2016 (5) TMI 428 - AT - Income Tax

Non accepting the claim that the rate of tax applicable to domestic companies and/or co-operative banks for Assessment Year 2004-05 is also applicable to the Appellant, in accordance with the provisions of Article 26 (Non-discrimination) of the double taxation avoidance agreement between India and the Republic of France ( India - France tax treaty - Held that - The issue is covered, against the assessee as relying on Chohung Bank vs. DDIT 2005 (11) TMI 372 - ITAT MUMBAI and JCIT vs. Sakura Bank Limited 2005 (12) TMI 465 - ITAT MUMBAI Principles for determining the profits of the PE - interest paid by the Indian branches to the head office and overseas branches - India- France tax treaty - Held that - The separate profit centre accounting approach for the HO does not hold good in the treaty context, because, even if it is an income of the GE as a profit centre, all that is taxable as business profits of the GE is the income attributable to the PE. As regards its being treated as interest income of the assessee, arising in the source jurisdiction, i.e. India, can only be taxed under Article 12 but then as provided in article 12 (5), the charging provisions of Article 12(1) and (2), which deal with taxability of interest in the source state, will not apply if the beneficial owner of the interest of the interest, being a resident of a contract state, carries on business in the other contracting state in which the interest arises, through a permanent establishment situated therein and that in such a case the provisions of Article 7, which deal with taxability of profits of the permanent establishment alone will apply. In plain words, when interest income arises to a GE even if that be so, the taxability under article 12 will not apply, and it will remain restricted to taxability of profits attributable to the permanent establishment under article 7. The profits attributable to the PE have anyway been offered to tax. As regards the theory, as advanced by learned Assessing Officer in considerable detail, that for taxing the GE, the taxability has to be in respect of (i) income attributable to the permanent establishment as a profit centre; and (ii) income of the GE in its own capacity by treating it as another independent separate profit centre, for the detailed reasons set out above and particularly as the fiction of hypothetical independence does not extend to the computation of GE profits, we reject the same. The authorities below were, therefore, clearly in error in holding that the interest of ₹ 1,59,32,854 paid by the Indian PE to the GE, or its constituents outside India are taxable in India. We may also add that in the case of Sumitomo Mitsui Banking Corp (2012 (4) TMI 80 - ITAT MUMBAI ), a five member bench has held that interest payment by PE to the GE is a payment by a foreign company s Indian PE to the foreign company itself, it cannot give rise to any income, in the hands of the GE, which is chargeable to tax under the Income Tax Act, 1961 itself, and, as such, treaty provisions are not really relevant. We humbly bow before the conclusions arrived at in this judicial precedent. - Decided in favour of assessee Remuneration received for marketing services rendered as income accruing to the Appellant - Held that - CIT(A) was completely in error in proceeding on the basis that income accrues when the services are rendered even in situation in which consideration for services so rendered is not finalised. Unless the consideration for services is finalised between the parties, income from such services cannot even be quantified, and obviously quantification of income must precede it s accrual. It is an undisputed position that the arrangements, which include the consideration for which services were rendered, were finalised only on 28th March, 2005. Such being the undisputed position, income could not have been quantified or accrued earlier. The very foundation of impugned addition is thus devoid of legally sustainable foundation. As for the levy of interest, or ALP adjustment for interest, there cannot be any occasion to levy interest unless there is an unreasonable delay in realisation of debts. The question of delay comes into play when liability to pay has crystallized. The liability of interest on account of delay in payment will arise only when there is a liability to pay, and the liability to pay will arise, only when the liability has crystallized. The liability had not even crystallized at the material point of time. The order passed by the Transfer Pricing Officer does not give any reasons as justification for such a levy does not even recommend this adjustment. Accordingly, addition for marketing services and levy of interest on in delay in realisation of the dues is deleted. - Decided in favour of assessee

Issues Involved:
1. Applicability of domestic tax rates to the appellant under the India-France tax treaty.
2. Taxability of interest paid by Indian branches to the head office and overseas branches under the India-France tax treaty.
3. Accrual of income for marketing services rendered and related interest charges.

Issue-wise Detailed Analysis:

1. Applicability of Domestic Tax Rates to the Appellant:
The appellant challenged the CIT(A)'s order, arguing that the tax rate applicable to domestic companies and/or cooperative banks for the Assessment Year 2004-05 should also apply to them under Article 26 (Non-discrimination) of the India-France tax treaty. However, the appellant's counsel acknowledged that this issue had been repeatedly decided against the appellant in previous cases, including Chohung Bank vs. DDIT and JCIT vs. Sakura Bank Limited. Consequently, the tribunal upheld the CIT(A)'s decision, rejecting the appellant's grievance. Ground no.1 was thus dismissed.

2. Taxability of Interest Paid by Indian Branches to the Head Office and Overseas Branches:
The appellant, a foreign company incorporated in France, contested the CIT(A)'s decision to tax interest paid by its Indian branches to the head office and overseas branches amounting to ?1,59,32,854 under Article 12 (Interest) of the India-France tax treaty. The Assessing Officer had treated this interest as income taxable in India, arguing that under the treaty, interest received by the head office from the branch is taxable under Article 12 at a lower rate. The CIT(A) upheld this view, relying on precedents such as Dresdner Bank AG vs. ACIT and DCIT vs. British Bank of Middle East.

However, the tribunal found that the CIT(A) erred in relying on these precedents, as they did not apply to the present case where the appellant sought treaty protection and relied on the India-France DTAA. The tribunal noted that the fiction of hypothetical independence of a PE for profit attribution does not extend to computing the GE's profits. The tribunal concluded that the interest paid by the Indian PE to the GE or its constituents outside India is not taxable in India under the treaty provisions. Ground No. 2 was thus allowed.

3. Accrual of Income for Marketing Services Rendered and Related Interest Charges:
The appellant contended that the remuneration of ?14,661,695 for marketing services rendered was wrongly taxed in Assessment Year 2004-05, as the amount crystallized only in Assessment Year 2005-06. Additionally, the appellant challenged the interest charged on the delayed payment of this remuneration. The Assessing Officer had added the remuneration and interest of ?9,89,176 for the delayed payment to the appellant's income for the relevant year. The CIT(A) upheld this addition.

The tribunal, however, found that the CIT(A) erred in holding that income accrues when services are rendered, even if the consideration is not finalized. The tribunal emphasized that income cannot be quantified or accrued until the consideration is finalized, which in this case occurred on 28th March 2005. Consequently, the tribunal deleted the addition of ?1,46,61,695 and the interest of ?9,89,176, noting that the income would be taxable in the year when the right to receive the dues crystallized. Ground nos. 3 and 4 and the additional grounds of appeal were allowed accordingly.

Conclusion:
The appeal was partly allowed, with the tribunal dismissing the first ground and allowing the second and third grounds, along with the additional grounds, in favor of the appellant. The decision was pronounced on 31st March 2016.

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