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The Tax Publishers Insertion of Explanation to Section 9(1)(v) and Payment of interest by an Indian branch to its foreign branch/head office *Facts:* Assessee a Swiss entity was a foreign bank with branch in India. It had taken borrowings from Singapore and London branches and interest was paid to these two branches of the assessee and the same was claimed as expenditure in its books also on its return. Issue arose on the taxability of the same interest in the hands of the foreign entity as the Indian branch created a PE for the foreign branches. It was the plea of the assessee that the logic of attributing income to a PE as per DTAA was only for the limited reason to enable computation and it cannot be extended to a point that whatever is paid as expense by Indian branch to its offshore branches will need to be taxed as income in the hands of the foreign entity in the hands of its PE in India. It would be an impossible scenario. One cannot tax something where payment is to one self. The explanation to Section 9(1)(v) inserted also cannot override the DTAA and bring in a taxing situation for the PE in India for the foreign branches. The same would be the case if Indian branch had lent money to its foreign branches in which case the Indian branch would need to be taxed on the interest as it is income arising or accruing out of India while the foreign PE will get into a neutral position of an income and an equal expense if at all taxed. On higher appeal to ITAT - Held in favour of the assessee that the explanation to Section 9(1)(v) cannot fasten tax liability in the hands of the PE in India. One cannot be taxed on the income of oneself. The principle of mutuality as held in Sumitomo Mitsui Banking Corporation v. DDIT (2012) 145 TTJ 649 (Mum.)(SB) : 2012 TaxPub(DT) 2235 (Mum-Trib) will also apply into the DTAA as well. *Applied:* Sumitomo Mitsui Banking Corporation v. DDIT (2012) 145 TTJ 649 (Mum.)(SB) : 2012 TaxPub(DT) 2235 (Mum-Trib) BNP Paribas v. ACIT, in ITAs No. 1076/Mum./2021 and 1670/Mum./2022, vide order dated 24-1-2023 *Ed. Note:* The fine print discussion on this is worth noting. Sometimes amendments are made in the Income tax statute as a knee jerk reaction to certain judicial decisions. Whether the amendments can really plug the gap or meet its ends needs to be seen. *Case:* Credit Suisse AG v. Dy. CIT 2023 TaxPub(DT) 1931 (Mum-Trib)

The Tax Publishers

Insertion of Explanation to Section 9(1)(v) and Payment of interest by an Indian branch to its foreign branch/head office

Facts:

Assessee a Swiss entity was a foreign bank with branch in India. It had taken borrowings from Singapore and London branches and interest was paid to these two branches of the assessee and the same was claimed as expenditure in its books also on its return. Issue arose on the taxability of the same interest in the hands of the foreign entity as the Indian branch created a PE for the foreign branches. It was the plea of the assessee that the logic of attributing income to a PE as per DTAA was only for the limited reason to enable computation and it cannot be extended to a point that whatever is paid as expense by Indian branch to its offshore branches will need to be taxed as income in the hands of the foreign entity in the hands of its PE in India. It would be an impossible scenario. One cannot tax something where payment is to one self. The explanation to Section 9(1)(v) inserted also cannot override the DTAA and bring in a taxing situation for the PE in India for the foreign branches. The same would be the case if Indian branch had lent money to its foreign branches in which case the Indian branch would need to be taxed on the interest as it is income arising or accruing out of India while the foreign PE will get into a neutral position of an income and an equal expense if at all taxed. On higher appeal to ITAT -

Held in favour of the assessee that the explanation to Section 9(1)(v) cannot fasten tax liability in the hands of the PE in India. One cannot be taxed on the income of oneself. The principle of mutuality as held in Sumitomo Mitsui Banking Corporation v. DDIT (2012) 145 TTJ 649 (Mum.)(SB) : 2012 TaxPub(DT) 2235 (Mum-Trib) will also apply into the DTAA as well.

Applied:

Sumitomo Mitsui Banking Corporation v. DDIT (2012) 145 TTJ 649 (Mum.)(SB) : 2012 TaxPub(DT) 2235 (Mum-Trib)

BNP Paribas v. ACIT, in ITAs No. 1076/Mum./2021 and 1670/Mum./2022, vide order dated 24-1-2023

Ed. Note: The fine print discussion on this is worth noting. Sometimes amendments are made in the Income tax statute as a knee jerk reaction to certain judicial decisions. Whether the amendments can really plug the gap or meet its ends needs to be seen.

Case: Credit Suisse AG v. Dy. CIT 2023 TaxPub(DT) 1931 (Mum-Trib)