DCIT Vs Standard Chartered Bank (ITAT Mumbai)
Mumbai ITAT Delivers Landmark Ruling on Taxation of Foreign Banks: Expatriate Salaries, Head Office Expenses, DTAA and Transfer Pricing Issues Decided
In a comprehensive 91-page ruling, the Mumbai ITAT adjudicated cross-appeals filed by Standard Chartered Bank for AYs 2004-05 and 2005-06, deciding several recurring issues concerning taxation of foreign banks, transfer pricing, section 44C, DTAA provisions, head office expenses and other disallowances. The Tribunal largely followed its own decisions in the assessee’s earlier years, emphasizing the principle of judicial consistency while deciding the issues.
On the issue of expatriate salary paid by the Head Office to employees deputed exclusively to the Indian branch, the Tribunal held that such expenditure cannot be regarded as “head office expenditure” under section 44C merely because the salary was initially paid outside India. Since the expatriates worked exclusively for the Indian Permanent Establishment, the expenditure was incurred wholly for the Indian business and was allowable under section 37(1). The Tribunal also held that Article 7 of the India-UK DTAA, being more beneficial, entitled the assessee to deduction of such expenses incurred for the Permanent Establishment, whether incurred in India or elsewhere. Accordingly, the Revenue’s challenge on this issue was dismissed.
With regard to the transfer pricing adjustment on allocation of direct costs, the Tribunal noted that while substantial documentation had been furnished, the assessee had failed to substantiate the arm’s length nature of the balance direct cost allocation of ₹33.24 crore. Consistent with earlier years, the adjustment on this portion was sustained, while recognising that the underlying expenditure may nevertheless be allowable under the normal provisions of the Act after necessary verification.
The Tribunal also upheld the CIT(A)’s relief on several other issues by following earlier decisions in the assessee’s own case, including restriction of section 14A disallowance, allowability of various business expenditures, and treatment of refurbishment expenses as revenue expenditure where no capital asset came into existence for the assessee. Most of the issues for AY 2005-06 were held to be identical to AY 2004-05 and were decided mutatis mutandis on the same reasoning.
Cases Discussed
