CREDIT LYONNAIS ( THROUGH THEIR SUCCESSORS : CALYAN BANK), MUMBAI V. ITO (IT) RG 1(1), MUMBAI

ITA 4433/MUM/2009

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79174 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 10 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-06-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 04-06-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 23-07-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SU RENDRA KUMAR
• Assessee Lawyers: MADHUR AGARWAL
• Keywords: Business income; Depreciation; Transfer pricing; Double taxation relief; Earning of tax free income; Permanent establishment
• Section: 37; 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . . , , , BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEM BER . / ITA NO. 4433 / MUM./ 20 09 ) ( / ASSESSMENT YEAR : 2004 05 ) CREDIT LYONNAIS (THROUGH THEIR SUCCESSORS: CALYON BANK) HOECHST HOUSE, 11 TH 12 TH & 14 TH FLOOR NARIMAN POINT, MUMBAI 400 021 .. / A PPELLANT V/S INCOME TAX OFFICER (INTERNATIONAL TAXATION) RANGE 1(1), SCINDIA HOUSE BALLARD ESTATE, MUMBAI 400 038 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAA C C 1441J . / ITA NO. 4581 / MUM./ 2009 ) ( / ASSESSMENT YEAR : 2004 05 ) DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 1(2 ) SCINDIA HOUSE, BALLARD ESTATE N.M. MARG, MUMBAI 400 038 .. / APPELLANT V/S CREDIT LYONNAIS (THROUGH THEIR SU CCESSORS: CALYON BANK) 3 RD FLOOR, APPEJAY HOUSE DINSHAW VACHA ROAD, MUMBAI 400 020 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAACL0941J CREDIT LYONNAIS CREDIT LYONNAIS 2 . / C.O. NO. 145/MUM./2010 ( . 4581 /MUM./20 09 ) ( ARISING OUT OF ITA NO. 4581 /MUM./20 09 ( / ASSESSMENT YEAR : 2004 05 ) CREDIT LYONNAIS (THROUGH THEIR SUCCESSORS: CALYON BANK NOW KNOWN AS CREDIT AGRICOLE CORPORATE AND INVESTMENT BANK 14 TH FLOOR, HOECHST HOUSE NARIMAN POINT, MUMBAI 400 02 1 .. / CROSS OBJECTOR V/S DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 1( 2 ) SCINDIA HOUSE, BALLARD ESTATE N.M. MARG, MUMBAI 400 038 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAAC L 0941 J . / ITA NO. 2403 / MUM./ 2011 ( / ASSESSMENT YEAR : 2005 06 ) CREDIT LYONNAIS (THROUGH THEIR SUCCESSORS: CREDIT AGRICOLE CORPORATE AND INVESTMENT BANK (EARLIER KNOWN AS: CALYON BANK), HOECHST HOUSE 11 TH FLOOR, NARIMAN POINT MUMBAI 400 021 .. / APPELLANT V/S DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 1( 2 ) SCINDIA HOUSE, BALLARD ESTATE N.M. MARG, MUMBAI 400 038 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAAC C 1441J CREDIT LYONNAIS CREDIT LYONNAIS 3 . / ITA NO. 2578 / MUM./ 2011 ( / ASSESSMENT YEAR : 2005 06 ) ASSTT. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 1(2) 119, SCINDIA HOUSE, BALLARD ESTATE N.M. MARG, MUMBAI 400 038 .. / APPELL ANT V/S CREDIT LYONNAIS (THROUGH THEIR SUCCESSORS: CALYON BANK) 11 TH FLOOR, HOECHST HOUSE NARIMAN POINT, MUMBAI 400 021 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAAC C 1441J / ASSESSEE BY : MR. MADHUR AGARWAL / REVENUE BY : MR. SURENDRA KUMAR / DATE OF HEARING 04 .0 6 .2014 / DATE OF ORDER 18.06.2014 / ORDER / PER BENCH THE ABOVE C ROSS APPEALS FOR THE ASS ESSMENT YEAR 2004 05, ARE DIRECTED AGAINST THE IMPUGNED ORDER DATED 12 TH MAY 2009, PASSED BY THE LEARNED COMMISSIONER (APPEALS) XXXI, MUMBAI, WHEREAS, CROSS APPEALS FOR THE ASSESSMENT YEAR 2005 06, ARE DIRECTED AGAINST THE IMPUGNED ORDER DATED 3 RD JANUARY 2011, PASSED BY THE LEARNED COMMISSIONER (APPEALS) XV, MUMBAI. T HE CROSS OBJECTION PREFERRED BY THE ASSESSEE, IS ARISING OUT OF THE REVENUES APPEAL FOR THE ASSESSMENT YEAR 2004 05 . CREDIT LYONNAIS CREDIT LYONNAIS 4 2 . SINCE ALL THESE CROSS APPEALS ARE INTER CONNECTED, AND THE ISSUES INVOLVE D ARE COMMON IN ALL THE APPEALS, THEREFORE, THESE APPEALS HEARD TOGETHER AND, AS A MATTER OF CONVENIENCE, ARE BEING DISPOSED OFF BY WAY OF THIS CONSOLIDATED ORDER. WE FIRST PROCEED TO ADJUDICATE THE ASSESSEES APPEAL BEING ITA NO.4433/MUM./2009, FOR THE A SSESSMENT YEAR 2004 05. 3 . GROUND NO.1, RELATES TO DISALLOWANCE OF EXPENDITURE UNDER SECTION 14A FOR A SUM OF ` 3,62,76,585, IN RELATION TO THE EARNING OF EXEMPT INCOME, AFTER APPLYING PROVISIONS OF RULE 8D. 4 . THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS EARNED INTEREST OF ` 4,54,00,000, ON THE INVESTMENT MADE IN NABARD / REC BONDS, WHICH HAVE BEEN CLAIMED AS EXEMPT. THE ASSESSEE, IN RESPONSE TO THE SHOW CAUSE NOTICE, SUBMITTED THAT THESE INVESTMENTS ARE COMING FROM THE EARLIER YEARS AND NO FRESH INVESTME NTS HAVE BEEN MADE IN THIS YEAR FOR EARNING ANY TAX FREE INCOME. FURTHER, THE ASSESSEE IS IN POSSESSION OF OWN FUNDS WHICH ARE INTEREST FREE AND IN FAR EXCESS OF THE AMOUNT INVESTED IN THE INSTRUMENTS WHICH HAVE EARNED TAX FREE INCOME TO THE ASSESSEE. BESI DES THAT, THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE FOR EARNING OF EXEMPT INCOME BECAUSE, THE ASSESSEE IS ENGAGED IN BANKING BUSINESS WHICH IS COMPOSITE AND INDIVISIBLE INSOFAR AS THE INCOME IS CONCERN ED BECAUSE IT CREDIT LYONNAIS CREDIT LYONNAIS 5 RESULTS INTO BOTH TAXABLE AND TAX FRE E INCOME. THE ASSESSING OFFICER, AFTER DETAIL DISCUSSION, WORKED OUT THE DISALLOWANCE AT ` 3,57,96,178. THE LEARNED COMMISSIONER (APPEALS) HELD THAT THE DISALLOWANCE SHOULD BE MADE AFTER APPLYING THE PROVISIONS OF RULE 8D AND ON THE BASIS OF FORMULA GIVEN IN RULE 8D, HE WORKED OUT THE DISALLOWANCE AT ` 3,62,76,585, WHICH RESULTED INTO THE ENHANCEMENT OF DISALLOWANCE BY SUM OF ` 4,80,407. 5 . BEFORE US, THE LEARNED COUNSEL, MR. MADHUR AGARWAL, SUBMITTED THAT IN THE ASSESSMENT YEAR 2002 03 AND 2003 04, THIS ISSU E HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE, HOWEVER, THE TRIBUNAL, IN THE ASSESSMENT YEAR 1998 99 TO 2000 01, VIDE ORDER DATED 10 TH OCTOBER 2012, HAS DIRECTED THE ASSESSING OFFICER TO SUSTAIN 2% OF THE EXEMPT INCOME. THUS, FOLLOWING THE JUDICIAL PRECEDEN CE, IF ANY DISALLOWANCE IS CALLED FOR, THE SAME SHOULD BE RESTRICTED TO 2% OF THE TOTAL EXEMPT INCOME. 6 . THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, STRONGLY RELIED UPON THE ORDER OF THE LEARNED COMMISSIONER (APPEALS). 7 . AFTER CAREFULLY CONSI DERING THE SUBMISSIONS OF THE PARTIES AND THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1998 99, 1999 2000 AND 2000 01 AND ALSO IN 2001 02. IT IS NOW AN CREDIT LYONNAIS CREDIT LYONNAIS 6 ADMITTED LEG AL POSITIONS THAT RULE 8D IS NOT APPLICABLE FOR THE ASSESSMENT YEAR S PRIOR TO 2008 09 , IN VIEW OF THE DECISION OF THE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. V/S DCIT, (2010), 328 ITR 081 (BOM.) . THUS, SOME REASONABLE BASIS HAS TO BE ADOP TED , FOR THE PURPOSE OF DISALLOWANCE . SINCE THE TRIBUNAL HAS ALREADY HELD THAT 2% OF THE TOTAL EXEMPT INCOME SHOULD BE DISALLOWED FOR THE PURPOSE OF SECTION 14A, WHICH WILL TAKE CARE OF ADMINISTRATIVE EXPENSES, THEREFORE, CONSISTENT WITH THE SAME PRECEDENC E, WE ALSO HOLD THAT THE DISALLOWANCE UNDER SECTION 14A, SHOULD BE RESTRICTED TO 2% OF THE EXEMPT INCOME EARNED BY THE ASSESSEE IN THIS YEAR. ACCORDINGLY, GROUND NO.1, IS TREATED AS PARTLY ALLOWED. 8 . GROUND NO.2, RELATES TO THE TAXABILITY OF INTEREST RECEIV ED ON NOSTRO ACCOUNT AND OVERSEAS PLACEMENTS WITH BRANCHES OUTSIDE INDIA. 9 . THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT HE DID NOT WISH TO PRESS THIS GROUND. ACCORDINGLY, THIS GROUND IS DISMISSED AS NOT PRESSED . 10 . AS AN ALTERNATIVE TO GRO UND NO.2, THE ASSESSEE HAS RAISED ADDITIONAL GROUND WHEREIN THE ASSESSEE HAS CHALLENGED THAT THE DEDUCTION OF ` 37,039, BEING INTEREST PAID TO THE HEAD OFFICE / OVERSEAS BRANCH SHOULD BE ALLOWED , WHEN THE DEPARTMENT IS TAXING THE INTEREST RECEIVED ON NOSTR O ACCOUNT AND OVERSEAS PLACEMENT. CREDIT LYONNAIS CREDIT LYONNAIS 7 11 . BEFORE US, IT HAS BEEN ADMITTED BY THE EITHER PARTY THAT SIMILAR ADDITIONAL GROUND HAS BEEN ADMITTED AND ALLOWED BY THE TRIBUNAL IN THE ASSESSMENT YEAR 2002 03 AND 2003 04 IN ASSESSEES OWN CASE. MORE SPECIFICALLY , IN M.A. NO.02 AND 03/MUM./2014, VIDE ORDER DATED 28 TH MARCH 2014. CONSISTENT WITH THE VIEW TAKEN THEREIN, WE ALSO ADMIT THE ADDITIONAL GROUND AND DECIDE THE SAME IN FAVOUR OF THE ASSESSEE I.E., THE SAID CLAIM OF DEDUCTION IS ALLOWED . THUS, THE ADDITIONAL GROUND R AISED BY THE ASSESSEE IS TREATED AS ALLOWED. 12 . IN GROUND NO.3, THE ASSESSEE HAS CHALLENGED THE CLAIM FOR DEDUCTION OF ` 2,97,50,453, IN RESPECT OF DEFERRED EXPENDITURE ON MOBILISATION OF INDIAN MILLENNIUM DEPOSIT SCHEME. 13 . BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT HE IS NOT PRESSING THIS GROUND, AS THE ASSESSEE HAS GOT FULL DEDUCTION OF THE ENTIRE EXPENDITURE IN VIEW OF THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 2001 02. ACCORDINGLY, THIS GROUND IS DISMISSED AS NOT PRESSED . 14 . GROU ND NO.4, READS AS UNDER: 4. THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT IN THE EVENT THE HIGHER AUTHORITIES REVERSE THE DECISION OF THE LEARNED CIT(A) IN THE EARLIER YEARS OF ALLOWING LOSS ON VALUATION OF SECURITIES, THE A.O. BE DIRECTED TO RECOMPUTED TH E PROFIT OR LOSS ON SECURITIES SOLD DURING EH YEAR UNDER APPEAL BY CREDIT LYONNAIS CREDIT LYONNAIS 8 TAKING INTO ACCOUNT THE DEPRECIATION ON SECURITIES DISALLOWED IN THE EARLIER YEARS. 15 . BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE DOES NOT ARISE IN THIS YEAR S INCE THE RELIEF HAS ALREADY BEEN ALLOWED IN THE EARLIER YEAR. THEREFORE, THIS GROUND IS PURELY CONSEQUENTIAL. IN VIEW OF THESE FACTS, THIS GROUND IS REJECTED. 16 . GROUND NO.5, 6 AND 7, READ AS UNDER: 5. THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE A.O. IN INVOKING THE PROVISIONS OF SECTION 92CA WITHOUT APPRECIATING THAT THE TRANSFER PRICING PROVISIONS CANNOT BE APPLIED FOR TRANSACTIONS BETWEEN HEAD OFFICE AND PERMANENT ESTABLISHMENT AS THEY ARE ONE AND THE SAME PERSON AND NOT SEPARATE INDEPENDEN T ENTERPRISE. 6. THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE A.O. IN MAKING ADDITIONS MERELY ON THE BASIS OF TPOS REPORT. 7. THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT IN VIEW OF THE PROVISIONS OF ARTICLE 7(3) OF THE DTAA BETWEEN INDIA AND FRANCE, NO ACCOUNT IS TO BE TAKEN OF ANY FREE OR COMMISSION FOR SPECIFIC SERVICES PERFORMED IN DETERMINING THE PROFITS OF A PE AND HENCE THE ADJUSTMENT RECOMMENDED BY THE TPO COULD NOT BE MADE. 17 . BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT HE DID NOT WISH TO PRESS THESE GROUNDS. ACCORDINGLY, THESE GROUNDS ARE DISMISSED AS NOT PRESSED . 18 . GROUND NO.8, RELATES TO THE ADDITION OF ` 72,25,900, TOWARDS INTEREST FREE AND COMMISSION WITH REFERENCE TO THE EXTERNAL COMMERCIAL BORROWINGS GRANTED B Y THE OVERSEAS BRANCHES. CREDIT LYONNAIS CREDIT LYONNAIS 9 19 . BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE HAD COME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2002 03 IN ITA NO.1935/ MUM./2007, ORDER DATED 30 TH SEPTEMB ER 2013, WHEREIN THE TRIBUNAL HAS HELD THAT THE TRANSFER PRICING ADJUSTMENT SHOULD BE MADE BY TAKING INTO ACCOUNT ONLY THE FEE AND OTHER CHARGES RECEIVED BY FOREIGN BRANCHES FROM THE BORROWERS OF ECB A T THE ESTIMATED RATE OF 20%. 20 . LEARNED DEPARTMENTAL REPR ESENTATIVE, ON THE OTHER HAND, RELIED UPON THE ORDER OF THE LEARNED COMMISSIONER (APPEALS). 21 . AFTER CAREFULLY CONSIDERING THE RELEVANT FINDINGS OF THE LEARNED COMMISSIONER (APPEALS) AS WELL AS THE TRIBUNAL, WE FIND THAT THIS ISSUE HAS BEEN DECIDED BY THE TR IBUNAL IN ASSESSEES OWN CASE BEING ITA NO.1935/MUM./2007, ETC., FOR THE ASSESSMENT YEAR 2002 03 , ORDER DATED 30 TH SEPTEMBER 2013, WHICH HAS ALSO BEEN FOLLOWED IN THE ASSESSMENT YEAR 2003 04. THE RELEVANT OBSERVATIONS ON THIS ISSUE BY THE TRIBUNAL ARE AS U NDER: 8.8 HAVING HELD THAT PARA 4 OF THE PROTOCOL DOES NOT APPLY TO THE CASE OF THE ASSESSEE , NOW, THE QUESTION ARISES AS TO WHETHER THE ADJUSTMENT MADE BY THE AUTHORITIES BELOW IS JUSTIFIED. FOR MAKING THE ADJUSTMENT, THE AUTHORITIES BELOW HAVE TAKEN INTO CONSIDERATION, THE INCOME TOWARDS INTEREST AS WELL AS THE FEE CHARGED BY THE FOREIGN BRANCH FROM THE CLIENTS. IT IS PERTINENT TO NOTE THAT WHEN THE LOAN IS PROVIDED BY THE SYNDICATE AND THE ASSESSEE HAS NOT CONTRIBUTED TO THE LOAN AMOUNT THEN AS REGAR DS THE INCOME OF INTEREST, THE SAME CANNOT BE ATTRIBUTED TO THE CREDIT LYONNAIS CREDIT LYONNAIS 10 ASSESSEE FOR PROVIDING 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 OTH ER 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 UNCONTROLLED SIMILAR TRANSACTION . IN OUR VIEW, THE INTEREST CANNOT BE TAKEN INTO ACCOUNT FOR AT TRIBUTION OF INCOME TOWARDS SERVICE CHARGES/FEES AND, THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF THE CASE ONLY THE FEE CHARGED BY THE FOREIGN BRANCHES CAN BE TAKEN INTO CONSIDERATION FOR MAKING ADJUSTMENT UNDER TRANSFER PRICING PROVISIONS. ACCORDINGLY, W E DIRECT THE AO/TPO 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 BORROWER S 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 SAME WOULD BE ONLY IN RESPECT OF THE FEE AND CHARGES OTHER T HAN INTEREST RECEIVED BY THE FOREIGN BRANCHES. THUS, THESE GROUNDS OF THE ASSESSEE ARE PARTLY ALLOWED . THUS, CONSISTENT WITH THE VIEW TAKEN BY THE TRIBUNAL IN ASSESSEES OWN CASE IN EARLIER YEARS, WHICH ARE ALSO PERMEATING ON THE FACTS OF THIS YEAR, WE HOLD THAT THE ADJUSTMENT IN RESPECT OF FEE AND OTHER CHARGES RECEIVED BY THE FOREIGN BRANCHES ON THE BORROWERS OF ECG SHOULD BE ESTIMATED @ 20%. THUS, GROUND NO.8 IS PARTLY ALLOWED. 22 . IN GROUND NO.9, THE ASSESSEE HAS CHALLENGED THE ADDITION OF ` 3,958, ON ACCOUNT OF INTEREST RECEIVED ON ACCOUNT OF CALL PLACEMENT WITH ITS HEAD OFFICE. CREDIT LYONNAIS CREDIT LYONNAIS 11 23 . BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED TH AT HE DID NOT WISH TO PRESS THIS GROUND . ACCORDINGLY, THIS GROUND IS DISMISSED AS NOT PRESSED . 24 . GROUND NO.10, R ELATES TO C HARGING OF THE BUSINESS INCOME @ 41% BEING THE RATE APPLICABLE TO FOREIGN COMPANIES. 25 . THE LEARNED COUNSEL FOR THE ASSESSEE FAIRLY SUBMITTED THAT THIS ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL IN THE ASSESSMENT YEAR 1998 99 AND 2000 01. CONSEQUENTLY, RESPECTFULLY FOLLOWING THE PRECEDENCE, WE REJECT THE CONTENTION OF THE ASSESSEE AND HOLD THAT THE BUSINESS INCOME OF THE ASSESSEE SHOULD BE CHARGED @ 41%, WHICH WAS THE RATE APPLICABLE TO THE FOREIGN COMPANY IN THIS YEAR. THUS, THE G ROUND NO.10, RAISED BY THE ASSESSEE IS TREATED AS DISMISSED. 26 . 2004 05 26. IN THE RESULT, ASSESSEE S APPEAL FOR THE ASSESSMENT YEAR 2004 05 IS PARTLY ALLOWED. WE NOW TAKE UP REVENUES APPEAL BEING ITA NO . 4 581/MUM./ 2009 , FOR THE ASSESSMENT YEAR 2004 05 . 27 . THE ONLY GROUND RAISED BY THE REVENUE IS THAT THE LEARNED COMMISSIONER (APPEALS) HAS ERRED IN LAW AND ON FACTS IN HOLDING THAT CREDIT LYONNAIS CREDIT LYONNAIS 12 THE CLAIM OF LOSS IN VALUATION OF U NMATURED CONTRACTS IS AN ALLOWABLE DEDUCTION WITHOUT APPRECIATING THAT SUCH A LOSS I S NOTIONAL IN NATURE. 28 . THE ASSESSING OFFICER DISALLOWED THE CLAIM OF LOSS ON RE VALUATION OF OUTSTANDING FOREIGN EXCHANGE CONTRACTS OF ` 1,13,95,291. 29 . THE LEARNED COMMISSIONER (APPEALS), FOLLOWING THE DECISION OF THE TRIBUNAL IN DEUTSCHE BANK, ITA NO.5299/ MUM./2001 AND ALSO THE DECISION OF THE HON'BLE SUPREME COURT IN WOODWARD GOVERNOR INDIA PVT. LTD., ALLOWED THE ASSESSEES CLAIM. 30 . BEFORE US, BOTH THE PARTIES ADMITTED THAT THIS ISSUE HAD COME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2002 03 AND ALSO IN EARLIER YEARS, WHEREIN THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. CONSISTENT WITH THE VIEW TAKEN IN EARLIER YEARS IN ASSESSEES OWN CASE , WE FIND NO MERIT IN THE GROUND RAISED BY THE REVENUE. THUS, T HE GROUND RAISED BY THE REVENUE STANDS DISMISSED. 31 . 2004 05 32. IN THE RESULT, REVENUES APPEAL FOR THE ASSESSMENT YEAR 2004 05 IS DISMISSED. WE NOW TAKE UP ASSESSEES CROSS OBJECTION NO.145/M UM./2010, WHICH IS ARISING OUT OF REVENUES APPEAL BEING ITA NO.4581/MUM./ CREDIT LYONNAIS CREDIT LYONNAIS 13 2009, FOR THE ASSESSMENT YEAR 2004 05 . THE GROUND RAISED BY THE ASSESSEE , READS AS UNDER: IN THE EVENT THE HIGHER AUTHORITIES REVERSE THE DECISION OF THE CIT(A) OF EXCLUDING THE LOSS OF ` 11,395,291 ESTIMATED ON UNMATURED FORWARD EXCHANGE CONTRACTS AS ON 31 ST MARCH 2004, IN THE YEAR UNDER APPEAL, THE A.O. BE DIRECTED NOT TO BRING TO TAX PROFIT ON SIMILAR CONTRACTS ARISING IN ANY OF THE YEARS. 32 . THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT IF THE GROUND RAISED BY THE REVENUE FOR THE ASSESSMENT YEAR 2004 05 IS TREATED AS DISMISSED, IN THAT EVENT, THE GROUND RAISED IN THIS CROSS OBJECTION WILL NOT SURVIVE. 33 . SINCE THE GROUND RAISED BY THE REVENUE IN THE ASSESSMENT YEA R 2004 05 HAS BEEN DISMISSED, THEREFORE, THE GROUND RAISED BY THE ASSESSEE IN THIS CROSS OBJECTION DOES NOT SURVIVE. CONSEQUENTLY, THE GROUND RAISED BY THE ASSESSEE IS STANDS DISMISSED. 34 . 2004 05 35. IN THE RESULT, ASSESSEES CROSS OBJECTION IS DISMISSED. WE NOW TAKE UP ASSESSEES APPEAL BEING ITA NO. 2403/MUM./ 2011, FOR THE ASSESSMENT YEAR 2005 06. 35 . GROUND NO.1 (A) A ND (B) , READ AS UNDER: CREDIT LYONNAIS CREDIT LYONNAIS 14 1(A) THE LEARNED CIT(A) ERRED IN DISALLOWING AD HOC INDIRECT EXPENSES OF ` 1,00,000 INCURRED TO EARN TAX FREE INTEREST INCOME. (B) THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT NO INDIRECT EXPENDITURE WAS INCURRED IN RELATION TO EX EMPT INCOME AS INTEREST ON SECURITIES WAS DIRECTLY CREDITED BY THE PAYEE TO THE APPELLANTS BANK ACCOUNT. 36 . THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE AFORESAID G ROUND S IS SIMILAR TO THE GROUND NO.1, RAISED BY THE ASSESSEE IN ITS APPEA L BEING ITA NO.4433/MUM./2009, FOR THE ASSESSMENT YEAR 2004 05, WHEREIN THE ASSESSEE HAS CHALLENGED THE AD HOC DISALLOWANCE OF INDIRECT EXPENSES UNDER SECTION 14A. 37 . THIS ISSUE HAS BEEN DECIDED BY US IN ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2004 05, WH EREIN, WE HAVE CONFIRMED THE DISALLOWANCE O AT THE RATE OF 2% OF THE TOTAL EXEMPT INCOME IN RELATION TO THE ADMINISTRATIVE EXPENDITURE FOL LOWING THE EARLIER YEARS ORDER OF THE TRIBUNAL. THUS, GROUND NO.1 (A) AND (B) , ARE TREATED AS PARTLY ALLOWED. 38 . GROUND N O.2, READS AS UNDER: THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE DY. DDIT(E) IN BRINGING TO TAX THE INTEREST OF ` 4,98,528 RECEIVED ON NOSTRO ACCOUNT AND OVERSEAS PLACEMENTS WITH THE APPELLANTS BRANCHES OUTSIDE INDIA. CREDIT LYONNAIS CREDIT LYONNAIS 15 39 . THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT HE DID NOT WISH TO PRESS THIS GROUND. ACCORDINGLY, THIS GROUND IS DISMISSED AS NOT PRESSED . 40 . THE ADDITIONAL GROUND RAISED BY THE ASSESSEE, READS AS UNDER: THE ASSESSING OFFICER ERRED IN NOT ALLOWING DEDUCTION OF ` 2,49,329 BEING INTEREST PAID TO HEAD OFFICE / OVERSEAS BRANCHES CONSISTENT WITH THE DEPARTMENTS STAND OF TAXING THE INTEREST RECEIVED ON NOSTRO ACCOUNT AND OVERSEAS PLACEMENTS. 41 . THIS GROUND IS SIMILAR TO THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IN ITS APPEAL FOR THE ASSESSMENT YEAR 2004 05 WHICH IS ALLOWED IN FAVOUR OF THE ASSESSEE. THEREFORE, CONSISTENT WITH THE VIEW TAKEN THEREIN, THE SAID GROUND IS TREATED AS ALLOWED. 42 . GROUND NO.3, 4 AND 5 ARE AS UNDER: 3. THE LEARNED CIT(A) ERRED IN UPHOL DING THE ACTION OF THE A.O. IN INVOKING THE PROVISIONS OF SECTION 92CA WITHOUT APPRECIATING THAT THE TRANSFER PRICING PROVISIONS CANNOT BE APPLIED FOR TRANSACTIONS BETWEEN HEAD OFFICE AND PERMANENT ESTABLISHMENT AS THEY ARE ONE AND THE SAME PERSON AND NOT SEPARATE INDEPENDENT ENTERPRISE. 4. THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE A.O. IN MAKING ADDITIONS MERELY ON THE BASIS OF TPOS REPORT. 5. THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT IN VIEW OF THE PROVISIONS OF ARTICLE 7(3) OF THE DTAA BETWEEN INDIA AND FRANCE, NO ACCOUNT IS TO BE TAKEN OF ANY FEE OR COMMISSION FOR SPECIFIC SERVICES PERFORMED IN DETERMINING THE PROFIT OF A PE AND HENCE THE ADJUSTMENT RECOMMENDED BY THE TPO COULD NOT BE MADE. CREDIT LYONNAIS CREDIT LYONNAIS 16 43 . THE LEARNED COUNSEL FOR THE ASSESSEE SUBMIT TED BEFORE US THAT HE DID NOT WISH TO PRESS THESE GROUNDS. ACCORDINGLY, THESE GROUNDS ARE TREATED AS DISMISSED. 44 . GROUND NO.6 (A), (B), (C) AND (D) , READ AS UNDER: 6(A) THE LEARNED CIT(A) ERRED IN CONFIRMING AN ADDITION TO THE EXTENT OF ` 28,74,327 TOWAR DS INTEREST, FEE AND COMMISSION WITH REFERENCE TO EXTERNAL COMMERCIAL BORROWINGS (ECB) GRANTED BY THE OVERSEAS BRANCHES. (B) THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT SUCH INTEREST, FEE AND COMMISSION WAS RELATABLE TO LOANS GRANTED BY OVERSEAS BRA NCHES AND HAD NO CONNECTION WITH SERVICES RENDERED BY INDIAN BRANCHES AND HENCE NO SUCH ADDITION WAS CALLED FOR. (C) THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT IN RESPECT OF THE OLD LOANS, INDIAN BRANCH HAD NO ROLE TO PLAY AND HENCE ATTRIBUTING INT EREST, FEES AND COMMISSION AS A SHARE OF INDIAN BRANCHES FOR THEIR EFFORTS WAS NOT JUSTIFIED AND NO TP ADJUSTMENT COULD BE MADE. (D) THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT THE BORROWERS WERE EXISTING CUSTOMERS OF INDIAN BRANCHES AND ACTIVITY, IF ANY, IN CONNECTION WITH THE DISBURSAL OF THESE LOANS WAS ONLY OF PROVIDING CREDIT INFORMATION ALREADY AVAILABLE ON THE RECORDS OF INDIAN BRANCHES . 45 . AFTER HEARING BO TH THE PARTIES, WE FIND THAT THE S E GROUND S ARE SIMILAR TO THE GROUND NO. 8, IN ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2004 05, AND IN VIEW OF THE FINDINGS GIVEN THEREIN, WE UPHOLD THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF FEE AND OTHER CHARGES RECEIVED BY THE FOREIGN BRANCHES FROM THE BORROWERS OF ECB @ 20%. CONSEQUENTLY, GROUND NO.6 (A) TO 6(D) , ARE TREATED AS PARTLY ALLOWED. CREDIT LYONNAIS CREDIT LYONNAIS 17 46 . GROUND NO.7 AND 8, READ AS UNDER: 7. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADDITION OF ` 493 ON ACCOUNT OF INTEREST RECEIVED ON CALL PLACEMENT WITH ITS HEAD OFFICE / OVERSEAS BRANCHES. 8. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADDITION OF ` 3,579 ON ACCOUNT OF INTEREST PAID BY THE APPELLANTS ON CALL BORROWINGS FROM ITS HEAD OFFICE / OVERSEAS BRANCHES. 47 . THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT HE DID NOT WISH TO PRESS THESE GROUNDS. ACCORDI NGLY, THESE GROUNDS ARE TREATED AS DISMISSED. 48 . GROUND NO.9, READS AS UNDER: 9. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE A.O. IN CHARGING THE BUSINESS INCOME @ 41.82% BEING THE RATE APPLICABLE TO FOREIGN COMPANIES FOR THE YEAR UNDER APPE AL. 49 . AFTER HEARING BOTH THE PARTIES, WE FIND THAT THIS GROUND IS SIMILAR TO GROUND NO.1 0 , RAISED IN ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2004 05 AND IN VIEW OF THE DIRECTIONS GIVEN THEREIN, THIS GROUND IS TREATED AS DISMISSED. 50 . 2004 05 51. IN THE RESULT, ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2005 06 IS PARTLY ALLOWED. CREDIT LYONNAIS CREDIT LYONNAIS 18 WE NOW TAKE UP REVENUE S APPEAL BEING ITA NO.2578/MUM./ 2011, FOR THE ASSESSMENT YEAR 2005 06. 51 . GROUND NO.1, READS AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) WAS JUSTIFIED IN RESTRICTING THE ADDITIONAL DISALLOWANCE MADE U/S 14A TO ` 1,00,000 INSTEAD OF ` 32,63,725 DETERMINED BY THE A.O. 52 . AFTER HEARING BOTH THE PARTIES, WE FIND THAT THIS GROUND IS SIMILAR TO GROUND NO.1 RAISED BY THE ASSESSEE IN ITS APPEAL, FOR THE SAME ASSESSMENT YEAR , WHEREIN WE HAVE HELD THAT THE DISALLOWANCE UNDER SECTION 14A, SHOULD BE RESTRICTED TO 2% OF THE EXEMPT INCOME EARNED BY THE ASS ESSEE IN THIS YEAR FOLLOWING THE EARLIER YEARS TRIBUNAL ORDER. ACCORDINGLY, GROUND NO.1, IS TREATED AS DISMISSED. 53 . GROUND NO.2, READS AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) WAS JUSTIFIED IN RESTRICTING THE ESTIMATION TO 20% AS AGAINST 25% DETERMINED BY THE TPO IN RESPECT OF ROLE PLAYED IN THE MARKETING ECB LOANS DISBURSED TO INDIAN CUSTOMERS. 54 . AFTER HEARING BOTH THE PARTIES, WE FIND THAT THIS GROUND IS SIMILAR TO THE GROUND NO.8, RAISED BY THE ASSESSEE IN ITS APPEAL FOR THE SAME ASSESSMENT YEAR 2004 05, WHEREIN WE HAVE FOLLOWING THE EARIER YEAR ORDER OF THE TRIBUNAL, HELD THAT ESTIMATION @ 20% ON THIS SCORE IS REASONABLE. THUS, THIS GROUND IS TREATED AS DISMISSED. CREDIT LYONNAIS CREDIT LYONNAIS 19 55 . GROUND NO.3 AND 4, BEING GENERAL IN NA TURE, HENCE, NO SEPARATE ADJUDICATION IS REQUIRED. 56 . 2005 06 57. IN THE RESULT, REVENUE S APPEAL FOR THE ASSESSMENT YEAR 2005 06 IS DISMISSED . 57 . , 2004 05 2005 06 , 2004 05 2005 06 2004 05 58. TO SUM UP, ASSESSEES APPEAL S FOR THE ASSESSMENT YEAR 2004 05 AND 2005 06 ARE PARTLY ALLOWED, R EVENUES APPEAL FOR THE ASSESSMENT YEAR 2004 05 AND 2005 06 ARE DISMISSED AND ASSESSEES CROSS OBJECTION FOR THE ASSESSMENT YEAR 2004 05 IS DISMISSED. 18 TH JUNE 2014 ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH JUNE 2014 SD/ - . . P.M. JAGTAP ACCOUNTANT MEMBER SD/ - AMIT SHUKLA JUDICIAL MEMBER MUMBAI, DATED : 18 TH JUNE 2014 CREDIT LYONNAIS CREDIT LYONNAIS 20 / COPY OF THE ORDER FORWARDED TO : ( 1 ) \ / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / B Y ORDER . / PRADEEP J. CHOWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI