The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has allowed State Bank of India’s claim for deduction of a ₹1,663.41 crore pension provision, holding that a liability determined through actuarial valuation constitutes an accrued and ascertained employee-benefit obligation rather than a contingent liability.
In a consolidated order covering cross-appeals filed by SBI and the Income Tax Department for Assessment Years 2012-13 and 2013-14, the Tribunal also rejected the Transfer Pricing Officer’s mechanical application of a 20% mark-up based on the Safe Harbour Rules for a year in which those rules were not applicable.
The Bench of Beena Pillai (Judicial Member) and Jagadishn (Accountant Member) however, held that SBI’s technical services to its associated enterprise involved an element of value addition and consequently prescribed a reasonable mark-up of 10% on the relevant cost.
One of the principal disputes concerned SBI’s claim for deduction of a ₹1,663.41 crore provision towards pension liabilities.
SBI contended that the provision represented an accrued employee-benefit obligation whose value had been scientifically quantified through actuarial valuation. The liability, according to the bank, was not contingent merely because the actual payment would take place in the future.
The Tribunal noted that an identical issue had been decided in SBI’s favour for Assessment Year 2011-12. In that decision, the Tribunal had distinguished a liability created merely through a board resolution from an independently enforceable employee-benefit obligation quantified on actuarial principles.
It reiterated that actuarial valuation does not create the liability. Instead, it determines the present value of an obligation that has already accrued because of services rendered by employees.
Relying on the earlier orders in SBI’s own cases and noting that the Revenue had not demonstrated any material change in the facts or the law, the Tribunal allowed the bank’s claim.
The Bench accordingly treated the pension provision as an ascertained liability and deleted the disallowance of ₹1,663.41 crore.
The transfer pricing dispute involved a total adjustment of ₹55.49 lakh. This included an adjustment of ₹14.82 lakh relating to technical services and ₹40.66 lakh concerning reimbursements and information technology-enabled services.
SBI had entered into a technical service agreement with Nepal SBI Bank, a joint venture between SBI and the Government of Nepal. The agreement had received approval from the Central Bank of Nepal and the governments concerned.
Under the arrangement, SBI deputed personnel to Nepal SBI Bank and recovered charges on an agreed fixed-fee basis. The bank recovered ₹74.13 lakh towards technical service fees.
SBI also provided information technology-enabled and related services to associated enterprises, including SBI Mauritius, SBI California, PT Bank SBI Indonesia and SBI Canada. Expenses relating to salary and allowances, directors’ sitting fees, the IT Global Centre and central accounting were allocated to the overseas entities.
The bank maintained that these were head-office expenses incurred for the coordinated and smooth functioning of its international banking operations. It recovered ₹203.33 lakh from its associated enterprises on a cost-to-cost basis without adding a separate mark-up.
The Transfer Pricing Officer concluded that SBI should have charged a 20% mark-up on both the technical service fees and the ITeS reimbursements. The officer relied on the margin prescribed under the Safe Harbour Rules and proposed the corresponding adjustments.
The Dispute Resolution Panel upheld the adjustment, observing that SBI had not produced suitable comparables for business support services and that the TPO had determined the value of the international transactions on a rational basis.
Before the ITAT, SBI argued that the Safe Harbour Rules were not in force for Assessment Year 2012-13 and therefore could not be used to determine the arm’s length price for that year.
Accepting this contention, the Tribunal held that the 20% mark-up prescribed under the Safe Harbour regime could not have been mechanically applied to a year for which the regime was not applicable.
However, the Bench declined to accept SBI’s broader contention that the consideration received from its associated enterprises should automatically be regarded as being at arm’s length.
The Tribunal observed that SBI had rendered technical services through the deputation of personnel and had itself acknowledged that the amount recovered from Nepal SBI Bank was higher than the cost incurred. The transaction therefore included an element of service and value addition that warranted appropriate remuneration.
Considering that the transaction pertained to Assessment Year 2012-13 and had remained in litigation for several years, the Tribunal found that identifying reliable contemporaneous comparables at this stage might not be practicable. A fresh remand, it said, would prolong the litigation without necessarily producing a more reliable arm’s length determination.
To bring finality to the dispute, the Bench fixed a mark-up of 10% on the relevant cost incurred by SBI. The amounts already recovered by the bank must be credited, and the transfer pricing adjustment will be restricted to the difference, if any, between the consideration calculated with the 10% mark-up and the amounts already recovered.
The Tribunal expressly clarified that the 10% mark-up was fixed on the peculiar facts of the case and was not based on the margin prescribed under the Safe Harbour Rules.
SBI had earned exempt income of ₹896.83 crore and voluntarily disallowed ₹1.31 crore towards administrative expenditure.
The Assessing Officer computed a disallowance of ₹1,163.37 crore under Section 14A read with Rule 8D. After reducing the amount voluntarily disallowed by SBI, the net addition stood at ₹1,162.06 crore.
The Tribunal restored the issue to the Assessing Officer for a limited recomputation. It directed the officer to exclude the interest component in terms of the applicable precedent and consider only those investments that had actually yielded exempt income during the relevant year.
Credit must also be given for SBI’s voluntary disallowance. The Tribunal further directed that the total disallowance under Section 14A could not exceed the exempt income earned during the year.
Another substantial dispute involved the exclusion of ₹978.81 crore relating to SBI’s provision for standard assets while computing the deduction under Section 36(1)(viia) of the Income Tax Act.
The department maintained that standard assets classified under Reserve Bank of India norms could not form part of a provision for “bad and doubtful debts.”
Rejecting this restrictive approach, the Tribunal held that the Income Tax Act and RBI’s prudential norms operate in different fields. RBI guidelines govern regulatory classification and financial reporting, whereas eligibility for deduction must be determined from the language of Section 36(1)(viia).
The expression “provision for bad and doubtful debts,” the Tribunal observed, is not necessarily restricted to accounts already classified as non-performing assets under RBI norms. A debt may be regarded as doubtful for provisioning purposes before it formally becomes an NPA.
The principle of allowability was therefore decided in SBI’s favour. The issue was restored to the Assessing Officer only for determining the correct amount of deduction within the statutory limits.
SBI also challenged additions of ₹51.31 crore towards interest on non-performing assets and ₹23.57 lakh towards interest on non-performing investments.
The Tribunal accepted SBI’s reliance on RBI prudential norms and the real-income principle. Following its decisions in the bank’s own cases for earlier years, it held that interest on sticky loans and non-performing investments could not be taxed merely on an accrual or notional basis when its actual recovery was uncertain.
The corresponding ground raised by SBI was allowed.
The Tribunal also allowed SBI’s deduction of ₹92 crore contributed to its Retired Employees Medical Benefit Scheme.
It rejected the Revenue’s contention that the expenditure was not allowable because the employer-employee relationship had ended after retirement. The Tribunal held that retirement benefits arise from past employment and constitute a legitimate business obligation.
The contribution formed part of a structured employee-benefit arrangement and could not be disallowed merely on technical grounds.
The Revenue challenged relief of ₹746.63 crore granted to SBI in relation to the loss on revaluation of investments and amortisation of premium on securities classified as Held to Maturity.
The Tribunal dismissed the Revenue’s ground and reiterated that securities held by a bank form an integral part of its banking business. The distinction between investments and stock-in-trade could not be applied mechanically without considering the commercial realities of banking operations.
It held that RBI classification does not conclusively determine the tax character of securities. A bank following a recognised and consistent method of valuing securities at cost or market value, whichever is lower, remains entitled to claim the resulting depreciation.
The Tribunal therefore upheld the relief granted to SBI.
The Revenue also questioned the allowance of ₹789.86 crore paid by SBI as broken-period interest while purchasing securities.
The Tribunal noted that broken-period interest represents interest attributable to the period before the purchaser acquired the security. Where the corresponding broken-period interest received is taxed as business income, the amount paid cannot be disallowed without producing an artificial or notional taxable income.
Following the Bombay High Court’s ruling in American Express International Banking Corporation and earlier orders in SBI’s own cases, the Tribunal upheld the deduction and dismissed the Revenue’s challenge.
On the issue of deferred-payment guarantee commission, however, the Tribunal ruled in favour of the Revenue.
It held that where the commission is received when the guarantee is issued and is not refundable, the income accrues in the year of receipt. It cannot be spread over the entire period for which the guarantee remains in force.
The Tribunal consequently set aside the relief granted by the Commissioner of Income Tax (Appeals) and restored the Assessing Officer’s treatment.
The Tribunal also decided several connected issues concerning both assessment years. Among other findings, it dismissed SBI’s claim for depreciation of ₹3.22 crore on leased assets; permitted recognition of depreciation and appreciation arising from the valuation of securities classified as Available for Sale and Held for Trading; allowed SBI’s ₹21.36 lakh staff-welfare expenditure, including payment made to a school for reservation of seats.
The tribunal restored the taxation of ₹142.71 crore recovered from bad debts written off in earlier years to the Assessing Officer for verifying whether deductions had previously been allowed; restored SBI’s deduction claim relating to windmill undertakings under Section 80-IA for examination; and sent disputes concerning short deduction of tax and disallowance under Section 40(a)(ia) back for verification;
The tribunal restored the claim involving ₹25.93 crore of interest expenditure disallowed under Section 40(a)(ia); restored SBI’s claim concerning ₹63.29 lakh of delayed-payment compensation; dismissed SBI’s claim for an additional deduction under Section 36(1)(viii) because a complete and verifiable computation had not been produced; restored the claim for double taxation relief and directed verification of the available foreign tax credit.
The ITAT directed the grant of due TDS credit after verification; and held that interest under Sections 234D and 244A must be calculated consequentially in accordance with law.
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