TaxTMI 
TaxTMI 
TaxTMI 
2016 (5) TMI 428
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....he assessee, by a series of orders passed by the various co-ordinate benches in assessee's own case as also in the cases of Chohung Bank vs. DDIT [(2006) 6 SOT 144 (Mum)] and JCIT vs. Sakura Bank Limited [(2006) 100 ITD 215 (Mum)].In this view of this undisputed position and the conclusions arrived at by the learned CIT(A) being in harmony with the views of the co-ordinate benches, we reject the grievance of the assessee. No interference is thus called for. 4. Ground no.1 is thus dismissed. 5. In second ground of appeal, the assessee is aggrieved that the learned CIT(A) has erred "in subjecting to tax, the interest paid by the Indian branches to the head office and overseas branches, amounting to Rs. 1,59,32,854, as interest income, applying the provisions of Article 12 (Interest) of the India- France tax treaty." 6. So far as this grievance of the assessee is concerned, relevant material facts are like this. The assessee before us is a foreign company, incorporated in France, carrying on the business of banking in India through it's branch offices. During the course of scrutiny assessment proceedings, the Assessing Officer noted that the India Office of the assessee has paid in....
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....ntracting state when- - the payer is - a resident of that State or - where, irrespective of the payer's residence, the interest is paid on the indebtedness of a permanent establishment (or fixed base) in that Contracting State and is borne by such permanent establishment (or fixed base). 90(d) The third criterion does not attach to the debtor's legal nature of residence. Instead, it attaches to the incurring of a debt for a permanent establishment (or a fixed base) and on the tatter's bearing the interest. Article 11(5) presupposes that the interest will reduce the profits to be taxed in the State of Permanent Establishment and that it will thus reduce that State's tax revenue. This loss is meant to be compensated by the arrangement in Article 11(2), which leaves taxation of interest to that State, as to the terms of Permanent Establishment." The argument of the assessee regarding Article 7 are not applicable because of the deeming provision in article 7 which provides that the income of the branch should be computed as if it is a separate and distinct entity from the non-resident. 6.3.2 For the purpose of assessment, the entity is one though for t....
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....05 on account of interest received from head office and other branches of the assessee could not be taxed in the hands of the assessee" and that "in response to our specific question, ...... (learned counsel) stated at the bar the assessee does not seek any treaty protection and would like this grievance to be adjudicated upon in the light of the provisions of the Income Tax Act." As against this factual scenario, in the present case, the assessee has sought treaty protection and relied upon the provisions of the applicable DTAA, i.e. India France DTAA [(1994) 209 ITR (St.) 130]; [Indo French DTAA, in short]. Learned CIT(A) was thus completely in error in relying upon the Dresdner Bank decision (supra) on the facts of this case. As for the British Bank of Middle East decision (supra), it simply follows the Dresdner Bank decision and is not, therefore, required to be dealt with on standalone basis. The reliance on British Bank of Middle East decision (supra) thus is equally misplaced. The reasoning adopted by the first appellate authority was thus wholly devoid of legally sustainable basis.It is also important to bear in mind the fact that the decisions relied upon by the learned CI....
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.... enterprise of a treaty partner country carries out business through a permanent establishment, "there shall, in each contracting state, be attributed that permanent establishment, the profit which it might be expected to make, if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment". This fiction comes into play for the limited purposes of computing profits attributable to permanent establishment only and is set out under the specific provision, dealing with computation of such profits, in the tax treaties, including in the Indo French DTAA. There is nothing, therefore, to warrant or justify application of the same principle in computation of GE profits as well. Clearly, therefore, the fiction of hypothetical independence is for the limited purpose of profit attribution to the permanent establishment. 13. To that extent, this approach departs from the separate accounting principle in the sense that the GE, to which PE belongs, is not seen in isolation with it's PE, and a charge, in respect of PE - GE transactions, on th....
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.... tax treaties, comes to an end. In Indo French DTAA, for example, articles 11(6), 12(5), 13(6) and 23(2) provide so. 16. The incomes, so relatable to the PE, are then taxable on the net basis as the PE income in the sense when these are earned from third parties through the PE, these receipts constitute incomes attributable to the PE, and when these receipts are by the enterprise from the PE itself, the entire income, generated by the business with the help of the inputs for which payments are made by the PE to the HO, is taxed as income attributable to the income of the PE. 17. So far as the banking business is concerned, an exception, with respect to deductibility of, and taxation of, intra GE interest is carved out in the relevant treaty provision itself. Article 7(3)(b) of the Indo French DTAA provides as follows: (b) However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission f....
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....ovisions of section 90 of the Act. In effect, it is a hybrid application of the taxability under the domestic tax law and the treaty provisions on the same item in the same profit and loss account though appearing on different sides, i.e. debit and credit. Article 7(3)(b) of Indo French DTAA is thus partly applied and partly not applied. That's what a series of coordinate benches, following the five member bench in the case of Sumitomo Mtsui Bank Corp (supra), have held to be permissible. 20. The peculiarities of Indo French DTAA do not, however, mitigate the overall scheme of the treaty that once the resident of the contracting state has a PE in other contracting state, what is taxable is the profit of the PE and on a net basis. Of course, going by the plain words of this particular treaty provision, interest received from the GE and other intra GE units is also to be taken into account in the computation of income attributable to the PE, but then we need really be concerned about that aspect of the matter since neither this issue is dispute before us nor the decision of a five member bench of this Tribunal in the case of Sumitomo Mitsui Banking Corp vs DDIT [(2012) 16 ITR (Tribu....
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....butable to the PE. As regards its being treated as interest income of the assessee, arising in the source jurisdiction, i.e. India, can only be taxed under Article 12 but then as provided in article 12 (5), the charging provisions of Article 12(1) and (2), which deal with taxability of interest in the source state, will not apply "if the beneficial owner of the interest of the interest, being a resident of a contract state, carries on business in the other contracting state in which the interest arises, through a permanent establishment situated therein" and that in such a case the provisions of Article 7, which deal with taxability of profits of the permanent establishment alone will apply. In plain words, when interest income arises to a GE even if that be so, the taxability under article 12 will not apply, and it will remain restricted to taxability of profits attributable to the permanent establishment under article 7. The profits attributable to the PE have anyway been offered to tax. As regards the theory, as advanced by learned Assessing Officer in considerable detail, that for taxing the GE, the taxability has to be in respect of (i) income attributable to the permanent est....
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....ed to in FY 2004-05, as was directed by the Transfer Pricing Officer vide her letter dated June 1, 2006." 26. The relevant material facts are like this. During the course of assessment proceedings, the Assessing Officer noted that the assessee had signed a transfer pricing agreement with it's Singapore branch for the marketing service provided by India branch in respect of External Commercial Borrowings. Even though this agreement was signed on 28th March, 2005, it was retrospective in effect inasmuch as the services rendered from 1st August, 2003 were covered by this agreement. It was also noted that, in terms of the agreement, the assessee was entitled to "one third of interest margin, commitment fees etc." It was noted that the amount of Rs. 1,46,61,695 which pertained to the previous year relevant to this assessment year (i.e. year ended 31st March, 2004) but it is shown as income of the next year, i.e. year ended 31st March, 2005. It was also noted that even though the amount has been paid to the assessee after such a long time after the end of financial year ended 31st March, 2004, but no interest has been charged on the overdue amount. It was in this backdrop that the Asses....