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2024 (6) TMI 673
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....o-operative banks for AY 2020-21 is also applicable to the Appellant, in accordance with the provisions of Article 26 (Non-discrimination) of the India France tax treaty. 3. The learned AO has erred in subjecting to tax, the data processing fees amounting to Rs. 36,03,02,885 paid by Indian branch offices of the Appellant to its Singapore branch, as income of the Appellant. 4. Without prejudice to Ground 3 above, the learned AO has erred in levying surcharge and health and education cess on the tax computed at the rate of 10% under Article 13 of the India-France tax treaty. 5. The learned AO has erred in holding that interest payable/ paid by the Indian branch offices of the Appellant to the head office and its other overseas branches amounting to Rs. 19,22,06,830 is chargeable to tax 6. Without prejudice to Ground 5 above, the learned AO has erred in levying surcharge and health and education cess on the tax computed at the rate of 10% under Article 12 of the India-France tax treaty. 7. The learned AO has erred in adding an amount of Rs. 23,88,795 to the income of the Appellant under the head 'profit and gain from business and profes....
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....essee for issuing notice u/s 143(2) of the Act through National Faceless Assessment Centre the ld.Counsel submitted that faceless assessment cannot be applied to the Non-resident Indian. The ld. Counsel submitted that CBDT issued notification treating assessment under Central Charge and International Taxation Charge as separate classes of cases excluding them from faceless assessment. He further submitted that the case of the assessee fall in the international taxation division to be assessed by Assistant Commissioner of Income Tax (IT), Circle 1(3)(1), Mumbai and notice u/s 143(2) of the act has been incorrectly issued by the National Faceless Assessment Centre without jurisdiction, therefore, the same is invalid. The ld. counsel after referring copy of notice issued u/s 143(2) dated 29.06.2021submitted that such notices are to be issued in the cases where the proceedings will be conducted electronically in e-assessment facility and the same is not applicable to the cases under international taxation and central charges. The ld. Counsel has also referred the following judicial pronouncements: "i. CIT-1, Nagpur Vs. Lalitkumar Bardia (2017) 84 Taxmann.com 213 (Bombay) ....
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....fficer any evidence on which the assessee may rely in support of the return:" The amended sub-section 2 of Sec. 143 is applicable w.e.f 1.04.2016 which entitles "Prescribed Income Tax Authorities" (r.w Rule12E) to issue notice under sub-section 2 of Sec. 143 apart from the assessing officer (officer holding PAN jurisdiction over the case). 7. Further we have perused the CBDT Notification No. 25/2021 dated 31.03.2021 which has authorized AC/DCIT (NaFAC) to act as prescribed income tax authority w.e.f 01.04.2021. The relevant extract of the said notification is reproduced as under: "S.O. 1437(E). In exercise of powers conferred under sub-section (2) of section 143 of Income-tax Act, 1961 (43 of 1961) (the Act) read with Rule 12E of the Income-tax Rules, 1962, the Central Board of Direct Taxes hereby authorises the Assistant Commissioner of Income-tax/Deputy Commissioner of Income-tax (NaFAC) having her / his headquarters at Delhi, to act as the 'Prescribed Income tax Authority' for the purpose of sub-section (2) of section 143 of the Act, in respect of returns furnished under section 139 or in response to a notice issued under sub-section (1) of section 142 of ....
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....Taxation Charges and there is nothing in this transition, including the provisions of Section 144B or the CBDT's Order, to infer exclusion of the operation of CBDT's order dated 13.08.2020. This Court must therefore conclude that the operation of the CBDT's order dated 13.08.2020 is saved by the application of the Section 24 of the General Clauses Act, 1897." 11. We consider that the cases referred by the ld. Counsel are entirely distinguishable from the fact of the cases of the assessee on the issue of issuing of notice u/s 143(2) by the prescribed authority i.e NaFAC with the introduction of faceless scheme by the CBDT. In the light of the above facts and finding we consider that notice issued u/s 143(2) of the Act in the case of the assessee by the prescribed authority i.e NaFAC is in accordance with the provision of the Act , therefore, we don't find any merit in this ground of appeal of the assessee and the same stand dismissed. Ground No. 2: Issue of rate of tax applicable to domestic company and/or cooperative bank for assessment year 2020-21 is also applicable to the assessee in accordance with Article 26 of the India-France Tax Treaty: 12. During the c....
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....n examined by the Tribunal in the case of M/s BNP Paribas, decided in ITA Nos, 4601 & 4602/M/2004,vide order dated 1-7-2013. In that case also the tax rate applied in the case of the assessee, a foreign company was 48% compared to 38% applied in case of domestic companies. The assessee had argued that it was discriminatory and not in accordance with law Reference was made to non-discrimination clause in the Treaty, as per which there should not be any discrimination between the domestic and the non-resident company. The Tribunal, however, referred to the Explanation in the Section 90, inserted in the IT Act with retrospective effect from 01-04-1962 as per which the higher tax rate in case of foreign company, should not be regarded as violation of non- discrimination clause. The Tribunal also referred to the judgment of the Hon'ble Supreme Court in the case of ACIT Vs. J.K. Synthetics The Tribunal accordingly, rejected the ground raised by the assessee. The facts in the present appeal are identical and, therefore, respectfully following the decision of the Tribunal in the case of M/s BNP Paribas(supra), we dismiss this ground raised by the assessee." Following the same,....
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....al entity, the same is not taxable in India. Without prejudice to the above, the assessee submitted that the data processing charges are also not taxable in India and the same do not constitute 'fees for technical services' under Article 13 of the India- France Double Taxation Avoidance Agreement ('DTAA') read with clause 7 of the Protocol to the DTAA. The AO vide draft assessment order did not agree with the submissions of the assessee and held that the decision of the Special Bench of the Tribunal in Sumitomo Mitsui Banking Corporation vs DDIT (2012) 145 TTJ 649 (Mum.)(SB) cannot be applied to data processing fees paid by the branch office to the Singapore branch in terms of the agreement entered between them as two individual entities i.e. as principal and independent contractor. The AO further held that the data processing fee paid by the branch office to the Singapore branch is taxable as fees for technical services and royalty as per the Act and the India-France DTAA and also the India-UK DTAA even if the Protocol to the India-France DTAA is invoked. The learned DRP, inter-alia, rejected the objections filed by the assessee on this issue by following the directions rendered i....
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....own case for AY 2001-02 to 2003-04 wherein interest paid by assessee to Head Office/overseas branches was held to be not liable to tax, following was the precise observation of the Tribunal in its order dated 20-6-2012 for AY 2002-03:- "3. The solitary issue involved in the appeal of the assessee for, the AY 2002-03 relates to the addition of Rs 1,48,30,613/- made by the A.O. and confirmed by the Ld CIT(A) on account of "interest" paid by the Indian Branches of the assessee bank to its head office and other overseas branches. 4. The assessee, in the present case is a commercial bank having its Head Office in France. It cames on the normal banking activities Including financing of foreign trade and foreign exchange transactions in India through its eight branches situated at Mumbai, New Delhi, Kolkata, Bangalore. Pune Ahmedabad, Chennai and Hyderabad During the previous year relevant to AY 2002-03, the Indian Branches of the assessee bank have paid total interest of Rs 1.48,30,613/- to its Head office and overseas branches and the same was claimed as a deduction while determining the profits attributable to Indian Branches, which was chargeable to tax in India. The....
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....." 5.1 The issue has also been dealt by the Special Bench of the Tribunal in the case of Sumitomo Mitsui Banking Corporation (supra), wherein the observation of the Bench at para 88 is as under:- "88. Keeping in view all the facts of the case and the legal position emanating from the interpretation of the relevant provisions of domestic law as well as that of the treaty as discussed above, we are of the view that although interest paid to the head office of the assessee bank by its Indian branch which constitutes its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to, the PE which is taxable in India as per the provisions of art. 7(2) and 7(3) of the Indo-Japanese Treaty read with, para 8 of the Protocol which are more beneficial to the assessee. The said interest. however, cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domestic law. Even otherwise, there is no express provision contained in the relevant tax treaty which is contrary to the....
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....ce of Rs 13.10,97,790 The assessee gets the relief accordingly. 14. Ground no 2 is thus allowed." 6. We see no reasons to take any other view of the matter than the view so taken in assessee's own case in assessment year 2008-09. Respectfully following the same, we direct the Assessing Officer to delete the impugned disallowance of Rs. 18,53,83,446/- The assessee gets the relief accordingly." Also, the above order has been followed by ITAT 'L' Bench, Mumbai in assessee's own case in A.Y.2010-11 (ITA No. 1182/Mum/2015). Further, the Bombay High Court has not admitted the Department's appeal on this ground for AYS 2006- 07 and 2007-08. Facts being identical, we follow the above orders of the Co- ordinate Bench and allow the 2 ground of appeal." As the facts in context of the aforesaid issue under consideration remains the same as was there before the Tribunal in the assessee's own case for A.Y. 2013-14, therefore, we respectfully follow the view therein taken. Accordingly. we herein direct the AO to delete the impugned addition of Rs 40,78,10.733/- The Ground of appeal No. 2 is allowed." 13. We further find that the....
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....he ground no. 3 of appeal of the assessee is allowed. Ground No. 4: Levying surcharge and health and education cess: 18. The issue in the ground no. 4 of the appeal of the assessee is pertained to levy of surcharge and education cess on the tax computed @ 10% under Article 13 of India-France Treaty. 19. During the course of appellate proceeding before us the ld. Counsel submitted that in case ground no. 3 raised in assessee's appeal is decided in assessee's favour then ground no. 4 would become academic in nature. 20. Since, we have decided ground no. 3 in favour of the assessee, therefore, considering the submission of the ld. Counsel this ground of appeal is dismissed as infructuous. Ground No. 5: Interest payable/paid by the Indian branch offices of the assessee to the head office and its other overseas branches amounting to Rs. 19,22,06,820/ is chargeable to tax-: 21. During the year under consideration the Indian branch office has paid an amount of Rs. 17,65,42,982/- to its head office/overseas branches as interest on subordinated debt. Further, BNP has paid an amount of Rs. 15,663,858/- as interest on NOSTRO overdrafts. The assessee submitted that Article 7 ....
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....nce Tax Treaty, according to which only so much of the profits shall be taxable in a state in which a PE situated, to the extent attributable to such a PE. The above position is also endorsed by the Organisation for Economic Co- operation and Development (OECD) Commentary 2008 with regard to the provisions of Article 7(2) as follows: This paragraph contains the central directive on which the attribution of profits to a permanent establishment is intended to be based. The paragraph incorporates the view that the profits to be attributed to a permanent establishment are those which that permanent establishment would have made if, instead of dealing with the rest of the enterprise, it had been dealing with an entirely separate enterprise under conditions and at prices prevailing in the ordinary market. This corresponds to the "arm's length principle discussed in the Commentary on Article 9. Normally, the profits so determined would be the same profits that one would expect to be determined by the ordinary processes of good business accountancy Therefore, the legal fiction is created essentially to enable the determination of profits attributable to a PE, and the ....
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.... "In so far as the taxability of interest payable by PE in India in the hands of GE under the domestic law is concemed, it is relevant to note that the PE in India and the GE abroad of which the said PE is part are not independent persons under the domestic lawie. Indian Income-tax Act and they are not assessed to tax separately in India. The taxable entity is only one ie the overseas GE which is the assessee bank in the present case who is a non- resident in India and the PE in India is part of that entity which is a taxable entity in India even in respect of income attributable to the PE in India. There is thus only one person assessable to tax re GE and PE is not an independent person who is assessed to tax separately in India It is a part of the GE and its income is chargeable to tax in the hands of GE which alone is the person assessable to tax in India." The above implies that for the purpose of section 2(31) of the Act, which defines the term 'person', on the basis of the observation made in the SMBC ruling (supra), the branch and the foreign bank are to be treated as the same taxable unit. As a result of the above discussion, under the provisions of t....
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....agraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 15, as the case may be, shall apply The purpose and scope of Article 11(4) of the OECD model convention [which is akin to Article 12(5) of the India - France Tax Treaty) has been explained in paragraph 25.1 of the OECD commentary: "25.1 A debt-claim in respect of which interest is paid will be effectively connected with a permanent establishment, and will therefore form part of its business assets, if the "economic ownership of the debt-claim is allocated to that permanent establishment under the principles developed in the Committee's report entitled Attribution of Profits to Permanent Establishments (see in particular paragr....
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....utable to the PE indirectly by force of attraction in the present case, such situation does not exist and article 11(6), therefore, in our opinion, has no application Further Article 12(6) of the of the India-France Tax Treaty reads as under "Interest shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political sub-division, a local authority or a resident of that Contracting State Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establish mentor fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated" As submitted above, the deeming fiction created by Article 7(2) of the India France Tax Treaty is only for the limited purpose of determination of profits attributable to PE in India and the same cannot be extended and applied to Article 12 of the Treaty or any other provision under the Act ....
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....elf, and, as such treaty provisions are not really relevant. We humbly bow before the conclusions arrived at in this judicial precedent. Of course, we have reached the same destination by following a different path but then as long as reach the same destination, our traversing through a different path does not really matter at all." Based on the above arguments, we wish to submit that the interest received by the HO/overseas branches from BNP should not be taxable under the provisions of the India-France Tax Treaty." 22. The assessing officer has not agreed with the submission of the assessee vide draft assessment order dated 29.09.2022 passed u/s 144C(1) of the Act and held that interest income of the overseas branch/HO of Rs. 19,22,06,830/ would be taxable under Article 12 of the India-France Treaty@10%. 23. The assessee filed objection before the DRP against the draft assessment order passed by the assessing officer. The DRP vide order u/s 144C(5) of the Act dated 27.06.2023 has dismissed the objection filed by the assessee holding that this issue is pending before the Hon'ble High Court for the earlier assessment years. Thereafter the assessing officer passed the....
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....he case as compared to AY 2017- 18. In fact, as noted above, the submissions of the assessee are also identical to those made for the AY 2017-18 Hence, it is relevant to quote the relevant portion from the order of the DRP for the AY 2017-18 as below" "As the facts of the case are identical to the facts as obtaining in the assessment year 2017-18, following the detailed reasoning and directions given by the DRP for AY 2017-18, Objection No. 3 of the assessee is rejected. In light of the facts and circumstances of the case and as per the law it is essential to maintain the principles of consistency and uniformity of taxation and assessment". B. The Appellant submits that as it is the admitted position that the facts and the law are the same as those considered and pronounced upon by two different Benches of the Hon'ble ITAT in the Appellant's own case, the same should be followed on the well- recognised principle of stare decisis viz. that precedents on identical facts and law should be followed and in consonance with judicial discipline. The CIT (DR)'s contention that the earlier decisions in the Appellant's own case should not be....
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....Court under Section 260A of the Act (which the Department already has done) the Department would seek to re-argue concluded matters, by once again re-arguing subsequent years, in the ITAT, on identical facts and law. (c) The Department's reliance in paragraphs 19 and 19.1 of its submissions upon the decision of the Kerala High Court and the Supreme Court is totally misconceived, inter alia, because (i) The decisions of the Tribunal in the Appellant's own case for carlier years contain no error whatsoever and are well-reasoned and cannot be faulted. It may be mentioned that the Hon'ble ITAT decided this issue in the Appellant's favour after considering detailed Written Submissions filed by the Departmental representative To allow the Department to once again re-agitate the very same issues would amount to completely violating the principle of judicial discipline and precedents and destroy the Appeal mechanism, apart from amounting to disrespect of earlier well-reasoned orders on the allegation that they "were influenced by inaccurate representation of facts". (ii) The Appellant takes serious objection to the following allegation made by the....
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....to adopt either Indian Domestic Law or the Double Taxation Avoidance Agreement between India and France ("the DTAA") for the purposes of its assessment, depending on whichever is more favourable. (ii) It is an admitted position that the Appellant has a Permanent Establishment ("PE") in India, within the meaning of the DTAA. (iii) It is submitted that in view of Article 12(5) of the DTAA, the interest which the Appellant's Indian PE pays to its Head Office ("the HO") and its Overseas Branches, is taken out of Article 12 and is subject to the provisions of Article 7 of the DTAA. This is because: • The interest paid to the HO/Overseas Branches is paid to them in respect of funds provided to the PE by the HO/Overseas Branches. • Such funds therefore clearly form a part of the assets of the PE • The interest so paid has admittedly been allowed to the Appellant as a deduction. • As such, it cannot be disputed that such interest has been paid in respect of a debt-claim which is effectively connected to the Appellant's PE (iv) The above reasoning forms the basis of the favourable decisions of the Hon'....
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....income from whatever source derived which is received or, is deemed to be received in India or, which accrues, or arises, or, is deemed or arises to him in India. The existing provisions in the Income-Tax Act which provide that certain Incomes will be deemed to accrue or, arise in India are couched in general language. The absence of clear-cut source rule sometimes creates uncertainty about the chargeability of certain types of income, in the case of Non-residents. In order to avoid any doubt, or, dispute in regard to the accrual of income by way of interest, royalty, and fees for the technical services in the case of Non-Residents, it is proposed to make certain provisions in the Income Tax Act, clearly specifying the circumstances in which such income shall be deemed to accrue, or, arise in India. 39. Under the proposed provision, interest payable by the Government will be deemed to accrue or, arise in India. Interest paid by a person resident in India, will also be deemed to accrue, or, arise in India, except in cases where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business, or a profession carried on by ....
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....r Article 1 of the DTAA, the tax treaty becomes applicable in the case of the assessee. However, section 90(2) of the IT Act, 1961 provides that if India has entered into a treaty for avoidance of double taxation which is applicable in the case of the assessee, then the provisions of the Act/DTAA will apply whichever are more beneficial to the assessee. 12. As per Article 7(1) of the DTAA, the business income of the assessee is taxable in India only if there exists a permanent establishment (PE) of the assessee in India within the meaning of Article 5 of the DTAA. There is no dispute that the assessee has a PE in India through its branches. Article 7(2) of the DTAA provides that the attribution of business profits to the PE will be done by treating the PE as 'if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly at arm's length with the enterprise of which it is a permanent establishment and other enterprises controlling, controlled by or subject to the same common control as that enterprise'. Thus, once the assessee opts to be governed under the beneficial pro....
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....The PE of the assessee in India remains the resident of the other Contracting State, that is, France, for the purpose of the Treaty as also the Act. Under the DTAA, the PE of an enterprise of a Contracting State in the other Contracting State(India) does not become the resident of the other Contracting State (le. India). The same situation prevails under the Act, where the branches of the assessee remain a non-resident for the purposes of the Act. Thus, the moment interest becomes payable by the PE in India, which is a non-resident for the purposes of the Act, the provisions of section 9(1)(v)(c) become attracted and the source rule for interest income becomes applicable for charging of this interest as income deemed to accrue or arise in India. It has been mentioned above that this source rule is silent about the payee (HO of BNP Paribas in this case). It becomes applicable when interest is payable by a non-resident for moneys borrowed or debt incurred for purposes of business in India and for earning income in India. Thus, once this interest becomes payable, it also becomes chargeable, which is in the hands of the HO, that is, the non-resident assessee itself. 14.1. That....
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....ice and Head office are same person and not separate entities and one cannot make profit out of himself. Thus, it was held by the Special Bench that interest paid by Branch office to its Head office is not chargeable to tax in India under the 1.T Act itself. Therefore, question of application of DTAA did not arise in this scenario as it would be contrary to the Act and less favourable to the assessee. 16. The way the issue was analysed and held by the Hon'ble Special Bench was never the intention of the Parliament. Therefore, the Legislature deemed it necessary to clarify this position by inserting an Explanation to section 9(1)(v)(c) by way of the Finance Act, 2015 w.e.f 01.04.2016: "Explanation. -For the purposes of this clause, - (a) it is hereby declared that in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non- resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the perman....
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....ons of the Act if such relief is available under the DTAA and to that extent the provisions of the Act are not applicable. Further, income of a non-resident from business activity is taxable in India if it has a business connection in India in accordance with the provisions contained in section 9(1)(i) and only such income is taxable as is attributable to the business connection. Similarly, under the DTAA income from business activity in the case of a non-resident shall be taxable only if such non-resident has a permanent establishment (PE) in India and only such income is taxable which is attributable to the PE. The concept of PE is almost on similar lines as business connection with variations as per different DTAAS. The DTAA further provides the manner of computation of income attributable to the PE. It is provided that for the purpose of computation of income the PE shall be deemed to be an independent enterprise with certain restrictions regarding allow ability of expenses paid to head office by the PE. Under DTAAs in case of a banking company the interest paid by a PE to its head office and other branches is allowed as deduction treating such a permanent establishmen....
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....ident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery would apply. Accordingly, the PE in India shall be obligated to deduct tax at source on any interest payable to either the head office or any other branch or PE, etc. of the non-resident outside India. Further, non-deduction would result in disallowance of interest claimed as expenditure by the PE and may also attract levy of interest and penalty in accordance with relevant provisions of the Act." 16.2 Thus to overcome the decision of the Hon'ble Special Bench in case of Sumitomo Mitsui & other simil....
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....que Francaise du Commerce Exteriur, or the Compagnie Francaise d' Assurance pour le Commerce Exterieur (COFACE); (ii) In the case of India, the Export, Import Bank of India; (iii) Any institution of the other Contracting State in the charge of the public financing of external trade. 4. The term "interest" as used in this article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this article. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt-claim in respe....
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....the non-resident in India and such interest is borne by such P.E for the debt it had taken from the non-resident, then such interest shall be deemed to arise in India in which P.E is situated. 16.6 From the above it is quite evident that in case of payments of interest by the P.E Branch Office of a non-resident to its head office in France, the interest is deemed to arise in India where the P.E is situated. 16.6.1 Article 12 (1) simply refers to "Interest arising in a Contracting State" it does not say interest paid by a resident of a contracting state (Source state). Therefore, interest paid by Branch Office of BNP Paribas in India to its Head Office in France is liable to tax in the source state i.e. India as per Article 12 (2) @ 10%. This position is non-debatable and undisputed w.e.f A. Y 2016-17 onwards. 16.7 Reference is also made to OECD Model Convention (2017 version) and relevant part of paragraph 5 of Article 11 (Article on Interest income) and commentary on the same is reproduced below: "Paragraph 5 of the OECD MC 2017 is reproduced below: "Interest shall be deemed to arise in a Contracting State when the payer is a resident o....
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....e interest is serviced by the head office but is ultimately borne by the permanent establishment. c) The loan is contracted by the head office of the enterprise and its proceeds are used for several permanent establishments situated in different countries. In cases a) and b) the conditions laid down in the second sentence of paragraph 5 are fulfilled, and the State where the permanent establishment is situated is to be regarded as the State where the interest arises. 16.7.1 From the above it is quite evident that even the OECD Model Convention 2017 treats the Head Office and its P.E in source country as two separate entities and paragraph 27 (b) of the commentary clearly brings out that when loan given by the H.O to its B.O/P. E in source country (India) is used solely for the purpose of business of B.O/P.E in source country (India), the interest arises in the country where P.E is situated (India in this case). 16.7.2 Para 29 of the Commentary on Article 7 (Business income) of OECD MC 2017 is reproduced below: 29. Some States consider that, as a matter of policy, the separate and independent enterprise fiction that is mandated by paragra....
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....n his commentary on paragraph 5 of the OECD MC, ("Klaus Vogel on Double Taxation Conventions Third Edition") Dr. Klaus Vogel has mentioned the following at M.No.89 and 90: "89(b) Rule: Under article 11 (5), interest shall be deemed to arise in a contracting state when- - the payer is - a resident of that State or - where, irrespective of the payer's residence, the interest is paid on an indebtedness of a permanentestablishment (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 latter's bearing the interest. Article 11 (5) presupposes that the interest will reduce the profits to be taxed in the State of the 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 the interest to that State." 16.8.1 Thus, international tax law commentators and OECD comment....
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.... case, has not disputed the deduction claimed by the Indian branch office. However, as per the Revenue, the interest received by the head BNP Paribas ITA no 1076/Mum/2021 ITA no. 1670/Mum./2022 Page 15 office/overseas branches is taxable under the provisions of section 9(1)(v) (c) of the Act. 22. Since the India-France DTAA is applicable in the present case, therefore, before proceeding further it is pertinent to consider the relevant provisions of the said DTAA vis-a-vis the facts of the present case. As per Article 12(1) of the DTAA, interest arising in a contracting state (i.e. say India) and paid to a resident of the other contracting state (i.e say France) may be taxed in the other contracting state (i.e. France). Further, under Article 12(2) of the DTAA, such interest may also be taxed in the contracting state in which it arises (i.e. say India), and according to the laws of that state, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10% of the gross amount of interest Para 5 of Article 12 provides that the provisions of para 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a contra....
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....services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices." 23. Thus, in the case of a banking enterprise, any payment by the PE to the head office of the enterprise by way of interest on money lent to the PE shall be allowedas a deduction, Further, the amount charged by the PE to the head office of the enterprise by way of interest on money lent to the head office of the enterprise shall be considered for the determination of profits of the PE In the present case, it is not in dispute that the money has been lent to the PE and not the other way around Thus, the first part of Article 7(3)(b) of the Act is only applicable in the present case, as the second part of this Article deals with the case wherein money is lent by the PE to the head office. Accordingly, BNP Paribas ITA no. 1076/Mum/2021 ITA no. 1670/Mum/2022 Page | 17 in the present case, the assessee has claimed a deduction in respect of interest paid by the PE to its head office/overseas branches. 24. Further, in view of Article 7 of the India-France DTAA, the Revenue though has ri....
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....he 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 establishment as a profit centre; and (ii) income of the GE in its own capacity by treating it as another independent separate profit centre, for the detailed reasons set out above and particularly as the fiction of hypothetical independence does not extend to the computation of GE profits, we reject the same. The authorities below were, therefore, clearly in error in holding that the interest of Rs. 1,59,32,854 paid by the Indian PE to the GE, or its constituents outside India are taxable in India. 23. We may also add that in the case of Sumitomo Mitsui Banking Corpn. (supra), a five member bench has held that interest payment by PE to the G....
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....) (v) (c) as amended by Finance Act 2015 read with Article 12 (1) & 12 (2) of the India-France DTAA. This is more so w.e.f A. Y 2016-17 onwards. With regard to the taxability of interest paid by Branch Office to Head Office. Article 7 does not come into picture at all. Provisions of Article 7 will apply only if as per Article 12 (5) of the DTAA, the beneficial owner of the interest (BNP Paribas Head Office), being resident of France, carries on business in the other state (ie. India) in which the interest arises, through a P.E situated therein, and the debt-claim in respect of which the interest is paid (ie. loan /debt given by Head Office to Branch Office) is effectively connected with such P.E. In the present case debt claim is not effectively connected with the P.E or the Branch Office of BNP Paribas in India, rather debt claim is of the Head Office and is effectively connected with the Head Office only. The Loan/Debt in this case has been advanced by the Head Office to the Branch Office. Therefore, by no stretch of imagination the debt claim can be said to be effectively connected with the P.E/Branch Office 12.2 Debt claim can be stated to be effectively conne....
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....e claim should be connected to the permanent establishment not only in form but also in substance. But it is difficult to visualize how an asset can be effectively connected with the permanent establishment otherwise than by forming part of its assets". 17.3.2 It has to be appreciated that the provisions of paragraph 1 of Article 11 presupposes that the debt claims are owned and held by the non-resident. The State of source is granted a limited and secondary right of taxation because the passive income generated from the asset arises in the said country. In such taxation it is not possible to resort to net income taxation, as in the case of a permanent establishment, because the asset has been acquired and held abroad and it is not possible to identify the expenses incurred in connection with acquisition and exploitation of the assets. Hence, a presumptive taxation is done at a stipulated percentage of the gross income. However, where the asset is owned by the permanent establishment in the State of source, and it has been acquired and exploited in the State of source by the permanent establishment so that the income is solely attributable to the permanent establi....
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....ommentary on Article 7. 25. It has been suggested that the paragraph could give rise to abuses through the transfer of loans to permanent establishments set up solely for that purpose in countries that offer preferential treatment to interest income. Apart from the fact that the provisions of Article 29 (and, in particular, paragraph 8 of that Article) and the principles put forward in the section on "Improper use of the Convention" in the Commentary on Article 1 will typically prevent such abusive transactions, it must be recognised that a particular location can only constitute a permanent establishment if a business is carried on therein and, as explained below, that the requirement that a debt-claim be "effectively connected" to such a location requires more than merely recording the debt-claim in the books of the permanent establishment for accounting purposes. 25.1. A debt claim in respect of which interest is paid will be effectively connected with a permanent establishment, and will therefore form part of its business assets, if the "economic" ownership of the debt-claim is allocated to that permanent establishment under the principles developed in the Com....
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....pply in such a scenario. 18.2 In this regard it is submitted that it is correct that B.O. is a P.E. of BNP Paribas H.O. in India but the condition that is required to be satisfied for provisions of Article 12(5) to be applicable is that the debt claim in respect of which the interest is paid by the B.O. must be effectively connected to the B.O./P.E. itself. Payer of the interest & debt advancer/ debt claimant cannot be same entities/persons. In the present case debt claimant/ debt advancer is the H.O. of BNP Paribas and, it is respectfully submitted that provisions of para 5 of Article 12 of DTAA are not applicable. Consequently, provisions of Article 7 will also not be applicable. Interest payment made by the B.O./P.E. to its H.O. will be taxable in the sources state i.e. India under para 2 of Article 12. 18.3 Hon'ble ITAT vide para 24 of its order has observed that the revenue has extended the fiction of hypothetical Independence of B.O. & H.O. for the computation of profit of the head office, also for bringing to tax the interest received from the B.O. under the provisions of the Act & that this approach of revenue is flawed. While making this observation H....
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.... (d) The Hon'ble co-ordinate bench vide para 22 of its order (for A.Y. 04-05) has further observed that: "The Profits attributable to the P.E. have anyway been offered to tax" However, even if it is considered that interest income of Rs. 19,22,06,830/- paid by P.E./B.O. to its H.O/G.E. is profits attributable to the P.E. it appears that the same has not been offered to tax by the P.E./B.O. in its P&L A/c in the present case. 18.4 From perusal of para 25 of the Hon'ble ITAT "I" Bench for A.Y 2017-18 it is evident that the said order is based on & has followed the order of the coordinate Bench for A.Y 2004-05 in assessee's own case. It has been clearly brought out in various paras above that order of the Hon'ble Coordinate Bench of ITAT for A.Y 2004-05 cannot serve as a precedent. Therefore, it is respectfully submitted that order of the Hon'ble Coordinate Bench for A.Y 2017-18, A.Y 2018-19 and A.Y 2016-17 may not be followed while deciding the current appeal of the assessee. 18.5 In fact the Hon'ble 'I' bench Mumbai vide its order dated 4.12.2020 in the case of DZ Bank AG for A.Y 2014-15, ΙΤΑ Νο 181....
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....cept for the supporting services rendered by the Indian Representative office in connection with dealing with that debt claim but then rendition of service by the PE, in connection with a debt claim, by itself would not make the debt claim effectively connected with the PE. What essentially follows is that unless the foreign enterprise, ie. DZ Bank AG Germany, carries on business through the permanent establishment in India, even if there be any, interest income earned by the foreign enterprise, even if earning of the said income is on account of a significant contribution from the activities of such a permanent establishment, cannot be taken out of taxability under article 11(5). Clearly, therefore, the conditions laid down under article 11(5) are not satisfied on the facts of this case, and, the entire interest income, therefore, is required to be taxed under article 11. For this reason alone, the interest income cannot be brought to tax under article 7 because the condition precedent for an interest income being brought to tax under article 7, i.e. fulfilling the twin conditions set out in article 7, are not satisfied. 27. In view of the above legal analysis, once entir....
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....f the above provision, under article 7(7). where profits sought to be taxed under article 7 include any item of income which is dealt with separately in other articles of the Indo German tax treaty, article 7 will yield to those specific provisions in respect of that income. That treaty approach is in consonance with the well settled principle of law contained in the Latin maxim generalia specialibus non derogant, i.e. general provisions do not override the specific provisions. Quite clearly, therefore, when a particular type of income is specifically covered by a treaty provision, the taxability of that type of income is governed by the specific provisions so contained in the treaty. Of course, even in the scheme of taxability of such specific incomes under the treaty provisions, as we will see a little later, the situations are specified in which the taxability under those specific provisions cease to come into play, and the taxability can shift to the general provisions of article 7. 14. The question then we must ask ourselves before embarking upon examining taxability of an income under article 7 is whether such an income can be taxed under any other specific provision....
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..... Nevertheless, the Tribunal may place reliance on an earlier decision to support its conclusion. It could not, therefore, be said that the decision in the assesses case before us, relating to the prior years, would operate as res judicata. The Tribunal is entitled to take a different view of the matter, if new materials were placed or on a closer and more intelligent analysis. It is evident from the various decisions placed before us that a different aspect of the matter has been presented for consideration, as laid down in thedecisions mentioned earlier. The Tribunal was therefore entitled to have a fresh look at the matter based on the line of thinking disclosed by these decisions." 19.1 Similarly Hon'ble Supreme Court in case of Shri Umed V/s Raj Singh and others 1975 AIR 43 vide its decision dated 28.08.1974 had held that: "To perpetuate an error is no heroism. To rectify it is the compulsion of judicial conscience. In this we derive comfort and strength from the wise and inspiring words of Justice Bronson in Pierce v. Delameter (2) "a judge ought to be wise enough to know that he is fallible and therefore ever ready to learn; great and honest enough to d....
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....may be taxed in the other contracting state (i.e. France). Further, under Article 12(2) of the DTAA, such interest may also be taxed in the contracting state in which it arises (i.e. say India), and according to the laws of that state, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10% of the gross amount of interest. Para 5 of Article 12 provides that the provisions of para 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a contracting state (i.e. say France), carries on the business in the other contracting state (i.e. say India) in which interest arises, through a PE situated therein, or performs in that other contracting state independent personal services from a fixed base situated therein, and the debt claim in respect of which the interest is paid is effectively connected with such PE or fixed base. Para 5 further provides that in such a case, the provisions of Article 7 or Article 15 as the case may be shall apply. Article 15 deals with independent personal services, which is not relevant to the present case. Since the assessee has PE in India, therefore, Article 7 which deals with busine....
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....e in the present case, as the second part of this Article deals with the case wherein money is lent by the PE to the head office. Accordingly, in the present case, the assessee has claimed a deduction in respect of interest paid by the PE to its head office/overseas branches. 24. Further, in view of Article 7 of the India-France DTAA, the Revenue though has rightly accepted that the fiction of hypothetical independence or a separate entity approach, as stated in this Article, comes into play for the limited purpose of computing the profit attributable to the PE. However, extended this fiction of hypothetical independence also for the computation of profit of the head office, for bringing to tax the interest received from the Indian branch office under the provisions of the Act. We are of the considered opinion that the latter approach is flawed. This aspect was extensively dealt with by the coordinate bench of the Tribunal in assessee's own case in BNP Paribas SA vs ADIT, in ITA No. 3422/Mum/2009, for the assessment year 2004-05. In the aforesaid decision, the coordinate bench held that the principles for determining the profits of the PE and GE/head office are not the sam....
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.... holding that the interest of Rs. 1,59,32,854 paid by the Indian PE to the GE, or its constituents outside India are taxable in India. 23. We may also add that in the case of Sumitomo Mitsui Banking Corpn. (supra),a five member bench has held that interest payment by PE to the GE is a payment by a foreign company's Indian PE to the foreign company itself, it cannot give rise to any income, in the hands of the GE, which is chargeable to tax under the Income Tax Act, 1961 itself, and, as such, treaty provisions are not really relevant. We humbly bow before the conclusions arrived at in this judicial precedent. Of course, we have reached the same destination by following a different path but then as long as reach the same destination, our traversing through a different path does not really matter at all. For this reason also, the grievance of the assessee deserves to be upheld." 25. From the aforesaid findings, it is also relevant to note that the coordinate bench of the Tribunal came to the conclusion that the interest paid by the Indian branch/PE to the head office/GE is not taxable in India independent of the decision of the Special Bench of the Tribunal in Su....
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....evenue interest received by the head office is taxable under the provision of Sec.9(1)(v)(c) of the Act, however we consider that in terms of provision of Sec. 90(2) the provision of the Act or the DTAA whichever is more beneficial to the assessee shall be applicable. 29. We have perused the provisions of Article 12 of the India-France DTAA which are reproduced as under: "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10 per cent of the gross amount of the interest ] 3. Notwithstanding the provisions of paragraph 2: (a) interest arising in a Contracting State shall be exempt from tax in that Contracting State provided it is derived and beneficially owned by (i) the Government, a political sub-division or local authority of the other Contracting State, or [(ii) the "Reserve Bank of India" in the case of India....
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....ne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this article shall apply to the last mentioned amount, In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention 1. Substituted by Notification No SO 650(E), dated 10-7-2000, w.r.e.f 1-4-1997." 30. As per Article 12(1) of the DTAA interest arising in a contracting state and paid to a resident of the other contracting state may be taxed in the contracting states in which it arises and the tax so charged shall not exceed 10% of the gross amount of the interest. However, the provision of Article 12(5) provid....
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....hether in the Contracting State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that Contracting State. Provided that where the law of the Contracting State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention, Agreement or Protocol signed after 1-1-1990 between that Contracting State and a third State which is a member of the OECD, the competent authority of that Contracting State shall notify the competent authority of the other Contracting State of the terms of the corresponding paragraph in the Convention, Agreement or Protocol with that third State immediately after the entry into force of that Convention, Agreement or Protocol and, if the competent authority of the other Contracting State so requests, the provisions of that paragraph shall apply under this Convention from that entry into force (b) However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than to....
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....ent establishment to the head office are not taxable in the hands of the head office as provided in Article 12(5) of the treaty and it also provide that in such cases income of the permanent establishment only to be taxed as per provision of Article 7 of DTAA. As per the provision of Sec.90(2) of the Act the assessee can opt for the taxability of its income as per the Double Taxation Avoidance Agreement between India and France (DTAA) or the Act which is more beneficial, accordingly even though the interest paid by the branches (PE) to the head office are taxable as per the provision of Sec. 9(1)(5)(c) of the Act, however, because of beneficial provision of DTAA i.e Article 12(5) as discussed supra will lead to the conclusion that such interest received by the overseas head office is not taxable under the provision of DTAA. It is clear from the provision of DTAA that interest income of the non-resident (head office) shall be taxable under Article 12 of the DTAA only when such head office shall not having any PE in India wherein branch (PE) is established in India then the provision of Article 7 only shall apply and Article 7 deal with taxability of only profit attributable to th....