AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2024 (6) TMI 673
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....he 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 profession 8. The learned AO has erred in granting short credit of taxes deducted at sour....
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....ssment 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) ii. Sant Baba Mohan Singh Vs. CIT (1973) 90 ITR 197 (All) iii. CIT Vs. Laxman Das Khandelwal (2019) 108 taxmann.com 183 (SC). 5. On the other....
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....ed 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 the said Act, or sub-section (1) of section 148 of the Act, for the purpose of issuance of notice under sub-section (2) of section 143 of the said Act. 2. This notification shall com....
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....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 course of appellate proceedings before us the ld. Counsel submitted that this issue has been decided against the assessee by the decision of coordinate benches of the Tribunal in the proceeding assessment years. The ld....
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.... 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, we uphold the order of the Ld. CIT(A) and dismiss the 1 ground of appeal. As the facts and the issue in the present appeal of the assessee remains the same, therefore, we respectfully follow the aforesaid order of the Tribunal. Accordingly, the Ground of ....
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....e 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 in assessee's own case for the assessment year 2014-15. In conformity, the AO, inter-alia, passed the impugned final assessment order on this issue. Being aggrieved, the assessee is in appeal before us. 11. During the hearing, the learned counsel submitted that this issue has been de....
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....2-03 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 said interest was treated by the AO as income of the assessee's Head office/overseas branches chargeable to tax in India. This decision of the A.O. was challenged by the assessee in the appeal filed before the Ld CIT(A) and the contention raised before the Ld. CIT (A) in this regard was that the Head office of the assesse....
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....f 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 domestic law in India on this issue, This position applicable in the case of interest paid by Indian branch of a foreign bank to its head office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the he....
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....46/- 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 Hon'ble jurisdictional High Court dismissed the appeal filed by the Revenue against the order passed by the coordinate bench of the Tribunal in assessee's own case for the assessment year 2009-10 on a similar issue. The relevant findings of the Hon'ble jurisdictional High Court in CIT vs BNP Paribas SA, in ITAs No.825 and 826 of 2017, vide order dated 27/08/2019, in this regard, are a....
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....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 (2) India-France Tax Treaty provides that profits attributable to a permanent establish (PE) should be computed on the basis of the profit which the PE might expect to make it if it were a distinct and separate enterprise and dealing wholly independently with the enterprise of which it is a PE or with enterprises with which it deals. The India-France Tax Treaty creates a legal fiction by treating the profit (PE) a....
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....t 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 same should not be extended to or have a bearing on any other provisions of a treaty or on the provisions of the Act, except specifically provided for Further, the Hon'ble Mumbai Income Tax Appellate Tribunal (ITAT), in BNP's own case of BNP Paribas SA v. ADIT reported at ITA/3422/2009 has observed as follows: 12. The fiction of hypothetical independence of a PE vis-a-vis it's GE and other PES outside the source jurisdiction is confined t....
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....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 the India - France Tax Treaty, BNP does not qualify as a separate person vis-à-vis its HO Further, Article 12 of the India France Tax Treaty relates to the taxability of interest income. Article 12(4) of the India-France Tax Treaty defines the term "interest' to mean income from 'debt-claims' In this regard, it is submitted that two parties are required to give rise to a 'debt-claim. In this connection, reliance is placed on the decision of the Hon'ble Kerala High C....
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.... 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 paragraphs 72-92 of Part I of the report) for the purposes of the application of paragraph 2 of Article 7. In the context of that paragraph, the "economic ownership of a debt-claim means the equivalent of ownership for income tax purposes by a separate enterprise, with the attendant benefits and burdens (eg. the right to the interest attributable to the ownership of the debt-claim and the potential exposure to gains or losses from the appreciation or depreciation of the debt-claim)." In view of the above, where the HO/overseas branches is/ are receiving payme....
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....blishment 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 or the Treaty Without prejudice to the same, the Assessee also places reliance on its own decision of the Hon'ble Mumbai ITAT [BNP Paribas SA (supra)] which after considering the decision of its co-ordinate bench in the case of SMBC ruling (supra) came to the following conclusion. ....The separate profit centre accounting approach for the HO does not hold good in the treaty context, because, even if it is an income of the GE as a profit centre, all that is taxable as business profits of the GE is the income attributable to the PE As regards its being treated as interest....
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.... 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 final assessment order on 21.07.2023 and treated the interest payment made to the head office as taxable @ 10% as per Article 12 of India-France DTAA. 24. During the course of appellate proceedings the ld. Counsel submitted that the similar issue on identical facts in the case of the assessee itself has been adjudicated in favour of the assessee by the coordinate bench of the ITAT vide ITA No. 1067/Mum/2021 & 1670/Mum/2022 dated 24.01.2023. He also submitted that this is a recurring issue and has been adjudicated in favour of the assessee in the earlier years by the ITAT. During the course of appellate p....
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....lant 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 followed deserves to be rejected for the following reasons which are without prejudice to one another.- (a) It completely violates the principle of stare decisis and the theory of precedents and adherence to judicial discipline. In this connection, the following observations of the MadrasHigh Court in the case of CIT Vs. L.G. Ramamurthi & Ors., (110 ITR page 453) are relevant: "No Tribunal of fact has any right or jurisdiction to come to a conclusion entirely contrary to the one reached by another Bench of the same Tribunal on the same facts. It may be that the members who constituted the Tribunal and decided on the earlier occasion were different from the members who decided th....
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....mental 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 CIT (DR) in paragraph 17.1 of his Written Submissions, where, after reproducing the Hon'ble ITAT's decision in the Appellant's own case for Assessment Year 2017- 18, the CIT (DR) has observed: "This assertion / submission of the Ld. Counsel is completely baseless and against the express provisions of the Act and the DTAA and was meant to misguide the Hon'ble Bench". The Appellant says that: * merely because the Department does not agree with valid legal submissions made by Counsel, does not give it any right to make such allegations. * In any event and without prejudice to the above, the Department was fully represented before the Hon'ble ITAT and there was therefore no question of the Hon'ble Bench be....
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....d 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'ble ITAT in the Appellant's own case and are unexceptionable and do not warrant any interference. (v) Wherever two contracting states have intended to bring the interest payable by a branch to its HO to tax, specific provisions have been inserted in the tax treaties. * For instance, Article 14(3) of the Tax Treaty between India and USA, which specifically provides that the interest paid by a branch of a Bank in India to its HO in USA should be taxed in India at the rates specified therein. * The Tax Treaty between India and France does not have any such provision corresponding to Article 14(3) of the Tax Treaty between India and USA, which specifically provides that interest received by the HO will be taxable. Hence, in the absence of specific provisions in the tax Treaty similar to India-USA Tax Treaty, the aforesaid interest cannot be brought to tax in the hands of Appe....
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.... 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 such person outside India or for the purposes of making or earning any income from any source outside India. Interest payable by a non-resident will, however, be deemed to accrue, or, arise in India only 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, profession carried on by the non-resident in India for the purposes of making or earning any income from a source in India." 9.3 Thus, it is evident that this source rule for payment of interest by non- residents applies to those instances where: i. business or profession is carried out by a non-resident in India, ii. the debt is incurred or borrowing is used for the purposes of that business in India, and iii. this was done for making or earning any income from a source in India. As mentioned above, the section does not say anything about the payee. The moment interest becomes payable by the non-resident o....
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....ther 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 provisions of the DTAA, and it is accepted that the assessee has a PE in India under the DTAA, then the single entity approach of the Act gives way to the distinct and independent entity or separate entity approach under the DTAA. Thus, the PE of the assessee in India is a separate entity than the enterprise of which it is a PE (sometimes referred to in international tax literature as the 'GE' - General Enterprise), while dealing with the enterprise, that is the GE (the assessee itself). 13. Under this separate entity approach, the PE is allowed to claim expenses as per law. However, Article 7(3) of the DTAA provides that: "... 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,know-how or other rights, or by way of commission or other charg....
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....his 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 such interest income would be chargeable in the hands of the non- resident assessee once it becomes payable by the PE was always enshrined in section 9(1)(v)(c) of the Act. 14.2 It will be pertinent to mention here that Hon'ble Supreme Court in the case of A Sanyasi Rao 219 ITR 330 had held that Section 9 is also charging section and is part of the Charging Scheme comprising of Section 4, 5, and 9 of the I.T Act. 15. The issue whether the interest paid by PE of Foreign bank to H.O is deductible in the hands of PE and whether the same interest is chargeable to tax in the hands of H.O or not was decided by the Hon'ble Special Bench of the ITAT in case of Sumitomo Mitsul Banking Corporation and SB vide its decision dated 02.04.2012 held as under: i) On the question whether the interest paid by the PE to the H.O. Is deductible, while such interest is not deductible under the Act because the payer & payee are the same person, Article 7(2) and 7(3) of the DTAA & its Protocol makes it clear that for the purpose of computing th....
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.... 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 shall apply accordingly; (b) "permanent establishment" shall have the meaning assigned to it in clause (ilia) of section 92F;" 16.1 The Memorandum to the Finance Bill, 2015 mentions the following in this regard: "Clarity regarding source rule in respect of interest received by the non- resident in certain cases The provisions of section 5 of the Act provide for scope of total income for the purposes of its chargeability to tax. In case of a non-resident person, the chargeability of income in India is on the basis of source rule under which certain categories of income are deemed to accrue or arise in India. The existing provisions of section 9 provide for the circumstances under which income is deemed to accrue or arise in India. Section 9(1) (v) relates specifically....
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....uction treating such a permanent establishment as an independent enterprise. The CBDT, in its Circular No. 740 dated 17/4/1996 had clarified that branch of a foreign company in India is a separate entity for the purpose of taxation under the Act and accordingly TDS provisions would apply along with separate taxation of interest paid to head office or other branches of the non- resident, which would be chargeable to tax in India. Some of the judicial rulings in this context have held that although under the provisions of the Income-tax law the payment of interest by the branch to head office is non-deductible under domestic law being payment to the self, however, such interest is deductible due to computation mechanism provided under the DTAA but it is not taxable in the hands of the Bank being income generated from self. The view expressed in the CBDT circular has not found favour in these judicial decisions. If the legal fiction created under the treaty is treated to be of limited effect, it would lead to base erosion. The interest paid by the permanent establishment to the head office or other branch etc. is an interest payment sourced in India and is liable to be taxed und....
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....her similar judicial pronouncements, Hon'ble Parliament amended the law vide Finance Act 2015 and inserted an Explanation as reproduced in para 16 above to restate the parliamentary intent that interest payable by the P.E in India of a non-resident bank to the Head office or any other P.E of such non-resident bank outside India shall be chargeable to tax in India (same shall be deemed to accrue or arise in India) and that this interest income will be in addition to any income attributable to the P.E in India. For charging this interest income, P.E shall be deemed to be a person separate or independent of the Head office. 16.3 Thus, interest paid by the Branch office to Head office is deemed to accrue or arise in India as per Section 9 (1) (v) (c) of the Act read with its Explanation and this position is undisputed w.e.f A. Y 2016-17. 16.4 Article 12 in the India-France DTAA is a specific Article dealing with interest income. The same is reproduced below: so charged shall ARTICLE 12 INTEREST 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. 1 [2. However, such interest ....
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....tablishment or fixed base. In such case, the provisions of article 7 or article 15, as the case may be, shall apply. 6. 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 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....
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....stablishment in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment, then such interest shall bedeemed to arise in the State in which the permanent establishment is situated". Relevant part of the commentary on Para 5 of Article 11 is reproduced below. 26. This paragraph lays down the principle that the State of source of the interest is the State of which the payer of the interest is a resident. It provides, however, for an exception to this rule in the case of interest-bearing loans which have an obvious economic link with a permanent establishment owned in the other contracting State by the payer of the interest If the loan was contracted for the requirements of that establishment and the interest is borne by the latter, the paragraph determines that the source of the interest is in the contracting State in which the permanent establishment is situated, leaving aside the place of residence of the owner of the permanent establishment, even when he resides in a third State 27. In the absence of an economic link between the loan on which the interest arises and the permanent establish....
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....nts are, as far as possible, treated in the same way as subsidiaries. These States may therefore consider that notional charges for dealings which, pursuant to paragraph 2, are deducted in computing the profits of a permanent establishment should be treated, for the purposes of other Articles of the Convention, in the same way as payments that would be made by a subsidiary to its parent company. These States may therefore wish to include in their tax treaties provisions according to which charges for internal dealings should be recognised for the purposes of Articles 6 and 11 (it should be noted, however, that tax will be levied in accordance with such provisions only to the extent provided for under domestic law). Alternatively, these States may wish to provide that no internal dealings will be recognised in circumstances where an equivalent transaction between two separate enterprises would give rise to income covered by Article 6 or 11 (in that case, however, it will be important to ensure that an appropriate share of the expenses related to what would otherwise have been recognised as a dealing be attributed to the relevant part of the enterprise). States considering these alte....
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....17. The AR of the assesee has relied on the decision of the Hon'ble ITAT Bench "I" Mumbai in Assessee's own case for A.Y 2017-18 (ITA NO. 1076 /MUM/2021), decision dated 24.01.2023 and for A.Y 2016-17 (ITA No. 919/MUM/2023), decision dated 18.08.2023 and for AY 2018-19 (ITA NO. 1670/MUM/2022, decision dated 24.01.2023). The relevant part of the decision of the Hon'ble ITAT in case of assessee for A.Y 2017-18 is reproduced below: "19 During the hearing, the learned counsel submitted that the Explanation to section 9(1)(v)(c) of the Act was inserted by the Finance Act 2015 to overcome the decision of the Special Bench of the Tribunal in Sumitomo Mitsui BNP Paribas ITA no. 1076/Mum /2021 ITA no 1670/Mum./2022 Page 14 Banking Corporation (supra). However, even under the provisions of the India France DTAA, the impugned payment has been held to be not taxable by the coordinate bench of the Tribunal in assessee's own case for the assessment year 2004-05. The learned counsel submitted that the taxability of the interest paid by the Indian branch office to the head office/overseas branch is governed by the provisions of Article 12 r/w Article 7 of the India-France DTAA a....
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....pect 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 business profits, becomes relevant for consideration in the present case As per Article 7(1) of the DTAA, the profit of an enterprise is taxable in the other contracting BNP Paribas ITA no. 1076/Mum./2021 ІТА по. 1670/Mum /2022 Page 16 state to the extent it is attributable to the PE Further, Article 7(2) of the DTAA provides that the profit attributed to the PE shall be 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 PE Article 7(3)(b) deals with payment by the PE to the head office of the enterprise and vice versa, and the same reads as under: "(b) However, no such deduction shall be allo....
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.... 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 same, and the fiction of hypothetical independence does not extend to the computation of the profit of the GE/head office The relevant findings of the coordinate bench of the Tribunal, in the aforesaid decision, are as under:- 22. Clearly, the principles for determining the profits of the PE and GE are not the same, and the fiction of hypothetical independence does not extend to computation of profit of the GE. The principles of computing separate profits for the PE and the GE treating them as distinct entities, in the case of Dresdner Bank AG (supra), was in the context of Section 5(2). The separate profit centre accounting approach for the HO does not hold good in t....
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.... 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 Sumitomo Mitsui Banking Corporation (supra) Thus, in view of the above, even though the submission of the Revenue that the amendment by Finance Act 2015, whereby Explanation to section 9(1)(v) of the Act was inserted specifically to overcome the decision in Sumitomo Mitsui Banking Corporation (supra), is accepted, the same would still not lead to taxation of the interest paid to the head office/overseas branches under the provisions of the DTAA Accordingly, in view of aforesaid findings and respectfully following the judicial precedent in assessee's own case cite supra, we direct the AO to delete the add....
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.... with the P.E/Branch Office of BNP Paribas bank in India and interest received by BNP Branch Office from X and Y will be taxable in India as per Article 12 (5) read with Article 7 of the DTAA. In this scenario debt/loan has been negotiated and given directly by the Head Office of BNP to a Company "Z" in India. Branch Office/ P.E of BNP had no role in negotiating and disbursing the loan to "2" in India. Therefore, interest payment made by "Z" to the BNP Head Office is chargeable to tax in India as per Section 9 (1) (v) read with Article 12 (2) of the DTAA at 10 per cent. In this scenario loan is given by Branch Office/P. E of Societe General (resident of France) in India to BNP Branch Office in India. The interest received by Societe General will becovered under Article 12 (5) of the DTAA and income of Societe General will be governed by Article 12 (5) read with Article 7 of the DTAA. 17.3 The paragraph 5 of Article 12 of the DTAA merely provides that in the State of source the interest is taxable as part of the profits of the permanent establishment, there owned by the beneficiary, which is a resident of the other State, if they are paid in respect of debt claims forming p....
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....duced below: "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 and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply" Relevant part of the commentary on Para 4 of Article 11 is reproduced below. 24. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed bath in the State of source and in the State of the beneficiary's residence when the beneficiary has a permanent establishment in the former State. Paragraph 4 is not based on such a conception which is sometimes referred to as "the force of attraction of the permanent establishment". It does not stipulate that interest arising to a resident of a Contracting State from a source situated in....
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....t attributable to the ownership of the debt-claim and the potential exposure to gains or losses from the appreciation or depreciation of the debt claim)." 17.4.1 From the above it is clear that for a debt claim to be effectively connected to a P.E, it (debt claim) must be recorded in the books of the B.O /P. E for accounting purposes, P.E/B. O should have the right to receive the interest and P.E should have economic ownership over the debt claim. 18. From the above examples it is quite clear that the Interest payment of Rs. 19,22,06,830/- being made by the B.O/ P. E in India to H.O. is on the loan/debt which has been advanced/given/disbursed by the H.O. of BNP Paribas to its B.O./P.E. In India. The debt claim appears in the books of H.O. of BNP Paribas in France as the loan advanced to B.O. for carrying out its business in India & BNP H.O. is enjoying the interest income. Therefore, this debt claim is effectively connected to the H.O. of BNP Paribas and provisions of Article 12 (2) will apply for taxing the same in the source state. 18.1 The Hon'ble bench vide para 21 of its order has observed that the payment of interest by the B.O. to the H.O. was claimed as deducti....
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....s and may be to foreign companies operating in India for their business in India. B.O. may also earn income from treasury operations in India. All these streams of income of P.E./ B.O. will be taxable in India as business income of BNP Paribas B.O./P.E. on net basis @ 40%. At the same time H.O. of BNP may have advanced loans to some Indian concern independent of its B.O./P.E. In India and interest income from the same will be taxable in the hands of BNP H.O. under Article 12(2) of the DTAA. As the H.O. and B.O. have the same PAN No. In India, this interest income of H.O. will be included in the same return as filed by the B.O. in India and it is required to be offered as income chargeable to tax @ 10% under para 2 of Article 12 of DTAA. (b) Similarly, H.O. can advance loans to its B.O./P.E. in India besides the capital Infusion & B.O. pays the interest on the same to H.O. This interest income of H.O. is also chargeable to tax @ 10% in the source state i.e. India as per para 2 of Article 12 of the DTAA. (c) Hon'ble bench vide para 22 of the order (for A.Y. 04-05) has also observed that when interest income arises to a H.O./G.E. (general enterprise), even if that be, the ta....
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.... the interest income is beneficial owner thereof, to 10% of the gross amount of interest. There is also no dispute that the interest revenues relating to the India operations of the DZ Bank AG have been offered to tax under article 11, and the matter has reached finality as such. In the assessment order itself, that aspect of the matter has been categorically noted by theAssessing Officer. 18. Coming back to the taxation of interest under article 11, the exception to this scheme of taxability of interest is set out in article 11(5) above. As is so set out in this provision, unless beneficial owner of interest, resident in a contracting state, ie. the foreign enterprise, "carries on business in the other contracting state in which the interest arises, through a permanent establishment situated therein and unless "debt claim in respect of which theinterest paid is effectively connected with such permanent establishment", the exclusion clause under article 11(5) will not come into play. 22. It is also important to bear in mind the fact that the exclusion clause under article 11(5) will be triggered only when the twin conditions that the foreign enterprise carried on business in ....
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....), as longas an income is taxable under any other specific provisions ofthe treaty, such as article 8 (shipping and air transport business income), article 10 (dividends), article 11(interest), article 12 (royalties and fees for technical services), article 13 (capital gains)), and unless it is excluded from the operation of such specific provisions (such as under article 10(4), article 11(5), article 12(5)], it cannot be taxed under article 7. 28. It is only a corollary of the unambiguous position that the DZ Bank AG and DZ Bank India Representative Office are only one taxable unit, that the same income cannot be taxed in the hands of the same assessee twice once under one article of the treaty Le. Article 11, and then under another article of the treaty, Le. Article 7. The scheme of taxability under article 7 and article 11, does not visualize, or permit, such incongruous situations." 18.5.1 in the present appeal interest income paid by B.O to H.O is covered under para 2 of the Article 12 of the France DTAA, same is not effectively connected to the P.E of the B.N.P Paribas in India, therefore, provisions of para 5 of Article 12 are not applicable. In fact, Hon'ble ITAT ....
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....est income in the hands of the assessee before us." 18.7 Reference is also made to the decision of Hon'ble ITAT "I" Bench in case of Marubeni Corporation, ITA No. 10/MUM/2013 for AY 2016-17 wherein the ITAT vide its decision dated 17.06.2022 held that the interest income on loans in the form of supplier's credit given to Indian parties is taxable as per Article 11 (2) of India-Japan DTAA and that the Article 7 does not come into play unless the interest income is attributable to the P.E and that no part of interest income, by any stretch of logic, can be said to be directly or Indirectly attributable to the Indian P.E of the assessee. 18.8 Even para 6 of Article 7 of the India France DTAA clearly states that Para 6 Where profits include items of income which are dealt with separately in other articles of this convention, then the provisions of these articles shall not be affected by the provision of this article." 18.9 It is therefore clear that interest paid by the B.O. of BNP Paribas to its H.O. will be taxed in the contracting state in which it arises (i.e. India) as per para 2 of Article 12 of the DTAA. Provisions of Article 7 of the DTAA do not come into pictu....
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....a-France DTAA." 26. Heard both the sides and perused the material on record. We consider that the similar issue on identical fact has been adjudicated by the coordinate bench of the ITAT in favour of the assessee vide ITA No. 1076/mum/2021. The relevant extract of the decision is reproduced as under: "21. We have considered the rival submissions and perused the material available on record. During the year, the Indian branch office paid interest to its head office and other overseas branches on debt and overdrafts. In the present case, it is undisputed that the various branches of the assessee in India constitute the PE of the assessee under the provisions of the India France DTAA. Further, it can also not be disputed that in terms of section 90(2), the provisions of the Act or the DTAA, whichever is more beneficial to the assessee shall be applicable. Thus, being an entity covered under the provisions of the India-France DTAA, the payment of interest to the head office and other overseas branches was claimed as a deduction by the Indian branch office under the provisions of Article 7(3) of the DTAA. The Revenue, in the present case, has not disputed the deduction claimed by th....
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....vice versa, and the same reads as under: "(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 for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (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 for specific 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 ....
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....does not hold good in the treaty context, because, even if it is an income of the GE as a profit centre, all that is taxable as business profits of the GE is the income attributable 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....
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....ice/overseas branches. As a result, ground no.4 raised in assessee's appeal is allowed." 27. The Ld. DR has referred the Explanation to section 9(1)(v)(c) inserted by way of the Finance Act, 2015 w.e.f 01.04.2016 and Indo- USA DTAA and was of the view that Debt claim can be stated to be effectively connected with the P.E only if debt/loan has been given by the P.E. We consider no merit in the general submission of the assessee for the following reasons:- i. in corresponding to the the Explanation to section 9(1)(v)(c) inserted by way of the Finance Act, 2015 w.e.f 01.04.2016 no change has been made in the India-France DTAA. ii. The provision of Sec.90(2) of the Act provide that 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 and in the case of the assessee. iii. even though the interest paid by the branches (PE) to the head office are taxable as per the provision of Sec. 9(1)(v)(c) of the Act, however, because of beneficial provision of DTAA i.e Article 12(5) such interest received by the overseas head office is not taxable under the provision of DTAA. ....
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....e 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 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 6. Interest shall be deemed to arise in a Contracting State when....
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....the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of one of the Contracting States carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed that permanent establishment the profits 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. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on the basis of an apportionment of the total profits of the enterpri....
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....ssion for specific 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. 4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 5. For the purpose of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 6. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article." 31. It is clear from the provision of Article 7 that the profit of an enterprise shall be taxable only in that contracting state unless the enterprise carries on business in the other contracting state through permanent establishment situated therein. Further Article 7(3) provides deduction of expenses to the permanent establishment and para 7(3)(b) provide that in the case of banking....
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....n offered to tax in the A.Y. under consideration and Rs. 25,38,041/- which has already offered to tax in the return of income filed for the A.Y.2019-20. The relevant part of the submission along with annexures made before the assessing officer on 31.01.2022 is reproduced as under: "During the financial year (FY) relevant to the subject AY i.e. FY 2019-20, BNP recorded an amount of Rs. 68,72,330 in its books of account as 'rental income. The said amount consists of Rs. 43,40,289 (which has been offered to tax during the subject AY) and Rs. 25,32,041 (which has been already offered to tax in the return of income filed by BNP for the AY 2019-20) Further, an amount of Rs. 1,43.249 has been recorded in the books of BNP as 'rental income' during FY 2020-21 but has been offered to tax under the head 'income from house property during the subject AY. Accordingly, while an amount of Rs. 44,83.538 (comprising of Rs. 43.40,289 recorded in books in FY 2019-20 and Rs. 1,43,249 recorded in books in FY 2020-21) has been considered for taxation under the head income from house property', an amount of Rs. 68,72,330 has been reduced from the net profits for the purpose of compu....