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2016 (5) TMI 428 - ITAT MUMBAI

2016 (5) TMI 428 - ITAT MUMBAI - TMI - Non accepting the claim that the rate of tax applicable to domestic companies and/or co-operative banks for Assessment Year 2004-05 is also applicable to the Appellant, in accordance with the provisions of Article 26 (Non-discrimination) of the double taxation avoidance agreement between India and the Republic of France ('India - France tax treaty'- Held that:- The issue is covered, against the assessee as relying on Chohung Bank vs. DDIT [2005 (11) TMI 372 .....

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able 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 ar .....

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fered 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 .....

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me, 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. - Decided in favour of assessee

Remuneration received for marketing services rendered as income accruing to the Appellant - Held that:- CIT(A) was completely in error in proceeding on the basis that income accrues when the services are rendered – even in situati .....

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ued earlier. The very foundation of impugned addition is thus devoid of legally sustainable foundation.

As for the levy of interest, or ALP adjustment for interest, there cannot be any occasion to levy interest unless there is an unreasonable delay in realisation of debts. The question of delay comes into play when liability to pay has crystallized. The liability of interest on account of delay in payment will arise only when there is a liability to pay, and the liability to pay will .....

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r The Appellant : Arvind Sonde For The Respondent : N. Sathyamoorthy ORDER Per Pramod Kumar AM: 1. By way of this appeal, the assessee appellant has called into question correctness of the order dated 26th February 2009, passed by the learned CIT(A), in the matter of assessment under section 143(3) of the Income Tax Act, 1961 ( the Act hereinafter) for the Assessment Year 2004-05. 2. In the first ground of appeal, the assessee has raised the following grievance, the assessee is aggrieved that th .....

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by the various co-ordinate benches in assessee s own case as also in the cases of Chohung Bank vs. DDIT [(2006) 6 SOT 144 (Mum)] and JCIT vs. Sakura Bank Limited [(2006) 100 ITD 215 (Mum)].In this view of this undisputed position and the conclusions arrived at by the learned CIT(A) being in harmony with the views of the co-ordinate benches, we reject the grievance of the assessee. No interference is thus called for. 4. Ground no.1 is thus dismissed. 5. In second ground of appeal, the assessee is .....

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ough it s branch offices. During the course of scrutiny assessment proceedings, the Assessing Officer noted that the India Office of the assessee has paid interest to the tune of ₹ 1,59,32,854/- to it s head offices and overseas branches. It was in this backdrop that the assessee was required to show cause as to why interest so earned by the head office and overseas branches of the assessee not be treated as income of the assessee and brought to tax, in it s hands, in India. It was explain .....

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His reasoning, in support of this action, is as follows: 6.3 I have considered the submissions of the assessee and the same are not acceptable on the basis of the following arguments. 6.3.1 Under the treaty, the income of a non-resident is characterized under the various head like business income, royalty, interest, fees for technical services, dividend etc. In case of business profits, income is to be computed only if the non-resident has a Permanent Establishment in India and the income attri .....

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he Treaty and which is more beneficial than the provisions of the I.T. Act because if no deduction is allowed, the interest income will be taxable @ 40% and if the benefit is allowed, the same income is being taxed @ 10%. The CBDT circular No. 740 is dearly applicable to this case. Reliance can also be placed on the commentary of Klaus Vogel in his book Klaus Vogel on Double Taxation Conventions-Third Edition" at para no.89 and 90 of page no. 750 which is reproduced as under: 89(b) Rule: Un .....

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ent establishment (or a fixed base) and on the tatter's bearing the interest. Article 11(5) presupposes that the interest will reduce the profits to be taxed in the State of Permanent Establishment and that it will thus reduce that State's tax revenue. This loss is meant to be compensated by the arrangement in Article 11(2), which leaves taxation of interest to that State, as to the terms of Permanent Establishment. The argument of the assessee regarding Article 7 are not applicable beca .....

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o role to play the assessee is not required to file two separate returns for business income and royalty income. There will be only one return and one assessment but for the purpose of computation of income, branch is a separate entity and Head office is another entity. 7. Aggrieved, assessee carried the matter in appeal before the learned CIT(A) but without any success. Learned CIT(A) upheld the addition made by the Assessing Officer. While doing so, he relied upon the observations made by a co .....

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-ordinate bench decision in the case of DCIT vs. British Bank of Middle East [(2008) 19 SOT 730 (Mum)] which also dealt with interest income received by an Indian branch of a foreign banking company from it s head office and overseas branches. Relying upon these judicial precedents learned CIT(A) confirmed the impugned addition of ₹ 1,59,32,854. The assessee is aggrieved and is in further appeal before us. 8. We have heard the rival contentions, perused the material on record and duly cons .....

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e us, the assessee abandoned it s plea that in terms of the India Germany DTAA [(1997) 223 ITR (St.) 1307], the income of ₹ 5,17,39,005 on account of interest received from head office and other branches of the assessee could not be taxed in the hands of the assessee and that in response to our specific question, …… (learned counsel) stated at the bar the assessee does not seek any treaty protection and would like this grievance to be adjudicated upon in the light of the prov .....

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herefore, required to be dealt with on standalone basis. The reliance on British Bank of Middle East decision (supra) thus is equally misplaced. The reasoning adopted by the first appellate authority was thus wholly devoid of legally sustainable basis.It is also important to bear in mind the fact that the decisions relied upon by the learned CIT(A) deal with the taxability of interest received by a PE from the GE (i.e. interest received by India branch of a foreign company from it s head offices .....

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ved by the Indian PE from the overseas GE does not necessarily hold good, for the converse situations, i.e. interest paid by the Indian PE to the overseas GE. We will deal with this aspect of the matter, while dealing with the core contention of the Assessing Officer, in the analysis which is to follow. 10. We have noted that there is no dispute about deductibility of the interest payments in question in the computation of income of the assessee from it s permanent establishment in India. The co .....

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he PE, corresponding addition will be made in the hands of the foreign branches or head office, as the case may be. A deduction thus allowed to the PE, if revenue s contention is to be upheld, will be completely profit neutral. 11. The approach so adopted by the revenue authorities, on the first principles, is contrary to the scheme of the tax treaties. 12. The fiction of hypothetical independence of a PE vis-a-vis it s GE and other PEs outside the source jurisdiction is confined to the computat .....

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te enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment . This fiction comes into play for the limited purposes of computing profits attributable to permanent establishment only and is set out under the specific provision, dealing with computation of such profits, in the tax treaties, including in the Indo French DTAA. There is nothing, therefore, to warrant or justi .....

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14. As a corollary to the above position, the observations made in the Dresdner Bank s case (supra) to the effect that since there are no specific legislative provisions to keep pace with this aspect of increased cross-border commerce, by providing for mechanism to compute profits accruing or arising in India in the hands of the foreign entities, the profits attributable to Indian PE of foreign enterprise are required to be computed in terms of general provisions of the IT Act, and the normal a .....

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007) 291 ITR 482 (SC)], do not apply to the treaty situation such as we are dealing with at present. On both of these occasions, before the coordinate bench as also before Hon ble Supreme Court, these observations were made in the context of ascertainment of profits under the scheme of the Income Tax Act, 1961. That s not the situation in the treaty situation, and, as per the mandate of Section 90, the provisions of the Income Tax Act cannot be thrust upon the assessee unless these provisions ar .....

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d, once an enterprise is found to be carrying on the related business or profession through a permanent establishment or a fixed base in the other contracting state, the scheme of taxability on the gross basis, as implicit in the taxation of dividend, interest, royalties and fees for technical services, and other incomes, under the tax treaties, comes to an end. In Indo French DTAA, for example, articles 11(6), 12(5), 13(6) and 23(2) provide so. 16. The incomes, so relatable to the PE, are then .....

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ibility of, and taxation of, intra GE interest is carved out in the relevant treaty provision itself. Article 7(3)(b) of the Indo French DTAA provides as follows: (b) However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other righ .....

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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. [Emphasis, by underlining, supplied by us] 18. In view of the above specific provision, interest payments to the GE or other intra GE units abroad is fully deductible. This provision, however, is banking .....

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no specific reference to taxability of interest received from the GE in the hands of the PE, as in the case of Indo French DTAA. What we have before us is a peculiar situation in which interest received from the GE, despite specific provision to that effect in article 7(3)(b), is not treated as taxable on the basis that interest credit in this regard is to be taxed on the basis of logic flowing from judicial precedents in the cases of CIT Vs Sir Kikabhai Premchand [(1953) 24 ITR 506 (SC)] and B .....

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of the taxability under the domestic tax law and the treaty provisions on the same item in the same profit and loss account though appearing on different sides, i.e. debit and credit. Article 7(3)(b) of Indo French DTAA is thus partly applied and partly not applied. That s what a series of coordinate benches, following the five member bench in the case of Sumitomo Mtsui Bank Corp (supra), have held to be permissible. 20. The peculiarities of Indo French DTAA do not, however, mitigate the overal .....

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the decision of a five member bench of this Tribunal in the case of Sumitomo Mitsui Banking Corp vs DDIT [(2012) 16 ITR (Tribunal) 116 (Mum)] is overruled as yet. To that extent, the provisions of the domestic law, having been held to be more beneficial to the assesses, hold the field. 21. It is also important to bear in mind the fact that a deduction, in respect of an internal charge, as is the inherent nature of an intra GE interest payment, being allowed in the computation of income attribut .....

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ing observations: Since my early days of teaching international tax law I have tried to explain to students the relationship between a PE and the general enterprise of which the PE is a part, as that of an egg and the yolk it contains. I have further explained that, with regard to income attribution to PEs, the OECD Model does not require that a general enterprise is divided into two separate parts - a head office and a PE - and that, therefore, an internal charge borne by a PE will not yield in .....

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g 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 (supra), was in the context of Section 5(2). 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 ta .....

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s 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 profit .....

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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 ₹ 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 Corp (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 .....

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be upheld. 24. Ground No. 2 is thus allowed. 25. In ground nos.3 & 4, which we will take up together, the assessee has raised the grievance that the CIT(A) erred in holding that the remuneration aggregating ₹ 14,661,695, received for marketing services rendered, as income accruing to the Appellant in Assessment Year 2004-05 even though the amount was crystallised only in Assessment Year 2005-06 and in charging interest on remuneration for marketing services received in financial year 2 .....

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t the learned AO erred in levying interest on the remuneration for marketing services, amounting to ₹ 9,89,176, in financial year ('FY') 2003-04, as opposed to in FY 2004-05, as was directed by the Transfer Pricing Officer vide her letter dated June 1, 2006. 26. The relevant material facts are like this. During the course of assessment proceedings, the Assessing Officer noted that the assessee had signed a transfer pricing agreement with it s Singapore branch for the marketing serv .....

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year (i.e. year ended 31st March, 2004) but it is shown as income of the next year, i.e. year ended 31st March, 2005. It was also noted that even though the amount has been paid to the assessee after such a long time after the end of financial year ended 31st March, 2004, but no interest has been charged on the overdue amount. It was in this backdrop that the Assessing Office made an addition of ₹ 1,46,61,695/- being remuneration for marketing services rendered during the relevant previou .....

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i.e. Assessment year 2004-05. The income accrues as and when the services are provided. There is no other contingencies available to show that the income has not accrued. The appellant is following the mercantile system of accounting and hence the income is taxable in this assessment year. The TPO and the AO has very elaborately discussed the issue and come to the correct decision. I completely concur with the decision. Further Transfer Pricing Regulations are in force for this assessment year. .....

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al matrix of the case in the light of applicable legal position. 29. In our considered view, learned CIT(A) was completely in error in proceeding on the basis that income accrues when the services are rendered - even in situation in which consideration for services so rendered is not finalised. Unless the consideration for services is finalised between the parties, income from such services cannot even be quantified, and obviously quantification of income must precede it s accrual. It is an undi .....

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