DTAA taxation and income accrual: internal branch interest escapes Indian tax, and service fees accrue only when quantified.

Under the India-France DTAA, the non-discrimination claim for a tax rate parity with domestic companies and co-operative banks was rejected because prior coordinate bench rulings already covered the point. The treaty treatment of an Indian branch's interest payments to its head office and overseas branches was distinguished from domestic law: the permanent establishment fiction applies only to profit attribution, and internal branch charges were not taxable in India as separate interest income. The article also states that marketing service remuneration does not accrue until the consideration is finalised and quantifiable, and related delay interest cannot arise before the underlying liability crystallises.

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Issues: (i) whether the assessee was entitled, under the India-France DTAA, to the same tax rate as domestic companies and co-operative banks by virtue of the non-discrimination clause; (ii) whether interest paid by the Indian branch to the head office and overseas branches was taxable in India as interest income under the treaty; and (iii) whether remuneration for marketing services and interest on delayed receipt thereof accrued in the assessment year in question.

Issue (i): whether the assessee was entitled, under the India-France DTAA, to the same tax rate as domestic companies and co-operative banks by virtue of the non-discrimination clause.

Analysis: The claim was covered against the assessee by prior coordinate bench decisions, and the appellate authority had followed those decisions. No fresh distinguishing feature was shown to warrant departure from that settled view.

Conclusion: The issue was decided against the assessee.

Issue (ii): whether interest paid by the Indian branch to the head office and overseas branches was taxable in India as interest income under the treaty.

Analysis: The fiction of treating a permanent establishment as a distinct and separate enterprise operates only for attributing profits to the permanent establishment and does not extend to taxing the head office or foreign branches on internal charges as separate income. Under the India-France DTAA, the banking-specific clause in Article 7(3)(b) permits deduction of intra-enterprise interest in computing PE profits, and Article 12 does not bring such internal interest to tax in the hands of the foreign enterprise once Article 7 applies. The domestic law approach of treating the head office and PE as separate profit centres for taxing the same internal interest was held inconsistent with the treaty scheme.

Conclusion: The issue was decided in favour of the assessee and the interest was held not taxable in India in the assessee's hands.

Issue (iii): whether remuneration for marketing services and interest on delayed receipt thereof accrued in the assessment year in question.

Analysis: Income from services could not be said to accrue before the consideration was finalised, because quantification is a necessary antecedent to accrual. Since the service arrangement and the consideration were finalised only later, the amount did not accrue in the relevant assessment year. Interest for delayed payment could not arise before the underlying liability itself crystallised, and the transfer pricing adjustment on that basis lacked supporting reasons.

Conclusion: The issue was decided in favour of the assessee, and the additions on account of service remuneration and interest on delay were deleted.

Final Conclusion: The appeal succeeded on the treaty-taxability of intra-branch interest and on the accrual of marketing service remuneration and related interest, while the non-discrimination claim failed.

Ratio Decidendi: The fiction of a permanent establishment's separate existence is confined to attributing business profits to the PE and does not, by itself, make internal head office or branch payments taxable as separate income of the foreign enterprise; further, income from services accrues only when the consideration is finalised and the amount becomes capable of quantification.

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