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2023 (3) TMI 1236 - AT - Income TaxIncome taxable in India - Taxability of interest paid by the Indian branch office to the other overseas branches of the assessee - profit attributable to the PE - CIT(A) by referring to the provisions of Explanation to section 9(1)(v) of the Act held that the Explanation has been added in the case of a person engaged in the business of banking and is therefore applicable in this case - HELD THAT - Since the assessee has a PE in India, therefore, the interest has been claimed as a deduction while computing the business profits of the Indian branch office. Further, as per Article 7(2) of the Indo-Swiss DTAA, the profit attributed to the PE shall be determined which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is the PE. Thus, in view of the aforesaid decision in BNP Paribas 2023 (3) TMI 193 - ITAT MUMBAI the fiction of hypothetical independence of the PE and head office/overseas branch cannot be extended to the computation of the profit of the head office/overseas branch, and the same is restricted only for computation of profit attributable to the PE. Special Bench in Sumitomo Mitsui Banking Corporation 2012 (4) TMI 80 - ITAT MUMBAI accepted that the independent fiction and separate entity approach under Article 7 of the tax treaty is only for the purpose of determining the profit attributable to the PE and not for the purpose of determining the total profits of the enterprise as a whole. Therefore, we direct the AO to delete the addition on account of interest income received by the overseas branches of the assessee from the Mumbai branch office. As a result, grounds no.1 and 2 raised in assessee s appeal are allowed.
Issues Involved:
1. Taxability of interest paid by the Indian branch office to other overseas branches. 2. Inclusion of net capital gains in total income. 3. Inclusion of interest under section 234B. 4. Initiation of penalty proceedings. Summary: Issue 1: Taxability of Interest Paid by Indian Branch Office to Other Overseas Branches The primary issue in grounds no.1 and 2 pertains to the taxability of interest paid by the Indian branch office to the other overseas branches of the assessee. The assessee, a tax resident of Switzerland, argued that the interest paid should not be taxed in India under the India-Switzerland tax treaty. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the interest paid by the Permanent Establishment (PE) to the head office and other branches is sourced in India and taxable under the Explanation to section 9(1)(v) of the Income-tax Act, 1961. The Tribunal, however, referred to the decision in BNP Paribas vs ACIT, which held that interest paid by the Indian branch/PE to the head office/overseas branches is not taxable in India under the provisions of the DTAA. The Tribunal directed the AO to delete the addition on account of interest income received by the overseas branches, allowing grounds no.1 and 2 in both appeals. Issue 2: Inclusion of Net Capital Gains in Total Income Ground no.3 in both appeals relates to the inclusion of net capital gains earned by the assessee, which are not subject to tax in India pursuant to Article 13(6) of the India-Switzerland tax treaty. This issue was not pressed during the hearing, and thus, the grounds were dismissed as not pressed. Issue 3: Inclusion of Interest under Section 234B Ground no.4 in both appeals concerns the inclusion of interest under section 234B of the Act. This issue was also not pressed during the hearing, leading to the dismissal of the grounds as not pressed. Issue 4: Initiation of Penalty Proceedings Ground no.5 in the appeal for A.Y. 2016-17 and ground no.7 in the appeal for A.Y. 2017-18 pertain to the initiation of penalty proceedings under section 271(1)(c) and section 270A(2) read with section 274 of the Act, respectively. The Tribunal found these grounds to be premature in nature and dismissed them. Conclusion: The appeals by the assessee were partly allowed, with the Tribunal directing the deletion of additions on account of interest income received by the overseas branches and dismissing other grounds as either not pressed or premature.
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