ORDER

Per Bench - These two set off Cross Appeals and Cross Objection of the Revenue are directed against the orders dated 29.09.2009 & 19.11.2010 of Commissioner of Income Tax(Appeals) for the assessment years 2002-03 &2003-04 respectively.

2. For the Assessment Year 2002-03 the assessee has raised the following grounds.

"The Commissioner of Income-tax (Appeals)-XXXI, Mumbai (CIT(A)) erred in holding that the Assessing Officer (AO) was justified in charging to tax, the interest of Rs.3,48,59,282 received by your appellants from their Head Office (HO)/overseas branches.

Your appellants submit that the interest received represents a receipt from 'self and should therefore be ignored in computing their taxable income.

Your appellants pray that the AO be directed accordingly.

2. Having held that the interest received by your appellants from their HO/overseas branches is liable to tax in India, the CIT(A) erred in not directing the AO to allow a deduction in respect of the interest of Rs.1,25,330 paid by your appellants to their HO/branches on the basis that the provisions of section 40(a)(i) of the Income-tax Act, 1961 (the Act) are applicable.

Your appellants submit that the provisions of section 40(a)(i) are not attracted for the reason that as stated earlier, the interest payment to HO/branches would amount to a payment to 'self'.

Your appellants pray that the AO be directed to allow them a deduction in respect of the interest payment of Rs. 1,25,330.

3. The CIT(A) erred in confirming the AO's action of applying the provisions of Article 12 of the Double Taxation Avoidance Agreement between India and France (DTAA) and thereby charging to tax, 10% of the interest of Rs.l,25,330 paid by your appellants to their HO/branches as income earned by the HO/branches in India.

Your appellants submit that the provisions of Article 12 of the DTAA are not applicable as they and their HO are residents of the same Contracting State i.e France and further submit that the AO's action amounts to taxing of the same amount twice over.

Your appellants pray that the AO be directed accordingly.

4. (a) The CIT(A) erred in confirming a disallowance of Rs.50,04,624 in respect of expenses held to be attributable towards earning the tax-free interest on securities and dividend income by applying the provisions of section 14A read with rule 8D in computing the amount of expenditure incurred in relation to the earning of exempt income.

(b) The CIT (A) ought to have appreciated that the provisions of rule 8D which were introduced w.e.f. March 24, 2008 were not applicable to the subject year.

(c) The CIT(A) ought to have held that as the investments were made in the earlier years, where it has been held that no expenditure was incurred in relation to exempt income as the investments were out of own funds, no interest / administrative expenditure could be held to have been incurred during the year under appeal in relation to such exempt income.

(d) The CIT(A) ought to have held that no administrative expenditure was incurred in relation to exempt income as:

Your appellants pray that the AO be directed to delete the disallowance of Rs.50,04,624.

5. The CIT(A) erred in upholding the AO's action of charging to tax, profit of Rs.1,98,42,490, arising on revaluation of unmatured forward forex contracts.

Your appellants submit that based on his stand in the earlier assessment years that a loss on revaluation of forex contracts being a notional loss, is not deductible in arriving at the taxable income, the CIT(A) ought to have directed the AO, not to charge to tax, the profit arising on revaluation of forex contracts.

Your appellants pray that the AO be directed accordingly.

6. The CIT(A) erred in holding that the AO was justified in rejecting your appellant's claim for a deduction in respect of data processing charges of Rs.90,45,380 on the basis that these charges qualify for treatment as 'royalty' and therefore, the provisions of section 40(a)(i) are attracted as tax was not deducted at source.

Your appellants submit that the provisions of section 40(a)(i) are not applicable as the data processing charges are neither in the nature of 'royalty' nor 'fees for technical services' under the provisions of the DTAA, but represent a mere reimbursement of expenses incurred by their regional data processing centre.

Your appellants pray that the AO be directed to allow them a deduction in respect of the expenses of Rs.90,45,380.

7. The CIT(A) erred in upholding the AO's contention that your appellants and their HO are 'associated enterprises' and the transactions between them are covered under section 92 of the Act.

Your appellants submit that they and their HO are not 'associated enterprises', either under the provisions of the Act or the DTAA.

Your appellants pray that the AO be directed accordingly.

8. The CIT(A) erred in confirming an addition of Rs.1,51,744 out of the adjustment made by the Transfer Pricing Officer (TPO) in respect of the arm's length price of the interest received on call placements.

Your appellants submit that no adjustment is warranted in respect of the interest received on call placements and pray that the AO be directed to delete the addition of Rs. 1,51,744.

9. The CIT(A) erred in confirming an addition of Rs.43,67,034, being 20% of the interest and commission in respect of External Commercial Borrowings (ECB) advanced to Indian borrowers, as compensation to your appellants for services rendered in respect of these ECB.

Your appellants submit that the TPO ought not to have made any adjustment as no significant services were rendered by them with respect to the advancement of the ECB and the interest earned thereafter was per efflux of time.

Your appellants pray that the AO be directed to delete the addition of Rs.43,67,034. 10. The CIT(A) erred in confirming that your appellant's income is taxable at the rate of 48% as applicable to a non-resident company.

Your appellants submit that on the facts and in the circumstances of their case, the CIT(A) ought to have held that in accordance with the provisions of Article 26 of the DTAA, tax on income is leviable at the rate applicable to a domestic company or the maximum marginal rate applicable to a co-operative bank.

Your appellants pray that the AO be directed to re-compute their tax liability in accordance with the provisions of Article 26 of the DTAA.

Your appellants crave leave to add to, amend, alter, vary, omit or substitute the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as they may be advised."

3. Ground No.1 regarding taxability of interest received from Head Office/overseas branches. At the time of hearing the learned counsel for the assessee has stated that the assessee does not want to press this ground and therefore ready to pay the tax on the interest received from Head Office/overseas branches. He has prayed that this ground may be dismissed as not pressed. Learned DR has raised no objection it this ground of the assessee's appeal is dismissed as not pressed. Accordingly ground no.1 of the assessee's appeal is dismissed being not pressed.

4. Ground Nos.2&3 regarding disallowance of interest paid to Head Office/overseas branches by invoking the provision of section 40(a)(i).

5. We have heard learned AR as well as learned DR and considered the relevant material on record. At the outset, we note this issue is covered in favour of the assessee by the decision of Special Bench of this Tribunal in case of Sumitomo Mitsui Banking Corpn. v. Dy. DIT(IT) [2012] 136 ITD 66/19 taxmann.com 364 (Mum.) . We further noted that for the Assessment year 1997-98 and 2001-02 the Tribunal has also considered and decided this issue in favour of the assessee.

6. For the Assessment Year 2001-02 the Tribunal vide order dated 07.08.2013 in ITA No.4295 &4965/M/2005 has held in para 15 as under:

"15. In view of our decision on grounds no. 5 and 6, above, taxing the interest income received from HO/Overseas branches, the natural consequence is that the interest paid by the assessee to its HO/Overseas branches would become deductible. However, we find that the amount of interest disallowed has been wrongly taken in this ground. On the perusal of the assessment order, it was noticed that the amount actually disallowed by the AO is Rs. 21,51,539/- and not Rs. 33,55,026/-. The AO is therefore, directed to grant deduction for the correct amount of Rs. 21,51,539/-."

7. Following the decision of special in case of Sumitomo Mitsui Banking Corpn. (supra) as well as coordinate bench of this tribunal in assessee's own case for A.Y.2001-02, we decide this issue in favour of the assessee and against the revenue.

8. Ground No.4 regarding disallowance u/s.14A of interest and operating expenses in terms of rule 8D.

9. We have heard learned AR as well as learned DR and considered the relevant material on record. Learned AR of the assessee has submitted that an Identical issue has been considered by the Tribunal in assessee's own case for the Assessment year 1997-98 as well as for the Assessment year 2001-02. He has further submitted that the Tribunal has given the findings that the assessee has its own interest free fund sufficient for investment and therefore, no disallowance is called for on account of interest expenditure u/s.14A. further the disallowance on account of operating expenses has been restricted by the Tribunal to 2% of the exempt income. The learned DR has not disputed the fact that an identical issue has been considered and decided by the Tribunal in assessee's own case for the earlier assessment years.

10. Having considered the rival submissions as well as relevant record, we note that for the Assessment Year 2001-02, the Tribunal has decided an identical issue in para 31 as under:

"31. After considering the rival submissions and perusing the relevant material on record we find that the question of allowing exemption under section 10(15) and (33) on gross basis is no more res integra in view of the order passed by the tribunal in assessee's own case for earlier years. As regards the contention of the DR for making disallowance under section 14A, we find that the same is also a settled issue. In principle, it is held that disallowance under section 14A is called for. However, the amount disallowable under section 14A has been adjudicated in earlier years. After noticing that the funds for investment in securities fetching exempt income were out of own funds, it has been held that no disallowance under section 14A on account of interest is called for. As regards the amount of other expenses disallowable, we find that the tribunal has upheld disallowance @ 2% of exempt income in the above referred case. Following the precedent, we direct accordingly."

11. It was stated by the assessee that the investment in question is the same as for the Assessment year 2001-02 and there is no change in the facts and circumstances. In view of the facts that there is no change in the facts and circumstances for the year under consideration and for the assessment year 2001-02, in respect of the investment then no disallowance on account of interest is called for, when the assessee was having its own interest free fund for making investment in securities. As regards the disallowance of operating/ administrative expenses, by following earlier order of this Tribunal, we restrict disallowance at 2% of exempt income.

12. Ground No.5 regarding taxability of the profit arising on revaluation of the unmatured forward forex contracts.

13. We have heard learned AR as well as learned DR and considered the relevant material on record. The learned AR of the assessee has submitted that the loss on revaluation was disallowed by the AO, in the previous assessment year but has been allowed by the tribunal therefore on the same analogy the profit arising on revaluation has to be taxed. However, the learned AR has submitted that taxing of the profit is subject to the final out come on the issue of loss.

14. Having regard to the facts that the loss on revaluation of unmatured forward forex contracts has been allowed by this tribunal in the earlier years i.e. 1998-99 then the natural corollary would be that the profit arising on revaluation of the unmatured forward forex contract is liable to be taxed as income. Accordingly, we dismiss this ground of the assessee.

15. Ground No.6 regarding disallowance of the data processing charges by the AO by classifying them to be royalty and invoking provision of section 40(a)(i).

16. We have heard learned AR as well as learned DR and considered the relevant material on record. At the outset, we note that an identical issue has been considered and adjudicated by this Tribunal in assessee's own case for Assessment Year 2001-02 in para 18 as under:

"18. After considering the rival submissions and perusing the relevant material on record, we find that the action of the revenue authorities on treating the amount being in the nature of royalty and hence not allowable under section 40(a)(i) cannot be allowed. The obvious reason is that the assessee made the payment on account of data processing costs to its head office. By no standard this amount can be considered as royalty as a consideration for the use of the assets specified under Explanation 2 to section 9(1)(vi). This amount is in the nature of head office expenses. The assessee did not include this amount in the ambit of head office expenses to be considered on the touchstone of section 44C of the Act. Since AO made disallowance by treating it as royalty, he had no occasion to consider the deductibility or otherwise of the amount as per the prescription of section 44A. Under such circumstances, we are of the considered opinion that it would be in the interest of justice if the impugned order on this issue is set aside and the matter is restored to the file of the AO. We order accordingly and direct the AO to consider the deductibility or otherwise of such amount by treating it as head office expenses. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings."

17. Accordingly, by following the earlier orders of this tribunal, we set aside this issue to the record of the Assessing Officer to consider deductibility of this amount as per the provisions of the Act including section 44C.

18. Ground No.7, regarding treating the Head Office and Indian branch as associated enterprise as per section 92 of the Act.

19. At the time of hearing, learned AR of the assessee has stated that assessee does not want to press this ground and same may be dismissed as not pressed. Learned DR raised no objection if ground of the assessee's appeal is dismissed as not pressed. Accordingly we dismiss this ground of the assessee's appeal being not pressed.

20. Ground No.8 regarding the addition of TP adjustment in respect of interest received on call placement.

21. We have heard learned AR as well as learned DR and considered the relevant material on record. At the outset, we note that an identical issue has been considered by the Tribunal in case of group concern name Credit Lyonnais v. ADIT (International Taxation) [2014] 61 SOT 75/[2013] 40 taxmann.com 87 (Mum.) in para 4.4 as under:

'4.4. Having considered the rival submissions and careful perusal of the relevant record, at the outset, we note that an identical issue has been considered by the Tribunal in assessee's own case for the assessment year 200 1-02 in para 4 as under :—

"4. Having heard the rival submissions on this point and perused the relevant material on record, it is noticed that albeit in the earlier years the ground of chargeability of interest income was decided In favour of the assessee, but in the current year the assessee chose not to press this ground because Of an additional ground which was initially sought to be raised by the Revenue for the consequential disallowance u/s.14A of Income-tax Act, 1961 (hereinafter also called as the Act') but subsequently abandoned because of the assessee not pressing of This ground In view of the fact that the learned AR has accepted the taxability of this amount of interest earned from Head office / overseas branches, ground no 2 is dismissed The natural corollary which, therefore, follows is that the interest paid to HO /overseas branches is deductible Ground no. 3 is allowed."

When the assessee has accepted the taxability as interest received on Nostro account and overseas placements, then as decided by this Tribunal in assessee's own case, the natural consequential effect would be the claim of assessee regarding interest paid to the head office/overseas branches, is allowable deduction. Accordingly, ground o.2 is dismissed as not pressed and ground No.3 is allowed.'

22. Accordingly, following earlier orders of this Tribunal, we decide this issue against the assessee.

23. Ground No.9 disallowance of interest and commission by the TPO in respect to ECB advance to Indian borrowers.

24. We have heard learned AR as well as learned DR and considered the relevant material on record. The TPO made an adjustment of 25% of interest and commission received by overseas branches in respect of ECB advance to Indian borrowers. The CIT(A) granted relief of 5% and restricted the adjustment to 20% of interest and commission. At the outset, we note that an identical issue has been considered by the Tribunal in case of Credit Lyonnais (supra) (through their successors Calyong Bank) in vide order dated 31st September 2013 in para 8.7 to 8.8 as under:

'8.7 We have considered the rival submissions as well as relevant material on record. The assessee being Indian branch has helped the foreign currency loan syndication in respect of two loans to Reliance Petroleum Limited and Reliance industries Limited to the tune of US$50 million and USD$ 11 million, respectively. There is no dispute that for these two loans, Credit Agricole lndosuez (Asia), Syngapore worked as an agent and Credit Lyonnais worked as lead arrangers/cc- arrangers. The ANZ Investment Bank, BA Asia Ltd. as well as ABN Amro Bank were also worked as co-arrangers. The role of the assessee in these transactions of foreign currency loan under ECB was to provide financial analysis of the borrowers, general market conditions and regulatory environment. The learned AR has vehemently argued that as per para 4 of Protocol, profit cannot be attributed to the PE on account of facilitation of conclusion of loan agreement or mere singing thereof. We do not agree with the contention of the learned AR of the assessee because of the fact that the role of the assessee is not merely facilitation of conclusion of loan agreement or signing thereof but the services provided by the assessee are the core-basis for taking the decision of granting the loan by the syndicate. The assessee provided the services regarding clients creditability analysis, its capacity so as to consider the capacity to repay the loan and risk involved in the loan transaction. Therefore, the role of the assessee in providing such a crucial service is inevitable for taking the decision of providing loan and as such cannot be said to be a mere facilitation of conclusion of the loan agreement or signing thereof. At this stage, para 4 of the Protocol between the India and France is quoted for ready reference as under :—

"4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise."

The plain reading of para 4, mentioned above, makes it clear that if the role of the PE is only to facilitate the conclusion of foreign trade or loan agreement or mere signing thereof, then no profit shall be attributed to PE in terms of Article 7(2) of the Indo France DTAA. As we have discussed above that the assessee's role in providing the services is the core-basis of taking the decision of granting loan, therefore, the nature of services provided by the assessee do not fall under the terms facilitation of conclusion of loan agreement or signing thereof as stipulated under para 4 of the Protocol.

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 C)T(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.'

25. As it is clear from the earlier order of this tribunal that the benefit of para 4 of the protocol between India and France does not apply as assessee has rendered the key services for taking decision of granting loan by the syndicate of Banks to the Indian borrowers, however as it was found that the TPO made the adjustment without considering any comparable. By following earlier orders of this Tribunal, 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 excluding interest received by the foreign branches from the borrowers in question by applying the rate of 20% as accepted in the earlier order. Accordingly, this ground is partly allowed.

26. Ground No.10 regarding rate of tax applicable to the assessee's income.

27. We have heard learned AR as well as learned DR and considered the relevant material on record. At the outset, we note that this issue has been considered and decided by the Tribunal in the assessee's own case for assessment year 2001-02 in para 22 as under:

"The AR before us, admitted that the issue is against the assessee. On going through the order of the CIT(A), we find that the CIT(A) has sustained the order of the AO by applying rate of tax @ 48%, instead of 35% as asked for by the assessee. Now that the assessee has accepted that the coordinate Bench of Kolkata has dealt with the issue and for the reasons mentioned therein, the AR accepts the rate as applied by the AO. We also find that there is no infirmity in the order of the revenue authorities, which we sustain."

28. We further note that even in the case of Credit Lyonnais (supra) (through their successors Calyong Bank), the issue has been considered and decided by the tribunal against the assessee. Accordingly, following the order of this tribunal, we decide this issue against the assessee that the rate of tax applicable on the assessee's income is 48%.

29. In the Cross Appeal, the revenue has raised the following grounds.

30. Ground No.1 regarding deduction of expenses u/s.37(1).

31. We have heard learned DR as well as learned AR and considered the relevant material on record. At the outset, we note that an identical issue has been considered and decided by this tribunal in assessee's own case for the A.Y.2001-02 in para 34 to 36 as under:

'34. Ground no. 3 pertains to disallowance of Rs. 1,16,62,285/- incurred by the HO on credit risk assistance.

35. The issue has been dealt with by the coordinate Bench, wherein they relied upon the decision of JCIT v. American Express Bank Ltd., reported in 24 taxman.com 50 . and held,

"12. Last ground of the Revenue's appeal is against the direction given by the learned CIT(A) to alow deduction of Rs. 48,60,08 independent of the provisions of section 44C of the Act. On this issue as well, the learned Departmental Representative was fair enough to concede that it was covered against the Revenue. We find that the Mumbai Bench of the Tribunal in the case of American Express Bank Ltd. (supra) has also taken similar view on this issue in favour of the assessee. In view of these facts we uphold the impugned order on this issue. This ground is not allowed".

36. Respectfully following the order in the assessee's own case, we sustain the order of the CIT(A).'

32. Following the earlier orders of this tribunal, we decide this issue against the revenue and in favour of the assessee.

33. Ground 2&3, regarding deletion of addition made due to TP adjustment on account of interest received on call placements.

34. We have heard learned DR as well as learned AR and considered the relevant material on record. This ground of revenue's appeal is common to the ground no.8 of the assessee's appeal. The rate of interest received by the assessee was found by the CIT(A), within the tolerance limit of +/- 5% of arms length price determination by the TPO and accordingly the benefit of proviso to section 92C(2) was given to assessee. We found no error in the order of the CIT(A) qua this issue when the interest charged by the assessee is within the tolerance range of the arms length price determined by TPO.

35. Ground No.3 regarding reducing 5% interest and fee out of the addition made by the TPO with respect to ECB advance to Indian borrowers.

36. We have heard learned DR as well as learned AR and considered the relevant material on record. This issue is common to the issue involved in the Ground No.9 of the assessee's appeal. In view of our finding in ground no.9 of the assessee's appeal, this ground of the revenue's appeal is dismissed.

CO No.218/M/2013

37. In the Cross Objection the revenue has raised the only ground as under:

"Without prejudice to the stand of Revenue that the interest of Rs. 3,48,S9,282/- received from HO/Overseas Branches is taxable in India as the branch and HO are separate entities for the purpose of taxation, if the interest income is held to be exempt by treating the HO and Branch as one entity necessary disallowance may be made u/s 14A of the L T. Act."

38. We have heard learned DR as well as AR and considered the relevant material on record. The assessee has not press the ground of taxability of interest of Rs.3.48 crores and consequently the same is subjected to tax. Accordingly the ground raised in the cross objection filed by the revenue become infructuous and hence dismissed.

For Assessment Year 2003-04.

39. For the Assessment Year 2003-04 the assessee has raised the following grounds:

40. Ground No.1 regarding taxability of interest received From Indian Branches from HO/overseas branches.

41. At the time of hearing the learned counsel for the assessee has stated that the assessee does not want to press this ground and therefore ready to pay the tax on the interest received from Head Office/overseas branches. He has prayed that this ground may be dismissed as not pressed. Learned DR has raised no objection it this ground of the assessee's appeal is dismissed as not pressed. Accordingly ground no.1 of the assessee's appeal is dismissed being not pressed.

42. Ground No.2, regarding disallowance of interest paid to HO/overseas branches by invoking the provision of section 40(a)(i), This ground is common to the ground no.2&3 of assessee's appeal for assessment year 2002-03. Therefore in view of our finding on this issue for Assessment Year 2002-03 this ground of the assessee's appeal is allowed.

43. Ground No.3 regarding the profit arising on revaluation of unmatured forward forex contract. This ground is common to the ground no.5 of the assessee's appeal for assessment year 2002-03. In view of our finding for the assessment year 2002-03 on this issue in para 12 of this order, this ground of the assessee's appeal is dismissed.

44. Ground No.4 regarding disallowance of provision toward country risk. The assessee made a provision of Rs.41,00,000 towards country risk management as per RBI guidelines vide its Circular No.DBOD.BP.71/21.04.103/2002-03 dated 19th February 2003. The AO disallowed the claim of deduction as this was not an actual return of bed debts, but only a provision was made as per the guidelines of the RBI therefore, in view of the first proviso to section 36(1)(viia)(a) of the Act no deduction is allowable to a foreign banking company. The CIT(A) has confirmed disallowance made by the AO, when the assessee itself has fairly conceded that this issue is now covered against the assessee by the decision of special bench of this Tribunal in case of New India Industries Ltd. v. Asstt. CIT [2007] 18 SOT 51 (Delhi) as well as the decision coordinate Bench in case of Ahmedabad and Gujarat Gas Financial Services Ltd v. Income Tax [2008] 115 ITD 218 (Ahd.) .

45. Before us, the learned AR has fairly conceded that this issue is covered against the assessee by the decision of the Special Bench of this Tribunal. Accordingly, we decide this issue against the assessee and in favour of the revenue.

46. Ground No.5 disallowance u/s14A being interest paid on FCNR(B) deposits. This issue is common to the ground no.3 raised by the revenue in the cross appeal as under:

"3. On the facts and in the circumstances of the case and in law, whether the ld. CIT(A) was justified in directing the Assessing Officer not to tax the interest income of Rs 18,71,711/- on nostro balances."

47. We have heard learned DR as well as AR and considered the relevant material on record. Learned AR of the assessee has submitted that as the assessee has not pressed ground of taxability of interest received Nostro account balances in the earlier years and consequently provision of u/s.14A cannot be invoked.

48. Learned AR of the assessee has stated that the assessee is ready to offer to tax the amount of interest received on balance of Nostro account. Accordingly, learned AR has urged that disallowance made u/s.14A may be deleted and the amount of interest may be taxed. In view of the statement of the learned AR of the assessee and to maintain the consistence on this issue, we direct the AO to tax the interest received on Nostro account balances and consequently the disallowance made u/s.14A is deleted. Ground no.5 of the assessee's appeal as well as ground no.3 of the revenue's appeal are allowed.

49. Ground no.6 regarding disallowance of provision, in respect of non performing assets. The assessee had made a provision of Rs.11.91 lacks in respect of NPA in pursuant to the Circular of RBI and claim of the same as deduction. The AO rejected the assessee's claim for deduction in respect of the provision made on the ground that section 36(1)(viia)(b) of the Act put a cap on all such provisions to the extent of 5% of total income which being accorded to the assessee. Accordingly, the AO held that no separate claim for any provision by whatever name called can be said to be allowable to the bank. On appeal, CIT(A) has confirmed the disallowance made by the AO in view of the decision of the special benches of this tribunal in case of New India Industries Ltd. (supra) as well as Gujarat Gas Financial Services Ltd. (supra).

50. Before us, learned AR of the assessee has placed reliance on the decision of the Hon'ble Supreme Court in case of Vijaya Bank v. CIT [2010] 323 ITR 166/190 Taxman 257 and submitted that the Hon'ble Supreme Court has held that if an amount is debit to the profit and loss account by creating a provision for a bad and doubtful debt, and further if the assessee has correspondingly/simultaneously obliterated the said provision from its account by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance-sheet, and consequently at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance-sheet is shown as net of the provision for "impugned bad debt", the assessee will be entitled to the benefit of deduction under section 36(1)(vii), as there is an actual write off by the assessee in his books.

51. We note that the AO has disallowed the claim of the assessee because it was found as a provision for NPA. As far as the allowbility of the claim for the provision for NPA is concern, it is settle proposition that the same cannot be allowed. The ld. AR has relied upon the decision of Hon'ble Supreme Court in case of Vijaya Bank (supra) however, when the provision in question is for NPA and not for Bad debts then in view of the decision of Hon'ble Supreme Court in case of Southern Technologies Ltd. v. Jt. CIT [2010] 320 ITR 577/187 Taxman 346 , provision for NPA is not a allowable claim. Accordingly, this issue is decided against the assessee.

52. Ground nos.7&8 regarding deductibility of expenditure of VRS payment under section 35DDA and not under section 37(1).

53. At the time of hearing, learned AR of the assessee has stated that assessee does not want to press this ground and same may be dismissed as not press. Learned DR has raised no objection if ground no.7&8 of the assessee's appeal are dismissed as not press. Accordingly, these grounds of the assessee's appeal are dismissed being not pressed.

54. Ground no.9 regarding disallowance of 20% of interest and commission as per TPO order with respect to ECB advance to Indian borrowers.

55. We have heard learned AR as well as DR and considered the relevant material on record. This ground is common to the ground no.9 of the assessee's appeal for assessment year 2002-03. In view of our finding on this issue for assessment year 2002-03, this ground is partly allowed.

56. Ground no.10 regarding rate of tax applicable to the assessee's income. This ground is common to the ground no.10 of the assessee's appeal for assessment year 2002-03, in view of our finding fir assessment year 2002-03, this ground is decide against the assessee.

57. Assessee has raised the additional grounds as under:

58. We have heard learned AR as well as DR and considered the relevant material on record on the admissibility of the additional grounds raised by the assessee. We note that both the additional grounds raised by the assessee are legal in nature and no investigation of fact is required for adjudication of these grounds. Accordingly, in the interest of justice and in view of the decision of Hon'ble Supreme Court in case of National Thermal Power Co. Ltd. v. Commissioner Of Income Tax [1998] 229 ITR 383 , we admit the additional grounds for adjudication on merits.

59. As regards, the additional ground no.1 for disallowance u/s.14A, we note that the CIT(A) has made disallowance of Rs.2,00,000/- on ad-hoc basis. The learned AR of the assessee has submitted that in the earlier years the tribunal has examined this issue and found that the assessee has urged its own interest free fund for the investment in the securities and therefore, no disallowance can be made u/s.14A on account of expenditure. He urged that 2% of the dividend income can be disallowance on account of operating expenditure. The DR has relied upon the orders of the authorities below. At the outset, we note that this ground is common to the ground no.4 of the assessee's appeal for assessment year 2002-03. In view of our findings for assessment year 2002-03, we restrict disallowance u/s.14A to 2% of the exempt income.

60. The additional ground No.2 regarding non allowbility of deduction u/s.36(1)(viia)(b).

61. We note that this issue is connected with the issue of disallowance of provision for non performing asset. As the issue of disallowance of non performing asset has been decided against the assessee, therefore, this issue is also decided against the assessee.

62. For the Assessment Year 2003-04 the Revenue in the Cross Appeal has raised the following grounds:

63. Ground no.1 regarding restriction of disallowance by the CIT(A) to Rs.2,00,000/- on ad-hoc basis. This issue is common to the additional ground raised by the assessee. In view of our finding for assessment year 2002-03 as well as on the additional ground of the assessee this ground of the revenue's appeal is dismissed.

64. Ground no.2 regarding deductibility u/s.37(1) of the direct expenses incurred by Head Office.

65. We have heard learned DR as well as ld. AR and considered the relevant material on record. This issue of the revenue's appeal is common to the issue raised in ground no.1 of the revenue's appeal for assessment year 2002-03. In view of our finding ground no.1 for assessment year 2002-03, this ground of the revenue's appeal is dismissed.

66. Ground No.3 regarding taxability of interest on Nostro account balances.

67. We have decided this ground along with ground no.5 of the assessee's appeal Accordingly, this ground is allowed.

68. Ground No.4(a) regarding allowance of 5% interest and fees out of the addition made by the TPO with respect of ECB advances to Indian borrowers. This ground of the revenue's appeal is common to the ground no.3 of the revenue's appeal for assessment year 2002-03. In view of our finding on the ground no.3 of the revenue's appeal is dismissed.

69. Ground no.4(b) regarding TP adjustment in respect of credit risk assistance expense of Rs.88,99,091/- charged by HO to the Indian Branch for providing assistance in doing credit risk analysis for the Indian entity. The TPO noted that this expenses has been charged to the Indian entity in the same invoices in which the HO has allocated expenses of Rs.20,391,525/- as Indian's share of HO expenses. Further the TPO has noted that this expenses has not been debited by the assessee to its profit and loss account, but has been claimed separately as a deduction in the computation of income filed with the return of income. The HO expenses of Rs.20,391,525/- was subject matter of consideration under section 44C. The assessee contended before the TPO that Head Office had also certain expenditure which is directly attributable to Indian branch, over and above the normal HO expenses/allocation. Therefore, expenses have not been considered for arriving at the limits allowable u/s44C. The TPO held that the details filed by the assessee indicate that these amounts of Rs.80,99,091/- are not being debited to the profit and loss account are being claim of the computation of income, as separate expenses. The amounts are also not being paid when Head Office had already charged. The assessee expenses towards cost of credit risk services to the tune of Rs.20,391,525/-. The TPO held that these expenses appear to be a duplication of services which are being performed by the Indian Branches. Even if vetting is required by the Paris Branch to reduce the risk of a wrong business decision, there cannot be two allocations for the same services. Accordingly, the TPO held that these expenses for the same activity are being claimed twice one as part of the Head Office Expenses and the other as separate expenses, the Arms Length Price of the separately claimed expenses was determined as NIL. The CIT(A) has deleted the addition made by the TPO by accepting the explanation of the assessee that these are for separate invoices and services rendered by the Head Office.

70. We have heard learned DR as well as learned AR and considered the relevant material on record. The TPO has recorded the fact that these expenses are invoiced by the Head Office in the same invoices in which the cost of credit risk expenses of Rs.20,391,525/- were also charged to the assessee.

71. Since no material has been product to show that this expenditure as claimed by the assessee separately is for the exclusive and dedicated work/service done by the HO to the assessee. Further there is no explanation by the assessee as on what basis this expenditure is charged by HO. Therefore, this issue cannot be decided in the absence of complete fact as whether the Head Office has charged this expenditure on the basis of man hour or dedicated deskwas assigned for this purpose exclusively for the service of the assessee. The assessee has also not filed any certificate from the auditor of the Head Office in support of this claim. Accordingly, we set aside this issue to record of the AO/TPO to examine the facts properly and the evidence to be filed by the assessee in support of this claim. The assessee is directed to file relevant evidence and certificate from the auditor of the Head Office to show that the payment has been made towards the dedicated exclusive service rendered by the Head Office to the assessee. Accordingly this ground is allowed for statistical purpose.

72. Ground no.5 regarding chargeability of interest under section 234D.

73. We have heard learned DR as well as learned AR and considered relevant material on record. At the outset, we note that this issue is now covered against the assessee by the decision of Hon'ble Bombay High Court in case of CIT v. Indian Oil Corpn. Ltd. [2012] 210 Taxman 466/25 taxmann.com 284 . Accordingly, this issue is decided in favour of the Revenue against the assessee.

CO.No.221/M/2013

74. The revenue has raised the only ground as under:

"Without prejudice to the stand of Revenue that the interest of Rs. 62,56,364/- received from HO/Overseas Branches is taxable in India as the branch and HO are separate entities for the purpose of taxation, if the interest income is held to be exempt by treating the HO and Branch as one entity necessary disallowance may be made u/s 14A of the L T. Act."

75. This ground raised by the revenue in the Cross Objection become infructuous, in view of the interest amount offered by the assessee to tax in ground no.1 of the assessee's appeal. Accordingly, the CO is dismissed as infructuous.

76. In the result, the Cross appeals for both assessment years are partly allowed and Revenue's Cross Objections are dismissed.

SUNIL