Interest Received By Overseas Head Office From Its Indian Permanent Establishment Is Not Taxable In View Of Treaty Benefits: Mumbai ITAT

The permanent establishment concept creates a minimum threshold of business presence below which the source country doesn't attempt to tax a foreign enterprise's business income. That threshold is set in terms of a minimum physical presence in the jurisdiction.

Noting that the assessee has a right to receive a repayment from the PE branch as the debt has been given by the assessee and it could not be established how the PE can pay interest on the debt/loan given by the PE itself, the Division Bench comprising Amarjit Singh (Accountant Member) and Kavitha Rajagopal (Judicial Member) observed that “even though the interest paid by the branches (PE) to the head office are taxable as per the provision of Sec. 9(1)(v)(c) of the Act, however, because of beneficial provision of DTAA i.e Article 12(5) such interest received by the overseas head office is not taxable under the provision of DTAA”. (Para 27)

The brief facts of the case were that the Assessee, a foreign company, is a commercial bank having its head office in France and eight branches in India. The Assessee is involved in normal banking activities including financing of foreign trade and foreign exchange transactions. During the year under consideration, the Indian branch office has paid an amount of Rs.17,65,42,982/- to its head office/overseas branches as interest on subordinated debt. Further, BNP has paid an amount of Rs.15,663,858/- as interest on NOSTRO overdrafts. The assessee submitted that Article 7 (2) India-France Tax Treaty provides that profits attributable to a permanent establish (PE) should be computed based on the profit which the PE might expect to make it if it were a distinct and separate enterprise and dealing wholly independently with the enterprise of which it is a PE or with enterprises with which it deals. The assessing officer however held that interest income of the overseas branch/HO of Rs.19,22,06,830/- would be taxable under Article 12 of the India-France Treaty@10%.

As regards interest paid by Indian branch office to its head office/overseas branches, the Bench relied upon Assessee's own case for earlier AY wherein it was held that:

(i) The fiction of hypothetical independence or a separate entity approach as per Article 7 of the India-France DTAA comes into play for the limited purpose of computing the profit attributable to the PE and this fiction cannot be extended to tax in the hands of the HO, the interest received from the Indian branch office;

(ii) Principles to determine profits of PE and head office are not the same, and the fiction of hypothetical independence does not extend to the computation of the profit of the head office;

(iii) Interest payment by PE to the HO is a payment by a foreign company's Indian PE to the foreign company itself and it cannot give rise to any income, in the hands of the HO.

The Bench rejected Revenue's reliance on Explanation to Section 9(1)(v)(c) to tax the interest and clarified that (i) no amendment has been made in the India-France DTAA subsequent to insertion of the said Explanation and as DTAA provisions are more beneficial to the Assessee, same need to be applied.

The Bench pointed that as per Article 12(5), interest income of the non-resident (head office) shall be taxable under Article 12 of the DTAA only when such head office does not have any PE in India, as Assessee is a head office of the banking company and having branches in the form of PE in India, in such cases the provision of Article 7 is to be applied which deals with taxability of profit attributable to the PE branches of such overseas head office.

The Bench also explained that the debt claim means a right to receive a repayment of money from another person arising in the course of carrying on a business.

The Bench went on to highlight that the debt regarding claim mean that some money due from one person to another and since, in the case of the Assessee branch has borrowed from the overseas head office, therefore, debt claim of the head office is connected to the PE branch in India.

The Bench reiterated that in the case of a banking enterprise, any payment by the PE to the head office of the foreign enterprise by way of interest on money lent to the PE shall be allowed as a deduction.

Further, the Bench clarified that the amount charged by the PE to the head office of the enterprise by way of interest on money lent to the head office of the enterprise shall be considered for the determination of profits of the PE.

Hence, in the present case, the ITAT concluded that the interest received by head office from its branches in India is not taxable in the hands of the head office in view of the provision of DTAA.

At the same time, the ITAT rejected Assessee's contention that tax rate applicable to domestic company should also apply to foreign company by invoking Article 26 of the India-France DTAA.

Thus, the ITAT partly allowed the Assessee's appeal.

Counsel for Assessee: Farooq Irani

Counsel for Revenue: Ajay Kumar Sharma

Case Title: BNP Paribas Vs Assistant Commissioner of Income Tax (IT)

Case Number: ITA No.3416/Mum/2023

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