I-T dept puts foreign banks' HQ expenses under scanner
December, 15th 2008
Indian branches of foreign banks
have come under the scanner of the Income-Tax Department. The Central Board of Direct Taxes (CBDT)
has instructed its field forces to carefully examine their claims of head office expenses to ensure they were in conformity with transfer pricing provisions and relevant tax treaty.
As per the provisions of the I-T Act, in case of a non-resident, head office expenditure is allowed to be deducted from total income at the rate of 5% of the adjusted total income or expenditure actually incurred by the taxpayer, whichever is less.
Also, deduction for any expenditure arising from an international transaction has to be in conformity with its arms-length price, which is the price at which two unrelated parties would agree to a transaction.
Assessing officers will check if these norms were being adhered to properly, an I-T department official, who did not wish to be named, said. At times, some branches of foreign companies prop up expenses charged as head office expenditure to show lower profits so that they have to pay lower tax.
The CBDT has also instructed its field officers to carry out assessments of Indian banks after proper verification of their accounts. Banks detailed statements filed with RBI will be matched with their income-tax returns filed with the department, as part of the verification exercise.
This is being particularly done to ensure that banks do not show higher non-performing assets or bad debts in their income returns than they do in their submissions to the RBI, to claim higher deduction. By claiming higher deduction on account of expenses, taxpayers reduce their taxable income.
The CBDT instruction follows an observation by the Comptroller and Auditor General that income-tax department was allowing large amounts of deductions under various sections to banks without proper verification causing loss of revenue, an official with the I-T department said.
It is, therefore, necessary that assessments in the cases of banks are completed with due care and after proper verification, the CBDT instruction said.