9911796707
TMI Blog2024 (6) TMI 673X X X X Extracts X X X X X X X X Extracts X X X X ..... round raised by the assessee. It is evident that the issue is recurring in nature and it is squarely covered by the decision of the ITAT in the proceeding assessment year as discussed supra in this order, therefore, following the decision of the coordinate bench of the Tribunal as referred above this ground of appeal no. 2 of the assessee is dismissed. Taxability of data processing fees paid by the Indian branch of the assessee to its Singapore branch - Tribunal in assessee s own case [ 2023 (3) TMI 193 - ITAT MUMBAI] for A.Y.2017-2018 as well as the order of the Special Bench of the Tribunal in the case of Sumitomo Mitsu Banking Corporation [ 2012 (4) TMI 80 - ITAT MUMBAI] we hold that the department was not justified in taxing the data processing charges to the Singapore Branch of the assessee by applying the provisions of Article 13 of the India-France Tax Treaty. Interest payable/paid by the Indian branch offices of the assessee to the head office and its other overseas branches as chargeable to tax - We consider that the similar issue on identical fact has been adjudicated in favour of the assessee [ 2023 (3) TMI 193 - ITAT MUMBAI] decided that as per Article 12(1) of the DTAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice, therefore, debt claim of the head office is connected to the PE branch in India, therefore, in the present case interest received by head office from its branches in India is not taxable in the hands of the head office in view of the provision of DTAA. Addition under the head profit and gain from business and provision - assessee recorded an amount in its books of account as rental income - HELD THAT:- We find that the submission of the assessee has not been considered by the assessing officer, therefore, we restore this issue to the file of the assessing officer for deciding afresh after verification of the submission and detail filed by the assessee. Accordingly, this ground of appeal is allowed for statistical purpose. X X X X Extracts X X X X X X X X Extracts X X X X ..... medabad, Chennai & Hyderabad. The assessee is involved in normal banking activities including financing of foreign trade and foreign exchange transaction. The assessee has filed return of income for the year under consideration on 15.02.2021 declaring total income of Rs. 546,63,91,110/-. The case of the assessee was subject to scrutiny assessment and the assessing officer issued draft assessment order on 29.09.2022 u/s 144C of the Income Tax Act 1961 proposing assessment with certain variations on the following issue: (i) Issue of rate of taxation regarding the tax rates applicable to non-resident. (i) Issue of data processing fee paid by the branch Office (BO) to the Head office (HO) regarding the treatment of data processing fee paid by Branch office to Head Office amounting to Rs. 36,03,02,885/- as fee for technical services and royalty. (ii) The subject of taxation of the receipt of interest Income by HO, interest income of the overseas branch/HO of Rs. 19,22,06,830/-." 3. The assessee filed objection before the Dispute Resolution Panel-1, Mumbai on 28.10.2022. The DRP vide its order dated 27.06.2023 has dismissed the objection raised by the assessee and thereafter as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of issuing notice u/s 143(2) of the Act. The ld. D.R also referred provision of Sec. 143 of the Act and submitted that though prescribed authority (NaFAC) may issue notice u/s 143(2) of the Act and order u/s 143(3) will be passed only by concerned assessing officer. The ld. D.R has also referred the decision of Hon'ble Karnataka High Court in the case of Adarsh Developers in Writ Petition No. 1109/2023 wherein the similar issue has been decided in favour of the revenue. 6. Heard both the sides and perused the material on record. On perusal of the notice dated 29.06.2021 it is evident that the said notice has been issued by the ACIT/NaFAC-1(2) Delhi in the capacity of the prescribed authorities u/s 143(2) of the Income Tax Act 1961. In this regard, we have perused the provision of Sec. 143(2) of the Act as amended by the Finance Act 2016 reproduced as under: 3-1 Sub-section 143(2), as amended by Finance Act 2016 reads as under: "143(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer or the prescribed income tax authority, as the case may be, if, considers it necessary or expedient to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f returns furnished under section 139 or in response to a notice issued under subsection (1) of section 142 of the said Act, for the purpose of issuance of notice under sub section (2) of section 143 of the said Act." 9. It is clear from the aforesaid notification and provision of the Act that the prescribed authority i.e NaFAC is only authorised to issue a notice under the said section in accordance with provision of the Act. 10. We have also perused the decision of Hon'ble Karnataka High Court in the Writ Petition No. 1109/2023 Adarsh Developers wherein the following question of law was considered by the Hon'ble High Court which is reproduced as under: "[a] Whether the Additional Commissioner of Income Tax NaFAC-1(1)(2) could have assumed jurisdiction in respect of the petitioner's case which belongs to Central Charge for issuance of notice under Section 143(2) of the Income Tax Act, 1961; and if the aforesaid officer could not have so assumed jurisdiction, whether the proceedings must fail for want of due notice 3 326 ITR 492 [GUJ] under Section 143(2) of the Income Tax Act, 1961." The Hon'ble High Court has rejected the petition of the assessee holding as under: "3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant findings of the coordinate bench of the Tribunal, in the aforesaid decision, are as under: "10. We have perused the various orders of the coordinate benches of the Tribunal in context of the aforesaid issue under consideration and are persuaded to subscribe to the claim of the Id. A.R that the aforesaid issue had consistently been decided by the coordinate benches against the assessee. On a perusal of a recent order of the Tribunal passed in the assessee's own case for A.Y, 2013-14 in ITA No. 552/Mum/2018, dated 22.04.2019, we find, that the Tribunal by relying on its earlier order for AY. 1996-97 in ITA No. 2760/Mum/2008, dated 28.08.2013 had therein concluded that the tax levied at a higher rate in the case of a foreign company is not to be regarded as a violation of the non- discrimination clause. For the sake of clarity the view taken by the Tribunal in context of the aforesaid issue is reproduced as under: "We find that while deciding the appeal for AY 1996-97 (ITA No. 2760/Mum/ 2008 dated 28.08.2013), the Tribunal has decided the issue as under: 4. The third issue is relating to tax rate. The assessee has submitted that the tax levied at higher rate in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is dismissed. Ground No. 3: Taxability of data processing fees paid by the Indian branch of the assessee to its Singapore branch: 15. During the course of appellate proceedings before us the ld. Counsel submitted that identical issue on similar fact has been adjudicated by the coordinate bench of the ITAT in favour of the assessee. On the other hand, the ld. D.R supported the order of lower authorities. 16. Heard both the sides and perused the material on record. With the assistance of ld. Representative we have perused the decision of coordinate bench vide ITA no.1076/Mum/2021 for A.Y.2017-2018 on this issue the relevant extract of the decision is reproduced as under: "10. The brief facts of the case pertaining to this issue are: The branch office of the assessee bank has paid Rs. 40,70,47,265, as data processing fees to its Singapore branch. During the assessment proceedings, it was noticed that the assessee itself had added back the markup on cost amounting to Rs. 1,93,83,203, in the computation of income pertaining to the branch office. During the assessment proceedings, the assessee submitted that payment of data processing charges to the Singapore branch consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r authorities and have also perused the material available on record. On a perusal of the aforesaid ground, we find, that the issue herein involved is about taxability of data processing fees paid by the Indian branch offices of the assessee to its Singapore branch (service agent) to the tune of Rs 40.78 10,733/ under Article 13 of the India-France Tax Treaty. We find that the Tribunal while disposing off the appeal of the assessee for A.Y. 2013-14 in ITA No. 552/Mum/2018, dated 22.04.2019 had adjudicated the said issue by relying on its earlier order passed in the assessee's own case for AY. 2009-10 in ITA No. 3541/Mum/2014, dated 31.03.2016, observing as under:- "In the above ground of appeal, the issue is about data processing fees paid by Indian Branch Office of the assessee to Singapore Branch to the tune of Rs 325,963,282/- under Article 13 of the India-France treaty. We find that while deciding the appeal for AY 2009-10 (ITA No. 3541/Mum/2014 dated 31.03 2016), the Tribunal has decided the issue as under. 5. Ground No.3 pertains to subjecting the data processing charges paid to the Singapore branch of the assessee amounting to Rs. 132,335,594/- applying the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relying on the decision of Mumbai Bench of the ITAT in the case of Dresdner Bank AG vs Add1. CIT 108 ITD 375, he held that the interest paid by the Indian branches of the assessee bank to its head office and overseas branches was chargeable to tax in India. Accordingly, the addition made by the A.O. on this issue was confirmed by the Ld. CIT(A). 5. We have heard the arguments of both the sides and perused the relevant material on record. As agreed by the Ld. Representatives of both the sides. the issue involved in this appeal of the assessee now stands squarely covered by the decision of Special Bench of the ITAT in the case of Sumitomo Banking Corp Mumbai wherein it was held, after elaborately discussing the legal position emanating from the interpretation of relevant provisions of Indian Income tax Act as well as treaty, that interest paid to the head office of the assessee bank as well as its overseas branches by the Indian branch cannot be taxed in India being payment to self which does not give rise to income that is taxable in India as per the domestic law or even as per the relevant 'tax treaty' Respectfully following the said decision of Special Bench of the ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecial Bench in the negative ie in favour of the assessee and question No. 2 in affirmative Le again in favour of the assessee." As the facts and circumstances of the case during the year under consideration are perimateria, where payment made by assessee to Singapore Branch for data processing was brought to tax. Respectfully following the order of the Tribunal in assessee's own case as well as the order of the Special Bench of the Tribunal in the case of Sumitomo Mitsu Banking Corporation (supra), we hold that the department was not justified in taxing the data processing charges to the Singapore Branch of the assessee by applying the provisions of Article 13 of the India-France Tax Treaty." 13. In effect thus, reversing the stand of the DRP, the coordinate bench has come to the conclusion that the payment on account of data processing charges paid to BNP Singapore cannot be taxed in the hands of the assessee. The conclusion arrived at by the coordinate bench, whatever may have been the path traversed by the coordinate bench to reach this point, are the same as arrived at by us. Of course, our reasons are different, as set out earlier in this order, but that does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anch was only in the nature of reimbursement of expenses. This finding of fact was not challenged in the Revenue's appeal for Assessment Year 2006-07 or in these appeals for Assessment Year 2008-09 and 2009-10. The Revenue has not been able to show any difference in facts and/or in law in the subject Assessment Years to that in Assessment Year 2006- 07. Therefore, the above decision of this Court for Assessment Year 2006-07 will apply in these two Appeals. 5. Therefore in view of the reasons stated in our order dated 20 March 2018 passed in Income Tax Appeal No.1192 of 2015 relating to Assessment Year 2006-07, the identical question as proposed in the two appeals do not give rise to any substantial question of law. Thus not entertained." 14. We find that this issue is recurring in nature and has been decided in favour of the assessee in the preceding assessment years. The learned DR could not show us any reason to deviate from the aforesaid decision and no change in facts and law was precedents in assessee's own case cited supra, ground no.2 raised in assessee's appeal is allowed." 17. We consider that this issue is recurring in nature and same has been decided in favou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... During the Financial Year (FY) ended 31 March 2020, BNP paid an amount of Rs. 176,542,982/- to it's head office(HO)/overseas branches as interest on sub ordinated debt. Further, BNP has paid an amount of Rs. 15,663,858/- as interest on NOSTRO overdrafts The Assessee submits that such interest paid by the Assessee to its Head Office and other branches constitutes a 'payment to self and hence not chargeable to tax in India In this regard, we wish to submit that Article 7(2) of the India France Tax Treaty provides that profits attributable to a Permanent Establishment (PE) should be computed on the basis of the profits which the PE might expect to make if it were a distinct and separate enterprise and dealing wholly independently with the enterprise of which it is a PE or with other enterprises with which it deals The India - France Tax Treaty creates a legal fiction by treating the branch (ie the PE) as being distinct from the other parts of the same enterprise of which it is a PE while having dealings with them. The fiction has been introduced to enable quantification of the profits made by the PE on an arm's length basis so that the State in which the PE is sit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly with the enterprise of which it is a permanent establishment" This fiction comes into play for the limited purposes of computing profits attributable to permanent establishment only and is set out under the specific provision, dealing with computation of such profits, in the tax treaties, including in the Indo French DTAA. There is nothing, therefore, to warrant or justify application of the same principle in computation of GE profits as well. Clearly, therefore, the fiction of hypothetical independence is for the limited purpose of profit attribution to the permanent establishment. Article 12 of the India-FranceTax Treaty The India - France Tax Treaty applies to 'persons' who are 'residents' of one or both of the Contracting States Article 3 of the India France Tax Treaty defines the term 'person to include an individual, a company and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States In this connection, reliance is placed on the ruling issued by the Special Bench of Mumbai Income Tax Appellate Tribunal (ITAT) in the case of Sumitomo Mitsui Banking Corporation vs DDIT repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order has been reproduced below: ….The provisions of article 7(2) are subject to the provisions of article 7(3) and if the same are read together in harmonious manner, we are of the view that it becomes clear that the profits attributed to the PE are 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 condition and dealing wholly independently with the enterprise of which it is a PE. The said fiction, in our opinion, therefore, is applicable only for the purpose of determining the profits attributable to the PE and this limited application contemplated in the treaty cannot be extended and applied to compute the income of the GE. Therefore, without prejudice to the above contention that interest received by HO/overseas branches is not covered within the definition of interest under Article 12(4) of the India France Tax Treaty, it is submitted that in absence of two separate and distinct parties, Article 12 (1) of the India France Tax Treaty does not cover the interest paid by BNP to its HQ/overseas branches. Further, Article 12(5) of the India - France Tax Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f article 11(4) of the OECD Model Convention, the provisions of which are parimateria to the provisions of article 11(6) of the Indo-Japanese treaty, we are of the view that the same is not applicable to the facts of the present case inasmuch as the situation as contemplated to make it applicable does not exist in the present case. In the present case, the amount is advanced by the head office of the assessee bank to its PE in India and the same represents liability of the PE in India as reflected in the balance sheet of that PE. Interest paid by the PE on such liability, therefore, cannot be regarded as interest paid in respect of debt claims forming part of the assets of the Permanent Establishment. It also cannot be said that the economic ownership of the debt claim is allocated to that Permanent Establishment so as to say that it is effectively connected with the Permanent Establishment. It is no doubt true that article 7 makes inroads in article 11 as a result of the provisions contained in article11(6) as contended by Shri Girish Dave. However, the situation contemplated in article11(6) should be found to be in existence in a case to bring the interest to article 7 in order t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 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 (1) 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. We may also add that in the case of Sumitomo Mitsui Banking Corpn. (supra), a five member bench has held that interest payment by PE to the GE is a payment by a foreign company's Indian PE to the foreign company itself, it cannot give rise to any income, in the hands of the GE, which is ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . pages 162 to 170 of the Appellant's paper book). (ii) Assessment Year 2016-17 (Sec. pages 134 to 151 esp. pages 145 to 150 of the Appellant's paper book). It is the position, admitted by both by the Assessing Officer ("AO") and by the DRP, that the facts of the current Assessment Year are identical to those of the earlier Assessment Years. See: (1) the following observations of the AO: "The submissions of the assessee on this issue have been carefully considered There are no changes in the facts of the case from the previous years and the submissions of the assessee are also identical. In connection with this issue it is essential to highlight the directions of the DRP dated 22/03/2022 in the assessee's case for the Assessment Year 2017-18 The DRP on this issue in Para No 12 Page No. 32 of the directions dated 22/03/2022 held as under. On this issue the reliance is made on the directions of the DRP. (ii) See the following observations of the DRP "The Panel has carefully considered the facts of the case and the detailed submissions made by the assessee. It is noticed that this issue is recurring in nature. There are no changes in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will not only shake the confidence of the public in judicial procedure as such, but it will also totally destroy such confidence. The result of this will be conclusions based on arbitrariness and whims and fancies of the individuals presiding over the courts or the tribunals and not reached objectively on the basis of the facts placed before the authorities. If a Bench of a Tribunal of the identical facts is allowed to come to a conclusion directly opposed to the conclusion reached by another Bench of the Tribunal on an earlier occasion that will be destructive of the institutional integrity itself...". The following observations of the Supreme Court in (2000) 1 SCC 644 are also relevant: "Precedents which enunciate rules of law form the foundation of administration of justice under the Indian legal system. This is a fundamental principle which every Presiding Officer of a judicial forum ought to know, for consistency in interpretation of law alone can lead to public confidence in the judicial system in India." (b) It would completely destroy the Appeal process, as instead of availing of the normal Appeal process, by appealing to the High Court under Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consequently, they shouldn't serve as a precedent in the present appeal". It is submitted that: * there was no "inaccurate representation of facts" whatsoever. There were only legal submissions advanced on admitted facts * merely because the Department does not agree with valid legal submissions made by Counsel, does not give it any right to make such allegations * In any event and without prejudice to the above, the Department was fully represented before the Hon'ble ITAT and there was therefore no question of the Hon'ble Bench being "misguided" as alleged or otherwise. C. Strictly without prejudice to its contention that the issue is squarely covered in the Assessee's favour by detailed and well- reasoned orders of the Hon'ble ITAT in its own case on identical facts and law, the Appellant once again justifies how and why its above Ground of Appeal deserves to be allowed, as has been done by the Hon'ble ITAT in its own case for three Assessment Years: (i) The Appellant being a resident of France, it has, by virtue of Section 90 of the Act, an option to adopt either Indian Domestic Law or the Double Taxation Avoidan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(v)(c) of the IT Act, 1961, the following income shall be deemed to accrue or arise in India: (v) income by way of interest payable by- (c) 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 profession carried on by such person in India; Thus, this section provides for a 'source rule' for taxation of interest income arising to a non-resident when interest is paid in respect of debts incurred for purposes of a business or profession carried out by that non-resident in India. The source rule does not make any distinction about the payee 9.1 The reason for introducing this source rule is provided in the explanatory note to the Finance Bill, 1976 by which this section was introduced. The same is reproduced hereunder: "38. "Source rule" regarding place of accrual of income by way of interest, royalty and fees for technical services - A non-resident taxpayer is chargeable to tax in India in respect of income from whatever source derived which is received or, is deemed to be received in India or, which accrues, or arises, or, is deemed or aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitute the same entity. The Income Tax Act, 1961 also recognises this principle. Thus, under the Act, the business income of the non-resident banking company would be taxed applying the provisions of section 9(1)(i) of the Act, that is, by applying the business connection test. Under the Act, there cannot be income from self and neither could there be payment to self as an allowable business expense. Thus, under the Act, the assessee bank could not debit interest payments to its Head Office (HO) and other branches and claim the same as an expense, nor could it show interest received from its HO and other branches as interest income while determining the business income attributable to activities carried out in India. However, the same is allowed as per Article 7 of the India-France DTAA 11. India has entered into a Double Taxation Avoidance Agreement (DTAA) with France, which has come into effect in 1994, and the assessee is a resident person of France as per Article 4 of the DTAA. Hence, as per Article 1 of the DTAA, the tax treaty becomes applicable in the case of the assessee. However, section 90(2) of the IT Act, 1961 provides that if India has entered into a treaty for av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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, know-how or other rights, or by way of commission or other charges 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." Thus, the DTAA specifically provides for the PE of a banking enterprise such as the assessee, to claim deduction on account of interest paid to HO and other offices and include in its profits the interest charged/received on moneys lent to HO and other offices. As already mentioned above, this was not possible under the provisions of the Act, but once the assessee opts for the beneficial provisions of the DTAA, the PE of the assessee in India has to be treated as a separate banking entity and the provisions of the DTAA become applicable. 14. The PE of the assessee in India remains the resident of the other Contracting State, that is, France, for the purpose of the Treaty as also the Act. Under the DTAA, the PE of an enterprise of a Contracting State in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the PE, such interest is not taxable under the Act as both are, under the Act, the same person and not separate entities & one cannot make profit out of himself. The fiction created in Article 7(2) of the DTAA treating the PE as separate and independent entity does not extend to Article 11. Also, the interest paid by the PE is not interest paid in respect of debt claims forming part of the assets of the PE so as to attract Article 11(6). The DTAA, even assuming that it does create a liability, cannot be applied u/s 90(2) as it is contrary to the Act and less favourable to the assessee. 15.1 As stated earlier it had been consistent stand of the Revenue that interest paid by the Branch office in India to its Head office is chargeable to tax in the hands of the non-resident Le. head office as per Section 9 (1) (v) (c) of the Act. However, Hon'ble Special Bench of the ITAT was of the view that under the Act both the Branch office and Head office are same person and not separate entities and one cannot make profit out of himself. Thus, it was held by the Special Bench that interest paid by Branch office to its Head office is not chargeable to tax in India under the 1.T Act its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) 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 profession carried on by such person in India. Section 90 of the Act provides that Central Government may enter into an agreement with the Government of any country or specified territory outside India among other things for providing relief from double taxation. India has entered into Double Taxation Avoidance Agreements (DTAAs) with 92 countries Further sub-section (2) of the sald section provides that in respect of an assessee to whom such DTAA applies, the provisions of the Act shall apply to the extent they are more beneficial to him. Therefore, the taxpayer is entitled to relief from the provisions of the Act if such relief is available under the DTAA and to that extent the provisions of the Act are not applicable. Further, income of a non-resident from business activity is taxable in India if it has a business connection in India in accordance with the provisions contained in sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia to tax in addition to the tax imposable under the other provisions of this Convention at a rate which shall not exceed the rate specified in paragraph 2(a) of Article 11 (Interest)" The Special Bench of the ITAT in the case of Sumitomo Mitsui Banking Corporation [136 ITD-66 TBOM] had mentioned that there are instances of other countries providing for specific provisions in their domestic law which allows for the taxability of interest paid by a permanent establishment to its head office and other branches and had pointed out absence of such a specific provision in the Income-tax Act. Considering that there are several disputes on the issue which are pending and likely to arise in future, it is essential that necessary clarity and certainty is provided for in the Act. Accordingly, it is proposed to amend the Act to provide 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Shall be exempt from tax in that Contracting State provided it is derived and beneficially owned by: (i) The Government a political sub-division or local authority of the other Contracting State; or 2[(ii) the "Reserve Bank of India" in the case of India and the "Bangue de France" and "Agence Francaise de Development" in the case of France: or (iii) any other institution as may be agreed from time to time between the competent authorities of the Contracting states: (b) Interest arising in a Contracting State shall be exempt from tax in that Contracting State if it is beneficially owned by a resident of the other a Contracting State and is derived in connection with a loan or credit extended o endorsed by: (i) In the case of France, the Banque Francaise du Commerce Exteriur, or the Compagnie Francaise d' Assurance pour le Commerce Exterieur (COFACE); (ii) In the case of India, the Export, Import Bank of India; (iii) Any institution of the other Contracting State in the charge of the public financing of external trade. 4. The term "interest" as used in this article means income from debt-claims of every kind, whether or not secured by mortgage and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be taxed in the Country of residence of the recipient l.e. France. However as per Article 12 (2) such interest may also be taxed in the source state in which it arises (Le. India) but at 10% of gross amount of interest. 16.5 Whether the interest income arises in India or not To examine whether interest paid by the branch office to the head office arises in India or not we will have to look into the provisions of Article 12 (6) as reproduced above. As per the same Interest shall be deemed to arise in India: a) When the payer is the Contracting State itself, a political sub-division or a local authority of India. b) When the payer is resident of India. c c) When the payer is a P.E of the non-resident in India and such interest is borne by such P.E for the debt it had taken from the non-resident, then such interest shall be deemed to arise in India in which P.E is situated. 16.6 From the above it is quite evident that in case of payments of interest by the P.E Branch Office of a non-resident to its head office in France, the interest is deemed to arise in India where the P.E is situated. 16.6.1 Article 12 (1) simply refers to "Interest arising in a Contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Moreover, any departure from the rule fixed in the first sentence of paragraphs is justified only where the economic link between the loan and the permanent establishment is sufficiently clear cut. In this connection, a number of possible cases may be distinguished: a) The management of the permanent establishment has contracted a loan which It uses for the specific requirements of the permanent establishment; it shows it among its liabilities and pays the interest thereon directly to the creditor. b) The head office of the enterprise has contracted a loan the proceeds of which are used solely for the purposes of a permanent establishment situated in another country. The interest is serviced by the head office but is ultimately borne by the permanent establishment. c) The loan is contracted by the head office of the enterprise and its proceeds are used for several permanent establishments situated in different countries. In cases a) and b) the conditions laid down in the second sentence of paragraph 5 are fulfilled, and the State where the permanent establishment is situated is to be regarded as the State where the interest arises. 16.7.1 From the above it is quite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16.7.3 Last 5 lines of Para 29 as above make it clear that in case of banks and other financial enterprises hypothetical independence /separate and independent enterprise fiction for internal interest payments has been recognized by OECD even before the adoption of the 2017 version of the Article 7. Therefore, there is no requirement for providing separate provision in the DTAA's for banks for recognizing the charges for internal interest payments between the B.O and H.O. 16.8 Even without this specific provision, the international tax law understanding is that such interest is taxable in the source State under Article 12(2). Thus, in his commentary on paragraph 5 of the OECD MC, ("Klaus Vogel on Double Taxation Conventions Third Edition") Dr. Klaus Vogel has mentioned the following at M.No.89 and 90: "89(b) Rule: Under article 11 (5), interest shall be deemed to arise in a contracting state when- - the payer is - a resident of that State or - where, irrespective of the payer's residence, the interest is paid on an indebtedness of a permanentestablishment (or fixed base) in that contracting State and is borne by such permanent establishment (o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rafts. In the present case, it is undisputed that the vanous branches of the assessee in India constitute the PE of the 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 BNP Paribas ITA no 1076/Mum/2021 ITA no. 1670/Mum./2022 Page 15 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-a-vis the facts of the present case. As per Article 12(1) of the DTAA, interest arising in a con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 permanent establishment. Likewise, no account shall be taken, in the determination of the 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 allowedas 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India, can only be taxed under 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, BNP Paribas ITA no.1076/Mum./2021 ITA по. 1670/Mum./2022 Page | 18 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 19 of the order of the Hon'ble ITAT as above, the learned counsel had Submitted before the Hon'ble Bench that taxability of the interest paid by the Indian Branch Office to the Head Office is governed by provisions of Article 12 read with Article 7 of the India France DTAA and the amendment in the Act by way of insertion of Explanation to Section 9 (1) (v) (c) of the Act cannot override the provisions of the DTAA. In this regards it is respectfully submitted that the taxability of the interest paid by the Indian Branch Office to the Head Office is governed by provisions of Section 9 (1) (v) (c) as amended by Finance Act 2015 read with Article 12 (1) & 12 (2) of the India-France DTAA. This is more so w.e.f A. Y 2016-17 onwards. With regard to the taxability of interest paid by Branch Office to Head Office. Article 7 does not come into picture at all. Provisions of Article 7 will apply only if as per Article 12 (5) of the DTAA, the beneficial owner of the interest (BNP Paribas Head Office), being resident of France, carries on business in the other state (ie. India) in which the interest arises, through a P.E situated therein, and the debt-claim in respect of which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.3.1 According to Claus Vogel (3 rd Edition, pages 565 to 569, 803) "The right or property giving rise to the dividend etc. must be effectively connected. According to the OECD Commentary it must form part of the assets of the Permanent Establishment or be 'otherwise' effectively connected with the permanent establishment. The connection of the assets to the permanent establishment is decisive. The term 'effectively connected' should not be understood to mean the opposite of 'legally connected' but rather something in the sense of 'really connected. The claim should be connected to the permanent establishment not only in form but also in substance. But it is difficult to visualize how an asset can be effectively connected with the permanent establishment otherwise than by forming part of its assets". 17.3.2 It has to be appreciated that the provisions of paragraph 1 of Article 11 presupposes that the debt claims are owned and held by the non-resident. The State of source is granted a limited and secondary right of taxation because the passive income generated from the asset arises in the said country. In such taxation it is not possible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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 permanent establishment there owned by the beneficiary which is a resident in the other State, if it is paid in respect of debt-claims forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment. In that case, paragraph 4 relieves the State of source of the interest from any limitation under the Article. The foregoing explanations accord with those in the Commentary on Article 7. 25. It has been suggested that the paragraph could give rise to abuses through the transfer of loans to permanent establishments set up solely for that purpose in countries that offer preferential treatment to interest income. Apart from the fact that the provisions of Article 29 (and, in particular, paragraph 8 of that Article) and the principles put forward in the section on "Improper use of the Convention" in the Commentary on Article 1 will typically prevent such abusive transactions, it must be recognised that a particular location can only constitute a permanent est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the taxable profits of the P.E. in India and has been allowed by the AO. Hon'ble bench vide para 22 of its order has further observed that para 5 of Article 12 provides that the provisions of para 1 & para 2 of Article-12 shall not apply if the beneficial owner of the interest being a resident of a contracting state (i.e say France), carries on business in the other contracting state (i.e say India) in which interest arises through a PE situated therein, and the debt claim in respect of which interest is paid is effectively connected with such P.E., and provisions of Article 7 shall apply in such a scenario. 18.2 In this regard it is submitted that it is correct that B.O. is a P.E. of BNP Paribas H.O. in India but the condition that is required to be satisfied for provisions of Article 12(5) to be applicable is that the debt claim in respect of which the interest is paid by the B.O. must be effectively connected to the B.O./P.E. itself. Payer of the interest & debt advancer/ debt claimant cannot be same entities/persons. In the present case debt claimant/ debt advancer is the H.O. of BNP Paribas and, it is respectfully submitted that provisions of para 5 of Article 12 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the H.O/G.E. is carrying out its business in India through a P.E. and Article 12(5) will be applicable instead of Article 12(1) & 12(2). With due regards to the observations of the Hon'ble bench it is most respectfully stated that para 5 of Article 12 (and subsequently Article 7) will be applicable only if debt claim on which B.O./P.E. is paying interest is effectively connected with the P.E. As has been clearly brought out above in the present case B.O./P.E. is paying interest and debt claim is effectively connected with the H.O./G.E. of BNP Paribas. (d) The Hon'ble co-ordinate bench vide para 22 of its order (for A.Y. 04-05) has further observed that: "The Profits attributable to the P.E. have anyway been offered to tax" However, even if it is considered that interest income of Rs. 19,22,06,830/- paid by P.E./B.O. to its H.O/G.E. is profits attributable to the P.E. it appears that the same has not been offered to tax by the P.E./B.O. in its P&L A/c in the present case. 18.4 From perusal of para 25 of the Hon'ble ITAT "I" Bench for A.Y 2017-18 it is evident that the said order is based on & has followed the order of the coordinate Bench for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stablishment are satisfied. So far as the debt claim being effectively connected with the PE is concerned, that cannot come into play only merely because the PE had a supporting role in creation of the debt claim. Unless a debt claim is part of the assets of the PE or income arising therefrom can be said to be income of the PE, it cannot normally be treated as effectively connected with the PE. In any case, the Assessing Officer has not brought on record any material to establish, or even indicate, that the debt claim is effectively connected with the PE, save and except for the supporting services rendered by the Indian Representative office in connection with dealing with that debt claim but then rendition of service by the PE, in connection with a debt claim, by itself would not make the debt claim effectively connected with the PE. What essentially follows is that unless the foreign enterprise, ie. DZ Bank AG Germany, carries on business through the permanent establishment in India, even if there be any, interest income earned by the foreign enterprise, even if earning of the said income is on account of a significant contribution from the activities of such a permanent establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t income was taxed twice by the A.O-one under Article 11(2) of the DTAA as interest income at 10% & then under article 11(5) read with article 7 of the DTAA. In the appeal matter under consideration interest income of the H.O. has not been taxed even once. 18.6 The Hon'ble ITAT 'I' Bench in the case of DZ Bank AG (mentioned supra) vide order dated 4.12.2020 had further held that general provisions do not override the specific provisions. Relevant part of the order is reproduced below: 13. As is glaring from a plain reading of the above provision, under article 7(7). where profits sought to be taxed under article 7 include any item of income which is dealt with separately in other articles of the Indo German tax treaty, article 7 will yield to those specific provisions in respect of that income. That treaty approach is in consonance with the well settled principle of law contained in the Latin maxim generalia specialibus non derogant, i.e. general provisions do not override the specific provisions. Quite clearly, therefore, when a particular type of income is specifically covered by a treaty provision, the taxability of that type of income is governed by the specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal is not barred by principle of res-judicata from taking a different view in subsequent years & the same has been held so by various Benches of the ITAT as well as Higher courts. In this context relevant part of decision of Hon'ble Kerala High Court in case of Kalpetta Estates Ltd. 211 ITR 635, dated 30.09.1994 is reproduced below: "4. We do not think that this decision would support the case of the revenue. What the Bench did was to affirm that the principles of res judicata will not apply to income-tax proceedings. Nevertheless, the Tribunal may place reliance on an earlier decision to support its conclusion. It could not, therefore, be said that the decision in the assesses case before us, relating to the prior years, would operate as res judicata. The Tribunal is entitled to take a different view of the matter, if new materials were placed or on a closer and more intelligent analysis. It is evident from the various decisions placed before us that a different aspect of the matter has been presented for consideration, as laid down in thedecisions mentioned earlier. The Tribunal was therefore entitled to have a fresh look at the matter based on the line of thinking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue, 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 Article 12(2) of the DTAA, such interest may also be taxed in the contracting state in which it arises (i.e. say India), and according to the laws of that state, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10% of the gross amount of interest. Para 5 of Article 12 provides that the provisions of para 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a contracting state (i.e. say France), carries on the business in the other contracting state (i.e. say India) in which interest arises, through a PE situated therein, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 money is lent by the PE to the head office. Accordingly, in the present case, the assessee has claimed a deduction in respect of interest paid by the PE to its head office/overseas branches. 24. Further, in view of Article 7 of the India-France DTAA, the Revenue though has rightly accepted that the fiction of hypothetical independence or a separate entity approach, as stated in this Article, comes into play for the limited purpose of computing the profit attributable to the PE. However, extended this fiction of hypothetical independence also for the computation of profit of the head office, for br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer 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 constituents outside India are taxable in India. 23. We may also add that in the case of Sumitomo Mitsui Banking Corpn. (supra),a five member bench has held that interest payment by PE to the GE is a payment by a foreign company's Indian PE to the foreign company itself, it cannot give rise to any income, in the hands of the GE, which is chargeable to tax under the Income Tax Act, 1961 itself, and, as such, treaty provisions are not really relevant. We humbly bow before the conclusions arrived at in this judicial precedent. Of course, we have reached the same destination by following a different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receive a repayment of money from another person arising in the course of carrying on a business including deposits with a financial institutions, accounts receivable, promissory notes, bills of exchange or bonds. Here the assessee has a right to receive a repayment from the PE branch as the debt has been given by the assessee and it could not be established by the Ld. DR how the PE can pay interest on the debt/loan given by the P.E itself. 28. As per the revenue interest received by the head office is taxable under the provision of Sec.9(1)(v)(c) of the Act, however we consider that in terms of provision of Sec. 90(2) the provision of the Act or the DTAA whichever is more beneficial to the assessee shall be applicable. 29. We have perused the provisions of Article 12 of the India-France DTAA which are reproduced as under: "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the payer is that Contracting State itself, a political subdivision, a local authority or a resident of that Contracting State Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this article shall apply to the last mentioned amount, In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprise to its various parts, provided, however, that the result shall be in accordance with the principles contained in this Article 3. (a) In determining the profits of a permanent establishment, there shall be allowed as 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, in accordance with the provisions of and subject to the limitations of the taxation laws of that Contracting State. Provided that where the law of the Contracting State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention, Agreement or Protocol signed after 1-1-1990 between that Contracting State and a third State which is a member of the OECD, the competent authority of that Contracting State shall notify the competent authority of the other Contracting State of the terms of the corresponding paragraph in the Convention, Agreement or Protocol w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king enterprises if the head office provide any money on interest then to determine the profit of a permanent establishment interest on such money paid to the head office can be reduced from the income attributable to the permanent establishment. The provision of Article 12 and 7 of the India-France DTAA demonstrate that interest payment made by the permanent establishment to the head office are not taxable in the hands of the head office as provided in Article 12(5) of the treaty and it also provide that in such cases income of the permanent establishment only to be taxed as per provision of Article 7 of DTAA. As per the provision of Sec.90(2) of the Act the assessee can opt for the taxability of its income as per the Double Taxation Avoidance Agreement between India and France (DTAA) or the Act which is more beneficial, accordingly even though the interest paid by the branches (PE) to the head office are taxable as per the provision of Sec. 9(1)(5)(c) of the Act, however, because of beneficial provision of DTAA i.e Article 12(5) as discussed supra will lead to the conclusion that such interest received by the overseas head office is not taxable under the provision of DTAA. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputing income under the head 'profits and gains from business or profession since an amount of Rs. 25,32,041 has already been considered for computing income from house property in AY 2019-20 and hence, only the balance amount (Rs.43,40,289) has been considered for the purpose of determining income under the head income from house property for the subject AY In this regard, please note that while an amount of Rs. 122,12,499 is reduced while computing income under the head profits and gains from business and profession (refer Point No. A(3a) of 'Schedule BP- Computation of income from business and profession' i.e income credited to profit and loss account but considered under other heads of income income from house property), a higher amount of Rs. 147.44,540 is considered as annual lettable value for the purposes of computing income under the head Income from house property (refer point 1(a) of 'Schedule HP - Details of Income from House Property) Accordingly, an amount of Rs. 25,32,041 (144,44,540- 122,12,499) has already been considered while computing income from house property during AY 2019-20. In this regard, copy of the acknowledgment along with the return ..... X X X X Extracts X X X X X X X X Extracts X X X X
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