Branch-to-head-office interest treatment under treaty law allowed deduction and no Indian tax was imposed on the head office receipt.

Interest paid by an Indian branch of a foreign bank to its overseas head office was treated as deductible in computing the income of the Indian permanent establishment, because the India-Japan treaty protocol to Article 7(3) allowed deduction of interest on funds advanced in the course of banking business and the payment was not treated as a payment to self. The corresponding interest received by the head office from the Indian branch was held not chargeable to tax in India under the domestic law and treaty position followed by the Tribunal. The notice objection under section 163 was treated as ancillary and did not affect the substantive relief.

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Issues: (i) Whether interest paid by the Indian branch of a foreign bank to its overseas head office is allowable as a deduction in computing the income of the Indian permanent establishment. (ii) Whether the interest received by the head office from the Indian branch is chargeable to tax in India. (iii) Whether disallowance could be made for want of notice under section 163 of the Income-tax Act, 1961.

Issue (i): Whether interest paid by the Indian branch of a foreign bank to its overseas head office is allowable as a deduction in computing the income of the Indian permanent establishment.

Analysis: The dispute was covered by the earlier decision in the assessee's own case and by the Special Bench ruling subsequently followed and approved in later proceedings. For a foreign banking enterprise, the protocol to Article 7(3) of the India-Japan treaty permits deduction of interest paid by the permanent establishment to its head office on funds advanced in the course of banking business. The payment was therefore not to be treated as a mere payment to self for the purpose of denying deduction.

Conclusion: The interest expenditure was allowable as a deduction, and the finding was in favour of the assessee.

Issue (ii): Whether the interest received by the head office from the Indian branch is chargeable to tax in India.

Analysis: The earlier coordinate-bench decision in the assessee's own case had already held that such interest is not taxable in India. The Tribunal followed that view and held that the interest received by the overseas head office from the Indian branch did not warrant taxation in India under the domestic law or under the treaty provisions relied upon by the revenue.

Conclusion: The interest received by the head office was not chargeable to tax in India, and the issue was decided in favour of the assessee.

Issue (iii): Whether disallowance could be made for want of notice under section 163 of the Income-tax Act, 1961.

Analysis: The notice point was treated as only an ancillary contention. In view of the substantive conclusion that the branch and head office were the same enterprise for the relevant treaty computation and that the assessment consequences did not turn on a separate representative-assessee notice, no separate interference was called for on this ground.

Conclusion: No separate relief was warranted on the notice issue, and it did not alter the relief granted to the assessee on the substantive questions.

Final Conclusion: The revenue's challenge to the allowability of branch-to-head-office interest and to the taxability of that interest in India failed, and the common issue was decided in favour of the assessee.

Ratio Decidendi: Where a foreign bank operates in India through a permanent establishment, interest paid by the Indian branch to its overseas head office in the course of banking business is deductible under the treaty framework, and the corresponding interest received by the head office is not chargeable to tax in India on the facts of the case.

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