TMI Blog2022 (12) TMI 997X X X X Extracts X X X X X X X X Extracts X X X X ..... the same legal entity - HELD THAT:- As in assessee s own case for A.Yrs. 2013-14 and 2014-15 [ 2019 (5) TMI 733 - ITAT MUMBAI] decided tax is not deductible from such interest payable by the PE in India to the overseas head office of a foreign bank and there is no question of making disallowance of such interest expenditure by invoking the provisions of section 40(a)(i) - Decided against revenue. MAT computation u/s 115JB - whether the provisions of Section 115 JB of the Act per se would be made applicable to a foreign company? - HELD THAT:- We find that Article 7(1) of the treaty prescribes that profits that were attributable to the PE would be taxable in India. The manner in which the AO had applied the provisions has the effect of not only bringing to tax the profits that are not attributable to the PE but also has the effect of taxing the other items not in accordance with the provisions of other Articles of the treaty. Five items of income earned by CSSB which was sought to be covered by the ld. AO within the ambit of MAT are not included in the books of accounts drawn up by CSMB in India. Once a particular item is not at all included in the books of accounts which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange Board of India (SEBI) as a Foreign Institutional Investor (FII) and conducts portfolio investments in Indian securities in its capacity as a SEBI registered FII. The assessee has a bank branch office in Mumbai (CSMB) which is registered with the Reserve Bank of India and undertaking banking operations in India. Since CSAG (i.e. assessee) is a tax resident of Switzerland, the assessee has opted for benefit of Indo-Swiss DTAA in respect of income earned by CSSB and CSMB. The CSMB constitutes a fixed place Permanent Establishment (PE) of CSAG (i.e. assessee) in India as provided in Article 5 of the DTAA and it has offered its income under Article 7 of the treaty. During the year under consideration, the assessee has invested in shares / securities of Indian companies and has earned its income from business, short term capital gains, long term capital gains and income from other sources. Additionally, during F.Y.2014-15, the assessee s Dubai Branch (CSDB) received referral fees of Rs.61,71,760/- from CSSIPL and CSFIPL. In the return filed by the assessee for A.Y.2015-16, the assessee has treated referral fees received as business income of CSDB and claimed that the same is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, technical or other consultancy services, including the provision of services of technical or other personnel, but does not include consideration for any construction, assembling, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head salaries‟. At this stage, we may briefly touch upon the nature of the impugned referral fee earned by the assessee. The relevant discussion in the orders of the authorities below reveal that CSDB referred an India resident client to the investment banking division of the Indian company; Indian company worked on the assignment of the issue of Convertible Bonds for the referred client, and 50% of the fee earned by the Indian Company was paid to CSDB in terms of global policy of the group, which is the amount of Rs.18,27,90,578/- in question. In the face of such fact situation, we are unable to appreciate the stand of the Assessing Officer as to why the referral fee‟ is to be construed as fees for technical services‟ as understood for the purposes of the Act. As per the Assessing Officer, the referral fee‟ has been paid by the Indian Company after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstrued to be attributable to assessee‟s PE in India and thus, the DRP rightly applied Article 7 of Indo- Swiss Double Taxation Avoidance Agreement (DTAA) and held the same to be non-taxable in India. The aforesaid conclusion of the DRP is hereby affirmed. Therefore, considering the short point on the basis of which the DRP has allowed the plea of the assessee, we dispose of the aforesaid appeal by affirming the ultimate direction of the DRP. Thus, Revenue fails in its appeal. 3.1. Respectfully following the same, the ground Nos. 1 2 raised by the Revenue are dismissed. 4. The ground No.3 raised by the Revenue is challenging the deletion of addition made on account of taxability of interest income in respect of transaction between two branches of the same legal entity. 4.1. We have heard rival submissions and perused the materials available on record. We find that Mumbai branch of the assessee paid interest of Rs.2,787/-, Rs.7,831/- and Rs.5,18,534/- to head office at Zurich, London branch and Singapore branch respectively. At the outset, the ld. AR pointed out that this issue is squarely covered in favour of the assessee by the decision of the Special Bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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)(i) 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. 4.2. The ld. DR vehemently argued that the wordings of Double Taxation Avoidance Agreement between India and Japan which was considered in Sumitomo ruling is different from that of DTAA between India and Switzerland which is applicable to the assessee in the instant case, in so far as there is no provision analogous to paragraph 8(c) of the protocol to the India Japan treaty in the India Switzerland treaty. The ld. DR argued that interest is specifically allowed as a deduction as per the protocol of India Japan tax treaty whereas the same is not the case with India Switzerland tax treaty. Thus, he argued that in assessee s case, either the interest paid by CSMB and debited to CSMB s profit and loss account should be disallowed or intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Tribunal in assessee s own case for A.Yrs. 2013-14 and 2014-15 vide order dated 05/03/2019 referred to supra wherein it has been held as under:- 6. As regards the argument of the assessee that payment of interest being a payment to self does not give rise to any income, the AO held that the same is not tenable because of the deeming provisions contained in article 7 of the treaty providing that the income of the branch should be computed as if it is a separate and distinct entity from the non resident. He held that the branch in India thus has to be treated as if it is an entity separate from the main entity for the purpose of computation of income and the provisions of domestic law including section 40(a)(i) will apply accordingly. He held that although the entity is one for the purpose of assessment, these are two separate entities for the purpose of computation of income. He thus held that even though the interest was allowable as deduction in the computation of income of the PE in India, the same was liable to be disallowed as per the provisions of section 40(a)(i) because of the failure to deduct tax on payment of such interest. Accordingly, the claim of the assessee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Indian branches to the head office while computing the profit attributable to the said branches constituting PE of the assessee bank in India was confirmed by the learned CIT(Appeals). He also held, following the decision of the Tribunal in the case of ABN Amro Bank NV (supra), that such interest not being allowable as deduction while computing the income of the Indian branches which constituted permanent establishment of the assessee bank, could not be brought to tax in India as income of the head office of the assessee bank. The addition made by the AO on account of such interest receivable by the head office of the assessee bank while computing its total income chargeable to tax in India therefore was deleted by him. Aggrieved by the order of the learned CIT(Appeals), the assessee and Revenue both have raised their grievance in the respective appeals filed before the Tribunal, which has been projected in the questions referred to this Special Bench for consideration and decision. 9. Shri Percy Pardiwala, learned Senior Advocate, appearing on behalf of M/s Sumitomo Mitsui Banking Corporation, appellant and M/s Bank of Tokyo Mitubhushi UFJ Ltd., intervener opened the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k us through para 7 and 8(1) of the protocol placed at page No. 148 of the Revenue's paper book II. He submitted that this portion of the protocol makes it clear that as per article 7(2) read with article 7(3) of the Indo-Japanese treaty, interest payable by PE in India to the overseas head office is an allowable expenditure while computing the profit attributable to the PE only in case of banking institution. He contended that such interest under the domestic law no doubt cannot be claimed as deduction by the assessee being payment to self but under the relevant treaty, the assessee is entitled to claim deduction as per article 7(2) and 7(3) on account of interest payable by its PE to head office while computing the profit attributable to the PE. As regards the applicability of the provisions of section 40(a)(i) which were invoked by the AO to make a disallowance on account of such interest paid by PE to GE, Shri Pardiwala submitted that the said provisions are attracted only when interest payable by PE in India to the overseas head office of the assessee bank is chargeable to tax in India. He submitted that the issue relating to chargeability of the said interest to tax in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other country can tax all profits that the GE derives from the source country, whether through a PE or not. It was held that it is the act of setting up a PE which triggers the taxability of transactions in the source state. 4.6. Respectfully following the same, the ground No.3 raised by the Revenue is dismissed. 5. The ground No.4 raised by the Revenue is challenging the action of the ld. CIT(A) wherein the ld. CIT(A) had directed the ld. AO to delete five items while calculating book profits u/s.115JB of the Act. The interconnected issue involved therein is whether the provisions of Section 115 JB of the Act per se would be made applicable to a foreign company, for which the assessee has raised the grounds in its cross objections. 5.1. We have heard rival submissions and perused the materials available on record. The ld. AO sought to invoke the provisions of Section 115JB of the Act as the assessee being a foreign company during the course of assessment proceedings. The assessee vide letter dated 06/11/2017 stated that CSSB and CSMB are both branch offices of CSAG (assessee herein) as such they form part of the same legal entity i.e. CSAG (within the meaning of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Authority of Advance Rulling, New Delhi was approved by the Hon ble Supreme Court in the case of Castleton Investment Ltd., vs. Director of Income Tax (International) Taxation, Mumbai reported in 379 ITR 363. We have perused the decision of the Hon ble Supreme Court in 379 ITR 363. For the sake of convenience, the said order is reproduced below: 1. Interlocutory application for intervention is allowed. 2. In these appeals order of the Authority for Advance Rulings (Income Tax), New Delhi, (hereinafter referred to as 'AAR') passed on 14.08.2012 is questioned. The basic issue, which is raised, pertains to the applicability of Section 115JB of the Income Tax Act, 1961 (hereinafter referred to as 'Act') in respect of foreign company which does not have any Permanent Establishment (PE) in India. 3. Mr. Harish Salve, learned senior counsel appearing for the appellants, has brought to our notice a circular dated 02.09.2015 issued by the Central Board of Direct Taxes, Ministry of Finance, Government of India. It states that Minimum Alternate Tax (MAT) provisions will not be available to FIIs and FPIs not having the business/Permanent Establishment in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not be applicable to a foreign company if- the foreign company is a resident of a country having DTAA with India and such foreign company does not have a permanent establishment within the definition of the term in the relevant DTAA, or the foreign company is a resident of a country which does not have a DTAA with India and such foreign company is not required to seek registration under section 592 of the Companies Act 1956 or section 380 of the Companies Act 2013. An appropriate amendment to the Income Tax Act in this regard will be carried out. 5. Learned Attorney General has made a statement at the Bar that the Government would abide by the decision which has been taken in the aforesaid Circular dated 02.09.2015 and Press Release dated 24.09.2015. 6. Learned counsel for the parties agree that in view of this submission, the present appeals can be disposed of in terms thereof. 7. Ordered accordingly. 8. We may place on record that one more issue has been decided in the impugned opinion of the AAR which relates to the applicability of the transfer pricing provisions, i.e., Sections 90-95 to the foreign companies. However, Mr. Salve submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x payable on the total income chargeable to tax is less than seven and one-half per cent. of book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the. amount of income-tax at the rate of seven and one-half per cent. This amendment will take effect retrospectively from 1st April, 2001, and will, accordingly, apply in relation to the assessment years 2001-2002 and subsequent years. 5.8. This makes the intention of the legislature very clear that MAT provisions are applicable only to domestic companies and not to foreign companies. 5.9. We are conscious of the fact that an amendment has been brought in Section 115JB vide insertion of Explanation- 4 by Finance Act, 2016 with retrospective effect from 01/04/2001. The said Explanation-4 is reproduced below:- Explanation 4.-For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if- the assessee is a resident of a country or a specified territory with which India has an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the accounts of foreign company are not prepared in accordance with Part II and Part III of Schedule-VI of companies Act 1956 and their accounts not being laid in Annual General Meeting before the shareholders of the company for approval, we hold that provisions of Section 115JB of the Act cannot be made applicable to a foreign company. 5.11. The Explanation-4 to Section 115JB of the Act could be viewed from another perspective also. This Explanation-4 has been introduced with retrospective effect from 01/04/2001 in the Act, meaning thereby that the retrospective amendment is clarificatory in nature which seeks to address series of orders issued by Authority of Advance Rulling which had held that FPIs are required to pay MAT. Since FPIs do not have PE in India, the retrospective clarification was inserted in the Act to address their concerns and allay their apprehensions that MAT provisions would be applied to them. The amendment does not impose a charge of MAT on foreign companies having PE in India, as the amendment merely provides an exemption for a certain class, it does not imply that everyone outside that class becomes liable to MAT, especially when they were not or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d five items while computing book profits u/s.115JB of the Act. Accordingly, it is also clear that MAT could not be applied even to foreign companies which have PE in India as it would be contrary to the basic foundation of the applicable treaty. 5.15. Moreover, we also find that different tax treatment has been prescribed in India-Switzerland treaty for each of the aforesaid five items of income. For example, Article 11 / Article 12 of the treaty prescribes a tax rate of 10% for interest income and IT support charges earned by the assessee. Similarly, capital gains earned by the assessee are not liable to tax in India by virtue of Article 13(6) of the treaty. Hence, applying the MAT provisions to these items of income would result in assessee being denied the benefits of the treaty. We have already stated that the provisions of Section 90(2) would override provisions of Section 115JB of the Act despite the fact that Section 115JB of the Act is a special section and a complete code by itself. This short aspect is also addressed by Delhi Tribunal in the case of Bank of Tokyo Mitsubishi UFJ Ltd reported in 49 taxmann.com 441 which has been approved by the Hon ble Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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