Expatriate salary, inter-branch interest and MAT relief for foreign bank branches were largely upheld, with limited remand.

Salary paid abroad to expatriate employees working exclusively for the Indian permanent establishment was held outside the head office expenditure restriction in section 44C, so the disallowance was deleted. Interest paid to the head office and overseas branches was allowed under the treaty framework, while interest received from them was held not taxable under mutuality principles, subject to limited section 14A recomputation. Section 115JB was held inapplicable to a foreign bank whose Indian accounts were not drawn under Parts II and III of Schedule VI, and deferred bank guarantee commission was taxable only when it crystallised. Issues on external commercial borrowing interest were remanded for fresh examination, and the treaty-rate challenge was rejected.

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Issues: (i) Whether salary paid abroad to expatriate employees working exclusively for the Indian permanent establishment was hit by the head office expenditure restriction under section 44C; (ii) whether interest paid to the head office and overseas branches, and interest received from them, was taxable or deductible in view of the treaty and the principle of mutuality; (iii) whether section 115JB applied to a foreign bank whose Indian accounts were prepared under the Banking Regulation Act, 1949 and not under Parts II and III of Schedule VI to the Companies Act, 1956; (iv) whether interest on external commercial borrowings attributable to the Indian permanent establishment required fresh examination and consequential deduction under section 44C; (v) whether deferred bank guarantee commission was taxable on receipt basis or accrual basis; (vi) whether the treaty rate of tax for the Indian permanent establishment could not exceed the domestic company rate; and (vii) whether interest under section 234B required recomputation after giving MAT credit.

Issue (i): Whether salary paid abroad to expatriate employees working exclusively for the Indian permanent establishment was hit by the head office expenditure restriction under section 44C.

Analysis: The salary in question was paid to expatriate employees deputed in India for the Indian branches. The expenditure was verifiable, was incurred wholly and exclusively for Indian operations, and did not represent administrative or general head office expenditure within the meaning of the provision. The restriction in section 44C was held inapplicable on the facts.

Conclusion: The disallowance was deleted in favour of the assessee.

Issue (ii): Whether interest paid to the head office and overseas branches, and interest received from them, was taxable or deductible in view of the treaty and the principle of mutuality.

Analysis: For interest paid by the Indian permanent establishment to the head office and overseas branches, the treaty provisions governing business profits and the banking exception in the protocol were applied, and deduction was allowed. For interest received by the Indian permanent establishment from the head office or overseas branches, the Tribunal held that under the domestic law the principle of mutuality applied, so that no income arose from dealings with self. The Tribunal accepted the assessee's position on taxability of such receipts, and rejected the revenue's plea that the amount should be grossed up or taxed in the hands of the branch. A consequential plea of disallowance under section 14A was, however, accepted for limited recomputation where the interest income was held exempt on mutuality principles.

Conclusion: The assessee succeeded on deductibility of interest paid and on non-taxability of interest received from head office or overseas branches, subject to recomputation of section 14A disallowance.

Issue (iii): Whether section 115JB applied to a foreign bank whose Indian accounts were prepared under the Banking Regulation Act, 1949 and not under Parts II and III of Schedule VI to the Companies Act, 1956.

Analysis: The Tribunal noted that the assessee's Indian accounts were not prepared under Parts II and III of Schedule VI and were not laid before an annual general meeting as contemplated by the MAT machinery. It held that, before the later clarificatory amendment, the MAT provision could not be applied to a banking company governed by the Banking Regulation Act in such a situation. The later explanation was treated as prospective.

Conclusion: Section 115JB was held inapplicable in favour of the assessee.

Issue (iv): Whether interest on external commercial borrowings attributable to the Indian permanent establishment required fresh examination and consequential deduction under section 44C.

Analysis: The Indian branches played an active role in sourcing, evaluating, and monitoring the borrowings. The Tribunal held that the effective connection with the permanent establishment required a factual re-examination of the agreements and related material to determine the correct attribution and taxation, including the nature of the receipts and corresponding deductions.

Conclusion: The issue was remanded for denovo consideration and was therefore only partly in favour of the assessee.

Issue (v): Whether deferred bank guarantee commission was taxable on receipt basis or accrual basis.

Analysis: Following binding precedent in the assessee's own case, the Tribunal held that the commission relating to the unexpired portion of guarantees did not crystallise into an absolute right to receive and remained contingent to that extent. The amount could not be taxed on receipt basis for the unexpired period.

Conclusion: The assessee succeeded on this issue.

Issue (vi): Whether the treaty rate of tax for the Indian permanent establishment could not exceed the domestic company rate.

Analysis: The Tribunal applied the statutory explanation to section 90(2) and held that a higher rate applicable to a foreign company is not regarded as less favourable merely because it exceeds the domestic company rate.

Conclusion: The contention was rejected against the assessee.

Issue (vii): Whether interest under section 234B required recomputation after giving MAT credit.

Analysis: The Tribunal directed recomputation in accordance with the law governing set-off of MAT credit while computing interest for default in advance tax.

Conclusion: The matter was allowed for limited recomputation in favour of the assessee.

Final Conclusion: The appeals were disposed of by granting substantial relief to the assessee on the core issues of expatriate salary, inter-branch interest, MAT applicability, and deferred guarantee commission, while remanding the ECB interest and section 14A related aspects for reconsideration and rejecting the challenge to the treaty rate claim.

Ratio Decidendi: Expenditure incurred exclusively for the Indian permanent establishment and not in the nature of head office expenditure is outside section 44C, inter-branch interest between a foreign bank and its Indian branch is governed by the treaty and mutuality principles as applicable, and MAT under section 115JB does not apply where the banking company's accounts are not drawn under Parts II and III of Schedule VI to the Companies Act, 1956.

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