Interest Received By Indian PE On Deposit Maintained With Head Office/Overseas Branch Is Not Taxable In India: Delhi High Court

The Delhi High Court has held that interest received by the Indian PE on deposits maintained with the Head Office/Overseas Branch is not taxable in India.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav has observed that the branch office would not partake in the character or attribute of a separate legal personality; the view as taken by the Tribunal is clearly rendered unexceptional. In any event, it would be the exception carved out in the Double Taxation Avoidance Agreement (DTAA) with respect to banking enterprises that would govern.

The conflict arose in the context of interest received by the Permanent Establishment of the Bank of Tokyo Mitsubishi UFJ Ltd. (MUFG Bank), comprising branches in India from its overseas branches and Head Office. During the assessment year in question, namely AY 2003–04, that sum was quantified at INR 7,002,160. It constituted interest earned by the PE in India on balances maintained either with its head office or other overseas branches outside India. The taxability of interest received has been answered in favor of the respondent-assessee. The department challenged the order of the tribunal.

The respondent-assessee contended that Article 7(2) of the India-US DTAA deals with the aspect of attribution of income to a PE. Article 7(2) provides in clear terms that no account would be taken while determining the profits of a PE for amounts charged by it by way of royalties, fees, or other similar payments, or for that matter, commission or other charges for specific services performed, or by way of interest on monies lent to the head office of the enterprise or any of its other offices, except in the case of a banking enterprise.

“Once we come to the firm conclusion that the branch office would not partake in the character or attribute of a separate legal personality, the view as taken by the Tribunal is clearly rendered unexceptional. In any event, it would be the exception carved out in the DTAA with respect to banking enterprises that would govern,” the court said.

The court relied on the judgment passed by the Bombay High Court in the case of Credit Agricole Indosuez, in which it was held that in the case of branch offices not being separate personalities or juridical entities, one person cannot thus profit from itself.

The court, while dismissing the department's appeal, held that it is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other, and then, by means of a fictional sale, introduce a fictional profit, which in truth and in fact is non-existent. Cut away the fictions, and you reach the position that the man is supposed to be selling himself and thereby making a profit out of himself, which, on the face of it, is not only absurd but against all canons of mercantile and income tax law.

Counsel For Appellant: Sanjay Kumar

Counsel For Respondent: Percy Pardiwalla

Case Title: The Commissioner Of Income Tax-International Taxation-3 Versus The Bank Of Tokyo-Mitsubishi UFJ Ltd

Citation: 2024 LiveLaw (Del) 667

Case No.: ITA 773/2018

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