Taxability of interest between branch and head office upheld under treaty rules for banking enterprises.

Interest received by an Indian permanent establishment from its head office and overseas branches was treated as taxable in India. The applicable treaty framework, including Article 7(3) of the India-US Double Taxation Avoidance Agreement, was applied as a special rule for banking enterprises, and the branch and head office were regarded as one legal person, making the receipt a transaction with self. The later domestic fiction in the Explanation to Section 9(1)(v) of the Income-tax Act, 1961, was noted as not applicable for the relevant assessment year, but it did not alter the result.

---

---

Issues: Whether interest received by the Indian permanent establishment on deposits maintained with its head office and overseas branches is taxable in India.

Analysis: The relevant treaty framework governed the dispute. Under Article 7(3) of the India-US Double Taxation Avoidance Agreement, amounts charged by a permanent establishment to its head office or other offices by way of interest are excluded from deduction in the case of a banking enterprise, reflecting a special treatment for banking businesses. The Court also noted that the later domestic statutory fiction in the Explanation to Section 9(1)(v) of the Income-tax Act, 1961, which deems certain interest payable by an Indian permanent establishment of a non-resident bank to accrue in India, was not applicable to the assessment year in question. Applying the settled principle that a branch and its head office are not separate legal persons, the receipt of interest from the head office was treated as a transaction with self, and the banking exception in the applicable treaty controlled the issue.

Conclusion: The interest received by the Indian permanent establishment from its head office and overseas branches was held taxable in India, and the challenge to the addition failed.

---