2019 (2) TMI 2043 - AT - Income Tax

Income accrued in India - PE in India - As per CIT-A addition has been wrongly made - grievance of the Revenue is that the CIT(A) ought to have appreciated that the PE of the assessee in India is a separate entity and interest paid by the Branch to its Head Office is liable to be taxed in the hands of the assessee in India as income - HELD THAT - This aspect of the matter has indeed been dealt with by the Tribunal vide its order 2014 (4) TMI 733 - ITAT MUMBAI in favour of the assessee and since the order of the Tribunal continues to hold the field, as it has not been altered by any higher authority, the Ground raised by the Revenue is liable to be dismissed. We hold so. Addition u/s 40(a)(i) - whether CIT(A) is correct in holding that the provisions of section 40(a)(i) do not apply without appreciating that the interest was chargeable to income? - HELD THAT - It is not Sec. 40(a)(i) of the Act which has been invoked by the Assessing Officer in order to bring to tax the impugned interest income. Pertinently, in this year, the impugned interest income has been brought to tax on the ground that it accrues or arises in India on account of assessee s PE in India. In contrast, in the earlier year, Sec. 40(a)(i) of the Act was invoked to disallow the expenditure represented by the interest paid by the Indian branch to the Head Office on the ground of non-deduction of tax at source, whereas in the instant year the said expenditure has been explicitly allowed by the AO after noticing that the requisite tax has been deducted at source. We are only trying to bring out the aforesaid to point out that the Ground of appeal has been raised by the Revenue without considering the relevant facts of the instant year. Be that as it may, the aforesaid Ground is liable to be dismissed.

Summary

Issues:
1. Taxability of interest income received by the Head Office from branches in India.
2. Applicability of Section 40(a)(i) of the Income Tax Act.

Analysis:

Issue 1: Taxability of interest income received by the Head Office from branches in India

The appeal by the Revenue pertains to the order of CIT(A)-57, Mumbai concerning the Assessment Year 2009-10. The Revenue contended that the interest income received by the Head Office from branches in India should be taxed in India as income. The Assessing Officer deemed the interest income to accrue or arise in India and held it taxable. However, the CIT(A) referred to a previous Tribunal decision for the same assessee for Assessment Year 2005-06, which held that such interest income is not chargeable to tax in India. The Tribunal upheld the CIT(A)'s decision based on the precedent, dismissing the Revenue's appeal.

Issue 2: Applicability of Section 40(a)(i) of the Income Tax Act

Regarding the applicability of Section 40(a)(i) of the Act, the Revenue argued that the CIT(A) erred in not applying it. However, the Tribunal clarified that in the present case, the interest income was taxed based on the accrual or arising in India due to the Permanent Establishment of the assessee in India. Unlike the previous year where Section 40(a)(i) was invoked for non-deduction of tax at source, in the current year, the tax was deducted at source. The Tribunal held that the Revenue's argument was misconceived as it did not consider the specific facts of the instant year. Consequently, the Tribunal dismissed the Revenue's appeal.

In conclusion, the Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal, emphasizing that the interest income received by the Head Office from branches in India was not taxable in India based on the established precedent. The Tribunal also clarified the distinction in the application of Section 40(a)(i) between the current year and the previous year, leading to the dismissal of the Revenue's appeal.