2014 (7) TMI 169 - AT - Income Tax

TDS on interest paid to Head Office/Overseas branches Principle of mutuality - Disallowance u/s 40(a)(i) of the Act - Held that - The decision in Sumitomo Mitsui Banking Corporation Versus Deputy Director of Income-tax, (IT), Rg. 2(1), Mumbai 2012 (4) TMI 80 - ITAT MUMBAI followed - where any Indian branch of a foreign bank passing interest to its head office and other overseas branches of the said foreign bank on advance received by it, the interest is neither deductible in the hands of the Indian branch nor chargeable to tax in the hands of the head office and overseas branches, as all being single entity - In the domestic law, such an income cannot be taxed. The issue has been decided by the Special Bench, in favour of the assessee, by holding that interest paid to the head office of the assessee bank by its Indian Branch which constitutes its P.E. in India, is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit to the P.E. which is taxable in India as per the provisions of article 7(2) and 7(3) because, it amounts to payment to self which is not taxable under the domestic law - Thus, the principles of mutuality were invoked for non deduction of tax - no disallowance u/s 40(a)(i) can be made on the payment of interest paid to the head office / overseas branches as the same is not taxable, being payment to self on the ground of principles of mutuality and no TDS was required to be deducted Decided in favour of Assessee.

Issues involved:
1. Deduction for interest paid to Head Office/Overseas branches disallowed by AO.
2. Applicability of section 40(a)(i) regarding tax deduction at source.
3. Interpretation of domestic law and treaty provisions on taxation of interest payments.
4. Judicial precedence set by the Special Bench decision in Sumitomo Mitsui Bank Corp. v/s DDIT.

Detailed Analysis:
1. The issue in question pertains to the disallowance of a deduction for interest paid to Head Office/Overseas branches by the assessee. The AO disallowed the deduction under section 40(a)(i) as no tax was deducted at the source by the assessee on the interest payment. The assessee contended that the payment made to the Head Office and other overseas branches should not attract section 195 as it was a payment to self, and thus, no disallowance should be made. The CIT(A) also rejected the assessee's contention, emphasizing that only the income accrued or arisen in India is subject to taxation, not the global income of the assessee bank.

2. The applicability of section 40(a)(i) regarding tax deduction at source was a crucial aspect of the case. The Special Bench decision in Sumitomo Mitsui Bank Corp. v/s DDIT was cited, which held that interest paid by an Indian branch to its Head Office and overseas branches of a foreign bank is not deductible as expenditure under domestic law. However, the interest payment is deductible while determining the profit attributable to the Permanent Establishment (PE) in India, as per the provisions of the treaty. The interest payment was considered not taxable in India, invoking the principles of mutuality, and hence, no TDS was required to be deducted.

3. The interpretation of domestic law and treaty provisions on the taxation of interest payments was extensively discussed. The Special Bench decision clarified that the Indian PE and the foreign General Enterprise (GE) are not separate entities for taxation purposes under domestic law. The interest payment to the Head Office was deemed allowable as a deduction while computing the profits of the PE in India for taxation purposes, as per the treaty provisions. The decision emphasized that the interest payment to the Head Office and overseas branches was not chargeable to tax in India, aligning with both domestic law and the treaty provisions.

4. The judicial precedence set by the Special Bench decision in Sumitomo Mitsui Bank Corp. v/s DDIT was crucial in resolving the issue. The decision established that interest payments made by the Indian branch of a foreign bank to its Head Office and overseas branches were not taxable in India, leading to the conclusion that no disallowance under section 40(a)(i) could be made. The decision upheld the principles of mutuality and clarified the tax treatment of such interest payments, providing a clear legal framework for similar cases.

In conclusion, the judgment highlighted the interplay between domestic law, treaty provisions, and judicial precedents in determining the tax treatment of interest payments to Head Office/Overseas branches, ultimately ruling in favor of the assessee based on the principles of mutuality and the interpretation of relevant legal provisions.

← Previous Next →