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TMI Blog2024 (5) TMI 1405X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Thus, the appeal now stands confined to Question (v) which reads as follows: - "(v) Whether the interest received by the Indian PE on deposit maintained with Head Office/Overseas Branch is not taxable in India?" 3. The aforesaid issue arises in the context of interest received by the Permanent Establishment [PE] of the Bank of Tokyo Mitsubishi UFJ Ltd., now known as MUFG Bank, comprising of branches in India from its overseas branches and Head Office. During the Assessment Year [AY] in question, namely AY 2003-04, that sum was quantified at INR 7,002,160/-. The aforesaid constituted interest earned by the PE in India on balances maintained either with its Head Office or other overseas branches outside India. The taxability of interest received has been answered in favour of the respondent-assessee with the Tribunal observing as follows: - "20. Ground No. 5 of the appeal for Assessment Year 2003-04 of the assessee is with respect to the interest of Rs. 7002160/- received by the Indian PE of the appellant on deposit maintained with the head office and its taxability. Undisputedly in the case the appellant had itself included the interest received by Indian PE on deposits main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (or the part thereof which includes the permanent establishment), whether incurred in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. 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, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprises, 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 toward 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention between that State and a third State which enters into force after the date of entry into force of this Convention, the competent authority of that State shall notify the competent authority of the other State of the terms of the corresponding paragraph in the Convention with that third State immediately after the entry into force of that Convention and, if the competent authority of the other State or requests, the provisions of this sub-paragraph shall be amended by protocol to reflect such terms. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this article. 5. 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. 6. For the purposes of the provisions of the preceding paragraphs of this article, 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. 7. 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." 11. Although Article 7 (2) of the India-Japan DTAA stands framed on lines similar to other treaties while dealing with the principle of attribution, the Protocol to the aforesaid Treaty makes the following significant provisions insofar as interest on monies paid or charged by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eability to tax of the interest received by the Indian permanent establishment from its head office in computing the total income. It is pointed out that the Indian permanent establishment and the head office are one and the same person. It is settled position that one cannot make a profit out of oneself as held by the apex court in Sir Kikabhai Premchand v. CIT (1953) 24 ITR 506 (SC). The impugned order of the Tribunal also places reliance upon the Special Bench decision in the case of Sumitomo Mitsui Banking Corpn. v. Deputy DIT (2012) 16 ITR (Trib) 116 (Mumbai) [SB] ; (2012) 19 taxmann.com 364 (Mum) [SB] to hold that man cannot make profit out of himself and, therefore, the interest received by the assessee from its own head office is not chargeable to tax. (c) So far as the reliance by the Revenue on order dated April 14, 2013, of this court admitting the appeal in Antwerp Diamond Bank N. V. (supra), is concerned, deduction on account of interest paid by the Indian permanent establishment to its head office was in the specific context of articles 7 (2) and 7 (3) of the Indo-Belgium DTAA. The case of Antwerp Diamond Bank N. V. (supra) before the Tribunal was a part of the Spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent factual matrix, viz., specific provision of the DTAA allowing deduction and not under the regular provisions of Income-tax Act. Thus, the fact that the appeal in the case of Antwerp Diamond (supra) is admitted would have no relevance for admitting the present appeal on the proposed question No. 5. It is also necessary to point out that the Tribunal in the impugned order has recorded the fact that the respondent-assessee has admitted before it that to bring about parity, it is not claiming any deduction of interest paid by it to its head office while computing the taxable income. (d) Accordingly, in view of the above settled position that no person can make profit out of itself, the proposed question of law not being substantial, is not entertained." 13. As is evident from the aforesaid passages of the judgment in Credit Agricole, the Bombay High Court had taken note of the indubitable and well settled position of branch offices not being separate personalities or juridical entities and that one person cannot thus profit from itself. Since the receipt of interest was from the Head Office of the respondent-assessee, it was according to Mr. Pardiwalla, the aforesaid principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hes and had pointed out absence of such a specific provision in the Income-tax Act. Considering that there were several disputes on the issue which were pending and likely to arise in future, it was essential that necessary clarity and certainty is provided for in the Income-tax Act. 9.7 Accordingly, the Income-tax Act has been amended to provide that in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India. 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 Income-tax Act relating to computation of total income, determination of tax and collection and recovery would apply. Accordingly, the PE in India shall be obligated to deduct tax at source on any interest payable to either the head of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m conclusion that the branch office would not partake the character or attribute of a separate legal personality, the view as taken by the Tribunal is clearly rendered unexceptional. In any event, it would be the exception carved out in the DTAA with respect to banking enterprises which would govern. 18. At this juncture, we deem it apposite to extract the following passages from the decision rendered by the Supreme Court in Kikabhai Premchand KT v. Commissioner of Income Tax (Central), Bombay (1953 SCC OnLine SC 127):- "10. It is well recognised that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. In the present case disregarding technicalities, it is impossible to get away from the fact that the business is owned and run by the assessee himself. In such circumstances we are of the opinion that is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. Cut away the fictions and you reach the position that the man is supposed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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