The Mumbai Bench of Income Tax Appellate Tribunal has held that the interest recieved by the officer or overseas branches would not be taxable under India-France DTAA.
The assessee, BNP Paribas is a commercial bank having its head office in France. The assessee has 8 branches in India which is involved in normal banking activities including financing of foreign trade and foreign exchange transactions. it was noticed by the AO that the Indian branch office had paid an amount to its head office/overseas branches as interest on the subordinated debt.
Further, the assessee had paid an amount as interest on Nostro overdrafts. The Indian branch office has claimed a deduction of such an amount citing the provisions of Article 7(3) of the India-France DTAA.
By referring to the provisions of India-France DTAA, the AO held that the Permanent Establishment (‘PE’) was considered as a separate entity then the enterprise of which it was a PE while dealing with the said enterprise. Accordingly, the AO held that the interest income of the head office/overseas branches would be taxable under Article 12 of the India-France DTAA at the rate of 10%. 18.
F.V. Irani on behalf of the assessee submitted that, the Explanation to section 9(1)(v)(c) of the Act was inserted by the Finance Act 2015 to overcome the decision of the Special Bench of the Tribunal in Sumitomo Mitsui BNP Paribas. He further submitted that the taxability of the interest paid by the Indian branch office to the head office/overseas branch was governed by the provisions of Article 12 r/w Article 7 of the India-France DTAA and the amendment in the Act could not override the provisions of the DTAA.
Surabhi Sharma on behalf of the revenue submitted that, under the Act, the assessee bank could not debit interest payments to the head office and other branches and claimed the same as an expense, nor could it show interest received from its head office and other branches as interest income while determining the business income attributable to activities carried out in India.
The Division Bench of G.S. Pannu, (President) and Sandeep Singh Karhail, (Judicial Member) referred to the earlier decision in assessee’s own case in BNP Paribas SA vs ADIT, in which the coordinate bench held that the principles for determining the profits of the PE and GE/head office are not the same, and the fiction of hypothetical independence does not extend to the computation of the profit of the GE/head office. The Bench allowed this ground of appeal.
“Thus, in view of the above, even though the submission of the Revenue that the amendment by Finance Act 2015, whereby Explanation to section 9(1)(v) of the Act was inserted specifically to overcome the decision in Sumitomo Mitsui Banking Corporation (supra), is accepted, the same would still not lead to taxation of the interest paid to the head office/overseas branches under the provisions of the DTAA”, the Bench further observed.
“Since the assessee has PE in India, therefore, Article 7 which deals with business profits, becomes relevant for consideration in the present case. As per Article 7(1) of the DTAA, the profit of an enterprise is taxable in the other contracting.”
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