2012 (4) TMI 80 - ITAT MUMBAI

Indo-Japan Treaty – Japanese Banking company having branch offices in India – loan advanced by HO to PE on which interest has been provided by the PE - deductibility of interest payable to the H.O. and other Overseas Branches in the hands of branch offices in India - taxability of interest payable by PE in the hands of Head Office in India – deduction of tax at source from interest payments – Held that:- Although interest paid to the H.O. 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 article 7(2) & 7(3) of the Indo-Japanese treaty read with paragraph 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 or relevant tax treaty. Accordingly, no liability for deduction of tax at source. Same is held for interest payments made to overseas branches – Decided in favor of assessee.