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TMI Blog2023 (3) TMI 1236X X X X Extracts X X X X X X X X Extracts X X X X ..... id decision in BNP Paribas [ 2023 (3) TMI 193 - ITAT MUMBAI ] the fiction of hypothetical independence of the PE and head office/overseas branch cannot be extended to the computation of the profit of the head office/overseas branch, and the same is restricted only for computation of profit attributable to the PE. Special Bench in Sumitomo Mitsui Banking Corporation [ 2012 (4) TMI 80 - ITAT MUMBAI ] accepted that the independent fiction and separate entity approach under Article 7 of the tax treaty is only for the purpose of determining the profit attributable to the PE and not for the purpose of determining the total profits of the enterprise as a whole. Therefore, we direct the AO to delete the addition on account of interest income received by the overseas branches of the assessee from the Mumbai branch office. As a result, grounds no.1 and 2 raised in assessee s appeal are allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant's total income in the income-tax computation sheet accompanying the assessment order for AY 2016-17. 4. In including interest of Rs 1,30,90,54,199 under 234B of the Act in the Appellant's income-tax liability, by using an incorrect principal tax liability as the base. 5. In directing that penalty proceedings be initiated under section 271(1)(c) read with section 274 of the Act. The Appellant craves leave to add, alter, vary, omit, substitute or amend any of the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Honourable Income-tax Appellate Tribunal to decide this appeal according to the law. For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the Appellant requests that the appeal be allowed as prayed." 4. The issue arising in grounds no.1 and 2, raised in assessee's appeal, is pertaining to the taxability of interest paid by the Indian branch office to the other overseas branches of the assessee. 5. The brief facts of the case pertaining to this issue are: The assessee is a company incorporated in Switzerland and is a tax resident of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g or accruing to head office from branches or vice versa. The AO further held that interest payment shown by the assessee to the head office is the attribution of interest income to the head office as provided in Article 7(2) of the DTAA on the basis of functions carried out, assets deployed and risks assumed by the head office and not to be considered as an expenditure as there is no concept of income from self. Accordingly, the income attributable to the head office/overseas branches was taxed in the hands of the assessee. As the assessee opted not to file the objection against the draft order before the learned DRP and intimated that the final assessment order be passed, accordingly, the AO passed the assessment order dated 27/02/2020 under section 144 r/w section 144C(3) of the Act. 6. The learned CIT(A) vide impugned order dismissed the appeal filed by the assessee on this issue and held that interest paid by the PE to the head office and other branches etc. is an interest sourced in India and is liable to be taxed under the source rule in India. The learned CIT(A) by referring to the provisions of Explanation to section 9(1)(v) of the Act held that the Explanation has been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee under the provisions of the India-France DTAA. Further, it can also not be disputed that in terms of section 90(2), the provisions of the Act or the DTAA, whichever is more beneficial to the assessee shall be applicable. Thus, being an entity covered under the provisions of the India-France DTAA, the payment of interest to the head office and other overseas branches was claimed as a deduction by the Indian branch office under the provisions of Article 7(3) of the DTAA. The Revenue, in the present case, has not disputed the deduction claimed by the Indian branch office. However, as per the Revenue, the interest received by the head office/overseas branches is taxable under the provisions of section 9(1)(v)(c) of the Act. 22. Since the India-France DTAA is applicable in the present case, therefore, before proceeding further it is pertinent to consider the relevant provisions of the said DTAA vis-à-vis the facts of the present case. As per Article 12(1) of the DTAA, interest arising in a contracting state (i.e. say India) and paid to a resident of the other contracting state (i.e. say France) may be taxed in the other contracting state (i.e. France). Further, under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices." 23. Thus, in the case of a banking enterprise, any payment by the PE to the head office of the enterprise by way of interest on money lent to the PE shall be allowed as a deduction. Further, the amount charged by the PE to the head office of the enterprise by way of interest on money lent to the head office of the enterprise shall be considered for the determination of profits of the PE. In the present case, it is not in dispute that the money has been lent to the PE and not the other way around. Thus, the first part of Article 7(3)(b) of the Act is only applicable in the present case, as the second part of this Article deals with the case wherein mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tracting 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 detailed reasons set out above and particularly as the fiction of hypothetical independence does not extend to the computation of GE profits, we reject the same. The authorities below were, therefore, clearly in error in holding that the interest of Rs.1,59,32,854 paid by the Indian PE to the GE, or its constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case the provisions of Article 7 or Article 14, as the case may be, shall apply." 9. Since the assessee has a PE in India, therefore, the interest has been claimed as a deduction while computing the business profits of the Indian branch office. Further, as per Article 7(2) of the Indo-Swiss DTAA, the profit attributed to the PE shall be determined 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 the PE. Thus, in view of the aforesaid decision in BNP Paribas (supra), the fiction of hypothetical independence of the PE and head office/overseas branch cannot be extended to the computation of the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Credit Suisse AG (CSMB') to the Singapore branch office of ('CSSB') of Credit Suisse AG is liable to tax in India by virtue of the Explanation inserted in section 9(1)(v) of the Income-tax Act, 1961 (Act) by the Finance Act 2015, without considering that the Appellant has filed its income-tax return for AY 2017-18 under the provisions of the India-Switzerland tax treaty, and that the aforesaid Explanation to section 9(1)(v) of the Act does not extend to the provisions of the India-Switzerland tax treaty. 2. In not demonstrating, as to how the interest of Rs. 3,58,49,989 paid by CSMB to CSSB is chargeable to tax in India under the provisions of the India-Switzerland tax treaty, other than by claiming that the interest is sourced in India. 3. In including the net capital gains of Rs.11,684,843,093 earned by the Appellant which are not subject to tax in India pursuant to Article 13(6) of the India-Switzerland tax treaty, after reducing fees for technical services of Rs. 85,09,971 earned by the Appellant, while computing the Appellant's total income in the income-tax computation sheet accompanying the assessment order for AY 2017-18. 4. In including interest of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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