Permanent establishment taxation: head office payments, intra-entity interest, and ECB-linked receipts were treated according to branch attribution rules.

An Indian permanent establishment was allowed deduction for expatriate salaries paid abroad by the head office where the employees worked in India and the expense was wholly and exclusively attributable to the Indian branch. Interest credited by the branch on balances with its head office and overseas branches was treated as not taxable because the head office and branch were regarded as the same taxable person. Interest on external commercial borrowings arranged for Indian borrowers was also held not separately taxable in the assessee's hands. The text further notes remand of the section 244A refund-interest issue and transfer pricing adjustments based on undisclosed section 133(6) material, and rejects any rate challenge above domestic company rates.

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Issues: (i) Whether salaries paid abroad by the head office to expatriate employees working in India were deductible in computing the income of the Indian permanent establishment; (ii) Whether interest credited by the Indian permanent establishment on funds lying with the head office and overseas branches was taxable in India; (iii) Whether interest received on external commercial borrowings arranged for Indian borrowers was taxable in India; (iv) Whether the addition in respect of interest under section 244A on income-tax refund should stand, and whether the transfer pricing adjustment based on data gathered under section 133(6) could be sustained without confronting the assessee with such material; (v) Whether the applicable rate of tax on income attributable to the Indian permanent establishment could exceed the rate applicable to domestic companies.

Issue (i): Whether salaries paid abroad by the head office to expatriate employees working in India were deductible in computing the income of the Indian permanent establishment.

Analysis: The issue was covered by earlier orders in the assessee's own case. The expatriates had worked in India, the salaries had suffered tax, and the expenditure was wholly and exclusively attributable to the Indian branch. The earlier decisions had held that such expenditure was allowable and that no part of it could be allocated to another branch merely because it was paid by the head office abroad.

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

Issue (ii): Whether interest credited by the Indian permanent establishment on funds lying with the head office and overseas branches was taxable in India.

Analysis: The issue was treated as covered by the assessee's own earlier cases and by the principle that the head office and its branch are the same person for this purpose. The reasoning accepted that a person cannot make profit out of itself, and therefore receipt of interest by the Indian permanent establishment from its own head office or other overseas branches could not be taxed as income.

Conclusion: The issue was decided in favour of the assessee and the addition was deleted.

Issue (iii): Whether interest received on external commercial borrowings arranged for Indian borrowers was taxable in India.

Analysis: The issue was held to be covered by earlier tribunal orders in the assessee's own case. The Indian branch had rendered syndication and related services and had already offered the attributable fee to tax. On the facts, the interest on the borrowings was not separately taxable in the hands of the assessee, and the associated levy made by the Revenue could not survive.

Conclusion: The issue was decided in favour of the assessee and the addition was deleted.

Issue (iv): Whether the addition in respect of interest under section 244A on income-tax refund should stand, and whether the transfer pricing adjustment based on data gathered under section 133(6) could be sustained without confronting the assessee with such material.

Analysis: The taxability of interest under section 244A was not finally resolved on merits; the matter was restored for fresh consideration in the light of the applicable special bench and High Court rulings. On the transfer pricing issue, the Revenue had used comparable data obtained under section 133(6) without confronting the assessee, which offended the requirement of fair hearing. The issue was therefore sent back for reconsideration after confrontation of the material and in accordance with law.

Conclusion: Both issues were restored to the Assessing Officer or Transfer Pricing Officer for fresh decision.

Issue (v): Whether the applicable rate of tax on income attributable to the Indian permanent establishment could exceed the rate applicable to domestic companies.

Analysis: The earlier orders in the assessee's own case had already rejected the contention based on the treaty article invoked by the assessee. The statutory explanation to section 90 made it clear that a higher rate for a foreign company is not to be treated as less favourable merely because domestic companies are taxed differently.

Conclusion: The issue was decided against the assessee.

Final Conclusion: The appeal succeeded on the substantive exemptions relating to expatriate salary, interest from the head office, and ECB-linked interest, but failed on the challenge to the tax rate. The remaining matters were remanded for fresh consideration, so the appeal was only partly allowed for statistical purposes.

Ratio Decidendi: Where the Indian permanent establishment and the head office constitute the same taxable person, a receipt from the head office to the branch cannot be treated as taxable income because no person can make profit out of itself; similarly, expenditure wholly and exclusively attributable to the Indian branch is allowable notwithstanding payment through the head office.

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