, the exclusion contained in Article 11(4) has no application. Consequently, the interest received under section 244A of the Act falls to be taxed under Article 11 of the India-Singapore DTAA. 17.5. Respectfully following the ratio laid down by Hon'ble Special Bench in Clough Engineering Ltd. (supra), as affirmed by Hon'ble Bombay High Court in Credit Agricole Indosuez (supra) and reiterated in DHL Operations B.V. (supra), we hold that the interest received by the assessee under section 244A of the Act is taxable under Article 11 of the India-Singapore DTAA. Accordingly, the assessee is entitled to the treaty rate of tax prescribed under Article 11(2)(b), and the Ld.AO is directed to recompute ....