2012 (12) TMI 405 - AT - Income Tax

Tribunal rules in favor of appellant, remands taxability decision to CIT(A)

The Tribunal ruled in favor of the appellant, partially allowing the appeal for statistical purposes. The disallowance of interest paid to the Head Office ... DTAA – India and Belgium - Whether interest paid by branch of foreign bank as PE to its Head Office in Belgium is allowable as deduction - Disallowing the interest paid to HO on debt & term deposit – Assessee is a branch of foreign bank in India as PE – Assessee has also deducted tax at source – Held that:- Following the decision in case of Sumitomo Mitsui Banking Corporation (2012 (4) TMI 80 - ITAT MUMBAI) that interest paid to the head office of the assessee bank by its Indian branch which constitutes its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the PE which is taxable in India. Thus interest paid by the Indian branch of the assessee Bank to its head office and other branches outside India is not chargeable to tax in India, it follows that the provisions of section 195 would not be attracted. In absence of any distinguishing feature brought on record by the Revenue. Appeal decides in favour of assessee. Additional grounds raised for the first time – Held that:- Following the decision in case of Tollaram Hassomal (2006 (3) TMI 136 - MADHYA PRADESH HIGH COURT) that 1additional grounds treating them to be legal grounds in appeal for the first time. Therefore remand the said additional grounds to the ld. CIT(A) to decide the same afresh. Issues:1. Disallowance of interest paid to Head Office2. Taxability of interest income in the hands of the Head OfficeIssue 1: Disallowance of interest paid to Head OfficeThe appellant, a branch of a foreign bank, was assessed on income attributable to its operations in India as a non-resident. The Assessing Officer (A.O.) observed that the appellant paid interest to its Head Office (H.O.) on subordinated debt and term deposits, which was claimed as expenses of the Permanent Establishment (PE) in India. The A.O. disallowed the interest payment based on the ABN Amro Bank case. The appellant argued that the interest paid should be deductible under the tax treaty between India and Belgium. The CIT(A) upheld the A.O.'s decision, but directed the deletion of double addition. The appellant appealed, citing the Sumitomo Mitsui Banking Corporation case, where it was held that interest paid to the H.O. by the Indian branch is deductible for determining PE's profit but not taxable in the H.O.'s hands. Following this precedent, the Tribunal deleted the addition made by the A.O. and allowed the appellant's grounds.Issue 2: Taxability of interest income in the hands of the Head OfficeThe appellant raised additional grounds, arguing that the interest received by the H.O. from the branch should not be taxable. Citing the Calcutta High Court's decision in ABN Amro Bank, the appellant contended that the interest income in the H.O.'s hands was not taxable. The Tribunal admitted these additional grounds based on the findings in the assessment order. The Tribunal referred to the Sumitomo Mitsui Banking Corporation case, which held that interest paid by the Indian branch to the H.O. is not taxable in India. Consequently, the Tribunal remanded the additional grounds to the CIT(A) for a fresh decision, following the principles laid down in the CIT vs. Tollaram Hassomal case. The additional grounds were partly allowed for statistical purposes.In conclusion, the Tribunal ruled in favor of the appellant, allowing the appeal partly for statistical purposes. The disallowance of interest paid to the H.O. was deleted based on the precedent set by the Sumitomo Mitsui Banking Corporation case. The issue of taxability of interest income in the H.O.'s hands was remanded to the CIT(A) for a fresh decision, following legal principles.