If no tax is deductible under section 195(1), section 40(a)(i) of the IT Act will not come in the way of the appellant claiming such deduction from its income: Barclays Bank Plc case
In Barclays Bank Plc, Mumbai vs. Addl. DIT, Mumbai (ITAT Mumbai) [I.T.A./584/Mum/2011 and I.T.A./4235/Mum/2014, decided on 12.01.2018], assessee-company was engaged in the business of structuring of asset liability, risk management services, underwriting for domestic rupees/debt instruments in India through the investment banking its returned incomes, assessed incomes, etc, for the captioned year were summarized as under:-
|A.Y.||RoI filed on||Returned Income||Assessment Date||Assessed Income|
One of the ground of appeal was about disallowance of interest paid to the head office(HO)/overseas branches on deposits placed with the assessee under section40(a)(i) of the Act. During the assessment proceedings, the AO found that the assessee had paid interest of Rs.2.99 crores to the HO/overseas branches (OB.s) on deposit placed with it by those entities, that it had debited the interest payment to the P&L account for the year under appeal ,that it had claimed a deduction in respect of the same. On being queried as to whether tax was deducted at source on the said interest payment, the assessee admitted that no tax was deducted on the payment made to HO/OB.s. Referring to the Circular No.740 of 1996, issued by the CBDT, the AO disallowed the claim made by the assessee for non deduction of tax at source.
Against the order of the AO the assessee preferred an appeal before the First Appellate Authority (FAA) and made elaborate submissions. After considering the available material, he relied upon the order of the Special Bench of the Tribunal delivered in the case of Bank of Tokyo Mitsubishi Ltd. and ABN AMRO Bank NV (98TTJ295) and held that the payment of interest was not allowable as deduction because the assessee had not deducted tax at source while making the payment of interest. Finally, he dismissed the appeal filed by assessee.
Before ITAT, Mumbai, the Authorised Representative (AR) stated that the order of the Tribunal, relied upon by the FAA was reversed by the Hon’ble Calcutta High Court. The AR further argued that the assessee was not required to deduct tax at source, that the FAA was not justified in considering interest portion for calculating the disallowance. He relied upon the case of Bank of Sumitomo (136 ITD 66); Bank of Tokyo(152 ITD 796) and the case of Bank of Tokyo Mitsubishi UFJ Ltd, (IT Appeal no.604 of 2015 of the Hon’ble Delhi High Court, dtd. 08.04.2016).The Departmental Representative(DR)supported the order of the FAA.
The learned Members of the Mumbai ITAT found that in the case of ABN Amro Bank NV(343 ITR81)the Hon’ble Calcutta High Court had dealt with the identical issue.
Facts of the case were that the assessee was a Netherlands company and its principal branch office was in India, that in the course of its banking activities, the branch office in India remitted substantial funds to its head office as interest. On appeal, two questions were raised:
(i) whether interest payment made by the branch office in India to its head office abroad was to be allowed as a deduction in computing the profits of the assessee’s branch in India, and
(ii) whether in making such payments to the head office, the branch office in India was required to deduct tax at source under section 195 of the Act. Deciding the issue of non deduction of tax at source, the Hon’ble Court held as under:
“23. According to the Revenue, under section 195(1), the appellant’s head office is to be treated as a foreign company. When the appellant remitted interest to such head office, it ought to have deducted tax under section 195(1). Having not so deducted the appellant is not entitled to claim the benefit, of such deduction, under section 40(a)(i).
24. Under article 7 read with definition of article 5, the permanent establishment is to be taken as an assessee for the purpose of computation of business profits. Further, under sub-article (3)(b) of article 7 payment of interest can be claimed as a deduction.
25. An unnecessary complication has been created by the interpretation made of section 40(a)(i)of the Income-tax Act read with section 195 of the Act by both the appellant and the respondents. First of all, a proper meaning has to be ascribed to the expression “chargeable” under the provisions of this Act. Section 195(1) says that, if any interest is paid by a person to a foreign company, which interest is chargeable under the provisions of this Act tax should be deducted at source. The word “chargeable” is not to be taken as qualifying only the phrase “any other sum” only but it qualifies the word “interest” also. This interpretation is supported by the phrase in parenthesis, namely, not being income chargeable under the head “Salaries”. Therefore, the meaning of this section is that such interest must be chargeable under the provisions of this Act. To simplify the matter, this interest must be accounted for or credited in the account of some person who is chargeable under the Act. In other words, this remittance of interest must result in an income which is chargeable under the Act. In those circumstances, tax may be deducted at source. But where this interest is not so chargeable, no tax is deducted. In this case, by virtue of the above Convention, the head office of the appellant is not liable to pay any tax under the Act. Therefore, in our opinion, there was and still is no obligation on the part of the appellant’s said branch to deduct tax while making interest remittance to its head office or any other foreign branch.
26. Therefore, in the circumstances, there is no scope for any argument that for the purpose of computation of expenditure the branch and the head office are to be taken as separate entities but for the purpose of payment of tax to be deducted at source on interest payment, it is to be taken as one bank and no deduction is to be made as sought to be made by the learned counsel for the appellant. Such contentions are totally unfounded, in our opinion. The permanent establishment and the head office have to be taken as separate entities for all purposes. But in the making of payment of interest no tax has to be deducted under section 195(1), for the reasons above.
27. Therefore, if no tax is deductible under section 195(1) section 40(a)(i) of the Act will not come in the way of the appellant claiming such deduction as from its income. Therefore, in the circumstances the appellant would be entitled to deduct such interest paid, as permitted by the convention or agreement, in the computation of its income.
28. In view of our above findings there is no conflict at all between the agreement and the Act. It is only the tax authorities, the Tribunal and to some extent the parties who have put a very complicated meaning to the provisions in the Convention read with the Act.”
Respectfully following the above judgment, the ITAT, Mumbai decided the abovementioned ground of appeal in favour of the assessee.