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2024 (5) TMI 1405 - HC - Income TaxTaxability in India - interest received by the Indian PE on deposit maintained with Head Office/Overseas Branch - scope of India-US DTAA - HELD THAT - As decided in Credit Agricole 2015 (6) TMI 974 - BOMBAY HIGH COURT had taken note of the indubitable and well settled position of branch offices not being separate personalities or juridical entities and that one person cannot thus profit from itself. Since the receipt of interest was from the Head Office of the respondent-assessee, it was according to Mr. Pardiwalla, the aforesaid principles which would govern. Explanation to Section 9 (1) (v) of the Act is principally concerned with entities engaged in the business of banking and a PE in India once remitting payments to its Head Office, the statute giving rise to a legal fiction of such remittances being deemed to have accrued or arisen in India. Explanation to Section 9 (1) (v) provision which introduces a statutory fiction by ordaining that a PE of a banking enterprise in India would be deemed to be a person separate and independent of the non-resident person of which it is a PE. However, it was the undisputed position before us that the said Explanation would have no application since it came into effect only from 01 April 2016 and by virtue of Finance Act, 2015. That only leaves us to examine the challenge that stands raised based on the well settled position of the law clearly not contemplating a person profiting out of itself. Once we come to the firm conclusion that the branch office would not partake the character or attribute of a separate legal personality, the view as taken by the Tribunal is clearly rendered unexceptional. In any event, it would be the exception carved out in the DTAA with respect to banking enterprises which would govern. As decided in Kikabhai Premchand KT 1953 (10) TMI 5 - SUPREME COURT it is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. Cut away the fictions and you reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income tax law.
Issues Involved:
1. Taxability of interest received by the Indian Permanent Establishment (PE) on deposits maintained with the Head Office/Overseas Branch. Summary: Issue: Taxability of Interest Received by Indian PE on Deposits Maintained with Head Office/Overseas Branch 1. The Commissioner of Income Tax challenged the Income Tax Appellate Tribunal's order dated 30 January 2018. The appeal was confined to the question: "Whether the interest received by the Indian PE on deposit maintained with Head Office/Overseas Branch is not taxable in India?" 2. The context involved interest received by the PE of Bank of Tokyo Mitsubishi UFJ Ltd. (MUFG Bank) from its overseas branches and Head Office during AY 2003-04, quantified at INR 7,002,160/-. The Tribunal had ruled in favor of the respondent-assessee, stating that such interest income is payment to self as payer and payee are the same entity. 3. The Tribunal relied on its previous order for AY 2011-12, where it was held that the issue is covered in favor of the assessee, directing the AO to delete the addition. 4. The appellants referred to the pendency of other appeals, but the court noted that previous orders would bind the parties regarding the first four questions proposed. 5. The provisions of the India-US Double Taxation Avoidance Agreement (DTAA) were considered, particularly Article 7 (2) and 7 (3), which deal with the attribution of income to a PE and special provisions for banking enterprises. 6. The respondent-assessee argued that Article 7 (3) of the India-US DTAA allows deductions for expenses incurred by a PE, including interest, except payments to the head office, unless it is a banking enterprise. 8. Article 14(3) of the India-US DTAA was highlighted, which provides that interest paid by the PE of a banking company in India to the Head Office may be subject to tax in India. 9. Similar provisions in the India-Netherlands DTAA and India-Japan DTAA were also considered, emphasizing that interest on monies lent to a PE by its head office is generally not deductible, except for banking enterprises. 12. The respondent-assessee argued that branches do not have separate legal entities, and thus, the interest received must be viewed as non-taxable. The Bombay High Court in DIT (I.T.) v. Credit Agricole Indosuez supported this view, stating that one cannot make a profit out of oneself. 14. The CBDT Circular No. 19/2015 was referenced, explaining that interest paid by a PE to its head office is deemed to accrue in India and is chargeable to tax, but this applies from 1 April 2016. 16. The Explanation to Section 9 (1) (v) of the Income Tax Act, 1961, introduced by the Finance Act, 2015, deems a PE of a banking enterprise in India as a separate entity, but this was not applicable for the period in question. 17. The court concluded that the branch office does not constitute a separate legal personality, and thus, the interest received from the head office is not taxable. The DTAA provisions for banking enterprises govern this issue. 19. The appeals were dismissed as the court found no merit in the challenge, upholding the Tribunal's view.
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