Sumitomo Mitsui Banking Corporation v. Dy. Director of IT

SUBSCRIBE FOR FULL CONTENT


The Tax Publishers2012 TaxPub(DT) 2235 (Mum-Trib) : (2012) 136 ITD 0066 : (2012) 145 TTJ 0649 : (2012) 070 DTR 0001 : (2012) 016 ITR (Trib) 0116 INCOME TAX ACT, 1961 --Double taxation relief--Agreement between India and JapanInterest payable by PR in India to GE in Japan--The assessee in the present case, was is a foreign banking company which is incorporated in and controlled from Japan and is a tax resident of that country. It carries on banking business in India through branch offices at Mumbai and New Delhi which constitute its permanent establishment in India in terms of the relevant article of the Indo-Japanese Tax Treaty. The other assessee also is a foreign banking company which is a tax resident of Belgium and carries on banking business in India through its branch at Mumbai which constitutes its permanent establishment in India in terms the relevant article of the India-Belgium Tax Treaty. In the case of both these assessees, advances were given by the overseas head offices to the branches in India on which interest was payable by the branches in India. The dispute that has arisen in their cases is relating to deductibility of interest so payable in the hands of PE in India and chargeability of the said interest to tax in India in the hands of foreign GE. These issues are referred for consideration of the Special Bench in the form of two questions which are already indicated at the beginning of this order. At the outset, one may note that the relevant provisions of the tax treaties entered into by India with Japan and Belgium are similar and in the absence of any material difference therein, one would be generally referring to the relevant provisions of the Indo-Japanese Tax Treaty for the sake of convenience. In so far as deductibility of the interest payable to the head office in the hands of branch offices in India is concerned, it was submitted on behalf of the assessee that interest so payable was allowable as deduction while computing profits attributable to the branch offices in India constituting permanent establishment in view of article 7(2) and 7(3) of the Indo-Japanese DTAA. Held: As regards the deduction of interest payable to the head office in the hands of India PR for the purpose of computing profits attributable to the said OR, there is no dispute that such deduction is not permissible under the Indian IT Act (domestic law) being the payment made to self. Both the Indian PE and the foreign GE of which it is a part are not separate entities for the purpose of taxation under the domestic law and the same being one and the same entity recognized as one assessee under the domestic law, interest payable by Indian PE to foreign GE of which it is a part, cannot be treated as expenditure allowable as deduction being payment to self. This position which is well settled under the domestic law has not been disputed even by the representatives of the assessees during the course of hearing. They, however, have relied on the relevant tax treaties in support of the assessee's claim for deduction on account of interest payable to GE while computing the profits attributable to PE in India as per article 7(2) and 7(3) read with paragraph No. 8 of the protocol. As regards the deduction of interest payable to the head office in the hands of Indian PE for the purpose of computing profits attributable to the said PE, there is no dispute that such deduction is not permissible under the Indian Income-tax Act (domestic law) being the payment made to self. Both the Indian PE and the foreign GE of which it is a part are not separate entities for the purpose of taxation under the domestic law and the same being one and the same entity recognized as one assessee under the domestic law, interest payable by Indian PE to foreign GE of which it is a part, cannot be treated as expenditure allowable as deduction being payment to self. This position which is well settled under the domestic law has not been disputed even by the representatives of the assessees during the course of hearing. They, however, have relied on the relevant tax treaties in support of the assessee's claim for deduction on account of interest payable to GE while computing the profits attributable to PE in India as per article 7(2) and 7(3) read with paragraph No. 8 of the protocol. [Para 50] As per article 7(1) of the Indo-Japanese treaty, the profits of an enterprise of Japan is taxable only in Japan unless that enterprise carries on business in India through a permanent establishment situated therein and in such a case where the Japanese enterprise carries on business in India through a PE situated in India, the profit of Japanese enterprise may also be taxed in India but only so much of them as is directly or indirectly attributable to the PE in India. The question, therefore, arises as to how to compute the profits of the Japanese GE that is attributable to the permanent establishment in India. Article 7(2) and 7(3) are relevant in this context which provide that the profits attributable to the PE in India shall be the profits which the PE might be expected to make if it were a distinct and separate enterprise engaged in the same and similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. Article 7(3) provides that in determining the profits of a PE, there shall be allowed as deduction expenses which are incurred for the purpose of PE, including executive and general administrative expenses so incurred, whether in the contracting state in which the PE is situated or elsewhere. As per paragraph No. 8 of the protocol, it has been agreed with reference to paragraph No. 3 of article 7 of the convention that no deduction shall be allowed in respect of amounts paid (other than reimbursement of actual expenses) by a PE of an enterprise to the HO of the enterprise or any other offices thereof, inter alia, by way of interest on moneys lent to the PE except where the enterprise is a banking institution. [Para 51] A combined reading of article 7(2) and 7(3) of the treaty and paragraph No. 8 of the protocol thus makes it clear that for the purpose of computing the profits attributable to the PE in India, the said PE is to be treated as a distinct and separate entity which is dealing wholly independently with the general enterprise of which it is a part and deduction has to be allowed for all the expenses which are incurred for the purpose of PE whether in India or elsewhere barring the amount paid by a permanent establishment to the head office of GE or any other offices thereof, inter alia, by way of interest on moneys lent to the permanent establishment except where the enterprise is a banking institution. In the case of a banking enterprise like the assessee in the present case, profit attributable to the PE in India thus is to be computed treating the same as a distinct and separate entity which is dealing wholly independently with the GE of which it is a part and deduction is to be allowed for all the expenses which are incurred for the purpose of PE, whether incurred in India or elsewhere, including the interest paid or payable by a PE to the Head Office or any other offices of the GE by way of interest on moneys lent to the PE. The interest in question is payable by the PE in India to the head office of the GE abroad on the moneys lent to it and the same being undisputedly the expenditure incurred for the purpose of PE, there is no hesitation to hold that the same is allowable as deduction while computing the profits of the PE in India for the purpose of taxation in India as per article 7(2) and 7(3) of the treaty read with paragraph No. 8 of the protocol. As a matter of fact, the assessing officer has not disputed this position and even revenue has not raised any material contention at the time of hearing to dispute this position. [Para 52] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 2235 (Mum-Trib) : (2012) 136 ITD 0066 : (2012) 145 TTJ 0649 : (2012) 070 DTR 0001 : (2012) 016 ITR (Trib) 0116

INCOME TAX ACT, 1961

--Double taxation relief--Agreement between India and JapanInterest payable by PR in India to GE in Japan--The assessee in the present case, was is a foreign banking company which is incorporated in and controlled from Japan and is a tax resident of that country. It carries on banking business in India through branch offices at Mumbai and New Delhi which constitute its permanent establishment in India in terms of the relevant article of the Indo-Japanese Tax Treaty. The other assessee also is a foreign banking company which is a tax resident of Belgium and carries on banking business in India through its branch at Mumbai which constitutes its permanent establishment in India in terms the relevant article of the India-Belgium Tax Treaty. In the case of both these assessees, advances were given by the overseas head offices to the branches in India on which interest was payable by the branches in India. The dispute that has arisen in their cases is relating to deductibility of interest so payable in the hands of PE in India and chargeability of the said interest to tax in India in the hands of foreign GE. These issues are referred for consideration of the Special Bench in the form of two questions which are already indicated at the beginning of this order. At the outset, one may note that the relevant provisions of the tax treaties entered into by India with Japan and Belgium are similar and in the absence of any material difference therein, one would be generally referring to the relevant provisions of the Indo-Japanese Tax Treaty for the sake of convenience. In so far as deductibility of the interest payable to the head office in the hands of branch offices in India is concerned, it was submitted on behalf of the assessee that interest so payable was allowable as deduction while computing profits attributable to the branch offices in India constituting permanent establishment in view of article 7(2) and 7(3) of the Indo-Japanese DTAA. Held: As regards the deduction of interest payable to the head office in the hands of India PR for the purpose of computing profits attributable to the said OR, there is no dispute that such deduction is not permissible under the Indian IT Act (domestic law) being the payment made to self. Both the Indian PE and the foreign GE of which it is a part are not separate entities for the purpose of taxation under the domestic law and the same being one and the same entity recognized as one assessee under the domestic law, interest payable by Indian PE to foreign GE of which it is a part, cannot be treated as expenditure allowable as deduction being payment to self. This position which is well settled under the domestic law has not been disputed even by the representatives of the assessees during the course of hearing. They, however, have relied on the relevant tax treaties in support of the assessee's claim for deduction on account of interest payable to GE while computing the profits attributable to PE in India as per article 7(2) and 7(3) read with paragraph No. 8 of the protocol.

As regards the deduction of interest payable to the head office in the hands of Indian PE for the purpose of computing profits attributable to the said PE, there is no dispute that such deduction is not permissible under the Indian Income-tax Act (domestic law) being the payment made to self. Both the Indian PE and the foreign GE of which it is a part are not separate entities for the purpose of taxation under the domestic law and the same being one and the same entity recognized as one assessee under the domestic law, interest payable by Indian PE to foreign GE of which it is a part, cannot be treated as expenditure allowable as deduction being payment to self. This position which is well settled under the domestic law has not been disputed even by the representatives of the assessees during the course of hearing. They, however, have relied on the relevant tax treaties in support of the assessee's claim for deduction on account of interest payable to GE while computing the profits attributable to PE in India as per article 7(2) and 7(3) read with paragraph No. 8 of the protocol. [Para 50] As per article 7(1) of the Indo-Japanese treaty, the profits of an enterprise of Japan is taxable only in Japan unless that enterprise carries on business in India through a permanent establishment situated therein and in such a case where the Japanese enterprise carries on business in India through a PE situated in India, the profit of Japanese enterprise may also be taxed in India but only so much of them as is directly or indirectly attributable to the PE in India. The question, therefore, arises as to how to compute the profits of the Japanese GE that is attributable to the permanent establishment in India. Article 7(2) and 7(3) are relevant in this context which provide that the profits attributable to the PE in India shall be the profits which the PE might be expected to make if it were a distinct and separate enterprise engaged in the same and similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. Article 7(3) provides that in determining the profits of a PE, there shall be allowed as deduction expenses which are incurred for the purpose of PE, including executive and general administrative expenses so incurred, whether in the contracting state in which the PE is situated or elsewhere. As per paragraph No. 8 of the protocol, it has been agreed with reference to paragraph No. 3 of article 7 of the convention that no deduction shall be allowed in respect of amounts paid (other than reimbursement of actual expenses) by a PE of an enterprise to the HO of the enterprise or any other offices thereof, inter alia, by way of interest on moneys lent to the PE except where the enterprise is a banking institution. [Para 51] A combined reading of article 7(2) and 7(3) of the treaty and paragraph No. 8 of the protocol thus makes it clear that for the purpose of computing the profits attributable to the PE in India, the said PE is to be treated as a distinct and separate entity which is dealing wholly independently with the general enterprise of which it is a part and deduction has to be allowed for all the expenses which are incurred for the purpose of PE whether in India or elsewhere barring the amount paid by a permanent establishment to the head office of GE or any other offices thereof, inter alia, by way of interest on moneys lent to the permanent establishment except where the enterprise is a banking institution. In the case of a banking enterprise like the assessee in the present case, profit attributable to the PE in India thus is to be computed treating the same as a distinct and separate entity which is dealing wholly independently with the GE of which it is a part and deduction is to be allowed for all the expenses which are incurred for the purpose of PE, whether incurred in India or elsewhere, including the interest paid or payable by a PE to the Head Office or any other offices of the GE by way of interest on moneys lent to the PE. The interest in question is payable by the PE in India to the head office of the GE abroad on the moneys lent to it and the same being undisputedly the expenditure incurred for the purpose of PE, there is no hesitation to hold that the same is allowable as deduction while computing the profits of the PE in India for the purpose of taxation in India as per article 7(2) and 7(3) of the treaty read with paragraph No. 8 of the protocol. As a matter of fact, the assessing officer has not disputed this position and even revenue has not raised any material contention at the time of hearing to dispute this position. [Para 52]