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TMI Blog2016 (5) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... er Article 12 but then as provided in article 12 (5), the charging provisions of Article 12(1) and (2), which deal with taxability of interest in the source state, will not apply “if the beneficial owner of the interest of the interest, being a resident of a contract state, carries on business in the other contracting state in which the interest arises, through a permanent establishment situated therein” and that in such a case the provisions of Article 7, which deal with taxability of profits of the permanent establishment alone will apply. In plain words, when interest income arises to a GE even if that be so, the taxability under article 12 will not apply, and it will remain restricted to taxability of profits attributable to the permanent establishment under article 7. The profits attributable to the PE have anyway been offered to tax. As regards the theory, as advanced by learned Assessing Officer in considerable detail, that for taxing the GE, the taxability has to be in respect of (i) income attributable to the permanent establishment as a profit centre; and (ii) income of the GE in its own capacity by treating it as another independent separate profit centre, for the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition for marketing services and levy of interest on in delay in realisation of the dues is deleted. - Decided in favour of assessee - ITA No.3422/Mum/2009 - - - Dated:- 31-3-2016 - Pramod Kumar AM and Pawan Singh JM For The Appellant : Arvind Sonde For The Respondent : N. Sathyamoorthy ORDER Per Pramod Kumar AM: 1. By way of this appeal, the assessee appellant has called into question correctness of the order dated 26th February 2009, passed by the learned CIT(A), in the matter of assessment under section 143(3) of the Income Tax Act, 1961 ( the Act hereinafter) for the Assessment Year 2004-05. 2. In the first ground of appeal, the assessee has raised the following grievance, the assessee is aggrieved that the learned CIT(A) erred in not accepting the claim that the rate of tax applicable to domestic companies and/or co-operative banks for Assessment Year 2004-05 is also applicable to the Appellant, in accordance with the provisions of Article 26 (Non-discrimination) of the double taxation avoidance agreement between India and the Republic of France ('India - France tax treaty' ) . 3. Learned counsel fairly accepts that the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest, fees for technical services, dividend etc. In case of business profits, income is to be computed only if the non-resident has a Permanent Establishment in India and the income attributable to such Permanent Establishment is taxable in India. In case of an assessee other than Bank, the payment of interest, royalty etc. by the branch to the Head Office is not allowable as a deduction (Refer to Article 7 (3) (b) of India France DTAA). However, in case of banks such deduction is specifically allowed. But such interest received by Head Office from the branch will be taxable under Article 12 of the Treaty at a lower rate of taxation. It is the benefit available to the banks in the Treaty and which is more beneficial than the provisions of the I.T. Act because if no deduction is allowed, the interest income will be taxable @ 40% and if the benefit is allowed, the same income is being taxed @ 10%. The CBDT circular No. 740 is dearly applicable to this case. Reliance can also be placed on the commentary of Klaus Vogel in his book Klaus Vogel on Double Taxation Conventions-Third Edition at para no.89 and 90 of page no. 750 which is reproduced as under: 89(b) Rule: Und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be taken into account to arrive at income accruing or arising in India under section 5(2) . Learned CIT(A) then referred, and relied upon, the co-ordinate bench decision in the case of DCIT vs. British Bank of Middle East [(2008) 19 SOT 730 (Mum)] which also dealt with interest income received by an Indian branch of a foreign banking company from it s head office and overseas branches. Relying upon these judicial precedents learned CIT(A) confirmed the impugned addition of ₹ 1,59,32,854. The assessee is aggrieved and is in further appeal before us. 8. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of applicable legal position. 9. As for the Dresdner Bank decision (supra), relied upon by the learned CIT(A), we cannot be oblivious to the fact that Dresdner Bank case (supra) was dealing with a situation in which the assessee had specifically abandoned it s reliance on the applicable tax treaty as evident from the Tribunal s observations, in paragraph 20 of the order, that we may place on record the fact that, during the course of arguments before us, the assessee abandoned it s p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f income of the assessee from it s permanent establishment in India. The controversy is confined to the taxability of this amount in the hands of the assessee, as, according to the Assessing Officer, while the foreign company is one unit for the assessment purpose, for the purpose of computation of income, these (i.e. HO and Indian PE) are two separate entities . Thus, going by the revenue s stand when an Indian PE claims deduction in respect of any payment to it s head office or other branches, while deduction will be allowed in computation of profits attributable to the PE, corresponding addition will be made in the hands of the foreign branches or head office, as the case may be. A deduction thus allowed to the PE, if revenue s contention is to be upheld, will be completely profit neutral. 11. The approach so adopted by the revenue authorities, on the first principles, is contrary to the scheme of the tax treaties. 12. The fiction of hypothetical independence of a PE vis-a-vis it s GE and other PEs outside the source jurisdiction is confined to the computation of profits attributable to the permanent establishment and, in our considered view, it does not go beyond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Co Ltd [(2007) 291 ITR 482 (SC)], do not apply to the treaty situation such as we are dealing with at present . On both of these occasions, before the coordinate bench as also before Hon ble Supreme Court, these observations were made in the context of ascertainment of profits under the scheme of the Income Tax Act, 1961. That s not the situation in the treaty situation, and, as per the mandate of Section 90, the provisions of the Income Tax Act cannot be thrust upon the assessee unless these provisions are favourable to the assessee vis- -vis treaty provisions. That is the reason that the theory of separate profit allocation for the PE and GE, and computation of profits of the GE on the basis of its hypothetical independence- which has been reiterated, and thus approved, by Hon ble Supreme Court in the case of Hyundai Industries Co Ltd (supra), does not come into play in respect of the treaty situations. 15 As far as the treaty situations, as in the case of Indo French DDTAA, are concerned, once an enterprise is found to be carrying on the related business or profession through a permanent establishment or a fixed base in the other contracting state, the scheme of taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nasmuch as it provides for the deduction in respect of interest paid to the GE and other intra GE units and it does also provide for taxation of interest received from the GE and other intra GE units. 19. Quite clearly, the provisions of the India France DTAA are materially different from the provisions of other tax treaties that the special bench was dealing with i.e. India Japan DTAA and India Belgium DTAA. In none of these treaties, there was no specific reference to taxability of interest received from the GE in the hands of the PE, as in the case of Indo French DTAA. What we have before us is a peculiar situation in which interest received from the GE, despite specific provision to that effect in article 7(3)(b), is not treated as taxable on the basis that interest credit in this regard is to be taxed on the basis of logic flowing from judicial precedents in the cases of CIT Vs Sir Kikabhai Premchand [(1953) 24 ITR 506 (SC)] and Betts Hartley Huett Co Ltd Vs CIT [(1979) 116 ITR 425 (Cal)] and on the basis that the observations made in the CIT Vs Hyundai Industries Co Ltd [(2007) 291 ITR 482 (SC)] will not be apply to this situation, while interest paid to GE is held to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E and the general enterprise of which the PE is a part, as that of an egg and the yolk it contains. I have further explained that, with regard to income attribution to PEs, the OECD Model does not require that a general enterprise is divided into two separate parts a head office and a PE and that, therefore, an internal charge borne by a PE will not yield income for anyone, but only produces a smaller amount of PE income to be taxed by the PE state and, correspondingly, a smaller amount of foreign income in respect of which the residence state needs to provide relief. I must admit that my attempts to get these views across have met with varying levels of success. Particularly students with an accounting background tend to be on the skeptical side .. . 22. Clearly, the principles for determining the profits of the PE and GE are not the same, and the fiction of hypothetical independence does not extend to computation of profit of the GE. The principles of computing separate profits for the PE and the GE treating them as distinct entities, in the case of Dresdner Bank (supra), was in the context of Section 5(2). The separate profit centre accounting approach for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same destination by following a different path but then as long as reach the same destination, our traversing through a different path does not really matter at all. For this reason also, the grievance of the assessee deserves to be upheld. 24. Ground No. 2 is thus allowed. 25. In ground nos.3 4, which we will take up together, the assessee has raised the grievance that the CIT(A) erred in holding that the remuneration aggregating ₹ 14,661,695, received for marketing services rendered, as income accruing to the Appellant in Assessment Year 2004-05 even though the amount was crystallised only in Assessment Year 2005-06 and in charging interest on remuneration for marketing services received in financial year 2004-05, on the premise that the delay in payment constituted a loan on which interest should have been charged at arm s length . The assessee has also taken an additional ground of appeal which states that the learned AO erred in levying interest on the remuneration for marketing services owed to the Indian branches of the Appellant, amounting to ₹ 1,46,61,695, as opposed to the arm's length price payable to the Indian branches of the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue and come to the correct decision. I completely concur with the decision. Further Transfer Pricing Regulations are in force for this assessment year. Even if the assessee has not raised and accounted the receipts for the services rendered, the AO is empowered to determine the Arms Length Price (ALP) and determine the income. The AO has properly determined the income as per the Transfer Pricing Regulations. In view of this addition made is in order and I uphold the AO s action. 27. The assessee is not satisfied and is in further appeal before us. 28. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of applicable legal position. 29. In our considered view, learned CIT(A) was completely in error in proceeding on the basis that income accrues when the services are rendered even in situation in which consideration for services so rendered is not finalised. Unless the consideration for services is finalised between the parties, income from such services cannot even be quantified, and obviously quantification of income must precede it s accrual. It is an undisputed position that the arrange ..... X X X X Extracts X X X X X X X X Extracts X X X X
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