Tax Appeal Dismissed: Court Upholds Tribunal's Decision on Transfer Pricing Issue

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Case Name:

Principal Commissioner of Income-Tax vs RBS Financial Services (India) Pvt. Ltd. (High Court of Bombay)

Income Tax Appeal (IT) No. 1417 of 2017

Date: 20th January 2020

Key Takeaways:

1. The court upheld the ITAT's decision to remand the case for fresh consideration.

2. The case highlights the importance of proper determination of Arm's Length Price in transfer pricing cases.

3. Previous decisions in similar cases (Credit Lyonnais and Calyon Bank) were considered relevant for comparison.

4. The court emphasized the need for a fresh assessment based on comparable transactions and specific fees, excluding interest.

Issue:

Was the Income Tax Appellate Tribunal (ITAT) correct in remanding the case back to the Assessing Officer for fresh consideration of the transfer pricing issue, particularly regarding the determination of the Arm's Length Price for syndication fees?

Facts:

1. The case pertains to the assessment year 2008-09.

2. The Transfer Pricing Officer initially determined the Arm's Length Price of syndication fees at 100%, adding Rs.22,63,47,950/- to the assessee's income.

3. The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's findings.

4. The assessee appealed to the ITAT, which remanded the case back to the Assessing Officer for fresh consideration.

5. The Revenue department appealed this decision to the High Court under Section 260A (of Income Tax Act, 1961).

Arguments:

Revenue's Arguments:

1. The ITAT incorrectly directed the Assessing Officer to follow the ratio of decisions in Credit Lyonnais and Calyon Bank cases, which had different facts.

2. The ITAT erred in directing the application of a 20% rate, violating Section 92(3) (of Income Tax Act, 1961), when the assessee had considered a 50% rate.

Assessee's Arguments:

While not explicitly stated, it can be inferred that the assessee argued for a lower rate of attribution for the syndication fees and for the consideration of comparable cases.

Key Legal Precedents:

1. M/s Credit Lyonnais Vs. ADIT (ITA No.1935/Mum/2007 dated 30.09.2013): This case held that only fees and charges (excluding interest) should be considered for transfer pricing adjustments in similar situations.

2. Calyon Bank Vs. DDIT (ITA No.4474/M/2009 dated 21.03.2014): This case relied on the Credit Lyonnais decision.

Judgement:

1. The High Court dismissed the Revenue's appeal.

2. The court found no error in the ITAT's decision to remand the case to the Assessing Officer for fresh consideration.

3. The court agreed that the proposed questions of law did not arise from the ITAT's order.

FAQs:

1. Q: What was the main issue in this case?

  A: The main issue was whether the ITAT was correct in remanding the case for fresh consideration of the transfer pricing issue, particularly the determination of Arm's Length Price for syndication fees.

2. Q: Why did the court dismiss the Revenue's appeal?

  A: The court found no error in the ITAT's decision to remand the case and believed that the questions of law proposed by the Revenue did not arise from the ITAT's order.

3. Q: What is the significance of the Credit Lyonnais and Calyon Bank cases?

  A: These cases established that only fees and charges (excluding interest) should be considered for transfer pricing adjustments in similar situations, which the ITAT found relevant to this case.

4. Q: What does this judgment mean for the assessee?

  A: The Assessing Officer will need to reconsider the case, taking into account the principles established in the Credit Lyonnais and Calyon Bank cases, which could potentially result in a more favorable outcome for the assessee.

5. Q: What is the importance of Arm's Length Price in this context?

  A: Arm's Length Price is crucial in transfer pricing cases to ensure that transactions between related entities are priced as if they were between unrelated parties, preventing tax avoidance through manipulated pricing.

1. Heard Mr.Suresh Kumar, learned standing counsel, Revenue for the appellant and Mr.P.J.Pardiwalla, learned senior counsel for the respondent/assessee.

2. This appeal has been preferred by the Revenue under Section 260A (of Income Tax Act, 1961) (briefly “the Act” hereinafter) assailing the legality and correctness of order dated 2nd January, 2017 passed by the Income Tax Appellate Tribunal (ITAT), Mumbai in ITA No.5997/Mum/2013 for the assessment year 2008-09.

3. The appeal has been preferred on the following questions, projected as substantial questions of law:-

“(i) Whether on facts and circumstances of the case and in law, the ITAT was correct in directing the Assessing Officer to follow the ratio of decision in case of M/s Credit Lyonnais (ITA No.1935/Mum/2007 dated 30.09.2013) and M/s Calyon Bank (ITA No.4474/M/2009 dated 21.03.2014) when the facts of those cases are not similar to facts of the assessee and hence cannot be considered as a valid comparable under Rule 10B (of Income Tax Rules, 1962) so as to adopt the rates as adopted in those cases?

(ii) Whether on the facts and circumstances of the case and in law, the ITAT was correct in directing the Assessing Officer to decide the issue by applying rate of 20% in violation of provision of section 92(3) (of Income Tax Act, 1961) when the assessee itself had considered the rate of 50%?”

4. In the course of the assessment proceeding the Transfer Pricing Officer passed an order dated 30th September, 2011 under Section 92CA(3) (of Income Tax Act, 1961) determining the arms length price of the syndication fee at 100%. He held that the entire amount of Rs.22,63,47,950/- was received by the assessee.

5. In the assessment order dated 25th January, 2012 which followed, the same was incorporated whereafter an addition of Rs.22,63,47,950/- was made to the income of the assessee.

6. On appeal before the first appellate authority, Commissioner of Income Tax (Appeals) by his order dated 25th July, 2013 upheld the findings of the Assessing Officer and dismissed the appeal.

7. Assessee thereafter preferred further appeal before the Tribunal. Tribunal by the impugned order dated 2nd January, 2017 remanded the matter back to the file of the Assessing Officer to decide the issue afresh by considering the decisions relied upon by the Tribunal for allocation of non-syndication fee between the assessee and associated enterprise after giving opportunity of being heard to the assessee.

8. While passing the said order, Tribunal relied upon a decision of the Coordinated Bench of the Tribunal in the case of M/s Credit Lyonnais Vs. ADIT decided on 30th September, 2012 where it was held as under:-

‘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 regards the income of interest, the same cannot be attributed to the 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 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 uncontrolled similar transaction. In our view, the interest cannot be taken into account for attribution 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, we 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 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 same would be only in respect of the fee and charges other than interest received by the foreign branches. Thus, these grounds of the assessee are partly allowed.”

9. Further reference was made to another decision of a Coordinated Bench of the Tribunal in the case of Calyon Bank Vs. DDIT decided on 21st March, 2014 wherein the decision in M/s Credit Lyonnais was relied upon.

10. Following the above decisions, Tribunal restored the issue to the file of the Assessing Officer for a fresh decision in accordance with law.

11. In the facts and circumstances of the case, we do not find any error or infirmity in the view taken by the Tribunal in remanding the matter back to the file of the Assessing Officer for a fresh decision in accordance with law.

12. On thorough consideration, we are of the opinion that the proposed questions of law does not arise out of the impugned order of the Tribunal.

13. In above view, Appeal is dismissed, but without any order as to costs.

(MILIND N. JADHAV, J.) (UJJAL BHUYAN, J.)