2016 (5) TMI 428 - AT - Income Tax

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

BNP Paribas SA Versus Assistant Director of Income Tax

BNP Paribas SA Versus Assistant Director of Income Tax - TMI 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.