Mutuality and prospective amendment barred revision over branch-to-head office interest taxation

Interest paid by an Indian branch to its head office and overseas branches was treated as a payment to self and, under the mutuality principle, was not taxable in India for the relevant years. The Tribunal also held that the Explanation inserted in section 9(1)(v)(c) by the Finance Act, 2015 operated prospectively from assessment year 2016-17 and could not be used to treat the completed assessment for assessment year 2013-14 as erroneous. As the Assessing Officer had followed the consistent view taken in earlier years and the assessee's disclosures, the allegation of lack of inquiry failed and the conditions for revision under section 263 were not satisfied.

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Issues: Whether the Commissioner was justified in invoking section 263 to revise the assessment on the ground that the Assessing Officer had not examined the taxability of interest paid by the Indian branch to the head office and overseas branches, and whether the amendment to section 9(1)(v)(c) could be applied retrospectively for the relevant assessment year.

Analysis: The Tribunal noted that the controversy was already covered by the Special Bench decision holding that interest paid by an branch to its head office or overseas branches is a payment to self and, under the principle of mutuality, is not taxable in India for the relevant years. It further noted that the later Explanation inserted in section 9(1)(v)(c) by the Finance Act, 2015 was held by co-ordinate bench decisions to operate prospectively from assessment year 2016-17 onwards, and therefore could not render the completed assessment erroneous for assessment year 2013-14. The Tribunal also found that the Assessing Officer had followed the consistent view taken in earlier years and the assessee's disclosures, so the allegation of lack of inquiry was unsustainable and the conditions for revision under section 263 were not met.

Conclusion: The revision order under section 263 was not sustainable. The issue was decided in favour of the assessee, and the assessment order was restored.

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