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2020 (1) TMI 19 - AT - Income TaxRevision u/s 263 - Income accrued in India - whether or not interest received by the Head Office/overseas Branches from the Indian Branch is taxable in India? - HELD THAT - As per Explanation (a) to section 9(1)(v)(c) of the Act, it was clarified that the interest paid by an Indian Branch of a non resident banking company shall be deemed to be accruing or arising in India and shall be chargeable to tax in addition to any income attributable to the PE in India. It further says that the PE in India shall be deemed to be a person separate and independent of the non resident person. In our view, the aforesaid provision would apply prospectively from 1st April 2016 and not prior to that. The aforesaid view has been expressed by the Co ordinate Bench in DCIT v/s BNP Paribas S.A. 2019 (7) TMI 1076 - ITAT MUMBAI . Therefore, Explanation (a) to section 9(1)(v)(c) of the Act cannot be pressed into action for bringing to tax the interest income in the impugned assessment years. In any case of the matter, the issue, whether or not interest received by the Head Office/overseas Branches from the Indian Branch is taxable in India is a highly debatable issue and the position of law prevailing at the time of completion of assessments as per the available judicial precedents on the issue, clearly held that the interest income was not taxable as it is governed by the principle of mutuality. Therefore, it cannot be said that it is not a possible view. Rather, the assessment orders would have been erroneous had the Assessing Officer taxed the interest income received from the Indian Branch overlooking the decision of the Special Bench in case of Sumitomo Mitsui Banking Corporation 2012 (4) TMI 80 - ITAT MUMBAI which was available at the time of completion of assessments. Even, assuming for the sake of argument that Explanation (a) to section 9(1)(v)(c) of the Act will apply retrospectively, however, proceedings under section 263 of the Act cannot be initiated on the basis of such retrospective amendment as the AO has to proceed on the basis of law prevailing as on the date of assessments. Thus, looked at from any angle, the assessment orders cannot be considered to be erroneous and prejudicial to the interests of Revenue for not bringing to tax the interest received from the Indian Branch. Accordingly, we hold that the impugned orders of CIT passed u/s 263 are unsustainable in law, hence, have to be quashed. Accordingly, we quash the orders passed under section 263 - Decided in favour of assessee.
Issues Involved:
1. Jurisdiction of the learned Commissioner of Income Tax (CIT) under section 263 of the Income Tax Act, 1961. 2. Taxability of interest paid by the Indian Branch to the Head Office and overseas branches under the India-USA Double Taxation Avoidance Agreement (DTAA) and the Income Tax Act. 3. Applicability of the principle of mutuality to the interest payments. 4. Retrospective application of Explanation (a) to section 9(1)(v)(c) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Jurisdiction of the learned CIT under section 263 of the Income Tax Act, 1961: The learned CIT exercised his power of revision under section 263 of the Act, considering the assessment orders erroneous and prejudicial to the interests of Revenue. The assessee contended that the exercise of power under section 263 was without jurisdiction since the assessment orders were neither erroneous nor prejudicial to the interests of Revenue. The assessee argued that the Assessing Officer had made specific inquiries regarding the interest income and had accepted the assessee's claim based on judicial precedents, which bound the Assessing Officer. 2. Taxability of interest paid by the Indian Branch to the Head Office and overseas branches under the India-USA DTAA and the Income Tax Act: The learned CIT held that the interest paid to the Head Office and overseas branches was taxable in India as per the provisions of the India-USA DTAA and the Income Tax Act. He observed that the Branch Office in India and the Head Office are two separate entities for taxation purposes. The CIT referred to Explanation (a) to section 9(1)(v)(c) of the Act, introduced by Finance Act, 2015, which clarifies that interest paid by the Indian Branch of a non-resident bank is taxable in India. The CIT also referred to CBDT Circular No. 740, dated 17th April 1996, which states that a Branch of a foreign company in India is a separate entity for taxation purposes. 3. Applicability of the principle of mutuality to the interest payments: The assessee argued that the interest paid by the Indian Branch to the Head Office/overseas branches is not taxable as it is considered a payment made to self, governed under the principle of mutuality. The assessee relied on the Special Bench decision of the Tribunal in Sumitomo Mitsui Banking Corporation v/s DDIT, which held that such interest is not taxable under the provisions of the Act. The Tribunal, in the present case, agreed with the assessee's contention, stating that the issue is squarely covered by the Special Bench decision, and the interest received from the Indian Branch is governed by the principle of mutuality, hence not taxable under the provisions of the Act. 4. Retrospective application of Explanation (a) to section 9(1)(v)(c) of the Income Tax Act: The learned CIT held that the amendment introduced by Explanation (a) to section 9(1)(v)(c) of the Act, which clarifies that interest paid by an Indian Branch of a non-resident banking company is taxable in India, is clarificatory in nature and applies retrospectively. The assessee contended that the said provision would apply prospectively from 1st April 2016. The Tribunal, in agreement with the assessee, held that the provision applies prospectively and cannot be invoked for the impugned assessment years. The Tribunal also noted that proceedings under section 263 cannot be initiated based on a retrospective amendment. Conclusion: The Tribunal quashed the orders passed under section 263 of the Act, holding that the assessment orders were not erroneous and prejudicial to the interests of Revenue. The Tribunal restored the assessment orders passed by the Assessing Officer for the impugned assessment years, allowing the appeals in favor of the assessee. The judgment emphasized that the interest received from the Indian Branch is not taxable under the provisions of the Act, governed by the principle of mutuality, and the provisions of the Act being more beneficial to the assessee will prevail over the provisions of the Tax Treaty.
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