2018 (8) TMI 850 - AT - Income Tax

Taxability of Interest paid by the branch (PE) in India to its parent foreign bank in Japan - Deduction of interest so paid as expenditure - India-Japan Double Taxation Avoidance Agreement (DTAA) - A.O held a conviction that as the source of the interest income earned by the head office was the latters branch office in India, thus the same as per Sec. 9(1)(v)(c) of the Act having deemed to have accrued or arisen in India, was therefore taxable in India as per the domestic law i.e. the Income Tax Act, 1961. - It was further held by the A.O that as the interest was paid by the branch office, hence the latter automatically became the representative assessee/agent as per Sec. 163(1)(c) of the Act. - CIT(A) deleted the additions. Held that - the interest income received by the head office of the assessee bank would not be chargeable to tax in India. The Article 7(3) of India-Japan DTAA expressly provides for deduction of interest on money advanced by the Head office to its Indian PE when such foreign enterprise is a banking institution - the interest paid by the branch office of the assessee bank in India to the head office of the bank on the amounts advanced by the latter in the normal course of its banking business is allowable as a deduction while computing the income of the Indian PE i.e. the branch of the assessee bank in India. - Order of CIT(A) sustained - Decided against the Revenue.

Issues Involved:
1. Allowability of interest paid by the branch office to its head office as an expenditure.
2. Chargeability of interest received by the head office from the branch office to tax in India.
3. Applicability of Section 40(a)(i) of the Income Tax Act, 1961.
4. Requirement of issuing notice under Section 163(1) of the Income Tax Act, 1961.

Detailed Analysis:

1. Allowability of Interest Paid by the Branch Office to its Head Office as an Expenditure:
The assessee, a foreign bank with branches in India, claimed interest expenditure paid to its head office. The Assessing Officer (A.O) disallowed this claim, arguing that the branch and head office are not separate entities for tax purposes, thus the payment was in the nature of a payment to self. The A.O relied on the Special Bench decision in ABN Amro Bank N.V. Vs. ADIT (2005) 97 ITD 89 (SB).

However, the CIT(A) and the Tribunal found that the issue was covered by the Tribunal's decision in the assessee's own case for A.Y. 2005-06, which followed the Special Bench decision in Sumitomo Mitsui Banking Corporation Vs. DDIT (2012) 136 ITD 66 (SB)(Mum). The High Court in ABN Amro Bank, N.V. Vs. CIT & Anr. (2012) 343 ITR 81 (Cal) supported the view that the branch and head office should be treated as separate entities under the DTAA. Thus, the interest paid by the branch to the head office is allowable as a deduction.

2. Chargeability of Interest Received by the Head Office from the Branch Office to Tax in India:
The A.O held that the interest received by the head office from the Indian branch is chargeable to tax in India under Section 9(1)(v)(c) of the Act and Article 11(2)(a) of the India-Japan DTAA, taxing it at 10% on the gross amount.

The CIT(A) and the Tribunal, relying on the Special Bench decision in Sumitomo Mitsui Banking Corporation, concluded that the interest paid by the Indian branch to the head office is not chargeable to tax in India. The Tribunal upheld the CIT(A)'s order, affirming that the interest income received by the head office from its Indian PE is not taxable in India.

3. Applicability of Section 40(a)(i) of the Income Tax Act, 1961:
The A.O disallowed the interest expenditure under Section 40(a)(i) for non-deduction of tax at source. However, the CIT(A) and the Tribunal found that the provisions of Section 40(a)(i) would not be attracted in this case. This conclusion was based on the Special Bench decision in Sumitomo Mitsui Banking Corporation, which held that the interest paid by the Indian branch to the head office is not subject to tax in India, and hence, the disallowance under Section 40(a)(i) does not arise.

4. Requirement of Issuing Notice under Section 163(1) of the Income Tax Act, 1961:
The CIT(A) addressed the issue of whether a notice under Section 163(1) was necessary for treating the branch as an agent of the head office. The CIT(A) concluded that it was not necessary to issue such a notice because the branch and head office are the same entity, and only for tax assessment purposes, they are treated separately. This part of the appeal was partly allowed.

Conclusion:
The Tribunal dismissed the revenue's appeals for both A.Y. 2007-08 and A.Y. 2008-09, upholding the CIT(A)'s orders. The interest paid by the branch to the head office is allowable as an expenditure, and the interest received by the head office is not chargeable to tax in India. The provisions of Section 40(a)(i) do not apply, and issuing a notice under Section 163(1) is not necessary. The appeals were dismissed in their entirety.

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