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2022 (6) TMI 1329 - AT - Income TaxIncome 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- -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.
Issues Involved:
1. Applicable rate of tax for the assessee under the India-Korea Double Taxation Avoidance Agreement (DTAA). 2. Deductibility of interest paid by the Appellant to its Head Office. 3. Taxability of interest paid by the Appellant in the hands of the Head Office. 4. Taxability of interest received by the Appellant from its Head Office. 5. Non-applicability of the provisions of section 44C of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Applicable Rate of Tax: The primary issue revolves around whether the assessee, a Korean banking company operating in India, should be taxed at the rate applicable to domestic companies (30%) or foreign companies (40%). The assessee argued that under Article 25 of the India-Korea DTAA, it should not face a higher tax rate than Indian companies. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) rejected this plea, citing Explanation 1 to Section 90 of the Income Tax Act, which clarifies that a higher tax rate for foreign companies does not constitute discrimination. The Tribunal upheld this view, noting that the retrospective amendment to Section 90 (effective from 1st April 1962) overrides the DTAA provisions, and hence, the higher tax rate for foreign companies is valid. 2. Deductibility of Interest Paid by the Appellant to its Head Office: The assessee claimed a deduction for interest paid by its Indian PE to its head office in Korea. The AO disallowed this deduction, arguing that payments within the same legal entity do not constitute admissible deductions. The Tribunal, however, referred to the five-member bench decision in Sumitomo Mitsui Banking Corp, which held that under treaty provisions, such interest payments are deductible. The Tribunal emphasized that the computation of profits attributable to a PE under tax treaties should treat the PE as independent of its head office, thus allowing the deduction of interest payments. 3. Taxability of Interest Paid by the Appellant in the Hands of the Head Office: The AO taxed the interest paid by the Indian PE to the head office under Article 12 of the India-Korea DTAA. The Tribunal rejected this approach, stating that the fiction of hypothetical independence (used for computing PE profits) does not extend to the computation of the head office's profits. Article 11(5) of the DTAA excludes such interest from being taxed under Article 12 if it is effectively connected with the PE. The Tribunal concluded that taxing the same interest as income of the head office would render the deduction meaningless. 4. Taxability of Interest Received by the Appellant from its Head Office: The assessee initially contested the taxability of interest received from its head office but later abandoned this plea. The Tribunal noted that the interest received by the PE from its head office should be included in the PE's taxable income, consistent with the five-member bench decision in Sumitomo Mitsui Banking Corp. 5. Non-applicability of the Provisions of Section 44C of the Income-tax Act, 1961: The assessee raised an additional ground, arguing that the provisions of Section 44C, which limit the deduction for head office expenses, should not apply under Article 25 of the India-Korea DTAA. The Tribunal admitted this additional ground and remitted the matter to the AO for adjudication on merits, as it had not been examined previously. Conclusion: The appeal was partly allowed, with the Tribunal granting relief on the deductibility of interest paid by the PE to the head office and rejecting the taxability of such interest in the hands of the head office. The cross-objections filed by the AO were dismissed as infructuous. The additional ground regarding Section 44C was remitted to the AO for further examination.
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