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TMI Blog2024 (5) TMI 1405X X X X Extracts X X X X X X X X Extracts X X X X ..... ordaining that a PE of a banking enterprise in India would be deemed to be a person separate and independent of the non-resident person of which it is a PE. However, it was the undisputed position before us that the said Explanation would have no application since it came into effect only from 01 April 2016 and by virtue of Finance Act, 2015. That only leaves us to examine the challenge that stands raised based on the well settled position of the law clearly not contemplating a person profiting out of itself. Once we come to the firm conclusion that the branch office would not partake the character or attribute of a separate legal personality, the view as taken by the Tribunal is clearly rendered unexceptional. In any event, it would be the exception carved out in the DTAA with respect to banking enterprises which would govern. As decided in Kikabhai Premchand KT [ 1953 (10) TMI 5 - SUPREME COURT ] it is 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 then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. Cut away the fictions and yo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same was challenged before the ld CIT(A) stating that such interest income is payment to self as payer and payee both are the same persons. Further it has been submitted that interest paid by HO is not in connection with any indebtedness but on account of deposits. The ld CIT(A) stated that claim is not eligible in view of the decision of the Hon'ble Supreme Court in case of Goetz India Ltd Vs. CIT 284 ITR 323. xxxx xxxx xxxx 23. We have carefully considered the rival contentions and also perused the order of the coordinate bench in ITA No. 306/Del/2016 for Assessment Year 2011-12 wherein, the claim of the assessee is discussed and allowed vide para No. 5 to 8 of the order. Therefore, we are of the view that issue is covered in favour of the assessee by the above order of the coordinate bench. Accordingly, we set aside the impugned order and direct the ld AO to delete the above addition. In the result ground No. 5 of the appeal of assessee for both the years are allowed. 4. Although the appellants have referred to the pendency of other appeals before this Court, we note that the orders passed on 08 April 2016 on ITA 604/2015 and ITA 605/2015 would bind parties insofar as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formed 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 7. Mr. Pardiwalla drew our attention to the aforesaid Article in clear terms providing that no account would be taken while determining the profits of a PE for amounts charged by it by way of royalties, fees or other similar payments or for that matter commission or other charges for specific services performed or by way of interest on monies lent to the head office of the enterprise or any of its other offices except in the case of a banking enterprise. 8. It was submitted that Article 14(3) of the India-US DTAA, however, and more specifically deals with a reverse situation where interest is paid by the PE of such a company in India to the Head Office and makes the following provisions: - ARTICLE 14 PERMANENT ESTABLISHMENT TAX xxxx xxxx xxxx 3. In the case of a banking company which is a resident of the United States, the interest paid by the permanent establishment of such a company in India to the head office may be subject in India to a tax in addition to the tax imposable under the other provisions of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the 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 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. 10. Learned senior counsel also placed for our consideration the India-Japan DTAA and where the following provisions stand incorporated and would be relevant to answer the question which stands posited:- ARTICLE 7 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment. 2. Subject to the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia-Japan DTAA reads as under: - 8. With reference to paragraph 3 of article 7 of the Convention, no deduction shall be allowed in respect of amounts paid or charged (other than reimbursement of actual expenses) by a permanent establishment of an enterprise to the head office of the enterprise or any other offices thereof, by way of : (a) royalties, fees or other similar payments in return for the use of patents or other rights, or for the use of know-how; (b) commission or other charges, for specific services performed or for management; and (c) interest on moneys lent to the permanent establishment; except where the enterprise is a banking institution. 12. On a more fundamental plane, it was Mr. Pardiwalla s submission that it would be wholly incorrect to view a branch or a subsidiary office of a parent entity as constituting a separate legal personality. It was his submission that branches do not have a separate legal entity and thus the taxability of the interest that was received must necessarily be answered in favour of the assessee. Learned senior counsel in this connection drew our attention to the following pertinent observations as rendered by the Bombay High Court in DI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50. As regards the deduction of interest payable to the head office in the hands of Indian permanent establishment for the purpose of computing profits attributable to the said permanent establishment, there is no dispute that such deduction is not permissible under the Indian Income-tax Act (domestic law) being the payment made to self. Both the Indian permanent establishment and the foreign general enterprise of which it is a part are not separate entities for the purpose of taxation under the domestic law and the same being one and the same entity recognised as one assessee under the domestic law, interest payable by Indian permanent establishment to foreign general enterprise of which it is a part, cannot be treated as expenditure allowable as deduction being payment to self. This position which is well settled under the domestic law has 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 general enterprise while computing the profits attributable to permanent establishment in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of Finance Act, 2015 [2015 Act] had this to state insofar as the Explanation to Section 9 (1) (v) of the Income Tax Act, 1961 [Act] is concerned. We deem it apposite to extract the following paragraphs from that Circular: - 9.4 The CBDT, in its Circular No. 740 dated 17/4/1996 had clarified that branch of a foreign company in India is a separate entity for the purpose of taxation under the Income-tax Act and, accordingly, TDS provisions would apply along with separate taxation of interest paid to head office or other branches of the non-resident, which would be chargeable to tax in India. 9.5 Some of the judicial rulings in this context have held that although under the provisions of the Income-tax Act the payment of interest by the branch to head office is non-deductible under domestic law, being payment to the self, however, such interest is deductible due to computation mechanism provided under the DTAA but it is not taxable in the hands of the Bank, being income generated from self. The view expressed in the CBDT circular has not found favour in these judicial decisions. If the legal fiction created under the treaty were treated to be of limited effect, it would hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PE and may also attract levy of interest and penalty in accordance with relevant provisions of the Income-tax Act. 9.8 Applicability:- These amendments take effect from 1st April, 2016 and will, accordingly, apply to the assessment year 2016-17 and subsequent assessment years. 15. It becomes pertinent to note that the Explanation to Section 9 (1) (v) of the Act is principally concerned with entities engaged in the business of banking and a PE in India once remitting payments to its Head Office, the statute giving rise to a legal fiction of such remittances being deemed to have accrued or arisen in India. The Explanation to Section 9 (1) (v) of the Act is reproduced hereinbelow: - [ Explanation . For the purposes of this clause, (a) it is hereby declared that in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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