The Delhi High Court in a recent case, held that interest received by an Indian permanent establishment ( PE ) over deposit in the head office/overseas branch is not taxable in India and dismissed the income tax department’s appeal.
The Commissioner of Income Tax challenged the order of the Income Tax Appellate Tribunal which was in favour of the respondent-assessee, The Bank of Tokyo Mitsubishi UFJ Ltd. (MUFG Bank) The conflict arose in the context of interest received by the of the MUFG Bank comprising branches in India from its overseas branches and Head Office. During the assessment year in question, the sum was quantified at INR 7,002,160 which 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 favour 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.
A division 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 taken by the Tribunal is clearly unexceptional. In any event, it would be the exception carved out in the Double Taxation Avoidance Agreement (DTAA) concerning banking enterprises that would govern.
While dismissing the department’s appeal, the court 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.
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