Home Case Index All Cases Income Tax Income Tax + AT Income Tax - 2022 (6) TMI AT This
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2022 (6) TMI 1329 - ITAT MUMBAIIncome deemed to accrue or arise in India - Applicable rate of taxation - retrospective insertion to Explanation to Section 90 - Assessee claim for the benefit of the non-discrimination clause of the India-Korea Double Taxation Avoidance Agreement (‘DTAA’) -taxing the Appellant’s income @ 40% (plus surcharge and education cess) or at rate applicable to a resident taxpayer - levy of the income tax on the assessee company at a rate higher than the domestic companies - HELD THAT:- We hold that the applicable rate of taxation, under the Income Tax Act 1961, for the assessee company cannot be read down in the light of the provisions of a double taxation avoidance agreement, as is the specific mandate of Explanation 1 to Section 90 or even on the first principles without the benefit of this Explanation. As for the mention, in paragraph 7 of the Bank of Tokyo Mitsubishi decision [2019 (8) TMI 895 - CALCUTTA HIGH COURT] of some clarification issued by the CBDT with respect to ABN Amro Bank, even if that be so, it is only elementary that Section 119(1)(a) does not visualize issuance of a circular “so as to require any income-tax authority to make a particular assessment or to dispose of a particular assessment in a particular manner”, and, therefore, such a clarification will not have any bearing on cases other than ABN Amro Bank, or the legally binding force of Section 119. In any event, even going by the observations made by the Hon’ble High Court, this communication was issued prior to 24th November 1997 – much before the retrospective insertion of Explanation 1 to Section 90 took place. With the amendment in law and with this significant change in the legal position, even if there is an old circular, issued in the context of pre-amendment law, it will not hold good any longer. Nothing, therefore, turns on the said communication either, and, in any event, even this communication has not been sighted before us. We are of the considered view that the plea of the assessee is, therefore, devoid of any sustainable merits. We reject the plea of the assessee, and decline to interfere in the matter. Deductibility of Interest paid by the Appellant to its Head Office - AO/DRP disallowing interest paid by the Appellant to its head office - HELD THAT:- The short reason for which the impugned disallowance is made is that the payment by an entity to itself, i.e. by its permanent establishment to the head office, and, therefore, it is an inadmissible deduction. What this approach overlooks is that this theory of tax neutrality vis-à-vis intra-company payments and incomes, whatever be its relevance or irrelevance in the cross-border situations, finds its support from judicial precedents in the cases of Sir Kikabhai Premchand [1953 (10) TMI 5 - SUPREME COURT] and Betts Hartley Huett & Co Ltd [1978 (4) TMI 58 - CALCUTTA HIGH COURT] is in the context of the computation of profits under the Income Tax Act. This theory would not, therefore, extend to the computation of profits attributable to a permanent establishment under the scheme of the tax treaties. The five-member bench decision, in the case of Sumitomo Mitsui Banking Corp [2012 (4) TMI 80 - ITAT MUMBAI] recognizes this position and specifically states that “the position under the domestic law, as emanating from the above judicial precedents is that one cannot make profit out of himself”, and in the lights of the corollaries to this position, declined the applicability of this theory in the treaty situation. There is no other reason assigned in this case in support of the disallowance of interest paid by the PE to the head office or the GE. For this short reason alone, therefore, the impugned interest disallowance must be deleted. The computations of profits attributable to the PE are to be computed on the basis of this hypothetical independence of the PE from its GE, and, to that extent, the profit neutrality theory of intra-company transactions will not come into play - though the assessee had initially raised a grievance against the taxability of interest received from its head office, when the appeal came up for hearing before us, this plea was abandoned even as there was a five-member bench decision, in support of the assessee, on that point. The assessee has claimed a deduction for interest paid by the PE to GE, and included in its taxable income, interest received by the PE from its GE. That is what, in our humble understanding and for the reasons set out above, the computation of profits of the PE, under the scheme of the tax treaties, envisages. In view of these discussions, and bearing in mind the entirety of the case, we hold that the disallowance of interest is not sustainable in law. Assessing Officer is directed to delete the same. Whether the said interest paid by the PE to GE (i.e. PE-GE interest) can be taxed in the hands of the assessee company as income of the GE, as has been done by the Assessing Officer? - It may perhaps be too much to contend that the taxability of PE-GE interest receipt is required to be considered on the basis of the domestic law provisions, but even this discussion seems entirely academic in the light of our finding, as above, that an internal charge for the PE profit attribution does not amount to taxable income in the hands of the GE anyway. Be that as it may, having decided this aspect of the matter on the treaty principles so far as taxability of PE-GE interest in the hands of the GE is concerned, we need not examine that aspect any further. In our considered view, for the detailed reasons set out in this order, dehors this theory of tax neutrality for intra-GE transactions also, this PE-GE interest is not taxable in the hands of the assessee. Of course, we have reached the same destination by following a different path but then as long as reach the same destination, our traversing through a different path does not really matter at all. We uphold the plea of the assessee that the interest paid by the PE to the GE cannot be brought to tax in the hands of the assessee company, even though it is to be allowed as a deduction in the computation of profits attributable to the permanent establishment. The Assessing Officer is directed to grant the relief accordingly. The assessee has already offered to tax the interest income received from its head office, and there is no surviving dispute in respect of the same.
|