The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that surcharge and health and education cess cannot be added to tax computed under the India–France tax treaty where doing so would exceed the maximum rate prescribed by the treaty.
The bench of Beena Pillai (Judicial Member) and Bijayananda Pruseth (Accountant Member) ruled that the arm’s length price of head office cost allocations cannot be fixed at nil merely because the tax authorities consider the expenditure unnecessary or perceive no benefit from it.
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The tribunal granted relief on several corporate tax and transfer pricing issues, including taxation of interest paid by the Indian branch to its overseas head office, deduction of direct expenses incurred abroad for the Indian business, and remuneration for marketing derivative products. Other issues were sent back for verification, fresh benchmarking or recomputation. Both appeals were ultimately partly allowed for statistical purposes.
The appellant/assessee is a France-based banking company conducting corporate and investment banking activities in India through branches that constitute its Indian permanent establishment.
For assessment year 2021–22, the bank declared income of ₹99,27,97,230. For assessment year 2022–23, it declared income of ₹1,59,06,95,250.
During scrutiny, the tax authorities examined transactions between the Indian branch and the bank’s head office, overseas branches and associated enterprises. The disputed adjustments concerned marketing of derivatives, support services for external commercial borrowings, guarantee commissions and allocation of head office expenditure.
The Assessing Officer also disputed the treatment of credit risk assistance, electronic data processing assistance and information system charges, besides taxing interest paid by the Indian branch to the head office or overseas branches. The final assessments were passed following directions issued by the Dispute Resolution Panel.
For assessment year 2022–23, the bank challenged the addition of surcharge and health and education cess to tax calculated at the treaty rate on interest and fees for technical services.
The bank argued that these additional levies could not increase the tax burden beyond the ceiling under the applicable provisions of the India–France Double Taxation Avoidance Agreement.
Accepting the submission, the tribunal held that where a treaty article specifies the maximum rate at which the relevant income may be taxed in India, separately adding surcharge and cess cannot take the tax above that maximum.
The bench directed the Assessing Officer to recompute tax on the relevant interest and fees for technical services at the rate prescribed under the applicable treaty article, without separately adding surcharge and health and education cess.
The direction concerns income taxable at the applicable treaty ceiling; the tribunal did not grant a general exemption from surcharge and cess on all income of the bank.
A substantial dispute concerned the Transfer Pricing Officer’s determination of the arm’s length price of allocated head office expenses at nil.
The challenged adjustments were ₹20,72,79,838 for assessment year 2021–22 and ₹16,61,25,262 for assessment year 2022–23.
The bank submitted that its head office performed centralised functions for global operations and allocated actual costs to international branches under a documented policy. According to the bank, these allocations carried no mark-up and were supported by invoices, cost-centre details, allocation keys, auditor certification and correspondence demonstrating the services provided.
The Revenue maintained that the bank had not adequately established the need for the services, their actual rendition or the resulting benefit.
The tribunal held that once an international transaction involving allocation or recharge of common costs is accepted to exist, its arm’s length price must be determined through a method recognised under Section 92C and the applicable rules.
A subjective view that expenditure was unnecessary or produced no benefit could not, by itself, justify reducing its value to nil without examining the evidence of services, the cost base, allocation keys and any mark-up.
However, the tribunal did not finally accept the entire allocation. It restored the matter to the Transfer Pricing Officer to verify the cost pool, exclude shareholder or stewardship expenses and duplicative costs, and examine the allocation methodology.
The officer was directed to use a prescribed method, refrain from questioning commercial expediency, and provide the bank a reasonable opportunity of being heard.
The bank also argued that it had already restricted the deduction of head office expenditure under Section 44C and that a separate transfer pricing adjustment could result in the same cost being disallowed twice.
The tribunal directed the Transfer Pricing Officer and Assessing Officer to examine the overlap and ensure that no duplicated adjustment or disallowance of the same expenditure was made.
This issue was therefore left for factual verification alongside the fresh determination of the arm’s length price.
The tribunal separately considered expenditure incurred by the head office or overseas branches directly for the Indian branch.
For assessment year 2021–22, the disputed amounts included ₹20,08,51,523 towards system implementation and Asia Pacific information system charges, and ₹5,71,53,416 towards credit risk and electronic data processing assistance.
For assessment year 2022–23, the corresponding disputed amounts were ₹17,36,58,764 for information system charges and ₹6,70,66,164 for credit risk and electronic data processing assistance.
Following earlier decisions in the bank’s own case, the tribunal held that expenditure directly attributable to the Indian branch was allowable under Section 37(1). Such expenses could not be treated as general head office expenditure subject to Section 44C merely because they were incurred outside India.
The Assessing Officer was directed to allow the expenses subject to verification of supporting invoices and their allocation to the Indian branch.
The tribunal also allowed the bank’s challenge to taxation of interest paid by its Indian branch to the head office or overseas branches.
The disputed interest was ₹11,43,28,282 for assessment year 2021–22 and ₹9,62,40,725 for assessment year 2022–23.
Following the earlier coordinate bench ruling, the tribunal noted that the amendment to Section 9(1)(v) could deem the interest to accrue in India under domestic law. However, the more beneficial treaty provisions, considered through Article 12(5) read with Article 7, prevented the interest from being independently taxed in the hands of the head office or overseas branches on the facts of the case.
The Assessing Officer was consequently directed to delete the additions.
The tribunal deleted transfer pricing adjustments concerning remuneration received by the Indian branch for marketing derivative products.
The tax authorities had attributed the entire commercial mark-up or initial dealer spread to the Indian branch. Following earlier findings, the tribunal observed that the Indian branch performed marketing functions, while the trading risks were borne by the head office or overseas branches.
It also noted that the Transfer Pricing Officer’s approach did not determine the arm’s length price through a prescribed method.
As the Revenue had shown no material change in the functional profile or governing arrangement, the tribunal directed deletion of adjustments of ₹11,50,544 for assessment year 2021–22 and ₹1,16,484 for assessment year 2022–23.
The adjustments for marketing and support services relating to external commercial borrowings were restored to the Transfer Pricing Officer for a limited computation.
Following the methodology adopted in earlier years, the tribunal directed application of 20% to fees and other charges, excluding interest. The authorities must first give credit for remuneration already offered by the bank.
The tribunal clarified that no adjustment would survive where the remuneration already offered was equal to or higher than the arm’s length amount calculated under that methodology.
The dispute over commission for reissuing bank guarantees was also remitted for fresh benchmarking.
The bank argued that the Indian branch reissued guarantees on the strength of counter-guarantees furnished by its head office or overseas branches, and therefore bore no substantive credit or default risk.
The challenged adjustments were ₹20,00,86,230 for assessment year 2021–22 and ₹90,06,926 for assessment year 2022–23.
The tribunal directed the Transfer Pricing Officer to consider the bank’s supporting material, including the Chartered Accountant’s certificate. Any internal comparable uncontrolled price was to be examined with reference to differences in functions, assets, risks and transaction volumes.
The tribunal did not finally determine the appropriate commission.
For assessment year 2021–22, the bank challenged taxation of interest earned by its head office or overseas branches on external commercial borrowings advanced to Indian borrowers.
The disputed components were ₹1,34,92,91,330 and ₹21,13,76,218. The bank maintained that part of the income had already been attributed to its Indian permanent establishment.
The tribunal restored the issue to the Assessing Officer to apply the findings in the bank’s earlier cases and recompute the taxable amount, if any, after accounting for income already attributed to the Indian establishment.
It expressly directed that the same income must not be taxed twice.
The tribunal allowed the bank’s claim for application of the India–France treaty rate to interest of ₹97,82,695 received on an income tax refund under Section 244A for assessment year 2021–22.
Following the Bombay High Court’s decision in the bank’s own case and the earlier tribunal ruling, the Assessing Officer was directed to recompute tax on the refund interest at the applicable treaty rate.
The authorities were also directed to verify disputed tax deducted at source credits using Form 26AS, certificates and other supporting evidence, and grant the credit due under law.
Despite granting relief on several substantive issues, the tribunal rejected the bank’s procedural challenges for assessment year 2022–23.
On the validity of the scrutiny notice, the bench noted that the assessment order and Dispute Resolution Panel directions recorded a notice dated May 31, 2023, whereas the bank’s ground referred to a notice dated June 23, 2024. The bank had not reconciled the discrepancy or demonstrated that the assessment rested only on the latter notice.
The limitation challenge was also rejected. The tribunal recorded that the Dispute Resolution Panel issued directions on December 8, 2025, and the final assessment order was passed on January 6, 2026, within the period prescribed by Section 144C(13).
Referring to the split verdict in ACIT (International Tax) v. Shelf Drilling Ron Tappmeyer Ltd., the bench declined to accept the limitation plea in the absence of a binding majority decision holding otherwise.
The tribunal directed consequential recomputation of interest under Sections 234A, 234B and 234C. For Section 234A, the Assessing Officer must also verify the bank’s claim that its return was filed within the prescribed due date.
The challenge to initiation of penalty proceedings under Section 270A was treated as premature and was not adjudicated in the quantum appeals.
Both appeals were partly allowed for statistical purposes, with certain additions deleted and several issues returned to the tax authorities for further examination.
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