No Income Tax on Interest paid by PE to General Enterprises: Branch and Head Offices forms part of same Legal Entity, rules ITAT [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that branch and head office forms part of the same legal entity and can’t be taxed on interest paid by PE to General Enterprises.

 Madhur Agarwal appeared for the appellant and Milind Chavan appeared for the respondent

The assessee, is a banking company incorporated and fiscally domiciled in, Korea. It carries business, through its permanent establishment, in India and it was pointed out that the levy of tax, on the profits of the assessee’s permanent establishment in India, at a rate higher than the rate at which tax was levied on the Indian entities carrying out the same activities, amounted to impermissible discrimination.

 The Assessing Officer rejected the plea of the assessee to reduce tax on the ground that in the light of Explanation 1 of Section 90, the provisions of a double tax avoidance agreement, the tax rate on a foreign company is higher than the tax rate on a domestic company cannot be considered to a less favourable charge or levy of tax in respect of such foreign company. The Assessing Officer thus proceeded to levy the tax at the rate prescribed for a foreign company.

The assessee claimed a deduction of Rs 2,34,51,979 being interest paid by the Indian permanent establishment (PE) to its head office, General Enterprises (GE), on the funds borrowed by the PE from its GE.  The Assessing Officer disallowed the same by observing that “the branch and the head office constitute the same legal entity and one cannot earn income from oneself”.

The Assessing Officer relied upon the CBDT circular 740 which stated that “Interest paid/ payable by such branch to its head office or any branch located outside India will be liable to tax in India and would be governed by the provisions of Section 115 of the Act.

It was observed that by Finance Act 2001, an Explanation was inserted below Section 90, with retrospective effect. The Tribunal viewed that unless such a foreign company makes prescribed arrangements for declaration and payment within India, of the dividend payable out of its income in India, the levy of tax at a higher rate cannot be considered a less favourable levy of tax or more burdensome taxation vis-à-vis the domestic companies

The Coram consists of Pramod Kumar (Vice President) and Amit Shukla (Judicial Member) held that “the applicable rate of taxation, under the Income Tax Act 1961, for the assessee company cannot be read down in the light of the provisions of a double taxation avoidance agreement, as is the specific mandate of Explanation 1 to Section 90 or even on the first principles without the benefit of this Explanation.” 

The Tribunal upheld the plea of the assessee that the interest of Rs 2,34,51,979 paid by the PE to the GE cannot be brought to tax in the hands of the assessee company, even though it is to be allowed as a deduction in the computation of profits attributable to the permanent establishment. The appeal was partly allowed.

To Read the full text of the Order CLICK HERE

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