2012 (9) TMI 193 - AT - Income Tax

Interest paid to Head office (Japanese banking company) by assessee (PE-Indian branch) - dis-allowance - Held that - Issue stands squarely covered by the decision rendered in case of Sumitomo Banking Corp. Mumbai (2012 (4) TMI 80 - ITAT MUMBAI ) wherein it was held that interest paid by the Indian Branch of the assessee bank to its overseas head office is not chargeable to tax in India. As further held by the Special Bench in the said case the provisions of sec.195 consequently would not be attracted in case of such payment of interest by the Indian Branch to overseas Head office and the question of disallowance of the said interest by invoking the provisions of sec.40(a)(i) does not arise - Decided against Revenue

Summary

Issues:
1. Disallowance of interest under section 40(a)(i) of the Act.
2. Taxability of interest income of the Head Office.

Analysis:
1. The appeal pertains to the disallowance of Rs. 40,32,971/- under section 40(a)(i) of the Act by the Assessing Officer (AO). The AO disallowed the deduction claimed by the assessee in respect of interest paid to the Head office due to insufficient tax deduction at the source. The Ld. CIT (A) deleted this disallowance, relying on the decision of the Kolkata Special Bench of the ITAT in the case of ABN Amro Bank NV, which held that interest paid to the Head Office, not taxable in India, did not require tax deduction at the source. The revenue appealed this decision before the Tribunal.

2. The second issue concerns the taxability of interest income of Rs. 60,32,971/- paid by the Mumbai Branch of the assessee bank to its Head office in Japan. The AO treated this interest as income of the Head office chargeable to tax in India and taxed it at a rate of 10% on a gross basis. The Ld. CIT (A) overturned this decision, following the same Kolkata Special Bench judgment mentioned earlier. The revenue challenged this decision as well.

3. During the hearing, the assessee did not appear, but the Ld. DR acknowledged that both issues were covered by a recent decision of the Special Bench in the case of Sumitomo Mitsui Banking Corpn. The Special Bench held that interest paid by the Indian Branch to its overseas head office was not chargeable to tax in India, and thus, provisions of sec.195 were not attracted. Consequently, the disallowance under sec.40(a)(i) was not applicable. The Tribunal upheld the decision of the Ld. CIT (A) based on this precedent and dismissed the revenue's appeal.

4. The Tribunal's decision affirms that interest paid by the Indian Branch to the overseas Head office is not taxable in India, as per the interpretation of relevant sections and judicial precedents. The judgment provides clarity on the tax treatment of such transactions and upholds consistency with previous rulings, ensuring fair application of tax laws in cases involving international banking operations.