Case Law Details
Interest was paid by assessee Indian branch of a Belgian bank to its head Office on subordinate debts and term borrowing. HELD, in view of domestic law as well as treaty same would not be chargeable to tax in India and thus, TDS provision of section 195 would not be attracted and, hence, question of disallowance under section 40(a)(i) did not arise.
Next ground of appeal is about disallowance of interest paid by the assessee to HO amounting to Rs.8.57Crores.During the assessment proceedings, AO found that interest of Rs.8,56,15, 525/- was paid by the assessee to HO on subordinate debts and term borrowing.That it had claimed the interest as an expense of the branch. However, the said interest was offered for taxation in the hands of the HO as per the Article 11 of the Indo-Belgium DTTA. Relying on the decision of special bench of Kolkata delivered in the case of ABN AMRO Bank (97 ITD 89),he disallowed the interest paid to HO.
Assessee preferred an appeal before the FAA.After considering the submission of the assessee,he held that AO had followed the decision of special bench of ITAT Kolkata,that he was inclined to agree with the stand taken by the AO ,that such disallowances were upheld by his predecessor for the earlier assessment years,that assessee himself has disallowed an amount of Rs. 43.68 lacs for failure to deduct tax at source u/s. 40(a)(i) of the Act. Finally,relying upon the order of the special bench delivered in the case of ABN AMRO Bank (Supra), he confirmed the disallowances made by the AO.
Before us,AR submitted that order of the special bench of Kolkata in the case of ABN AMRO Bank had been overruled by the Hon’ble High Court of Kolkata.He further relied upon the judgment of Sumitomo Mitsui Banking Corporation (ITA Nos. 5402 and 545 8/Mum/2006) DR supported the order of the FAA.
We have heard the rival submissions and perused the material before us.AO and the FAA had relied upon the order of the special Bench of Kolkata for disallowing the claim of the assessee ,but now the said order has been reversed.We further find that issue in question has been dealt extensively in the case of Sumitomo Mitsui Banking Corporation (supra).While deciding the appeal filed before it ,Tribunal has held as under:
“Keeping in view all the facts of the case and the legal position emanating from the interpretation of the relevant provisions of the domestic law as well as that of the treaty as discussed above, we are of the view that although interest paid to the head office of the assessee-bank by its Indian branch which constitutes its permanent establishment in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the permanent establishment which is taxable in India as per the provisions of article 7(2) and (3) of the Indo-Japanese treaty read with paragraph 8 of the protocol which are more beneficial to the assessee. The said interest, how-ever, cannot be taxed in India in the hands of the assessee-bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domestic law. Even otherwise, there is no express provision contained in the relevant tax treaty which is contrary to the domestic law in India on this issue. This position applicable in the case of interest paid by Indian branch of a foreign bank to its head office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the head office. At the time of hearing before us, the learned representatives of both sides have also not made any separate submissions on this aspect of the matter specifically. Having held that the interest paid by the Indian branch of the assessee-bank to its head office and other branches outside India is not chargeable to tax in India, it follows that the 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 permanent establishment, 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 ques-tion 2 in affirmative, i.e., again in favour of the assessee.
Respectfully, following the same, we reverse the order of the FAA. Ground no 2 is decided in favour of the assessee-bank.
good piece of judgement by proper interpretation of DTTA and indian law pl