Bank of America National Association Vs CIT (ITAT Mumbai)
Summary: Bank of America National Association, a resident of the United States of America carrying on banking business through branches across the world, had five Indian branches at Mumbai, New Delhi, Kolkata, Chennai and Bangalore during AY 2013-14. The assessee filed its return of income on 25 November 2013 declaring total income of ₹817,13,21,220. The return was selected for scrutiny, and the Assessing Officer issued a draft assessment order dated 22 February 2017 under section 144C read with section 143(3) of the Income-tax Act, 1961.
The Commissioner of Income Tax (International Taxation)-I, Mumbai subsequently examined the assessment record and initiated proceedings under section 263 through notice dated 20 March 2019. The CIT considered the assessment order erroneous and prejudicial to the interests of the Revenue on the ground that the Assessing Officer had not made the required inquiry regarding interest paid by the Indian branches to the head office and overseas branches. The CIT also considered the Explanation introduced to section 9(1)(v)(c) by the Finance Act, 2015, effective from 1 April 2016, to be retrospective and held that the interest was taxable in India.
The CIT accordingly set aside the assessment order and directed the Assessing Officer to make a fresh assessment for AY 2013-14 and examine the taxability of interest paid by the Indian branch permanent establishments to the head office and overseas branches. The CIT observed that such interest was taxable at 10% under section 9(1)(v)(c) read with Articles 11(2)(a) and 14(3) of the India-USA DTAA.
The assessee challenged the revision order before the ITAT Mumbai.
The assessee submitted that the issue concerning interest paid by the Indian branches to the head office and overseas branches had already arisen in earlier assessment years. According to the assessee, the Assessing Officer had followed the consistent approach adopted in earlier years and the decision of the Special Bench of the Tribunal in Sumitomo Mitsui Banking Corporation. The assessee contended that the Assessing Officer had considered the relevant records and submissions and had taken a possible view, so the proposed revision under section 263 amounted to a change of opinion.
The assessee also relied upon the Tribunal’s decision in DCIT Vs BNP Paribas SA, ITA No. 1689/Mum/2018 for AY 2012-13, under which the operation of the Explanation introduced to section 9(1)(v)(c) by the Finance Act, 2015 was held to be prospective.
The Department submitted that the Indian branches constituted permanent establishments of the assessee and that the assessee was claiming deduction for interest paid by the Indian branches to the head office and overseas branches while seeking to avoid taxability of the corresponding interest received by those offices. The Revenue contended that the Assessing Officer had accepted the assessee’s position without making the necessary inquiry and that the assessment order was therefore erroneous and prejudicial to the interests of the Revenue.
The Tribunal noted that the assessment order dated 22 February 2017 had dealt with interest income of ₹207,05,49,598 earned by the head office/overseas branches from Indian clients on external commercial borrowings attributable to the Indian branches under the force of attraction rules. The CIT, however, focused on the separate interest amount of ₹1,86,06,181 paid by the Indian branches to the head office/overseas branches and held that the Assessing Officer had failed to inquire into its taxability.
The Tribunal considered the Special Bench decision in Sumitomo Mitsui Banking Corporation. The Special Bench had held that although interest paid by an Indian permanent establishment to its head office was not deductible as expenditure under domestic law as a payment to self, it could be considered in determining profits attributable to the permanent establishment under the applicable treaty. It also held that the interest could not be taxed in India in the hands of the foreign enterprise as a payment to self. The same position was stated to apply to interest paid by an Indian branch to branch offices abroad.
The Tribunal further considered the amendment introduced by the Finance Act, 2015 through Explanations to section 9(1)(v)(c), effective from 1 April 2016. The Tribunal noted the view in DCIT Vs BNP Paribas SA that the amendment operated prospectively. It also noted that the CBDT position referred to in the material made the amendment applicable from AY 2016-17 onwards. Accordingly, for AY 2013-14, the amendment could not be applied to bring the interest income to tax.
The Tribunal also observed that the issue had consistently been decided in favour of the assessee in preceding assessment years. The Tribunal referred to the assessee’s own case for AY 2011-12 in ITA No. 444/Mum./2017, dated 29 August 2018, where the same view had been reiterated.
The Tribunal rejected the CIT’s conclusion that the Assessing Officer had made no inquiry. The assessment records of earlier years were available to the Assessing Officer, and the assessee had made submissions explaining why the interest received was not taxable in India in view of the judicial precedents. In those circumstances, the Tribunal held that there was no requirement for the Assessing Officer to conduct further inquiry on the disputed issue. It therefore found the CIT’s conclusion that no inquiry had been carried out to be without basis.
The Tribunal also relied upon the decision concerning JP Morgan Chase Bank NA, where, in similar circumstances, the order passed under section 263 had been quashed. The Tribunal noted that the assessment order could not be treated as erroneous merely because the Assessing Officer had followed the position supported by earlier years and judicial precedents.
The Tribunal held that the condition of the assessment order being erroneous had not been fulfilled. It found the CIT’s revision order under section 263 unsustainable in law and quashed the order passed under section 263. The assessment order passed by the Assessing Officer was restored. Consequently, the appeal filed by Bank of America National Association was allowed. The order was pronounced in the open Court on 26 August 2022.
The supplied material therefore records that, for AY 2013-14, the Tribunal did not sustain the revision under section 263 concerning the taxability of interest paid by the Indian branches to the head office and overseas branches, particularly in view of the prevailing judicial position, the prospective operation of the Finance Act, 2015 amendment, and the inquiry and material available before the Assessing Officer.
Cases Discussed
- Bank of America National Association, ITA No. 444/Mum./2017, dated 29th August 2018
- DCIT Vs BNP Paribas SA, ITA No. 1689/Mum/2018, AY 2012-13
- JP Morgan Chase Bank NA, ITA No. 3747/Mum/2013, AY 2012-13
- Sumitomo Mitsui Banking Corporation Vs Deputy Commissioner of Income-tax, [136 ITD 66 (Bom)(SB)]
A TaxGuru publication also discusses the Finance Act, 2015 amendment and the interest-taxability issue. Explanatory Notes to Provisions of Finance Act, 2015 – TaxGuru
FULL TEXT OF THE ORDER OF ITAT MUMBAI
