TaxTMI 
TaxTMI 
2022 (8) TMI 1608
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....s the 'learned AO') [hereinafter referred to as the 'Assessment Order'] for AY 2013-14 as erroneous and prejudicial to the interest of the revenue; ● erred on facts in concluding that the learned AO has made no inquiry regarding the taxability/ deductibility of the interest paid by the Indian branches of the Appellant to its head office and overseas branches; and ● erred in setting aside the aforesaid Assessment Order with directions to the learned AO to make a fresh assessment and examine the taxability of interest paid by the Indian branches of the Appellant to its head office and overseas branches. 2. Without prejudice to Ground No. 1, the learned CIT has erred in considering the interest paid by the Indian branches of the Appellant to its head office and overseas branches as chargeable to tax under Article 11(2)(a) and Article 14(2) of the Double Taxation Avoidance Agreement between India and the United States of America and by treating the amendment in section 9(1)(v) of the Act as being retrospective thereby disregarding the Explanatory Note to Finance Act 2015 and Circular 19 of 2015. 3. Without prejudice to Gro....
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....gly, he set aside impugned assessment order and directed to make a fresh assessment order observing as under: "15. As in the instant case, the AO has failed to make any inquiry in relation to the issue of income arising to the assessee on account of payment of interest by the Indian branch PE to HO/Overseas branches, which has been borne by the Indian branch PE as an expense, the assessment order is erroneous and prejudicial to the Revenue, within the meaning of section 263(1) of the Act. It is also evident that the interest paid by Indian branch PE to its HO/Overseas branches is taxable in India as income of the assessee @ 10% u/s 9(1)(v)(c) of the Act read with Article 11(2)(a) and 14(3) of the India-USA DTA. Therefore the assessment order made u/s 143(3) read with section 144C(3) of the Act by the AO is set aside and the assessing officer is directed to make a fresh assessment for AY 2013-14 and examine the taxability of the interest income of the assessee in light of the discussion above in relation to the interest paid by the Indian branch PE of the assessee to its HO/Overseas branches which is also borne by the Indian branch PE as expense, after making due inquiries ....
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....ng DTAA and Income-tax Act simultaneously, which should not be permitted in law. He submitted that order of the Assessing Officer in accepting the version of the assessee, without making an enquiry is erroneous to that extent of not assessing the interest income under reference. 8. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. In the case, the Assessing Officer in the impugned assessment order dated 22/02/2017 has proposed addition of interest income of Rs.207,05,49,598/- earned by the head office/overseas branches from the Indian clients on external commercial borrowing (ECB) issued as attributable to Indian branches in view of force of attraction rules and proposed to tax at the rate of 20% along with applicable surcharge and cess under the provision of section 115A of the Act read with Article 7(3) of DTAA. 8.1 But the Ld. CIT after perusal of records observed that from Form No. 3CEB of Income-tax Rules, 1962 (in short 'the Rules') that Indian branches, which are permanent establishment of the assessee in India, has made payments of Rs. 1,86,06,181/- as interest to the head office/overseas branche....
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....aty 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 Head Office. At the time of hearing before us, the learned representatives of both the sides have also not made any separate submissions on this aspect of the matter specifically. Having held that the interest paid by the Indian branch of the assessee Bank to its head office and other branches outside India is not chargeable to tax in India, it follows that the provisions of section 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the PE, the question of disallowance of the said interest by invoking the provisions of section 40(a)j) does not arise. Accordingly we answer question No.1 referred to this Special Bench in the negative i.e. in favour of the assessee and question No. 2 in affirmative i.e. again in favour of the assessee." 8.5 The issu....
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....4/Mum/2017, dated 29th August 2018, the Tribunal again reiterated the same view. Thus, as could be seen from the facts on record, the issue has been consistently decided by the Tribunal in favour of the assessee up to the assessment year 2011-12. As regards the contention of the Department that as per the provision contained under section 9(1)(v)(c) of the Act interest income is taxable in India and the applicability of such provision has been ignored by the appellate authority, we must observe, this particular aspect relating to the applicability of section 9(1)(v)(c) of the Act was also under consideration of the Special Bench in case of Sumitomo Mitsui Banking Corporation (supra) and the Special Bench clearly and categorically held that since the interest payable by the Indian Branch to the Head Office is a payment to self, it cannot be brought to tax by relying upon the provision of section 9(1)(v)(c) of the Act. Therefore, insofar as the applicability of the aforesaid provision is concerned, it stands settled in favour of the assessee by the decision of the Tribunal, Special Bench, referred to above. Moreover, by virtue of explanation to section 9(1)(v)(c) of the Act, it is pr....
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....re available with the Assessing Officer and further assessee also made submission making its claim that said interest received was not taxable in the hands of the PE in India in view of the judicial precedents. In background of such facts and circumstances, in our opinion, the Assessing Officer was not ought to have carry out further enquiry on the issue in dispute, therefore the finding of the Ld. CIT that no enquiry has been carried out by the Assessing Officer on the issue in dispute is without any basis and fallacious. The explanation below section 263 of the Act is also not applicable over the facts of the case. The said explanation, prescribe that the assessment order is deemed to be erroneous insofar as prejudicial to the interest of the revenue if the Assessing Officer has not carried out the inquiries which ought to have been carried out in the facts of the case. In the case, in background of the earlier years and submission of the assessee, there was no requirement of carrying out further inquiries on the issue-in-dispute. 8.11 The Tribunal in the case of JP Morgan chase Bank NA in ITA No. 3747/Mum/2013 for assessment year 2012-13 in identical circumstances quashed the....
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....itomo Mitsui Banking Corporation (supra). The Special Bench after considering all the aspects of the issue, including the interplay between the provisions of the Act and the Tax Treaty, held that since the interest paid by Indian Branch to foreign Head Office/overseas branches is in the nature of payment made to self, it will be governed by the principle of mutuality, hence, would not be taxable under the provisions of the Act. The Special Bench observed, that since the provisions of the Act are more beneficial to the assessee qua the interest income, it will prevail over the provisions of the Tax Treaty. In this context, the Special Bench decision also referred to the CBDT Circular no.740, dated 17th April 1996, and held that if the interest income is not chargeable to tax under the provisions of domestic law, it cannot be brought to tax by way of a Board Circular. The ratio laid down by the Special Bench in the decision referred to above, squarely applies to the facts of the present case. Inasmuch as, the issue of taxability of interest received by a foreign bank from its Indian branch, in our considered opinion, is squarely covered by the aforesaid decision of the Special Bench ....