2016 (5) TMI 428 - AT - Income Tax

India-France Tax Treaty: Appeal Partially Allowed, Income Tax Rulings in Appellant's Favor

The tribunal partly allowed the appeal, dismissing the first ground regarding the applicability of domestic tax rates to the appellant under the ... Non-discrimination under Double Taxation Avoidance Agreement (Article 26) - Taxability of interest and interplay between Article 7 (Business Profits) and Article 12 (Interest) of a DTAA - Fiction of hypothetical independence of a Permanent Establishment for profit attribution - Deductibility and taxation of intra-group interest for banking enterprises under treaty carve out - Accrual of income and requirement of crystallisation of consideration for services - Transfer pricing adjustments and levy of interest on delayed inter company paymentsNon-discrimination under Double Taxation Avoidance Agreement (Article 26) - Claim that the rate of tax applicable to domestic companies and/or co-operative banks under the India France DTAA applied to the appellant was rejected. - HELD THAT: - The appellant's plea invoking Article 26 (Non discrimination) was considered in the light of co ordinate bench decisions adverse to the assessee, and counsel conceded that the issue was covered against the assessee by a series of orders including those in the assessee's own case and other precedents. The Tribunal found the CIT(A)'s conclusions to be in harmony with those co ordinate bench views and, in the circumstances, declined to interfere with the CIT(A)'s order dismissing the claim. [Paras 3, 4]Ground No.1 dismissed; non discrimination claim not accepted.Taxability of interest and interplay between Article 7 (Business Profits) and Article 12 (Interest) of a DTAA - Fiction of hypothetical independence of a Permanent Establishment for profit attribution - Deductibility and taxation of intra-group interest for banking enterprises under treaty carve out - Addition of interest paid by the Indian permanent establishment to the head office/overseas branches (treated as taxable in the hands of the foreign enterprise) was deleted; the interest was not taxable in India in the hands of the general enterprise. - HELD THAT: - The Tribunal held that the coordinate decisions relied upon by the CIT(A) (e.g., Dresdner Bank and British Bank of Middle East) were factually distinguishable because, unlike those cases, the assessee here asserted treaty protection under the Indo French DTAA. The Tribunal explained that the fiction of hypothetical independence of a PE is confined to attribution and computation of profits attributable to the PE (Article 7(2)) and does not extend to computing profits of the general enterprise. Under the treaty, when the beneficial owner of interest carries on business in the source state through a PE, Article 12(5) excludes the charging provisions of Article 12 and requires application of Article 7; thus interest borne by the PE reduces PE profits and does not create taxable income in the hands of the GE. The Indo French DTAA contains a specific carve out for banking enterprises (Article 7(3)(b)) allowing deduction and providing for taxation of intra group interest in specified circumstances, but the Tribunal held the revenue's approach of taxing the GE on such intra group interest paid by the PE was contrary to the treaty scheme as applied to the facts here. Reliance on domestic law separate accounting approaches was rejected insofar as they were inconsistent with treaty provisions and Section 90 mandate. The Tribunal therefore concluded that the assessments below were legally unsustainable and deleted the addition. [Paras 17, 18, 21, 22, 23]Ground No.2 allowed; the interest of Rs. 1,59,32,854 paid by the Indian PE to the GE/overseas units is not taxable in India in the hands of the GE under the treaty scheme.Accrual of income and requirement of crystallisation of consideration for services - Transfer pricing adjustments and levy of interest on delayed inter company payments - Addition of remuneration for marketing services and imposition of interest/ALP adjustment for delayed payment were deleted; the marketing income was not taxable in AY 2004 05 as it had not crystallised prior to finalisation of consideration. - HELD THAT: - The Tribunal held that income cannot accrue and be quantified before the consideration for services is finally agreed between the parties. The facts showed that the arrangements fixing consideration were finalised only on 28 March 2005; therefore the amount could not have been quantified or treated as accrued in the earlier year. Consequently the foundation for the addition was unsustainable. As regards levy of interest or ALP adjustment, such a levy presupposes an existing, crystallised liability; since the liability had not crystallised at the relevant time, there was no justification for charging interest or making the ALP adjustment. The Transfer Pricing Officer's order did not provide reasons to support the interest levy. The Tribunal deleted the additions and directed that the income be taxed in the year in which the right to receive the dues crystallises. [Paras 26, 29, 30, 31]Grounds Nos.3 and 4 and additional grounds allowed; addition of Rs. 1,46,61,695 and Rs. 9,89,176 deleted; income taxable when right to receive crystallises.Final Conclusion: The appeal is partly allowed: the non discrimination ground is dismissed, the addition of intra group interest taxed in the hands of the general enterprise is deleted, and the addition and interest in respect of marketing service fees are deleted with the income to be taxed in the year when the right to receive the dues crystallises. Issues Involved:1. Applicability of domestic tax rates to the appellant under the India-France tax treaty.2. Taxability of interest paid by Indian branches to the head office and overseas branches under the India-France tax treaty.3. Accrual of income for marketing services rendered and related interest charges.Issue-wise Detailed Analysis:1. Applicability of Domestic Tax Rates to the Appellant:The appellant challenged the CIT(A)'s order, arguing that the tax rate applicable to domestic companies and/or cooperative banks for the Assessment Year 2004-05 should also apply to them under Article 26 (Non-discrimination) of the India-France tax treaty. However, the appellant's counsel acknowledged that this issue had been repeatedly decided against the appellant in previous cases, including Chohung Bank vs. DDIT and JCIT vs. Sakura Bank Limited. Consequently, the tribunal upheld the CIT(A)'s decision, rejecting the appellant's grievance. Ground no.1 was thus dismissed.2. Taxability of Interest Paid by Indian Branches to the Head Office and Overseas Branches:The appellant, a foreign company incorporated in France, contested the CIT(A)'s decision to tax interest paid by its Indian branches to the head office and overseas branches amounting to Rs. 1,59,32,854 under Article 12 (Interest) of the India-France tax treaty. The Assessing Officer had treated this interest as income taxable in India, arguing that under the treaty, interest received by the head office from the branch is taxable under Article 12 at a lower rate. The CIT(A) upheld this view, relying on precedents such as Dresdner Bank AG vs. ACIT and DCIT vs. British Bank of Middle East.However, the tribunal found that the CIT(A) erred in relying on these precedents, as they did not apply to the present case where the appellant sought treaty protection and relied on the India-France DTAA. The tribunal noted that the fiction of hypothetical independence of a PE for profit attribution does not extend to computing the GE's profits. The tribunal concluded that the interest paid by the Indian PE to the GE or its constituents outside India is not taxable in India under the treaty provisions. Ground No. 2 was thus allowed.3. Accrual of Income for Marketing Services Rendered and Related Interest Charges:The appellant contended that the remuneration of Rs. 14,661,695 for marketing services rendered was wrongly taxed in Assessment Year 2004-05, as the amount crystallized only in Assessment Year 2005-06. Additionally, the appellant challenged the interest charged on the delayed payment of this remuneration. The Assessing Officer had added the remuneration and interest of Rs. 9,89,176 for the delayed payment to the appellant's income for the relevant year. The CIT(A) upheld this addition.The tribunal, however, found that the CIT(A) erred in holding that income accrues when services are rendered, even if the consideration is not finalized. The tribunal emphasized that income cannot be quantified or accrued until the consideration is finalized, which in this case occurred on 28th March 2005. Consequently, the tribunal deleted the addition of Rs. 1,46,61,695 and the interest of Rs. 9,89,176, noting that the income would be taxable in the year when the right to receive the dues crystallized. Ground nos. 3 and 4 and the additional grounds of appeal were allowed accordingly.Conclusion:The appeal was partly allowed, with the tribunal dismissing the first ground and allowing the second and third grounds, along with the additional grounds, in favor of the appellant. The decision was pronounced on 31st March 2016.