Citi Bank N.A. Vs Addl. DIT (International Taxation) (ITAT Mumbai): Transfer Pricing Adjustments Deleted

The present cross appeals are filed by the assessee and the Revenue against the order passed by the Ld.CIT(A)-XXXI, Mumbai for Assessment Year 2002-03. The assessee has also filed Cross Objection No. 284/Mum/2007 in the Revenue’s appeal. Since the appeals and the cross objection arise out of the same assessment year and several issues overlap with each other, they were heard together and are being disposed of by this common order.

Brief facts of the case are as under:-

2. The assessee is a non-resident banking company carrying on banking business in India through its branches. For the year under consideration, the assessee filed its return of income declaring income from its banking operations carried on in India. During the course of assessment proceedings, the Ld.AO examined various claims made by the assessee in relation to its banking business as well as certain international transactions entered into with its overseas branches/Head office. Various additions and disallowances were made while completing the assessment, which subsequently formed the subject matter of challenge before the Ld.CIT(A). 2.1. Various notices were issued to the assessee, in response to which the assessee furnished requisite replies and submissions during the assessment proceedings. Insofar as the issues arising from the regular assessment are concerned, the Ld.AO after considering the submissions of the assessee:

• disallowed the assessee’s claim towards broken period interest in respect of securities purchased during the year but remained unsold as at the year end;
• made disallowance u/s.14A of the Act in relation to dividend income earned from the investment made by the assessee in National Securities Depository Ltd.
• treated expenditure incurred on overseas training of officers employed in India as being covered by the restriction contained in section 44C of the Act.
• made an adjustment while computing deduction in respect of bad debts written off by taking into consideration the provision for bad and doubtful debts.
• computed notional profit arising on valuation of unmatured forward exchange contracts, disallowance of interest paid by the Indian branch to the overseas branches, and deduction claimed in respect of payments made pursuant to the Voluntary Retirement Scheme.

2.2. Apart from the aforesaid issues, the assessment also involved determination of arm’s length price in respect of various international transactions. A reference was made for determination of the arm’s length price and transfer-pricing adjustments were proposed in relation to, transactions concerning money market loans/deposits, marketing and facilitation of ECB/Trade Loans, correspondent banking activities undertaken between the Indian branch and overseas branches, derivative transactions entered into by overseas branches with Indian customers referred by the Indian branch, and supervisory/oversight functions performed by certain employees of the Indian branch in relation to overseas branches. The Ld.TPO called for various details in respect of the international transactions. After considering the submissions of the assessee the Ld.TPO adopted different methodologies for benchmarking these transactions and proposed adjustments of Rs.16,23,37,928/- vide order dated 28/03/2005, which were incorporated in the assessment order passed on 30/03/3005. Aggrieved by the order of the Ld.AO, the assessee filed appeal before the Ld.CIT(A).

3. The Ld.CIT(A) granted relief on some of the issues while sustaining the assessment on others. The Ld.CIT(A) granted partial relief in respect of certain transfer-pricing adjustments by modifying the quantum and/or the basis adopted by the Ld.TPO, while sustaining the remaining adjustments. Aggrieved by the order of the Ld.CIT(A), the Revenue as well as the assessee are in appeal before before this Tribunal.

4. The assessee also filed Cross Objection No. 284/Mum/2007, wherein alternate claim has been raised in relation to broken period interest, namely, that in the event the deduction in respect of securities remaining unsold at the year end is not allowed in the year under consideration, appropriate deduction ought to be granted in the year in which such securities are ultimately sold.

4.1. It is noted that the cross appeals and the cross objection emanate from the same assessment proceedings and involve overlapping factual and legal issues.

5. Revenue Ground No. 1 and Cross Objection No. 1 – Broken period interest Revenue Ground No. 1:

“On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in directing the Assessing Officer to allow the claim of deduction of Rs. 89,38,56,853/- on account of broken period interest.”

Cross Objection No. 1:

“The assessee contends that, if the disallowance of broken period interest on securities purchased during the year but remaining unsold at the year end is sustained, deduction thereof should, in any event, be granted at the time when the securities are sold.”

5.1. The Ld.DR relied upon the assessment order and submitted that the broken period interest pertaining to securities remaining unsold at the year end was not allowable as a revenue deduction. 5.2. The Ld.Sr.Counsel, on the other hand, submitted that the issue stands concluded in favour of the assessee by the judgment of the Hon’ble Supreme Court in the assessee’s own case for assessment year 1997-98 in Civil Appeal no. 1549/2006, and also in a subsequent decision in case of Bank of Rajasthan Ltd. v. CIT (2024) 167 taxmann.com 430. It was further submitted that the securities were held as stock-in-trade and that identical relief had been granted in the assessee’s own case for earlier years. We have perused the submissions advanced by both sides in light of records placed before us

6. We noted that, Hon’ble Supreme Court, while deciding the issue in assessee’s own case affirmed the view of Hon’ble Bombay High Court in case of American Express Banking Corp. reported in (2002) 125 Taxman 488. In substance Hon’ble Supreme Court observed that where the securities are treated as stock-in-trade, the broken period interest cannot be regarded as capital expenditure and is allowable as revenue expenditure. Hon’ble Supreme Court also approved the distinction drawn by Hon’ble Bombay High Court in case of American Express International Banking Corporation and held that the decision in case of Vijaya Bank Ltd. is distinguishable on facts with that of the assessee.

6.1. We find that the Ld.CIT(A) allowed the claim following the binding judgment in the assessee’s own case for assessment year 2001-02. The factual position that the securities constituted stock- in-trade has not been controverted before us. Once the securities are held as stock-in-trade, the broken period interest forms part of the revenue account and is allowable in accordance with the settled position noticed above. We therefore find no infirmity in the order of the Ld.CIT(A) on this issue.

Accordingly, Ground No.1 raised by the revenue in its appeal stands is dismissed. In view of our decision, the alternate plea raised by the assessee in Cross Objection No.1 becomes academic and is dismissed as infructuous.

7. Ground No.2 raised by the revenue is challenging the deletion of Disallowance u/s. 14A.

“On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in directing the Assessing Officer to delete the addition of Rs. 10,82,500/- made on a pro-rata basis on account of interest expenditure relatable to earning exempt tax-free income.”

The assessee during the year under consideration earned dividend income of Rs. 18,75,000/- from its investment in NSDL. The Ld.AO made disallowance of interest expenditure of Rs. 10,82,500/- u/s. 14A.

7.1. On an appeal before the Ld.CIT(A), the disallowance was deleted by observing that the assessee had sufficient interest-free funds and that no nexus had been established between borrowed funds and the investment yielding exempt income.

8. Before us, the Ld.DR relied upon the assessment order.

8.1. On the contrary, the Ld.Sr.Counsel submitted that the investment in NSDL was of Rs.3 crores whereas the assessee had substantial capital, reserves, surplus and non-interest-bearing demand deposits. He placed reliance on the decision of Hon’ble Supreme Court in case of South Indian Bank Ltd. v. CIT reported in (2021) 130 taxmann.com 178, wherein Hon’ble Court held that, proportionate disallowance of interest is not warranted where investments yielding exempt income can be regarded as having been made out of sufficient own funds.

We have perused the submissions advanced by both sides in light of records placed before u/s.

9. We note that the finding of the Ld.CIT(A) regarding availability of sufficient interest-free funds remains uncontroverted. The Ld.AO has not established a direct nexus between any interest-bearing borrowing and the investment in NSDL. In these circumstances, and having regard to the ratio of South Indian Bank Ltd. (supra), we do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld.

Accordingly, Ground No.2 raised by the revenue stands dismissed.

10. Ground No.3 raised by the revenue is challenging the deletion of disallowance of overseas training expenditure under section 44C.

“On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in directing the Assessing Officer to allow the expenses incurred on overseas training of employees amounting to Rs. 1,12,56,290/-.”

10.1. During the year, officers employed in India were sent to Regional Training Centres at Istanbul and Philippines and expenditure of Rs. 1,12,56,290/- was incurred. The Ld.AO treated the expenditure as head office expenditure falling within the scope of section 44C and thus restricted the deduction.

10.2. On an appeal before the Ld.CIT(A), the claim of the assessee was allowed following the view taken in the preceding year.

11. Before this Tribunal this Ld.Sr.Counsel submitted that the definition of ‘head office expenditure’ in the Explanation to section 44C is exhaustive and that travelling expenditure covered by clause (c) concerns employees or persons employed in or managing the affairs of an office outside India. He submitted that the officers in the present case were employed in India and were sent abroad for training. He placed reliance was placed on DIT v. American Express Bank Ltd. reported in (2025) 181 taxmann.com 433.

11.1. On the contrary, the Ld.DR relied on the orders of the authorities below to the extent adverse to the assessee. We have perused the submissions advanced by both sides in light of records placed before us.

12. We find that the principle relied upon by the Hon’ble Supreme Court is that, for an expenditure to fall within the Explanation to section 44C, following conditions must be satisfied:

• it must be incurred outside India,
• must be in the nature of executive and general administration expenditure, and
• must fall within one of the specific species enumerated in the Explanation or otherwise prescribed.

He submitted that the categories in the Explanation cannot be enlarged beyond their express terms.

12.1. It is noted that in the present case, the expenditure is in respect of employees of the Indian branch who were sent abroad for training. It is not expenditure in respect of employees employed in, or managing the affairs of, an office outside India. Nothing has been brought on record by the revenue to show that the expenditure falls within any other prescribed category of head office expenditure. We therefor do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld.

Accordingly, Ground No.3 raised by the revenue stands dismissed.

13. Ground No.4 is in respect of Bad debts and opening provision u/s. 36(1)(vii).

“On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in directing the Assessing Officer to restrict the adjustment against bad debts to the opening balance in the provision for bad and doubtful debts account instead of the closing balance.”

The dispute is whether, while computing deduction for bad debts written off u/s.36(1)(vii), the adjustment contemplated by the proviso is to be made with reference to the opening credit balance in the provision for bad and doubtful debts account or the closing balance. The Ld.CIT(A) accepted the assessee’s contention that the opening balance alone is relevant.

13.1. The Ld.DR relied upon the assessment order.

13.2. The Ld.Sr.Counsel submitted that the issue is squarely covered by the decision of Hon’ble Bombay High Court in assessee’s own case in ITA no. 5758 of 2010. The Ld.Sr.Counsel relied upon the decision of Hon’ble Bombay High Court in assessee’s own case and CBDT Instruction No. 17/2008 dated 26/11/2008, which clarify that the expression ‘credit balance’ for this purpose refers to the opening credit balance brought forward as on the first day of the relevant accounting year.

13.3. He also placed reliance on the CBDT Instruction no. 17/2008 dated 26/11/2008 which was issued directing the assessing officers to allow amount of bad debts written off that exceeds credit balance available in the provision for bad and doubtful debts account created under section 36(1)(viia) of the Act. The instruction also specified that the credit balance for this purpose will be the opening credit balance as on 1st April of a relevant financial year.

We have perused the submissions advanced by both sides in light of records placed before u/s.

14. It is noted that the Ld.CIT(A) allowed the claim of the assessee by observing the closing provision is not required to be adjusted against the amount of bad debts actually written off. This is in accordance with the instruction issued and the ratio of Hon’ble High Court in assessee’s own case(supra). We therefore do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld.

Accordingly, Ground No.4 raised by the revenue stands dismissed.

Assessee’s Appeal

15. Ground No.1 raised by the assessee is against the addition of Notional profit on unmatured forward exchange contracts.

“The Ld.CIT(A) erred in confirming the action of the Ld.AO in bringing to tax the net profit of Rs. 48,79,384/- on unmatured forward exchange contracts.”

The assessee for the year under consideration offered Rs.48,79,384/- being net profit on unmatured forward exchange contracts. The assessee submitted that in the earlier years the loss on this account was disallowed and therefore the profit in the current year should not be taxed. The Ld.AO however rejected the claim of the assessee.

Aggrieved by the order of the Ld.AO, the assessee preferred appeal before the Ld.CIT(A).

15.1. Before the Ld.CIT(A), the assessee contended that the said amount represented unrealised/notional profit and was not chargeable to tax. The Ld.CIT(A) rejected the claim by placing reliance on the decision in assessee’s own case in preceding year, wherein reliance was placed on the decision of this Tribunal in case of Deutsche Bank A.G. reported in (2003) 86 ITD 431. Aggrieved by the order of the Ld.CIT(A), the assessee preferred appeal before this Tribunal.

16. The Ld.Sr.Counsel contended that anticipated losses on outstanding forward contracts are recognised on the principle of prudence, while hypothetical profits which have not accrued in real terms cannot be brought to tax. Reliance was placed on the decision of Hon’ble Madras High Court in case of Indian Overseas Bank v. CIT, reported in183 ITR 200. He also placed reliance on the decision of Hon’ble Mumbai Special Bench in case of DCIT vs. Bank of Bahrain & Kuwait reported in 132 ITR 505.

17.1. The Ld.DR on the contrary, relied upon the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us.

17. It is noted that in the assessee’s own case for Assessment Year 2001-02, similar issue was rejected after recording a concession on behalf of the assessee. The decision by Hon’ble Madras High Court in Indian Overseas Bank (supra), and decision by Hon’ble Special Bench decision in case of DCIT vs. Bank of Bahrain & Kuwait (supra), relied by the Ld.Sr.Counsel held that, estimated or notional profits on outstanding forward contracts, without actual settlement, cannot be subjected to tax merely because a book entry has been passed. These decisions have been passed at a later stage.

17.1 The charge under the Act is on real income that has accrued or arisen. A mere valuation surplus on an executory forward contract, in the absence of settlement or crystallisation of a right to receive, cannot by itself be treated as real income merely on the basis of a year-end accounting entry. Accordingly, the addition of Rs. 48,79,384/- is directed to be deleted.

Accordingly, Ground No.1 raised by the assessee stands allowed.

18. Ground No.2 raised by the assessee is challenging the disallowance of interest paid to Head Office/overseas branches under section 40(a)(i).

“The Ld.CIT(A) erred in upholding the disallowance of Rs. 27,73,955/- in respect of interest paid to overseas branches on borrowings and NOSTRO/VOSTRO accounts by invoking section 40(a)(i).”

The assessee paid interest of Rs.27,73,955/- on NOSTRO/VOSTRO accounts and borrowings from overseas branches without deducting TDS under section 195 of the Act. The lower authorities invoked section 40(a)(i) on the ground that tax had not been deducted u/s. 195.

18.1. At the outset, the Ld.Sr.Counsel relied on the decision of Hon’ble Mumbai Special Bench in case of Sumitomo Mitsui Banking Corporation v. DDIT reported in (2012) 19 taxmann.com 364, wherein it was held, in the context of a foreign bank, that interest paid by the Indian branch to the Head Office/overseas branches is, in law, a payment to self; while deduction may be governed by the applicable treaty provisions, such payment does not result in taxable income in the hands of the same foreign enterprise and consequently does not attract section 195. He further submitted that the specific deeming provision inserted in section 9(1)(v) by Finance Act, 2015 operates prospectively and has no application to Assessment Year 2002-03.

18.2. The Ld.DR on the contrary relied upon the orders passed by authorities below.

We have perused the submissions advanced by both sides in light of records placed before us.

19. For the year under consideration, the issue is covered by the decision of Hon’ble Special Bench in case of Sumitomo Mitsui Banking Corporation (supra). Once the payment is not chargeable to tax in India in the hands of the Head Office/overseas branch under the law applicable to this year, there is no failure to deduct tax u/s. 195 and the disallowance u/s. 40(a)(i) cannot survive. The Ld.AO is directed to delete the disallowance.

Accordingly Ground No.2 raised by the assessee stands allowed.

20. Ground No.3 is against restricting the claim of the assessee in respect of VRS pension/Mediclaim payments and section 35DDA.

“The Ld.CIT(A) erred in directing the Ld.AO to allow only one-fifth of the amount of Rs. 1,32,31,435/- being VRS payments made during the year under the 1999 scheme by applying section 35DDA, notwithstanding that deduction in the earlier year had been allowed under section 37.”

The assessee had introduced voluntary retirement schemes in 1993 and 1999. Under the separation package, monthly pension and Mediclaim premia were payable to former employees. The actuarial provisions created in the earlier years had been added back in the computation of income. During the year, actual payments were made out of those provisions. The Ld.AO treated the payment relating to the 1999 scheme as governed by section 35DDA and allowed only one-fifth thereof.

20.1. On an appeal before the Ld.CIT(A), the view of Ld.AO was upheld. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before this Tribunal.

21. The Ld.Sr.Counsel submitted that section 35DDA, as it stood for the relevant year, applied to payment of a sum to an employee ‘at the time of his voluntary retirement’ and contemplated lump- sum separation compensation, whereas the payments presently in dispute are recurring pension and Mediclaim payments after retirement. Reliance was placed on the decision of coordinate bench of this Tribunal in case of Novartis India Ltd. reported in (2025) 173 taxmann.com 620, wherein recurring pension payments were distinguished from lump-sum VRS compensation. The earlier order in the assessee’s own case was thus sought to be distinguished on the ground that this precise aspect had not been examined.

21.1. The Ld.DR on the contrary relied upon the orders passed by authorities below. We have perused the submissions advanced by both sides in light of records placed before us.

22. It is noted that the payments are stated to be recurring monthly pension/Mediclaim payments made after retirement and not lump- sum compensation paid at the point of voluntary retirement. On perusal of the language of section 35DDA applicable to the year and having regard to the later coordinate Bench decision in Novartis India Ltd. (supra), such recurring payments cannot be mechanically subjected to amortisation under section 35DDA. At the same time, deduction can be granted only to the extent the corresponding provision had been disallowed in the earlier year and no double deduction results.

22.1. We therefore direct the Ld.AO to allow the actual recurring pension and Mediclaim payments made during the year, after a limited verification that the corresponding provision had been added back/disallowed in the earlier year and that no deduction has otherwise been claimed.

Accordingly, Ground No.3 raised by the assessee stands principally allowed subject to verification in the aforesaid terms.

23. Additional Ground raised vide application dated 15/10/2019 challenging the Jurisdiction of the Transfer Pricing Officer:

“On the facts and in the circumstances of the case and in law, the transfer pricing order dated 28/03/2005 passed u/s. 92CA(3) is without jurisdiction and thus the order is void ab initio. Consequently, the transfer pricing additions made in the assessment order dated 30/03/2005 are liable to be deleted.”

The additional ground challenges the competence of the Additional Commissioner of Income-tax, Transfer Pricing-1, who passed the order u/s.92CA(3). The Ld.Sr.Counsel submitted that the Explanation to section 92CA referred to a Joint Commissioner, Deputy Commissioner or Assistant Commissioner authorised by the Board, and that the Additional Commissioner was not separately mentioned. Reliance was placed on authorities dealing with contextual construction of statutory designations.

23.1. The Ld.DR opposed admission of the ground by relying on the order passed by coordinate bench of this Tribunal in case of Novartis India Ltd. vs. ACIT in ITA no.6832/Mum/2012 vide order dated 18/01/2024 It was submitted that coordinate Bench in a similar issue had not been accepted identical objection raised by the assessee therein .

We have perused the submissions advanced by both sides in light of records placed before us.

24. The objection arises from the designation appearing on the transfer pricing order and does not require investigation into new primary facts.

Being a jurisdictional legal plea arising from the record, we admit the additional ground raised vide application dated 15/10/2019

25. On merits, however, we are unable to accept the contention raised by the Ld.Sr.Counsel. Section 2(28C), as applicable, defines ‘Joint Commissioner’ to include an Additional Commissioner of Income-tax. The Explanation to section 92CA uses the expression ‘Joint Commissioner’ as a defined expression under the Act. In the absence of any material establishing that the officer was otherwise not authorised by the Board to discharge the functions of a Transfer Pricing Officer, the transfer pricing order cannot be declared void merely because the officer’s designation was ‘Additional Commissioner’. We also draw support from the decision of Hon’ble Delhi Tribunal in case of DCIT v. BBC Worldwide (India) (P.) Ltd. reported in (2019) 112 taxmann.com 380 and decision of coordinate bench of this Tribunal in case of Tata Motors Ltd. v. ACIT reported in (2025) 173 taxmann.com 928, that do not support the proposition that an order passed by an Additional Commissioner is per se without jurisdiction.

Accordingly additional ground raised by the assessee vide application dated 15/10.2019 stands dismissed.

26. Grounds Nos. 4, 7 and 8 is raised by the assessee challenging the general and procedural aspect with regard to reference the Ld.TPO. As these are general in nature, it does not require separate adjudication.

27. Grounds Nos.5 and 6 are raised by the assessee challenging applicability of transfer pricing provisions to transactions between the Indian PE and Head Office/overseas branches.

The Ld.Sr.Counsel submitted that the Indian branch and the Head Office constitute the same legal person and that Article 9 of the India-USA DTAA contemplates transactions between enterprises of different Contracting States. It was contended that the domestic deeming fiction in section 92F cannot enlarge the scope of the Treaty. The Ld.DR relied upon the orders below.

27.1 The Ld.Sr.Counsel fairly brought to our notice the decision of Hon’ble Ahmedabad Special Bench in case of TBEA Shenyang Transformer Group Company Ltd. v. DCIT reported in (2024) 169 taxmann.com 145, wherein, applicability of transfer pricing provisions to dealings between a permanent establishment and its Head Office/overseas enterprise has been decided against the taxpayer. We therefore do not find any merit in the grounds raised by the assessee.

Accordingly, Grounds Nos.5 and 6 raised by the assessee stands dismissed.

28. Ground No.9 of assessee’s appeal and Ground No.5 of revenue appeal are in respect of transfer pricing adjustment for Venture capital advisory services rendered by the assessee to group entities. The assessee rendered venture capital advisory services to following group entities:-

28.1. In respect of certain arrangements, fees were charged at 2.5% of the portfolio balance, while in respect of another arrangement the remuneration was on a cost-plus basis. The Ld.TPO rejected the assessee’s benchmarking and applied TNMM with an average mark-up of 20.82%, resulting in an adjustment of Rs.1,23,17,597/-.

28.2. The Ld.CIT(A), after holding that the comparables selected by the Ld.TPO were not reliable, adopted a mark-up of 15% on an ad hoc basis and determined an adjustment of Rs. 89,35,197/-. Aggrieved by the adjustment resteicted on ad hoc basis, both assessee as well as revenue are in appeal before this Tribunal.

29. The Ld.Sr.Counsel submitted that the serviced provided by the assessee under venture capital advisory service segment are as under:

i) sourcing of potential investment and business opportunities;

ii) evaluation of the investment opportunities identified, including due diligence on the target investee company and issuance of a report giving their recommendation;

iii) monitoring the performance of the investee company and recommending the strategy to be followed by the investee company; and

iv) providing advice as to the timing for the disposition of the investment.

He submitted that 2.5% portfolio-based fee was supportable by external CUP having regard to the SEBI (Mutual Fund) Regulations, 1996, which has been accepted by the Ld.TPO in subsequent years.

29.1. The Assessee submits that its transactions with (i) Citicorp Finance (India) Limited and (ii) Citicorp Investment Bank (Singapore) Limited, where fees were charged as 2.5% of the portfolio balance ought to be accepted as being at an ALP based on the Comparable Uncontrolled Price (‘CUP’) method.

29.2. The Assessee submits that services provided by it are purely advisory in nature and the decisions of investment and divestment are made by the investor, whereas, the services provided by asset management company are discretionary portfolio management which are at a higher level and more value added service. Accordingly, the fee charged by the Assessee at the rate of 2.5% of portfolio balance per annum is at an arm’s length basis. Thus, the Assessee submits that the fees charged by it to Citicorp Finance (India) Limited and Citicorp Investment Bank (Singapore) Limited are on an arm’s length basis and, hence, no adjustment is called for.

29.3. Concerning the transactions entered into with Citicorp International Finance Corporation, the Assessee submits that it does not agree with the approach adopted by the learned CIT(A) for determining the arm’s length price in a completely ad hoc manner which is contrary to the mandate of section 92C. However, in order to avoid protracted litigation and wastage of precious judicial time, the Assessee submits that it is agreeable to the Hon’ble ITAT upholding the directions of the learned CIT(A) for this assessment year alone, i.e., AY 2002-03 and this concession ought not to be treated as an acquiescence by the Assessee of the order of the CIT(A) in any other proceeding.

He however submitted that, although assessee is disputing the ad hoc approach, in principle, the assessee do not wish to press for any further relief beyond the position emerging from the Ld.CIT(A)’s order so as to avoid protracted litigation for this year.

29.4. The Ld.DR on the contrary contended that, if the comparables of both sides were rejected, the matter should be restored to the Ld.TPO rather than adopting an ad hoc rate. We have perused the submissions advanced by both sides in light of records placed before us.

30. We note that the Ld.CIT(A) rejected the comparability analysis underlying the Ld.TPO’s 20.82% mark-up. Once the basis of that margin dos not survive, submission of Ld.DR seeking restoration to Ld.TPO cannot be accepted. As regards portfolio-based fee charged to Citicorp Finance(India) Ltd., and Citicorp Investment Bank(Singapoer) Ltd., the assessee demonstrated specific external basis and has also been accepted by the Ld.TPO in subsequent years.

We therefore accept the portfolio-based remuneration of 2.5% as being at arm’s length for the transactions to which that remuneration mechanism applies.

30.1. As regards the transaction with Citicorp International Finance Corporation, the which the assessee has not pressed for further relief beyond the order of the Ld.CIT(A), the adjustment sustained by the Ld.CIT(A) is left undisturbed for this year.

Assessee Ground No. 9 is partly allowed and Revenue Ground No. 5 is dismissed.

31. Ground No. 10 in assessee’s appeal and Ground No. 6 in revenue’s appeal relates to adjustment made to Data Centre Support Services.

The assessee rendered Data Centre Support Services to overseas branches at cost plus 10%. The Ld.TPO rejected the assessee’s comparables and applied an average mark-up of 27.69% based on three companies, thereby proposing an adjustment of Rs.1,75,20,846/-.

31.1. On an appeal, The Ld.CIT(A) rejected six of the seven comparables selected by the assessee as well as the three comparables selected by the Ld.TPO and adopted an ad hoc mark- up of 20%, thereby sustaining an adjustment of Rs. 1,08,82,513/- .

Against the order of Ld.CIT(A), both the assessee and revenue are in appeal before this Tribunal.

32. The Ld.Sr.Counsel submitted that MYM Technologies Ltd., one of the assessee’s comparables, was never rejected for any stated reason and had a single-year margin of 5.31%, whereas the assessee earned a margin of 10%. It was further pointed out that the Revenue has not challenged the specific exclusion by the Ld.CIT(A) of the companies used by the Ld.TPO.

32.1. On the contrary, the Ld.DR contended that the Ld.TPO’s comparables were appropriate and that the Ld.CIT(A) should not have determined the ALP by adopting ad hoc mark up of 20% We have perused the submissions advanced by both sides in the light of records placed before us.

33. We find that the Revenue’s ground is confined to the ad hoc reduction of the mark-up and does not specifically assail the reasons recorded by the Ld.CIT(A) for excluding the Ld.TPO’s comparables. Further, no cogent reason has been shown for exclusion of MYM Technologies Ltd., which is stated to be functionally comparable and whose margin of 5.31% is below the assessee’s 10% mark-up. On the material before us, the assessee’s margin is therefore at arm’s length. The transfer pricing adjustment on this segment is directed to be deleted. Assessee Accordingly, Ground No.10 raised by the assessee stands allowed and Ground No.6 raised by revenue stands dismissed.

34. Ground No.11 raised by the assessee is on Interest on placements with overseas branches/Head Office The assessee placed overnight/short-term foreign currency deposits with overseas associated enterprises. LIBOR was used as the benchmark under CUP. On an aggregate basis, the assessee earned interest in excess of the benchmark; however, on a transaction-wise basis certain placements reflected short recovery. The Ld.TPO ignored the excess recovery and made an adjustment in respect of the shortfalls.

34.1. In an appeal before the Ld.CIT(A), assessee was granted partial relief by applying tolerance range, however the Ld.CIT(A) did not permit aggregation/set-off.

Aggrieved by the order of Ld.CIT(A), the assessee as well as revenue are in appeal before this Tribunal.

35. The Ld.Sr.Counsel submitted that Rule 10A(d) recognises number of closely linked transactions as a ‘transaction’ and that the placements with the same class of overseas AEs should be aggregated. In support he placed reliance the decision of coordinate bench of this Tribunal in case of Barclays Bank PLC v. ADIT (IT) reported in (2018) 100 taxmann.com 476, wherein aggregation of money market loan/deposit transactions was upheld.

35.1. The Ld.DR on the contrary contended that the assessee failed to furnish any working to demonstrate that, on an aggregate basis, the pricing of its international transactions was at arm’s length or to substantiate the manner in which the alleged excess interest earned on certain transactions could be adjusted against the shortfall in interest charged on other transactions. He submitted that, each international transaction is required to satisfy the arm’s length principle in accordance with the provisions of Chapter X and that the assessee cannot seek a set-off merely on the basis of an overall computation without establishing the factual and transactional basis for such adjustment.

35.2. The Ld.DR further submitted that section 92(3) of the Act expressly prohibits computation of income under section 92(1) in a manner which has the effect of reducing the income chargeable to tax in India or increasing the loss. Therefore, according to him, any interest earned in excess of the arm’s length price in one or more international transactions cannot be used to neutralise or set off the shortfall arising from other international transactions where interest has been charged at a rate lower than the arm’s length rate. According to the Ld.DR, in the absence of transaction-wise working demonstrating the arm’s length price and establishing the permissibility of the claimed adjustment, the relief sought by the assessee, was not sustainable.

We have perused the submissions advanced by both sides in light of records placed before us.

36. We are unable to accept the interpretation of section 92(3) of the Act by the Ld.DR. The embargo contained therein is attracted where the computation under section 92(1) has the effect of reducing the income chargeable to tax or increasing the loss. It cannot be construed as requiring the selective benchmarking of transactions resulting in a short recovery while disregarding corresponding transactions, undertaken on the same basis, resulting in an excess recovery. Where the international transactions are closely linked and are appropriately evaluated on an aggregated basis, the excess recovery arising from one transaction cannot be considered in isolation while determining the arm’s length result of the other closely linked transactions.

36.1. In the present facts of the case, the assessee has contended that the transactions in question are closely linked and that the excess recovery in certain transactions ought to be considered against the short recovery in the remaining transactions. Following the principle laid down in Barclays Bank PLC (supra), we direct the Ld.AO/TPO to consider the transactions on an aggregated basis and grant set-off of the excess recovery against the short recovery, subject, of course, to verification of the computation furnished by the Assessee. On the aggregate computation placed before us, the resultant position does not warrant any adverse adjustment.

Accordingly, Ground No. 11 raised by the Assessee is allowed.

37. Ground No.12 raised by the assessee is against adjustment made in respect of Compensation for marketing ECB/Trade Loans. The Ld.TPO noticed that the assessee rendered support in relation to marketing of ECB/Trade Loans during the year under consideration but had not recognised any income for the Assessment Year 2002-03. The assessee explained that the compensation was computed and invoiced only in December 2002 and had been offered to tax in Assessment Year 2003-04. The Ld.TPO after considering the submissions of the assessee proposed an adjustment of Rs.3,23,36,826/- by applying the methodology followed in the subsequent year.

37.1. On an appeal before the Ld.CIT(A), the addition was sustained, however, the Ld.CIT(A) directed corresponding exclusion in the subsequent year to avoid double taxation. Aggrieved by the order of the Ld.CIT(A), assessee is in appeal before this Tribunal.

38. The Ld.Sr.Counsel submitted that the Ld.TPO did not dispute the arm’s length character of the amount however, disputed the year of taxability. He submitted that, this aspect do not fall within the transfer pricing determination of the arm’s length price.

38.1. The Ld.DR on the contrary, relied on orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us.

39. It is not in dispute that the assessee rendered support services in relation to marketing of ECB/Trade Loans during the year under consideration. The dispute before us is essentially with regard to the year in which the compensation for such services was liable to be recognised and offered to tax.

39.1. The assessee’s case is that the compensation was computed and invoiced only in December 2002 and was accordingly offered to tax in Assessment Year 2003-04. In our view, the issue as to the year of accrual or taxability of an income is distinct from the determination of the arm’s length price of an international transaction. The jurisdiction of the Ld.TPO under section 92CA is to determine the arm’s length price of an international transaction referred to him and not to determine the year in which an otherwise undisputed income is assessable to tax. In the present case, the Ld.TPO has not brought anything on record to demonstrate that the compensation attributable to the services rendered during the year was not at arm’s length. Rather, the adjustment has been computed by applying the methodology adopted in the subsequent assessment year, essentially on the premise that the income pertained to the year under consideration.

39.2. The mere fact that the services were rendered during the year cannot, by itself, confer jurisdiction upon the Ld.TPO to determine the year of taxability of the corresponding income in the course of transfer-pricing proceedings. The question whether the income accrued during the year under consideration is required to be examined in accordance with the provisions governing computation and accrual of income under the Act and cannot be treated as a transfer-pricing adjustment merely because the underlying transaction is an international transaction.

39.3. It is noted that the fact that the assessee consistently contended that the compensation was computed and invoiced in December 2002 and was offered to tax in Assessment Year 2003- 04. The Ld.CIT(A), while sustaining the addition in the year under consideration, has himself directed the corresponding exclusion of the amount in the subsequent year so as to prevent double taxation. This direction reinforces that the dispute is essentially one concerning the year of recognition of the same income, rather than the arm’s length character of the transaction.

39.4. In the circumstances, we are of the view that the impugned adjustment cannot be sustained as a transfer-pricing adjustment for the year under consideration. The issue, of the correct year of taxability cannot be determined by the Ld.TPO under section 92CA by applying the methodology adopted in the subsequent year. Accordingly, the adjustment made on this regard deserved to be deleted. The corresponding direction of the Ld.CIT(A) for exclusion in the subsequent year consequently does not survive. Accordingly Ground no.12 raised by the Assessee stands allowed.

40. Ground No.13 raised by the assessee and Ground No.7 raised by the revenue is challenging the adjustment in respect of Banking activities. The Ld.TPO treated certain correspondent banking activities performed by the Indian branch for overseas branches as a separate international transaction, allocated costs of Rs.2,66,18,780/- and applied a mark-up of 20.82%, resulting in an adjustment of Rs.3,21,60,810/-. 40.1. The Ld.CIT(A) sustained the approach but reduced the mark- up to 15%, resulting in an adjustment of Rs.3,06,11,597/-. Aggrieved by the order of the Ld.CIT(A), both sides are in appeal before this Tribunal.

41. The Ld.Sr.Counsel submitted that correspondent banking activities such as facilitating remittances, letters of credit, guarantees, cheque collections and similar services are driven by the needs of the Indian customers; the overseas group entities merely perform a local component of the overall banking service. Such activities are reciprocal in a global banking network and no inter-bank market charge is ordinarily levied for the reciprocal assistance. Reliance was placed on the decision of coordinate bench of this Tribunal in case of ADIT v. Hongkong & Shanghai Banking Corporation Ltd. reported in (2020) 113 taxmann.com 245 and subsequent coordinate Bench decisions following the same view.

41.1. On the contrary, the Ld.DR relied upon the orders passed by authorities below. We have perused the submissions advanced by both sides in light of records placed before us. 42. The issue for our consideration is whether the correspondent banking activities undertaken by the Indian branch in connection with transactions involving the overseas branches of the assessee’s banking network constitute a separate international transaction warranting an independent cost-plus remuneration.

42.1. The nature of the activities described before us, namely, facilitation of remittances, letters of credit, guarantees, cheque collections and allied correspondent banking functions, has to be appreciated in the context of the manner in which an international banking network operates. The Indian branch undertakes such activities essentially in connection with banking transactions originating from or involving its customers in India. The overseas branches/entities, on the other hand, perform the corresponding local functions in their respective jurisdictions. Thus, the activities performed by the respective branches are components of an integrated banking transaction rather than standalone services rendered by one group entity to another for which an independent inter-bank charge necessarily arises.

42.2. We also find merit in the contention of the Ld.Sr.Counsel that the mere identification of activities performed by the Indian branch for or in connection with overseas branches cannot, by itself, lead to the conclusion that a separate international transaction exists requiring a mark-up on the costs attributable to such activities. The Revenue is required to establish the existence and nature of the transaction and the basis on which the Indian branch is said to have rendered an independent service to its overseas associated enterprise.

42.3. The issue is also covered in favour of the Assessee by the decision of the coordinate Bench in ADIT v. Hongkong & Shanghai Banking Corporation Ltd. (supra) wherein, on consideration of similar correspondent banking activities, the Tribunal did not approve the approach of imputing a separate cost-plus remuneration merely on the basis of the activities performed by the Indian branch for overseas branches. We are also informed that the aforesaid view has subsequently been followed by coordinate Benches in similar cases. In the absence of any distinguishing feature having been brought to our notice, judicial consistency requires us to follow the said view.

42.4. In the present case, therefore, we are unable to sustain the very basis on which the adjustment has been made. Once the activities in question do not constitute a separately chargeable service giving rise to an independent international transaction warranting remuneration in the manner determined by the Ld.TPO, the question of applying a mark-up of 20.82% or 15% thereon does not arise. Accordingly, the adjustment of sustained by the Ld.CIT(A) is deleted. Consequently, the Revenue’s ground challenging the reduction of mark-up to 15% becomes academic.

Accordingly, Ground No.13 raised by the assessee stands allowed and Ground No.7 raised by the revenue stands dismissed.

43. Ground No. 14 raised by the assessee and Ground No.8 raised by the revenue is challenging the adjustment in respect of Derivative transactions. The dispute relates to derivative transactions directly entered into by overseas branches with Indian customers referred by the Indian branch. The overseas branches earned revenue of Rs.8,17,24,140/-. The Ld.TPO applied the Profit Split Method and attributed 60% of the day-one Initial Net Present Value, making an adjustment of Rs.4,87,41,684/-.

43.1. On an appeal, the Ld.CIT(A) retained the method but reduced the attribution to 20%, sustaining an adjustment of Rs.1,62,47,228/-

Aggrieved by the order of the Ld.CIT(A), the assessee and the revenue are in appeal before this Tribunal.

Before us, the assessee challenges the very basis of the adjustment while the Revenue seeks restoration of the higher attribution.

43.1. The Ld.Sr.Counsel submitted that in the disputed category the Indian branch merely referred an Indian customer to an overseas branch; the overseas branch assumed the market, interest-rate, commodity, operational, credit, legal and regulatory risks. It was further submitted that the Profit Split Method under Rule 10B(1)(d) requires determination of combined net profit and a reliable evaluation of the relative contributions of the associated enterprises; neither the Ld.TPO nor the Ld.CIT(A) undertook that exercise. Reliance was placed, on the decision of coordinate bench of this Tribunal in case of Barclays Bank PLC and Australia and New Zealand Banking Group Ltd. v. DCIT reported in (2026) 183 taxmann.com 592.

43.2. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us.

44. The dispute essentially concerns the attribution of the revenue earned by the overseas branches from derivative transactions entered into with Indian customers referred by the Indian branch. The undisputed position is that, in the transactions falling under the disputed category, the Indian branch merely referred the customers to the overseas branches. The overseas branches thereafter entered into the derivative transactions directly with the customers and assumed the substantive risks associated with such transactions, including market, interest-rate, commodity, credit, operational, legal and regulatory risks. The revenue of Rs.8,17,24,140/- was accordingly earned by the overseas branches from the derivative transactions undertaken by them.

44.1. The Ld.TPO adopted the Profit Split Method and attributed 60% of the day-one Initial Net Present Value to the Indian branch. The Ld.CIT(A) reduced such attribution to 20%. In our considered view, however, the issue cannot be resolved merely by applying a percentage to the revenue or the day-one Initial Net Present Value. Rule 10B(1)(d) contemplates determination of the combined net profit arising from the international transaction and its allocation between the associated enterprises having regard to their relative contribution, to be evaluated on the basis of the functions performed, assets employed and risks assumed, together with the relevant economic circumstances.

44.2. In the present case, neither the Ld.TPO nor the Ld.CIT(A) undertook such an exercise. There is no determination of the combined net profit of the relevant transactions, nor is there any cogent analysis demonstrating the relative contribution of the Indian and overseas branches so as to justify the attribution of 60% or, as sustained by the Ld.CIT(A), 20%. A percentage attribution, in the absence of the underlying exercise contemplated under Rule 10B(1)(d), cannot by itself constitute a valid application of the Profit Split Method.

44.3. We find that the issue is squarely covered by the decision of the coordinate Bench in Barclays Bank PLC and Australia and New Zealand Banking Group Ltd. v. DCIT (supra) wherein, on consideration of the nature of similar derivative transactions and the manner in which the Profit Split Method was applied, the Tribunal did not approve an attribution based merely on an estimated percentage without undertaking the exercise mandated under Rule 10B(1)(d). No distinguishing feature has been brought to our notice by the Revenue.

44.4. Further, the fact that the Indian branch referred customers to the overseas branches cannot, by itself, justify attribution of a substantial portion of the profits earned by the overseas branches. The extent of the Indian branch’s contribution has to be evaluated having regard to the actual functions performed by it and the risks assumed by it vis-à-vis those undertaken by the overseas branches. Where the overseas branches themselves entered into the derivative contracts and assumed the substantive risks and performed the functions associated with those transactions, such factors necessarily form part of the analysis of relative contribution under the Profit Split Method. Accordingly, we hold that the attribution made by the Ld.TPO and reduced by the Ld.CIT(A), is not supported by the methodology prescribed under Rule 10B(1)(d). The adjustment sustained by the Ld.CIT(A) is therefore deleted.

Consequently, the Revenue’s ground seeking restoration of the higher attribution of 60% does not survive and is dismissed.

Accordingly, Ground No.14 raised by the assessee stands allowed and Ground No.8 raised by the revenue stands dismissed.

45. Ground No.15 raised by the assessee and Ground No.9 raised by the revenue is against the adjustment in respect of Cross-border supervisory responsibilities undertaken by the assessee. It is submitted that certain employees of the Indian branch performed supervisory/oversight responsibilities in relation to branches in Bangladesh, Sri Lanka and Nepal. During the course of transfer pricing proceedings, the Ld.TPO required the assessee to furnish the computation of the total costs attributable to the supervisory functions performed in relation to the Bangladesh, Sri Lanka and Nepal branches. In response, the assessee furnished the aggregate cost of Rs.11,41,22,710/-, comprising Rs.8,54,68,897/- towards salary costs, Rs.2,15,96,786/- towards pro-rata communication costs, Rs.67,53,763/- towards executive staff and secretarial costs, and Rs.3,03,264/- towards travel costs.

The Assessee contended that two items aggregating to Rs.2,56,00,865/- ought to be excluded from the allocable cost. The first was Rs.2,39,79,398/-, representing salary paid in foreign currency outside India, which had not been claimed as a deduction while computing the income of the Indian branch. The second was Rs.16,21,467/-, representing costs which did not pertain to the Indian branch and had been disallowed by the assessee in its computation of income. The Ld.TPO, however, did not accept the assessee’s contention regarding exclusion of these amounts.

Considering that the aggregate revenue of the Bangladesh, Sri Lanka and Nepal branches, in proportion to the combined revenue of these branches and the Indian branch, worked out to 4.16%, the Ld.TPO allocated Rs.47,47,504/- towards the cost attributable to the supervisory functions by applying the said percentage to the aggregate cost of Rs.11,41,22,710/-. The Ld.TPO thus treated the activity as a separate international transaction, allocated a proportion of salary and overheads and applied a mark-up of 20.82%, resulting in an adjustment of Rs. 57,35,934/-.

45.1. On an appeal by the assessee, the Ld.CIT(A) excluded certain costs but retained a 15% mark-up, sustaining an adjustment of Rs. 53,82,059/-. Against the order passed by the Ld.CIT(A), the assessee and revenue are in appeal before this Tribunal.

46. The Ld.Sr.Counsel submitted that the employees were primarily engaged in the Indian business; the overseas role was merely supervisory, involved insignificant time, was generally discharged through e-mail/telephone, and did not alter the employees’ compensation. Part of the salary of international-cadre employees was directly paid by the Head Office and had not been claimed as a deduction in India. Reliance was placed on the decision of coordinate bench of this Tribunal in case of ADIT v. Hongkong & Shanghai Banking Corporation Ltd. reported in (2020) 113 taxmann.com 245, wherein similar liaison and group-level coordination by bank employees was held to be incidental and not a separate international transaction requiring benchmarking.

46.1. The Ld.DR on the contrary, relied on the orders passed by authorities below.

We have perused the submissions advanced by both sides in light of records placed before us.

The issue for our consideration is whether the supervisory/oversight functions performed by certain employees of the Indian branch in relation to the Bangladesh, Sri Lanka and Nepal branches constitute a separate international transaction warranting an independent remuneration on a cost-plus basis.

The material placed before us indicates that the employees concerned were primarily engaged in the business operations of the Indian branch. The functions performed by them in relation to the overseas branches were in the nature of supervisory oversight and coordination and were undertaken through routine communication, including e-mail and telephone. There is nothing on record to demonstrate that the Indian branch deployed dedicated personnel or incurred expenditure specifically for rendering an independent service to the overseas branches, or that the overseas branches separately availed of any identifiable service from the Indian branch for which an independent charge would ordinarily arise between unrelated parties.

The Ld.TPO has proceeded by identifying the salary and certain overhead costs of the employees and allocating a proportion thereof based essentially on the ratio of the revenues of the overseas branches to the combined revenues of the overseas branches and the Indian branch. However, such revenue-based allocation, by itself, does not establish either the existence of a separate international transaction or the quantum of any benefit derived by the overseas branches. The fact that certain employees of the

Indian branch exercised supervisory or oversight responsibilities in respect of overseas branches cannot, without a further examination of the actual functions performed, time devoted, resources employed and benefit derived, justify an automatic allocation of a proportion of their salary and overheads.

We also find merit in the submission of the Ld.Sr.Counsel that the overseas supervisory functions were incidental to the employees’ principal responsibilities in relation to the Indian business. The mere fact that the employees, in the course of their employment, also provided guidance or coordination to the overseas branches does not necessarily convert such incidental activities into a separately chargeable service rendered by the Indian branch to its associated enterprises.

This issue is also covered by the decision of the coordinate Bench in ADIT v. Hongkong & Shanghai Banking Corporation Ltd., (supra), wherein similar liaison, coordination and group-level functions performed by employees of the Indian branch were considered in the context of transfer pricing proceedings. The coordinate Bench did not approve the treatment of such incidental functions as a separate international transaction requiring an independent cost- plus remuneration. No distinguishing feature has been brought on record by the Revenue in the present case so as to warrant a different conclusion.

We further note that a part of the salary relating to international- cadre employees, amounting to Rs.2,39,79,398/-, was directly paid in foreign currency outside India and was not claimed as a deduction in computing the income of the Indian branch. Thus, quite apart from the question whether the underlying activity constitutes an independently remunerable service, the inclusion of such expenditure in the cost base of the Indian branch would also require a specific factual and legal basis. Likewise, the amount of Rs.16,21,467/-, which already been disallowed by the assessee in its computation of income, cannot mechanically form part of the cost base merely because it appeared in the computation furnished before the Ld.TPO.

More fundamentally, however, in the absence of a finding that the Indian branch rendered a distinct and independently remunerable service to its associated enterprises, the question of applying a mark-up of 20.82%, or the reduced mark-up of 15% adopted by the Ld.CIT(A), does not arise. The determination of a mark-up presupposes the existence of a transaction requiring remuneration and a properly identified cost base. Neither has been satisfactorily established in the present case.

Accordingly, we hold that the supervisory and oversight activities performed by the employees of the Indian branch in relation to the Bangladesh, Sri Lanka and Nepal branches, on the facts of the present case, were incidental to their overall employment functions and did not constitute a separate international transaction warranting a transfer pricing adjustment. The adjustment sustained by the Ld.CIT(A) is therefore deleted.

Accordingly, Ground No.15 raised by the assessee stands allowed and Ground No.9 raised by the revenue stands dismissed.

In the result, appeal filed by the assessee stands partly allowed, appeal filed by the Revenue stands dismissed and Cross Objection filed by the assessee is dismissed as infructuous.

Order pronounced in the open Court on 08/10/2026.