2022 (12) TMI 997 - AT - Income Tax

Income deemed to accrue or arise in India - referral fees earned by Singapore Branch Office - AO proceeded to bring to tax the referral fee treating it as FTS taxable at 10% as per Article 12 of DTAA between India and Switzerland - Whether not taxable in India u/s.5(2) r.w.s. 9(1)(i) - whether the said fee is taxable in India as fee for technical services u/s.9(1)(vii)? - HELD THAT - As decided in assessee own case 2018 (2) TMI 969 - ITAT MUMBAI referral activity was undertaken outside India and assessee's Mumbai branch (PE) had no role to play in the performance of the referral activity, the referral fee earned by CSDB could not be construed to be attributable to assessee‟s PE in India and thus, the DRP rightly applied Article 7 of Indo- Swiss Double Taxation Avoidance Agreement (DTAA) and held the same to be non-taxable in India. The aforesaid conclusion of the DRP is hereby affirmed. - Decided in favour of assessee. Addition of taxability of interest income in respect of transaction between two branches of the same legal entity - HELD THAT - As in assessee s own case for A.Yrs. 2013-14 and 2014-15 2019 (5) TMI 733 - ITAT MUMBAI decided tax is not deductible from such interest payable by the PE in India to the overseas head office of a foreign bank and there is no question of making disallowance of such interest expenditure by invoking the provisions of section 40(a)(i) - Decided against revenue. MAT computation u/s 115JB - whether the provisions of Section 115 JB of the Act per se would be made applicable to a foreign company? - HELD THAT - We find that Article 7(1) of the treaty prescribes that profits that were attributable to the PE would be taxable in India. The manner in which the AO had applied the provisions has the effect of not only bringing to tax the profits that are not attributable to the PE but also has the effect of taxing the other items not in accordance with the provisions of other Articles of the treaty. Five items of income earned by CSSB which was sought to be covered by the ld. AO within the ambit of MAT are not included in the books of accounts drawn up by CSMB in India. Once a particular item is not at all included in the books of accounts which are drawn up in India, how can the same be subject matter of applicability of provisions of Section 115JB of the Act. Reliance in this regard is placed on the decision of Apollo Tyres Ltd. 2002 (5) TMI 5 - SUPREME COURT . When the accounts of CSMB do not incorporate the aforesaid five items of income earned by CSSB, the department cannot impose MAT provisions by using the fiction which is contrary to the Banking Regulation Act, 1949. The provisions of Income Tax Act cannot require CSMB to re-write the accounts in a manner different than what is stipulated in the Banking Regulation Act, 1949. Hence, even on merits, the question of applying the MAT to CSSB s income does not arise. Accordingly, the ground No.4 raised by the Revenue is dismissed.

Summary

Issues Involved:
1. Taxability of referral fees earned by the Singapore Branch Office of a Swiss company in India.
2. Taxability of interest income in respect of transactions between branches of the same legal entity.
3. Applicability of Section 115JB of the Income Tax Act (MAT provisions) to a foreign company.

Detailed Analysis:

1. Taxability of Referral Fees:
The Revenue challenged the CIT(A)'s decision that referral fees earned by the Singapore Branch Office (CSSB) from Indian entities are not taxable in India under Section 5(2) read with Section 9(1)(i) of the Income Tax Act. The interconnected issue was whether the referral fees are taxable as fees for technical services (FTS) under Section 9(1)(vii).

The Tribunal noted that the assessee, a Swiss tax resident, operates through a Mumbai branch (CSMB) and has opted for the benefit of the Indo-Swiss DTAA. The referral fees were treated as business income by the assessee, claiming non-taxability in India due to the absence of a Permanent Establishment (PE) in India for the Dubai Branch (CSDB).

The AO taxed the referral fees as FTS at 10% under Article 12 of the DTAA. However, the CIT(A) relied on a previous Tribunal decision, which held that referral fees are not FTS but business income, not taxable in India due to the absence of a PE. The Tribunal upheld this view, dismissing the Revenue's grounds.

2. Taxability of Interest Income:
The Revenue contested the deletion of interest income addition for transactions between different branches of the same legal entity. The Mumbai branch paid interest to its head office and other branches. The AR argued that the issue is covered by the Special Bench decision in Sumitomo Mitsui Banking Corporation, which held that interest paid to the head office is not deductible as it is a payment to self and not taxable in India.

The Tribunal noted the Revenue's argument that the India-Switzerland DTAA does not have a provision analogous to the India-Japan treaty considered in Sumitomo. However, the AR contended that the issue was about the taxability of interest received by the overseas branches, not the deductibility of interest paid by the Mumbai branch.

The Tribunal agreed with the AR, finding that the issue is covered by the previous Tribunal decisions in favor of the assessee, and dismissed the Revenue's ground.

3. Applicability of Section 115JB (MAT Provisions):
The Revenue argued that MAT provisions apply to foreign companies with a PE in India, as per Article 7 of the applicable treaty. The assessee contended that MAT provisions were never intended for foreign companies, supported by legislative intent and judicial precedents.

The Tribunal noted the legislative intent behind Section 115JB, which applies to domestic companies. It referred to the Finance Bill 2002 and the explanatory memorandum, indicating that MAT provisions are not applicable to foreign companies. The Tribunal also considered the retrospective amendment (Explanation-4) to Section 115JB, which clarified MAT inapplicability to FIIs/FPIs without a PE in India.

The Tribunal held that MAT provisions do not apply to foreign companies, including those with a PE in India, as it would contradict the treaty provisions. It also noted that the income items added by the AO were not attributable to the PE and were governed by specific treaty articles with different tax treatments.

The Tribunal concluded that MAT provisions could not be applied to the assessee's income and dismissed the Revenue's ground.

Conclusion:
The Tribunal dismissed the Revenue's appeal on all grounds and allowed the assessee's cross-objection, holding that the referral fees are not taxable in India, interest income between branches is not taxable, and MAT provisions do not apply to the foreign company.