733. Taxability of interest remitted by branches of banks to the head office situated abroad, under the Foreign Currency Packing Credit Scheme of Reserve Bank of India
1. The Reserve Bank of India has introduced a Foreign Currency Packing Credit Scheme (FCPCS) for Indian exporters. Under this scheme, the Authorised Dealers in India can arrange for lines of credit from abroad for providing preshipment credit to Indian exporters at internationally competitive rates of interest. Such credit can also be arranged by Indian branches of foreign banks from their head offices or any other branch abroad.
2. References have been received seeking clarification as to whether interest remitted by a branch in India to its head office or a branch abroad on the lines of credit arranged under this scheme would be chargeable to tax in India and whether tax would have to be deducted at source in terms of section 195 of the Income-tax Act, 1961.
3. It is clarified that the branch of a foreign company/concern in India is a separate entity for the purposes of taxation. Interest paid/payable by such branch to its head office or any branch located abroad would be liable to tax in India and would be governed by the provisions of section 115A of the Act. If the Double Taxation Avoidance Agreement with the country where the parent company is assessed to tax provides for a lower rate of taxation, the same would be applicable. Consequently, tax would have to be deducted accordingly on the interest remitted as per the provisions of section 195 of the Income-tax Act, 1961.
Circular : No. 740, dated 17-4-1996.