9911796707
TMI Blog2012 (4) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be taxed in India. 2. The assessee in the present case viz. M/s Sumitomo Mitsui Banking Corporation is a Foreign Banking Company incorporated in and controlled from Japan. It carries on banking business in India through branch offices at Mumbai and New Delhi. The return of income for the year under consideration was filed by it on 28-11-2003 declaring total income of Rs. 25,68,33,480/-. During the course of assessment proceedings, it was noted by the AO from the details of interest furnished by the assessee that interest of Rs. 5,02,66,781/- was provided by the Indian branch offices (also referred to as Permanent Establishment i.e. 'PE in India') of the assessee bank as payable to its Head Office (also referred to as General Enterprise i.e. 'GE' in short) and overseas branches for the year under consideration. The AO also noted that tax at source was not deducted by the assessee from the said interest. He, therefore, required the assessee to explain why the interest payable by its Indian branches to head office and overseas branches should not be disallowed u/s 40(a)(i). In reply, it was submitted that the assessee bank is a non resident in India and as per the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s submitted on behalf of the assessee that interest so payable was allowable as deduction while computing profits attributable to the branch offices in India constituting permanent establishment in view of article 7(2) and 7(3) of the Indo-Japanese DTAA. It was contended that the provisions of article 7(3) of the DTAA makes it amply clear that in determining the profits of a permanent establishment, there shall be allowed as a deduction expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred, whether in the contracting state in which the permanent establishment is situated or elsewhere. It was submitted that paragraph 8 of the protocol no doubt makes it clear that no deduction shall be allowed for any payments made or amounts charged by a PE of an enterprise to its head office for the items specified therein. It was contended that the said paragraph 8, however, carves out an exception and specifies that any interest payable by a PE to the GE which is a banking institution, should be allowed. It was submitted that the assessee in the present case is a banking corporation and the interest payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be extended to say that since the interest is allowable as deduction in the hands of PE, the same should also be taxed in the hands of the recipient GE as income. It was contended that interest earned by the head office of the assessee bank from its Indian branches thus could not be taxed in India. 5. The AO did not find merit in the submissions made on behalf of the assessee. According to him, as per the provisions of section 9(1)(v)(c), income by way of interest payable by a person who is a non resident, where the interest is payable in respect of any debt incurred or moneys borrowed and used, for the purposes of a business or a profession carried on by such person in India shall be deemed to accrue or arise in India. He also relied on Circular No. 740 dated 17-04-1996 issued by CBDT clarifying that the branch of a foreign company/concern in India is a separate entity for the purposes of taxation and interest paid or payable by such branch abroad would be liable to tax in India and would be governed by the provisions of section 115A of the Act. It was further clarified that if the double taxation avoidance agreement with the country where the parent company is assessed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is one for the purpose of assessment, these are two separate entities for the purpose of computation of income. He thus held that even though the interest was allowable as deduction in the computation of income of the PE in India, the same was liable to be disallowed as per the provisions of section 40(a)(i) because of the failure to deduct tax on payment of such interest. Accordingly, the claim of the assessee for deduction of the said interest was disallowed by the AO by invoking the provisions of section 40(a)(i) in the assessment completed vide an order passed u/s 143(3). 7. Against the order passed by the AO u/s 143(3), an appeal was preferred by the assessee before the learned CIT(Appeals). As regards the deductibility of interest payable by the Indian branches to the Head Office of the assessee bank, it was submitted on behalf of the assessee before the learned CIT(Appeals) that the interest so payable was allowable as deduction in view of Article 7(3) of the Indo-Japanese DTAA. As regards the action of the AO in disallowing the said deduction by invoking the provisions of section 40(a)(i), it was contended that the Indian branch and head office of the assessee bank being o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed their grievance in the respective appeals filed before the Tribunal, which has been projected in the questions referred to this Special Bench for consideration and decision. 9. Shri Percy Pardiwala, learned Senior Advocate, appearing on behalf of M/s Sumitomo Mitsui Banking Corporation, appellant and M/s Bank of Tokyo Mitubhushi UFJ Ltd., intervener opened the arguments. He submitted that the issue arising from the appeal of the assessee, which has been referred to this Special Bench, relates to the deductibility of interest payable by the Indian branches of a foreign bank to its head office while computing the income of the said branches which constitute PE of the foreign bank in India. He submitted that such interest was held to be allowable expenditure by the AO accepting the stand of the assessee based on article 7(2) and 7(3) of the Indo-Japanese treaty. He submitted that deduction for the said interest representing expenditure of the PE of the assessee bank in India, however, was disallowed by the AO by invoking the provisions of section 40(a)(i) since no tax at source was deducted by the PE of the assessee bank in India from the said interest payable to the head office. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO to make a disallowance on account of such interest paid by PE to GE, Shri Pardiwala submitted that the said provisions are attracted only when interest payable by PE in India to the overseas head office of the assessee bank is chargeable to tax in India. He submitted that the issue relating to chargeability of the said interest to tax in the hands of the assessee in India is involved in the appeal of the Revenue and since the said issue is also referred to this Special Bench, arguments on this aspect of the matter will be advanced by him in more details while replying to the arguments of the Revenue thereon. 11. Shri Girish Dave, Special Counsel of the Revenue, in reply, did not raise any material contention to dispute the claim of the assessee that interest payable by PE of the assessee bank in India to its HO abroad is allowable as deduction while computing the profits of the PE chargeable to tax in India in terms of article 7(2) & 7(3) of the Indo-Japanese treaty. He, however, strongly supported the action of the AO in disallowing the deduction claimed by the assessee for the said interest by invoking the provisions of section 40(a)(i) of the Act as a result of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble Calcutta High Court in the judgment delivered in the said case. He submitted that the PE in India and overseas head office of a foreign bank are held to be two distinct and separate entities by the Hon'ble Calcutta High Court in some places whereas they are treated as one entity for the purpose of TDS u/s 195(1). He submitted that interest payable by the PE in India has been held to be not taxable in the hands of head office in India by the Hon'ble Calcutta High Court without giving any reason whatsoever in support. He submitted that even article 11 of the DTAA, which is relevant and vital in this context, has not been discussed and considered by the Hon'ble Calcutta High Court. 13. Shri Girish Dave submitted that the assessee is adopting split approach by claiming deduction for interest under treaty and by claiming exemption for the same interest in the hands of recipients under local law. He submitted that articles 7(2) and 7(3) of the treaty under which the assessee is claiming deduction for such interest recognize PE and head office as two distinct entities especially in respect of interest in so far as banking entity is concerned. He contended that full effect has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary. He contended that there is virtually no difference in PE and subsidiary when it comes to taxation and, therefore, PE is to be treated as subsidiary while dealing with the taxation of a banking enterprise. 16. Shri Dave then took us through the provisions of article 11 of Indo-Japanese treaty and contended that treaty is to be read as part of the domestic law and it is to be applied when there is nothing contrary contained in the domestic law. He contended that interest payable by Indian branches of the assessee bank to its head office is income of the head office which has definitely arisen in India and since the same is payable to the head office which is resident of Japan, it is taxable in Japan as per article 11(1). He contended that the said interest income, however, is also be taxed in India at the concessional rate of 10% as per article 11(2) of the Indo-Japanese treaty in the hands of head office if it is the beneficial owner of interest. He submitted that section 5(2)(b) of the Income-tax Act, 1961 covers income that accrues or arises in India or deemed to accrue or arise in India. He submitted that article 11(2), on the other hand, covers only interest income arising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. CIT reported in 67 Taxman 160. He submitted that similarly the stand taken by the assessee that interest payable by the PE in India was not taxable income in the hands of overseas GE in India in view of article 11(6) of the treaty is not acceptable. He submitted that scope of article 11(6) has been explained in the UN commentary and the situations in which article 11(6) is applicable are also well identified. He contended that such situation does not exist in the present case especially when we are concerned with interest paid by the PE of the assessee bank in India to its UK branch. 19. Shri Girish Dave then took us through pages 11 to 13 of the assessment order where the AO has dealt with the contentions raised on behalf of the assessee on this issue and strongly relied on the same. He submitted that the CBDT circular No. 740 dated 17-04-1996 relied upon by the AO is squarely applicable in the present context. He also relied on the OECD commentary wherein scope and purpose of articles 11(1) and 11(2) of the treaty has been explained. He then relied on the decision of Queen's Bench Division & Court of Appeal in the case of Solomon v. Commissioners of Customs & Excise [19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... briefly took us through the said articles and para No. 7 and 8 of the protocol to show how the assessee is entitled for deduction on account of interest payable by PE to GE under treaty. 22. Shri Pardiwala then invited our attention to article 11(1) of the treaty dealing with interest deemed to arise in India. He contended that the said article has no application to the facts of the assessee's case since it is a case of interest payable by assessee's own PE in India. He contended that similarly article 11(2) of the treaty has no application in the present context since it provides that the interest may also be taxed in the contracting States in which it arises but only according to the laws of that contracting States. He contended that as far as Indian Tax Laws are concerned, interest payable by PE is not taxable as income in the hands of GE being payment to self. He contended that the expression used in article 11(2) "taxed" means and includes chargeability, rate and collection. He referred to article 14(3) of Indo-US treaty in this context and submitted that if interest income received by head office from PE in India had been taxable in India as per article 11(2), there would ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributable to the PE, the deduction allowed to the PE for such interest under article 7(2) and 7(3) will get nullified, which cannot be the intention. 24. Shri Pardiwala then took us through the relevant portion of the judgment of Hon'ble Calcutta High Court in the case of ABM Amro Bank (supra) to explain the exact proposition propounded therein and the effects thereof. He submitted that interest payable by PE to head office, as held by the Hon'ble Calcutta High Court in the case of ABN Amro Bank (supra), is not chargeable to tax in India in the hands of head office as per the convention. Although he agreed that no reasons are specifically given by the Hon'ble Calcutta High Court for coming to this conclusion, he submitted that the Tribunal for this reason cannot hold the decision of Hon'ble Calcutta High Court as per incurim. He contended that this Special Bench of the Tribunal, on the other hand, is bound to follow the said decision of the Hon'ble Calcutta High Court being the only decision of the High Court available on the issue. He contended that the decision rendered by the Hon'ble Calcutta High Court on the issue is very clear although there may not be elaborate reasons give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee bank in India has separate and independent existence, Shri Pardiwala submitted that the profit & loss account and balance sheet of Indian branches were prepared separately by the assessee as per the specific requirement of the Reserve Bank of India. He submitted that finally the accounts of the assessee bank are consolidated at head office level or entity level wherein inter branch figures would get squared off and are not reflected separately. He contended that branch of a bank is only a part of the entity having no separate existence or identity in legal parlance. As regards the decision of Mumbai Bench of ITAT in the case of Industries Development Bank of India reported in 91 ITD 34 and relied upon by Shri. Girish Dave in this context, Shri Pardiwala submitted that the issue involved in the said case was in relation to exemption u/s 54E in respect of IDBI Bonds. He submitted that the assessee in the said case viz. the IDBI had claimed the exemption u/s 54E in respect of Bonds issued by itself and the decision was rendered by the Tribunal in this context which is entirely different from the context in which the issue has arisen for consideration of the Special Bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal on its earlier decision rendered in the case of Bank Indosuez which was in relation to treaty and the said reliance, therefore, was clearly misplaced. As regards the contention of Shri Girish Dave that interest having been credited in the books, it is deemed to have been received by head office, reliance was placed by Shri Pardiwala on the decision of Hon'ble Supreme Court in the case of CIT v. Soshoku Ltd. 125 ITR 525 wherein it was held that credit in the books does not always tantamount to receipt. 31. As regards the CBDT Circular No. 740 (supra) relied upon by Shri Girish Dave, Shri Paridwala submitted that the same is detrimental to the assessee and, therefore, cannot be relied upon. He submitted that the said circular in any case has been issued with reference to section 115A which covers interest received by a foreign company from Indian concern. He contended that Indian branch of a foreign bank cannot be considered as Indian concern as held by the Hon'ble Bombay High Court in the case of CIT v. Dorr-Oliver(India) Ltd. 209 ITR 691. As regards the decision of Soloman (supra) relied upon by Shri Girish Dave, Shri Pardiwala submitted that the relevant portion of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1961. He submitted that the same is also chargeable to tax in the hands of the assessee as per article 11(2) of the relevant treaty as rightly held by the AO for the reasons given in detail in the assessment order. He submitted that PE and HO are now defined in section 92F and the same further supports the case of the Revenue that PE and HO are different entities for taxation purpose. He submitted that it is not a case where treaty is imposing tax as sought to be contended by Shri Pardiwala. He submitted that article 14(3) of the US treaty further confirms this position as it presupposes that interest is chargeable to tax in India under domestic law. 34. Shri Soli Dastur, learned Senior Advocate, appearing for M/s Antwerp Diamond Bank - NV, submitted that the head office of the assessee bank in this case is in Belgium with branch in India. He submitted that the HO in Belgium advanced money to the Indian branch on which Indian branch paid interest to the HO. He submitted that in the return of income filed for the year under consideration, interest payable to HO was claimed as deduction while computing the income of the Indian branch constituting PE of the assessee bank in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d was also accepted by TPO in subsequent years as an arm's length interest rate. He submitted that article 7(3)(b) places restriction on allowing deduction on account of interest payable by PE to GE and as per the said restriction, such deduction is to be allowed only in case of banking company like that of the assessee in the present case. He contended that legal position of allowing the deduction on account of interest payable by PE to GE of a banking company thus is very clear as per the relevant provisions of the treaty and there is no ambiguity on this aspect. 36. Coming to the issue of taxability of interest payable by PE in the hands of GE in India, Shri Dastur submitted that as per article 11(1) of the treaty, such interest is taxable in Belgium. Referring to article 11(2) of the treaty, he contended that it contemplates two different entities so as to attract article 11(2). He then took us through the relevant portion of OECD commentary on article 11(2) and submitted that if the interest payable by PE to GE is not chargeable to tax in India as per domestic law, it cannot be brought to tax under the treaty. Relying on the decision of Hon'ble Andhra Pradesh High Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot a resident of India. He then referred to the expression "person paying interest" used in article 11(5) of the treaty and submitted that there being no such person paying interest, there does not arise any interest income which can be taxed under article 11(5). He submitted that article 11(4), on the other hand, clearly applies to the facts of the assessee's case. In this regard, he again relied on the decision of Hon'ble Supreme Court in the case of Ishikawajima-harima Heavy Industries Ltd. v. Director of Income-tax (supra) and submitted that the said decision rendered in the context of article 12(5) is applicable in the present case as the provisions of article 12(5) are similar to that of article 11(4). 39. Shri Dastur then referred to commentary on article 7 of the treaty and also the decision of Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan 263 ITR 706 at page No. 748 to contend that if the interest payable by the Indian PE is to be brought to tax in India in the hands of GE, corresponding provision has to be made in the Indian Income Tax Act by making the necessary amendment. He contended that no such amendment, however, has been brought in by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reted in a way the Revenue wants, such interest will be taxable in the hands of GE in India without there being deduction for the said interest allowable in the hands of PE. He contended that this will lead to absurd result which cannot be the intention. He contended that article 7 thus will have priority and there is no need to go to article 11 at all. He contended that article 7(7) makes this position further clear. 42. Shri Srivastava, Special Counsel for the Revenue, appearing in the case of M/s Antwerp Diamond Bank NV, submitted that article 7(2) of the treaty lays down the procedure for apportionment of income between head office and Indian branch. He submitted that as per the said scheme of apportionment, what can be allowed as deduction is cost of funds to the head office. He contended that if, however, there is no such cost incurred at HO level, interest payable by the branch to the HO will be only a notional expenditure which cannot be apportioned as per article 7(2) of the treaty. He also contended that whether such interest payment is at arm's length or not is not relevant in this context. He relied on the report on the taxation of multi national banking enterprise in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver and wherever apportionment of income is sought to be done, the concept of separate entity or existence of two entities is very much embedded. He contended that once it is accepted that GE and PE are different entities, interest payable by PE becomes income in the hands of GE and since the same is arising in India, it becomes taxable in India as per article 11(2) of the treaty. 45. Shri Srivastava then referred to article 11(6) of the treaty to point out that the same refers back to article 7 in certain situations. He submitted that article 7(1) talks about taxability of enterprise. He submitted that lending of money to PE becomes another activity of GE which is separate from PE activities and income from that activity in the form of interest received from PE is chargeable to tax in India by the principle of force of attraction. He contended that interest in the present case is actually payable by PE to GE and it is not a case of earning of notional interest income. He contended that taxability of such interest depends on accrual and not on the basis that who has paid the same. 46. As regards the OECD commentary relied upon by Shri Dastur, Shri Srivastava submitted that the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. He relied on the decision of Hon'ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. v. CIT 26 ITR 27 and submitted that what is accrual of income has been explained by the Hon'ble Supreme Court. He contended that there must be authority to tax income and there is no such authority in the domestic law to tax the interest income receivable by the GE from PE. As regards the decision of Hon'ble Supreme Court in the case of Hyundai Heavy Industries Co. Ltd. (supra) relied upon by Shri Srivastava, he submitted that the issue involved in the said case was limited and specifically related to attribution of profit to PE. He invited our attention to page No. 489 of the report and submitted that profit in the said case was undisputedly earned and the question raised before the Hon'ble Apex Court was only relating to attribution of the said profit. He submitted that similarly the issue as well as relevant facts involved in the case of CIT v. Ahmedbhai Umarbhai and Co. 18 ITR 472 cited by Shri Srivastava were entirely different and the decision rendered in the said case by the Hon'ble Supreme Court is not applicable in the present case. 49. We have considered the rival submissions in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been disputed even by the learned representatives of the assessees during the course of hearing before us. They, however, have relied on the relevant tax treaties in support of the assessee's claim for deduction on account of interest payable to GE while computing the profits attributable to PE in India as per article 7(2) and 7(3) read with paragraph No. 8 of the protocol.. It is, therefore, pertinent to refer to the said two articles and paragraph No. 8 of the protocol which are reproduced below : "7(2) Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits 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 a permanent establishment. (3) In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he protocol, it has been agreed with reference to paragraph No. 3 of article 7 of the convention that no deduction shall be allowed in respect of amounts paid (other than reimbursement of actual expenses) by a PE of an enterprise to the HO of the enterprise or any other offices thereof, inter alia, by way of interest on moneys lent to the PE except where the enterprise is a banking institution. 52. A combined reading of article 7(2) and 7(3) of the treaty and paragraph No. 8 of the protocol thus makes it clear that for the purpose of computing the profits attributable to the PE in India, the said PE is to be treated as a distinct and separate entity which is dealing wholly independently with the general enterprise of which it is a part and deduction has to be allowed for all the expenses which are incurred for the purpose of PE whether in India or elsewhere barring the amount paid by a permanent establishment to the head office of GE or any other offices thereof, inter alia, by way of interest on moneys lent to the permanent establishment except where the enterprise is a banking institution. In the case of a banking enterprise like the assessee in the present case, profit attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax from such interest and there is no question of making disallowance on account of deduction claimed for such interest by invoking the provisions of section 40(a)(i). The question thus is whether the interest payable by the Indian PE is chargeable to tax in India in the hands of Foreign GE and this has been raised as question No. 2 for the consideration of this Special Bench. 54. As rightly submitted by Shri Pardiwala, questions No. 1 and 2 referred to this Special Bench are interlinked and unless and until question No. 2 is answered, question No. 1 cannot be decided because the decision on question No. 2 is having direct bearing on the final answer to question No.1. If question No. 2 is decided in favour of the assessee holding that interest payable by Indian PE to the overseas head office of the assessee bank is not chargeable to tax in India, the provisions of section 195 would not be attracted and there being no failure on the part of the assessee to deduct tax at source from the said interest, the question of disallowance of the said interest by invoking the provisions of section 40(a)(i) will not arise. The disallowance made by the AO by invoking the said provisions accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overseas GE which is the assessee bank in the present case who is a non resident in India and the PE in India is part of that entity which is a taxable entity in India even in respect of income attributable to the PE in India. There is thus only one person assessable to tax i.e. GE and PE is not an independent person who is assessed to tax separately in India. It is a part of the GE and its income is chargeable to tax in the hands of GE which alone is the person assessable to tax in India. 57. In the case of Kikabhai Premchand (Sir) v. CIT (supra) it was held by the Hon'ble Supreme Court that under the Income-tax Act, all that the State can tax is income, profits and gains in the relevant accounting year. It was held that it is well recognized that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. In the case before the Hon'ble Supreme Court, the business was owned and run by the assessee himself and it was held in these facts and circumstances by the Hon'ble Supreme Court that it was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount in question was includible in the computation of assessee's income as profit in respect of sales made to its head office in London within the meaning of section 9(1) of the Income-tax Act, 1961. Their lordships answered the said question in the negative and in favour of the assessee holding that when the transaction between the London head office of the assessee and its unit in India was a transaction as between principal and principal, it cannot be held that any income arose in favour of the assessee either directly or indirectly since the gain in London office was offset by the loss incurred in the Indian branch. It was held that in law there cannot be a valid transaction of sale between the branch office of the assessee in India and its head office in London. It was held that it is a elementary proposition that no person can enter into a contract with oneself and debiting or crediting one's account cannot alter this legal position. It was held that if one unit of a business does not debit any commission to another unit of the same business then it is difficult to follow how any saving has been effected by the business. 59. The position under the domestic law as emanating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of the domestic law are more beneficial to the assessee than the provisions of the relevant tax treaty, the provisions of the domestic law shall override and prevail over the provisions of the treaty. Article 23 of the Indo-Japanese treaty, therefore, cannot be interpreted in a way as sought by Shri Girish Dave because if such interpretation is assigned to article 23 and the interest income which is otherwise not taxable in India as per the domestic law is held to be taxable relying on the provisions of the treaty, the same will run contrary to the provisions of section 90(2). Such interpretation, therefore, cannot be assigned to article 23 and the only interpretation which, in our opinion, can be assigned to the said article so as to make the provisions thereof in consonance with section 90(2) of the domestic law is that if there is an express provision made in the convention giving benefit to the assessee which is contrary to the domestic law, then the provisions of treaty can be relied upon which shall override and prevail over the provisions of the domestic law to give any benefit expressly given to the assessee under the treaty. The decision of Hon'ble Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest is the beneficial owner of the interest, the tax so charged shall not exceed 10% of the gross amount of interest. In the present case, there is no dispute that the head office of the assessee bank in Japan is the beneficial owner of the interest and that is how the said interest has been taxed by the AO in the hands of the assessee at a fixed tax rate of 10%. It is, however, to be noted that such interest can be taxed in India in the hands of GE at a maximum rate of 10% as per article 11(2) according to the Laws of India. As already held by us, interest payable by the PE in India to the GE of which it is a part is a payment to self and the same, therefore, does not give rise to income in India that is taxable as per the domestic law. 64. As stated in the preliminary remarks on OECD commentary on article 11 concerning the taxation of interest, the formula reserving the exclusive taxation of interest to one State, whether the State of the beneficiary's residence or the State of source, could not be sure of receiving general approval. It is stated that a compromise solution, therefore, has been adopted by providing that interest may be taxed in the State of a residence, but l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odel convention has been explained in para 24 and 25.1 of the OECD commentary on Model Tax Convention on Income and on Capital (condensed version) issued in July 2010 as under: "24. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of source and in the State of the beneficiary's residence when the beneficiary has a permanent establishment in the former State. Paragraph 4 is not based on such a conception which is sometimes referred to as "the force of attraction of the permanent establishment". It does not stipulate that interest arising to a resident of a Contracting State from a source situated in the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may have in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the interest is taxable as part of the profits of the permanen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Shri Girish Dave. However, the situation contemplated in article 11(6) should be found to be in existence in a case to bring the interest to article 7 in order to treat the said income as business profit attributable to the PE indirectly by force of attraction. In the present case, such situation does not exist and article 11(6), therefore, in our opinion, has no application. 68. Now we shall deal with the contention of Shri Girish Dave seeking extension of the deeming fiction created in article 7(2) to treat the Permanent Establishment in India of the assessee bank as a separate and independent entity for the purpose of application of article 11 especially paragraph 2 thereof. It is relevant here to refer to the provision of article 7(2) which is reproduced hereunder : "Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which it is a part as two separate entities only for the purpose of determining the profits attributable to the PE and not for the purpose of determining the total profits of the enterprise as a whole. 71. While explaining the peculiar relationship between a PE and the enterprise of which it is a part, a comparison is often made to a Yolk and its egg. The PE is considered as yolk and the enterprise as a whole is considered as the egg. This comparison is made to show that whatever is in the yolk is necessarily in the egg itself and there is no need to account for the egg separately. On the other hand, not every thing that is in the egg is part of the yolk and it is, therefore, not necessary to account for the yolk separately in cases where the resident State avoid total taxation using the credit method or the tax exemption method. This position can further be explained by giving an example as follows : Suppose there is a PE in one State which is a part of a GE having HO in another State. During the relevant year, loan has been advanced by HO to PE on which interest of Rs. 3 crores has been provided by the PE. The total profit of the HO excluding the said interest say is Rs. 95 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate to the person resident of another State if he is the beneficial owner of such interest, at the rate not exceeding 10% according to the laws of that State. This option thus has to be exercised by the source State by making suitable provisions in the domestic law providing expressly for taxing the interest payable by PE in that State to the GE in another State. This position has been recognized in the commentary on 'Model Convention on Income and on Capital' (condensed version) published by OECD in July, 2010 in para no. 29 which states that some States consider that the separate and independent enterprise fiction that is mandated by article 7(2) should not be restricted to the application of article 7, 23A and 23B but should also extend to the interpretation and application of other article of the convention, so as to ensure that permanent establishments are, so far as possible, treated in the same way as subsidiaries. These states also consider that notional charges for dealings which, pursuant to article 7(2), are deducted in computing the profits of the PE should be treated, for the purposes of other article of the convention, in the same way as payments that would be made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable by such bank abroad will be liable to tax in India and would be governed by the provisions of section 115A. The provisions of section 115A read as under : "115A(1) Where the total income of - (a) a non-resident (not being a company) or of a foreign company, includes any income by way of - (i) dividends (other than dividends referred to in section 115-O; or (ii) interest received from Government or an Indian concern on monies borrowed or debt incurred by Government or the Indian concern in foreign currency; or (iii) income received in respect of units, purchased in foreign currency, of a Mutual Fund specified under clause (23D) of section 10 or of the Unit Trust of India, The income-tax payable shall be aggregate of - It is clearly manifest from the above provisions that section 115A is applicable inter alia, in respect of income received by a non resident (not being a company) or a foreign company from Government or an Indian concern on moneys borrowed or debt incurred by Government or the Indian concern in foreign currency. The said provision, however, has no application to the facts of the present case. In any case, if the interest income in quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent concepts and when a foreign enterprise carries on business through a Permanent Establishment in India, it brings itself within the fiscal jurisdiction of India to such an extent that India can tax the profits derived by the foreign enterprise from India directly or indirectly through Permanent Establishment. In the present case, we, however, are concerned with the interest payable by the Indian PE to the foreign GE and the basic question is whether such interest payable by the PE to the GE of which it is a part can give rise to any income chargeable to tax in India in the hands of GE. As already held by us, there are no express provisions in the Indo-Japanese tax treaty to bring the said income to tax in India in the hands of GE and in any case, the said interest payable by the PE to the GE of which the PE is a part is a payment to self which cannot give rise to any income chargeable to tax in India as per the domestic law. The decision of Hon'ble Supreme Court in the case of Hyundai Heavy Industries Co. Ltd. (supra), in our opinion, thus is not of any help to the Revenue in the present context and the reliance of Shri Girish Dave thereon is clearly misplaced. 78. Shri Girish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the enterprise of which it is a part. One of such aspects is that a PE is not the same as a subsidiary and is not in fact legally or economically separate from the rest of the enterprise of which it is a part. In the context of a PE and its head office, as contrasted with a parent company and its subsidiary, it is the enterprise as a whole which legally bears the risk. 80. As regards the decision of Federal Court of Appeal (FCA), Canada in the case of Cudd Presssure (supra) relied upon by Shri Girish Dave, it is observed that the issue involved in the said case was whether a US resident corporation could, in the computation of the profits attributable to its Canadian PE, deduct 'notional rent' charged by it in relation to the Canadian PE's use of specialized equipment in the performance of the lucrative contract in Canada. It was decided by the lower court that the notional rent was not deductible in computing the Canadian PE's taxable business income from Canadian sources on the basis of factual finding that an arm's length separate and distinct entity in the situation of Cudd's Canadian PE would not have rented the specialized equipment, but would have purchased it instead. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged in the same or similar conditions and dealing wholly independently with the non-resident person of which it is a permanent establishment." The PE of a non-resident in Pakistan thus is treated as a distinct and separate person under the domestic law by making express provision and keeping in view the said provision made in the domestic law, it was held by the Hon'ble Sindh Court that the doctrine of mutuality does not and cannot apply to a situation to which section 105(1)(a) applies. As already discussed by us, there is no such provision contained in the Indian Income Tax Act and in the absence thereof, the interest payable by the Indian PE to its foreign GE of which it is a part can not be said to have given rise to income which is chargeable to tax in India as per the domestic law being payment to self as per the principle of mutuality. 82. In the case of Dresdner Bank AG vs. Addl. CIT (supra) cited by Shri Girish Dave, the issue before the Division Bench of this Tribunal was whether, under the Indian Income-tax Act, 1961, the profits arising out of dealings of the foreign companies Indian Branch office, with its head office and with other foreign branches, is taxable in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that we did seek comments of the parties on as to why this appeal should not be referred to a larger Bench and let the law be settled in a holistic manner by taking into account all aspects of the intra organization dealings, and unfettered by the earlier decisions of this Tribunal. Learned counsel's emphatic opposition to this suggestion was on the ground that the assessee bank has already wound up its operations in India and it does not want to delay finalization of its tax liability as the constitution of larger Bench will result in, that the case before us only deals with an income situation under the Act while ABN Amro Bank N.V.'s case deals with an expense situation under the tax treaty, and, that, the issue decided by the Tribunal in ABN Amro Bank N.V.'s case (supra) does not arise in this appeal at all. Learned Departmental Representative also, equally emphatically, submitted that the issue before us does not need to be referred to a larger Bench. It was also submitted that there have been no judicial precedents, either from Tribunal or even the higher judicial forums, on the scope of 'income accruing or arising in India' under section 5(2)(b) and, therefore, there is no qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) to the extent that decision of Special Bench would prevail over that of the Division Bench and the Division Bench has to follow the decision of Special Bench as a matter of judicial discipline and propriety, it is to be noted that the Division Bench in the case of Dredsner Bank (supra) has taken pains to present the other view on this complex issue and that too in the peculiar circumstances of that case as discussed in paragraph No. 72 of its order which has been reproduced herein above. Nevertheless, we are of the view that the judicial discipline and judicial propriety are of paramount importance and the same cannot be dispensed with while discharging the judicial duty, whatsoever peculiar the circumstances are or howsoever complex the issue is. 84. Shri Srivastava, Special Counsel for the Revenue, has strongly relied on the provisions of section 4 read with section 5(2) of the Income-tax Act in support of the Revenue's case that the interest payable by PE in India being the income arising in India to the foreign GE which is a non resident is chargeable to tax in India. We have already considered this aspect of the matter. As noted by us, the GE alone is the taxable entity in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and decided in the light of relevant provisions of the law and the relevant tax treaty whichever is applicable. 86. According to Shri Srivastava, whenever there is apportionment of income, the concept of separate entities or existence of two entities is very much embedded. We find it difficult to accept this contention of Shri Srivastava. In our opinion, question of apportionment of income does not always arise only in the case of two entities which are separately chargeable to tax. Moreover, the relation between GE and PE, as already discussed by us, is so peculiar that the GE and PE which is a part of that GE are one and the same entity for the purpose of taxation and the PE is treated as separate entity only for the purpose of determining the profit attributable to it in India as per the deeming fiction created in the relevant article of the treaty. As regards the contention raised by Shri Srivastava relying on article 11(6) of the Indo-Japanese treaty and the principle of force of attraction, we have already discussed this aspect while dealing with the argument of Shri Girish Dave. As held by us, article 11(6) of the Indo-Japanese treaty is not applicable in the present cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the treaty as discussed above, we are of the view that although interest paid to the head office of the assessee bank by its Indian branch which constitutes its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the PE which is taxable in India as per the provisions of article 7(2) & 7(3) of the Indo-Japanese treaty read with paragraph 8 of the protocol which are more beneficial to the assessee. The said interest, however, cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domestic law. Even otherwise, there is no express provision contained in the relevant tax treaty which is contrary to the domestic law in India on this issue. This position applicable in the case of interest paid by Indian branch of a foreign bank to its Head Office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the Head Office. At the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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