Salary paid overseas to expatriates treated as wholly deductible by domestic branch; Section 115JB held inapplicable

ITAT DELHI - AT held for the assessee that salary paid overseas to expatriates was incurred wholly and exclusively by the Indian branch and not allocable to the Head Office; prior tribunal conclusions rejecting Revenue's identical contentions were affirmed. The tribunal found Section 115JB (MAT) inapplicable because the profit & loss account was not prepared under Part II of Schedule VI and the provision was not retrospective, particularly for entities governed by special banking enactments. The tribunal also reversed lower authorities and held interest income from the Head Office/overseas branches was not taxable in the assessee's hands.

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ISSUES PRESENTED AND CONSIDERED

1. Whether salaries paid overseas by the head office to expatriates working exclusively in India for the permanent establishment (PE) are deductible for computation of profits attributable to the Indian PE (Article 7(3) of the applicable DTAA; Section 44C of the Act).

2. Whether the provisions of Section 115JB (Minimum Alternate Tax) apply to a banking enterprise in respect of income attributable to its Indian PE, where computation is governed by Article 7(3) of the DTAA and Section 90 of the Act.

3. Whether interest received by the Indian branches/PE from the head office/overseas branches is taxable in India or is not chargeable because such receipts constitute payments to self (interaction of domestic law, DTAA provisions-Article 7 and Article on Interest-and established principles that a person cannot make profit out of itself).

4. Whether deferred bank guarantee commission received by the bank is taxable on issuance of the guarantee (i.e., accrual vs. deferral over guarantee life) for income-tax purposes.

5. Whether additions made in computing book profit under Section 115JB on account of provision for wealth-tax are appropriate (and whether the issue remains relevant once Section 115JB applicability is determined).

6. Whether interest paid to the head office and interest income received from Indian branches are taxable/deductible (consistency of treatment for interest paid/received between PE and head office/branches under DTAA and domestic law).

7. Whether Head Office expenditures claimed as deductions under Section 44C are allowable absent invoices/debit notes.

8. Whether Section 14A is applicable if interest to/from head office/branches is held not taxable.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Deductibility of salaries paid overseas to expatriates working in India (DTAA Art.7(3) / Sec.44C)

Legal framework: Article 7(3) of the DTAA permits deductions "in determining the profits of a PE" for expenses incurred for the PE's business, including executive and administrative expenses incurred elsewhere; Section 44C deals with allocation of profits between PE and head office. Domestic law prohibits deduction of payments to oneself except as permitted by treaty and computation rules.

Precedent treatment: Consistent judicial and tribunal precedents (coordinate bench, Bombay High Court and affirmed Supreme Court orders on similar facts) held that salaries paid by head office to expatriates working exclusively for the Indian PE are expenses incurred for the PE and allowable; earlier tribunal and High Court decisions in identical factual matrices have been followed.

Interpretation and reasoning: The Tribunal adopts prior decisions because facts and legal matrix are identical; where expatriates are stationed in India and work exclusively for the Indian PE, the expense is incurred for the PE's business and falls within Article 7(3) deductions. Section 44C characterization does not preclude allowance where treaty attribution governs and the expense is not allocable elsewhere.

Ratio vs. Obiter: Ratio - deduction allowed for salaries paid overseas to expatriates stationed in India for the PE under Article 7(3); Obiter - comments on entries in books of the PE not being determinative of treaty-based allowability.

Conclusion: Deduction upheld; lower authorities' disallowance reversed (assessees' ground allowed).

Issue 2 - Applicability of Section 115JB (MAT) to banking enterprise where DTAA governs attribution (Section 90 interaction)

Legal framework: Section 115JB imposes MAT; Section 90(2) makes DTAA provisions prevail over domestic law where applicable; Article 7(3) of DTAA prescribes profit attribution to PE and may require a different computation basis.

Precedent treatment: Coordinate decisions, and Delhi High Court orders in identical facts, conclude Section 115JB is inapplicable where profit computation for PE is governed by Article 7(3) and where the bank's accounts are not prepared per Part II Schedule VI, rendering MAT's mechanism inapplicable to the subject year.

Interpretation and reasoning: The Tribunal follows judicial consistency - for banking companies whose accounts/PE computations fall to be determined under DTAA Article 7(3), Section 115JB cannot be invoked to override treaty-based computation; the change effected by Section 115JB was not retrospective to alter prior treatment where accounts could not be prepared per the statutory scheme contemplated by MAT.

Ratio vs. Obiter: Ratio - Section 115JB not invocable in the subject year because DTAA attribution under Article 7(3) (and Section 90) governs the computation for the banking PE; Obiter - historical rationale regarding account preparation and non-retrospectivity of MAT insertion.

Conclusion: MAT provisions rejected for the assessment year in question; ground allowed.

Issue 3 - Taxability of interest received by Indian branches from head office/overseas branches (receipt from self)

Legal framework: Domestic law treats branch and head office as same person absent statutory fiction; DTAA Article 7 and treaty provisions addressing banking exceptions (protocols/Article particulars) may carve out specific treatment; later statutory amendments (Explanation to s.9(1)(v)) deem certain inter-office interest of banking enterprises to arise in India (effective from AY 2016-17).

Precedent treatment: Multiple tribunal and High Court decisions (including coordinate bench, Calcutta and Bombay High Courts, and subsequent appellate confirmation) have accepted that interest received by an Indian PE from its head office/other branches is not chargeable as income to the PE because it amounts to payment to self; decisions relying on the principle that one cannot make a profit out of oneself (Supreme Court authority) and Special Bench precedents were considered.

Interpretation and reasoning: The Tribunal followed binding and closely analogous judicial orders (including recent High Court confirmations) which held that branch and head office are the same person for taxability of such receipts; where interest is received from the head office/overseas branches, it constitutes receipts from self and is not taxable. Noted that subsequent legislative changes (Explanation to s.9(1)(v) via Finance Act, 2015) alter treatment prospectively from AY 2016-17, but do not affect the subject year.

Ratio vs. Obiter: Ratio - interest received by the Indian PE from its head office/overseas branches for the subject assessment year is not taxable; Obiter - discussion on later statutory amendments and CBDT circular clarifying post-2016 position.

Conclusion: Addition for interest income deleted; assessee's ground allowed.

Issue 4 - Accrual treatment of deferred bank guarantee commission (recognition over guarantee life vs. immediate accrual)

Legal framework: Revenue recognition in banking practice - whether guarantee commission is attributable to the year of issue or to be recognized over the guarantee's life as per accounting policy and precedents.

Precedent treatment: Coordinate tribunal and High Court decisions, including the bank's own earlier decisions at Calcutta High Court and followed by Delhi High Court, held that deferred guarantee commission is to be spread over the life of the guarantee; earlier tribunal orders applying these precedents were followed.

Interpretation and reasoning: The Tribunal found consistent accounting policy and authoritative precedent in favour of deferral; absent distinguishing facts, the Assessing Officer's view that commission accrues on issuance was not sustained given settled jurisprudence allowing spread over guarantee period.

Ratio vs. Obiter: Ratio - deferred bank guarantee commission is to be recognized over the period to which it relates and not immediately accrued on issuance; Obiter - comments on consistency of accounting across years.

Conclusion: Addition deleted; Revenue's ground dismissed.

Issue 5 - Applicability of Section 115JB addition on account of wealth-tax provision to P&L

Legal framework: Section 115JB calculation and book profit adjustments; wealth-tax provisions as book adjustments may be relevant if MAT applies.

Precedent treatment & reasoning: Since Tribunal has held Section 115JB inapplicable for the subject year (Issue 2), MAT-related adjustments (including wealth-tax provision adjustments) become academic for the year under consideration.

Ratio vs. Obiter: Obiter (academic) - no adjudication on merits of wealth-tax provision adjustment because MAT inapplicability renders the point moot.

Conclusion: Ground rejected as academic.

Issue 6 - Deduction of Head Office expenditure under Section 44C absent invoices/debit notes

Legal framework: Section 44C permits apportionment/attribution of profits and expenses between PE and head office; treaty and accounting substance govern allowability; documentary formalities (invoices) are relevant but not necessarily determinative where treaty attribution and consistent accounting exist.

Precedent treatment & reasoning: Earlier decisions between the parties disposed identical issue in favour of the assessee for prior years; tribunal followed those precedents and found no distinguishing facts; absence of invoices/debit notes did not, on the record and in light of binding precedent, preclude allowance of HO expenditures attributable to the PE under treaty principles.

Ratio vs. Obiter: Ratio - where treaty attribution and consistent accounting are established, absence of invoices/debit notes alone does not automatically negate deduction under Article 7/Section 44C; Obiter - administrative concerns on substantiation.

Conclusion: Revenue's challenge rejected; deduction upheld.

Issue 7 - Applicability of Section 14A if interest to/from head office/branches held not taxable

Legal framework: Section 14A addresses expenditure related to exempt income; applicability depends on presence of exempt income and consequential assessment adjustments.

Precedent treatment & reasoning: The Revenue raised the question but acknowledged no consequential addition was made by the Assessing Officer regarding Section 14A; the assessee did not contest admissibility of the ground but there was no live dispute to decide.

Ratio vs. Obiter: Obiter - no substantive adjudication due to absence of consequential assessment entries.

Conclusion: Revenue's additional ground rejected as not pressable on facts.

Overall Conclusion

The Tribunal, following judicial consistency and binding/coordinate precedents, allowed the assessee's appeals in respect of (i) deductibility of salaries paid overseas to expatriates working for the Indian PE, (ii) non-applicability of Section 115JB for the subject year, and (iii) non-taxability of interest received by Indian branches from head office/overseas branches for the subject year; and dismissed the Revenue's cross-appeal grounds challenging deletion of deferred bank guarantee commission, MAT-related adjustments (academic), deletion of interest-related additions, and disallowance of head office expenditure under Section 44C. No further substantive issues remain for adjudication in the appeal pair before the Tribunal.

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