BNP PARIBAS SA, MUMBAI V. ADDL DIT (IT) RG 3, MUMBAI

ITA 339/MUM/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79344 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-07-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 14-07-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 13-01-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJAY KUMAR SHRIVASTAVA
• Assessee Lawyers: A V SONDE
• Keywords: Business income; Double taxation relief; Non-deduction of tax
• Section: 143(3); 2

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL L , BENCH MUMBAI , BEFORE SHRI R.C.SHARMA , A M & AMIT SHUKLA , J M ITA NO. 339 / MUM/20 1 0 ( ASSESSMENT YEAR : 2005 - 06 ) BNP PARIBAS SA , FRENCH BANK BUILDING, 62, HOMJI STREET, FORT, MUMBAI - 400 001 VS. ADIT (INTERNATIONAL TAXATION) , RANGE - 3, MUMBAI - 400 001 PAN/GIR NO. : AAACB 4868 Q ( APP ELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : MR. A.V.SONDE /REVENUE BY : MR . AJAY KUMAR SHRIVASTAVA DATE OF HEARING : 14 TH JULY , 201 4 DATE OF PRONOUNCEMENT : 16 TH JU LY , 201 4 O R D E R PER R.C.SHARMA ( A .M.) : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) - 10 , DATED 27 - 10 - 2009, FOR THE ASSESSMENT YEAR 2005 - 06 , IN THE MATTER OF ORDER PASSED UNDER SECTION 143(3) OF THE I.T. ACT . FOLLO WING FIVE GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE : - AGGRIEVED BY THE ORDER PASSED BY THE COMMISSIONER OF INCOME - TAX (APPEALS) - X, MUMBAI [HEREINAFTER REFERRED TO AS 'THE CIT(A)'], UNDER SECTION 250 OF THE INCOME - TAX ACT, 1961 ('THE ACT') AND BASED ON TH E FACTS AND CIRCUMSTANCES OF THE CASE, BNP PARIBAS SA (HEREINAFTER REFERRED TO AS 'THE APPELLANT'), RESPECTFULLY SUBMITS THAT THE CIT(A) ERRED IN UPHOLDING THE ORDER OF THE ADDITIONAL DIRECTOR OF INCOME - TAX (INTERNATIONAL TAXATION) - RANGE 3, MUMBAI ('THE ASSESSING OFFICER') AND IN DISPOSING THE APPEAL OF THE APPELLANT ON THE FOLLOWING GROUNDS: 1. IN NOT ACCEPTING THE CLAIM THAT THE RATE OF TAX APPLICABLE TO DOMESTIC COMPANIES AND / OR CO - OPERATIVE BANKS IS ALSO APPLICABLE TO THE APPELLANT, IN ACCORDANCE WITH THE ITA NO. 339 / 10 2 PROVISIONS OF ARTICLE 26 (NON - DISCRIMINATION) OF THE INDIA - FRANCE TAX TREATY. 2. IN SUBJECTING TO TAX, THE INTEREST PAID BY THE INDIAN BRANCHES OF THE APPELLANT TO ITS HEAD OFFICE AND OVERSEAS BRANCHES, AMOUNTING TO RS 30,948,018, AS INTERES T INCOME, APPLYING THE PROVISIONS OF ARTICLE 12 (INTEREST) OF THE INDIA - FRANCE TAX TREATY. 3. IN SUBJECTING TO TAX, THE DATA PROCESSING CHARGES PAID TO THE SINGAPORE BRANCH OF THE APPELLANT, AGGREGATING RS 132,335,594, APPLYING THE PROVISIONS OF ARTIC LE 13 (ROYALTIES, FEES FOR TECHNICAL SERVICES AND PAYMENTS FOR USE OF EQUIPMENT) OF THE INDIA - FRANCE TAX TREATY. 4. IN NOT GRANTING CREDIT FOR TAX DEDUCTED AT SOURCE AMOUNTING TO RS 2,689,177 ON INTEREST ON SUB - ORDINATED DEBT, PAID BY INDIAN BRANCHES OF THE APPELLANT TO ITS HEAD OFFICE. 5. IN NOT DIRECTING THE ASSESSING OFFICER TO COMPUTE INTEREST UNDER SECTION 234C OF THE ACT CONSIDERING THE 'RETURNED INCOME' OF THE APPELLANT. 2 . AT THE OUTSET, IT WAS CONTENDED BY LEARNED AR THAT ALL THE GROUNDS ARE COVERED BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y.2001 - 02, 2002 - 03 & 2003 - 04. A CHART ALONG WITH COPY OF THE ORDERS OF TRIBUNAL WAS PLACED ON RECORD. 3 . WE HAVE CONSIDERED R IVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IN THE FIRST GROUND , THE ASSESSEE IS AGGRIEVED BY THE ACTION OF THE LOWER AUTHORITIES IN NOT ACCEPTING THE CLAIM THAT THE RATE OF TAX APPLICABLE TO DOMESTIC COMPANIES AND/OR COOPERATIVE BANKS IS ALSO APPLICABLE TO THE ASSESSEE IN ACC ORDANCE WITH THE PROVISIONS OF ARTICLE 26 OF INDIA - FRANCE TAX TREATY. LEARNED AR FAIRLY CONCEDED THAT THE ISSUE IS COVERED AGAINST THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY 1996 - 97, 1997 - 98, 1998 - 99 AND 2000 - 01. LEARNED DR ALSO AGREED WITH THE FACT ITA NO. 339 / 10 3 THAT THE ISSUE IS COVERED AGAINST THE ASSESSEE BY VARIOUS ORDERS OF THE TRIBUNAL. WE HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW AS WELL AS ORDERS OF THE TRIBUNAL FOR A.Y.1996 - 97, 1997 - 98, 2000 - 01 & 2001 - 02 AND FOUND THAT I SSUE HAS BEEN DECIDED AGAINST THE ASSESSEE. AS THE FACTS AND CIRCUMSTANCES DURING THE YEAR UNDER CONSIDERATION ARE SAME, RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE, WE DISMISS THE GROUND NO.1 RAISED BY THE ASSESSEE. 4 . IN GRO UND NO.2 , THE ASSESSEE IS AGGRIEVED BY THE ACTION OF THE LOWER AUTHORITIES FOR TAXING THE INTEREST PAID BY THE INDIAN BRANCH OF THE ASSESSEE TO ITS HEAD OFFICE AND OVERSEAS BRANCHES AMOUNTING TO RS. 3,09,48,018/ - , APPLYING THE PROVISIONS OF ARTICLE 12 (INT EREST OF INDIA - FRANCE TAX TREATY) . IN THIS REGARD, LEARNED AR PLACED ON RECORD THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AYS. 2001 - 02 TO 2002 - 03. IN AY 2001 - 02, THE TRIBUNAL HAS DEALT WITH THE ISSUE AT PARA 13, 14, 15 & 16 AT PAGE 5 AND DECI DED THE ISSUE IN FAVOUR OF THE ASSESSEE. SIMILARLY THE TRIBUNAL IN ASSESSEES OWN CASE IN THE AY 2002 - 03 & 2003 - 04 DECIDED THE ISSUE AT PAGE 2, 3 & 6 AT PARA 3,4,5, & 13 . LEARNED AR ALSO PLACED RELIANCE ON THE DECISION OF ITAT SPECIAL BENCH IN THE CASE OF SUMITOMO MITSUI BANKING CORPORATION VS. DDIT(IT) , REPORTED IN (2012) 145 TTJ (MUMBAI)(SB) 649 , WHEREIN EXACTLY SIMILAR ISSUE HAS BEEN DEALT AT PARA 88 PAGE 700 & 701. 4.1 ON THE OTHER HAND, IT WAS CONTENDED BY THE LEARNED DR THAT MUTUALITY ISSUE WAS NOT A RGUED BEFORE THE LOWER AUTHORITIES, WHETHER ITA NO. 339 / 10 4 TRANSACTION IS COVERED BY THE SPECIAL BENCH, THE ISSUE OF MUTUALITY WAS NOT CONSIDERED BY THE SPECIAL BE N CH. HE ALSO RELIED ON THE OBSERVATION MADE BY HONBLE SUPREME COURT IN THE CASE OF BANGALORE CLUB VS. CIT, REPORTED IN (2013) 350 ITR 509 (SC) AND OUR ATTENTION WAS INVITED TO PARA 23 . IT WAS CONTENDED BY THE LEARNED DR THAT TAKING LOAN FROM HO AT INTEREST ITSELF SHOWS THAT BORROWING IS ON COMMERCIAL BASIS, THEREFORE, THERE IS NO QUESTION OF APPLYING PRINCIPLE OF MUTUALITY. HE FURTHER CONTENDED THAT IF PRINCIPLE OF MUTUALITY IS APPLIED IN ALL THE CASES, SECTION 44C WILL BE REDUNDANT. THE CITDR MR. AJAY KUMAR SHRIVASTAVA FURTHER CONTENDED THAT T HE I TAT SB IN CASE OF SUMITOMO MITSUI BANKING CORPORATION 136 I TD 66( MUM)(SB) HAS HELD THAT THE INTEREST RECEIVED BY HO(GE) IS NOT TAXABLE IN HANDS OF GE IN INDIA UNDER DOMESTIC LAW ON PRINCIPLES OF MUTUALITY AS THE INTEREST PAID BY PE TO GE IS PAYMENT TO SELF. AS PER LEARNED DR, B EFORE THE SB, THE COUNSELS FROM BOTH THE SI DES DID NOT DISPUTE THE POSITION THAT SUCH INTEREST PAYMENTS WERE COVERED BY PRINCIPLES OF MUTUALITY BEING PAYMENT TO SELF, THOUGH THE REVENUE ARGUED THAT FOR PURPOSE OF TAXATION UNDER DOMESTIC LAWS ALSO THE PE AND GE SHOULD BE TREATED AS SEPARATE ENTITIES . THIS ARGUMENT WAS REJECTED BY I TAT ON GROUNDS THAT UNDER THE DOMESTIC LAW THERE IS ONLY ONE ASSESSABLE ENTITY I.E. GE AND PE IS NOT AN INDEPENDENT PERSON AND IT IS PART OF GE . 4.2 IN VIEW OF THE ABOVE, LEARNED CITDR STRONGLY DEFENDED THE ORDER OF THE A O ON THE PLEA THAT THE DECISION OF SB HINGES ON THE ASSUMPTION THAT THE IMPUGNED TRANSACTIONS ARE COVERED BY PRINCIPLES OF MUTUALITY ITA NO. 339 / 10 5 BEING PAYMENT TO SELF WHEREAS THE NON APPLICABILITY OF MUTUALITY TO SUCH TRANSACTION WAS NEITHER ARGUED BY ANY SIDE NOR WAS ANY OBJECTION RAISED TO SUCH ASSU MP TION. 4.3 BY REFERRING TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF BANGALORE CLUB (SUPRA), LD. DR SUBMITTED THAT FOLLOWING PRINCIPLES WERE FOLLOWED BY APEX COURT IN BANGALORE CLUB(SUPRA) WITH REGARD TO A PPLICABILITY OF PRINCIPLES OF MUTUALITY: (I) THERE SHOULD BE COMPLETE IDENTITY BETWEEN THE CONTRIBUTORS AND PARTICIPATORS. (II) THE MUTUAL ACTIVITY IS RESTRICTED TO WITHIN MEMBERS OF MU T UAL GROUP (CONTRIBUTORS AND PARTICIPATORS) AND NOT WITH OUTSIDERS . (III) ONLY THAT SURPLUS WHICH IS EARNED OUT OF THE TRANSACTIONS BETWEEN THE CLOSED GROUP OF MEMBERS ONLY AS A CLASS IS EXEMPT BUT INCOME ARISING FROM OPERATIONS WITH THIRD PARTIES WAS OUTSIDE OF THE MUTUALITY, RUPTURING THE 'PRIVITY OF MUTUALITY', CON SEQUENTLY, VIOLATING THE ONE TO ONE IDENTITY BETWEEN THE CONTRIBUTORS AND PARTICIPATORS. (IV) THE TRANSACTIONS RESULTING IN INCOME ARE NOT IN NATURE AKIN TO BUSINESS, OR TAINTED WITH COMMERCIALITY. (V) IT CANNOT BE SAID THAT INCORPORATION W HICH BRINGS INTO BEING A LEGAL ENTITY SEPA RATE FROM ITS CONSTIT UENT MEMBERS IS TO BE DISREGARDED ALWAY S AND THAT THE LEGAL ENTITY CAN NEVER MAKE A PROFIT OUT OF ITS OWN MEMBERS ... ' THE PRINCIPLE THAT NO ONE CAN MAKE A PROFI T OUT OF HIM SELF IS TRUE ENOUGH BUT MAY IN ITS ITA NO. 339 / 10 6 APPLICATION EASILY LEAD TO CONFUSION, AT WHAT POINT , DOES THE RELATIO N SHIP OF MUTUALITY END AND THAT OF TRADING BEGIN' IS A DIFFICULT AND VEXED QUESTION. AS PER LEARNED DR T HE NEXT TEST OF MUTUALITY TO APPLY IS THAT ALL TRANSACTIONS MUST BE WITHIN THE MEMBERS OF MUTUAL GROUP. THE ASSESSEE BEING IN BANKING BUSINESS IS DEALING WITH THIRD PARTIES AS WELL AS ITS OWN BRANCHES TO EARN ITS BUSINESS INCOME. THE MONEY ADVANCED BY BO TO HO OR HO TO BO ARE DURING THE COURSE AND PART OF REGULAR BANKING ACTIVITIES WHICH ARE ALSO CARRIED IN SIMILAR FASHION WITH THIRD PARTIES. HE N C E THESE ARE COMMERCIAL TRANSACTIONS NOT LIMITED AMONGST THE MUTUAL ENTITIES BUT EXTENDED TO THIRD PARTIES ALSO AND THE PRIVITY OF MUTUALITY GETS DILUTED FOR THIS REASON. AGAIN REFERRING TO T HE DECISION OF HONBLE SUPREME COURT, LEARNED DR CONTENDED THAT ALL TRANSACTIONS BETWEEN LEGAL ENTITY AND ITS CONSTITUENT MEMBERS (SUCH AS BO AND HO) ARE NOT ALWAYS COVERED BY PRINCIPLES OF MUTUALITY. THE PRINCIP LE THAT NO ONE CAN TRADE WITH HIMSELF IS NOT UNIVERSALLY APPLICABLE. IT MIGHT HERE BE POINTED OUT THAT IT HAS BEEN HELD BY THE HOUSE OF LORDS IN SHARKEY VS. WERNHER (1956) AC 58 ; (1956) 29 LTR 962 (HL) THAT THE GENERAL PROPOSITION THAT NO ONE COULD TRADE WITH HIMSELF AND MAKE IN ITS TRUE SENSE OR MEANING TAXABLE PROFITS BY DEALING WITH HIMSELF IS NOT UNIVERSALLY TRUE AND THAT THERE ARE SITUATIONS IN WHICH A MAN COULD BE SAID TO MAKE A PROFIT OUT OF THE CONSUMPTION OF HIS OWN GOODS. THE HONBLE SUPREME COURT IN BANGALORE CLUB (SUPRA) ALSO BAS HELD THAT THIS MAXIM IS NOT UNIVERSALLY APPLICABLE. WHEN THE BUSINESS ACTIVIT Y OF ITA NO. 339 / 10 7 BANKING BY ASSESSEE BANK COMPRISES OF CONTINUOUS /INTEGRATED INFLOWS AND OUTFLOWS OF MONEY WITH S EVERAL ENTITIES INCLUDING CUSTOMERS, OTHER BANKS AND ITS OWN BRANCHES, THEN THE PRO FIT OF THE BANKS BUSINESS WOULD DEPEND ON NET INFLOWS OUT OF ALL OPERATIONS AND IT CANNOT BE SAID THAT A PART OF SUCH TRANSACTIONS ARE GOVERNED BY MUTUALITY BY DISINTEGRATING SOME OF THE CONSTITUENT TRANSACTIONS BETWEEN BO AND HO OUT OF THE ONE COMPOSITE BUSINESS OF BANKING AND THEN TO SAY THAT SUCH TRANSACTIONS ARE GOVERNED BY MUTUALITY. WHEN THE TOTAL PROFIT OF A BANK REPRESENTS THE RESULTANT AGGREGATION OF DIFFE R ENT ITEMS OF ACTIVITY THEN HOW COULD IT BE SAID THAT THE PROFIT FROM EACH ITEM OF ACTIVITY ( INCLUDING FROM ACTIVITY BETWEEN BO & HO ) WHICH MAKES UP THAT TOTAL IS ONLY A NOTIONAL ONE TO THE EXTENT IT ARISES FR OM TRANSACTIONS BETWEEN BO & HO AND NOT THE ACTUAL OR REAL PROFIT. IF THE PROFITS FROM MULTIPLE ACTIVITY AS A BANKING BY BO OR HO IS CONSIDE RED IN ITS ENTIRETY AS TWO INDEPENDENT OPERATING ENTITIES, THEN THE PRINCIPLE THAT NO ONE CAN TRADE WITH ITSELF WILL NOT ARISE AT ALL. THE APPLICABILITY OF PRINCIPLE OF MUTUALITY HAS TO BE TESTED QUA THE ENTIRE ACTIVITY OF BANKING BUSINESS AND NOT QUO. THE PART OF BUSINESS ACTIVITY COMPRISING OF TRANSACTIONS BETWEEN BO AND HO ONLY WHEN THE ULTIMATE BUSINESS PROFIT IS SUM TOTAL OF ALL THE ACTIVITIES CARRIED BY THE BO OR HO IN ITS JURISDICTION OF OPERATION OF BANKING BUSINESS, THE PRINCIPLE OF TRADING WITH O NE SELF HAS TO BE SEEN W. R . T. WHOLE ACTIVITY COMPRISING OF THE BUSINESS AND NOT BY DISINTEGRATING VARIOUS INTEGRATED OPERATIONS OF A COMMON BUSINESS. ITA NO. 339 / 10 8 4. 5 WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF RIVAL PARTIES, GONE THROUGH THE ORDERS OF AUTHORITIES BELOW AS WELL AS ORDERS OF THE TRIBUNAL IN ASSESSEES OWN CASE AND ALSO THE ORDER OF THE SPECIAL BENCH IN THE CASE OF SUMITOMO MITSUI BANKING CORPORATION (SUPRA) . DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF BANGALORE CLUB (SUPRA) IS DISTINGUISHAB LE ON FACTS WHERE INTEREST INCOME WAS EARNED BY ASSESSEE CLUB FROM THIRD PARTY I.E. BANKS WITH WHICH DEPOSIT WAS MADE. HOWEVER, IN THE INSTANT CASE HO HAS GIVEN FUNDS TO ITS BRANCH I.E. ASSESSEE. F OLLOWING WERE THE OBSERVATIONS AT PARA OF SPECIAL BENCH 88 : - 88. KEEPING IN VIEW ALL THE FACTS OF THE CASE AND THE LEGAL POSITION EMANATING FROM THE INTERPRETATION OF THE RELEVANT PROVISIONS OF DOMESTIC LAW AS WELL AS THAT OF THE TREATY AS DISCUSSED ABOVE, WE ARE OF THE VIEW THAT ALTHOUGH INTEREST PAID TO THE HE AD OFFICE OF THE ASSESSEE BANK BY ITS INDIAN BRANCH WHICH CONSTITUTES ITS PE IN INDIA IS NOT DEDUCTIBLE AS EXPENDITURE UNDER THE DOMESTIC LAW BEING PAYMENT TO SELF , THE SAME IS DEDUCTIBLE WHILE DETERMINING THE PROFIT ATTRIBUTABLE TO, THE PE WHICH IS TAXABL E IN INDIA AS PER THE PROVISIONS OF ART. 7(2) AND 7(3) OF THE INDO- JAPANESE TREATY READ WITH, PARA 8 OF THE PROTOC O L WHISH ARE MORE BENEFICIAL TO THE ASSESSEE, THE SAID INTEREST, HOWE V ER, CANNOT BE TAXED IN INDIA IN THE HANDS OF ASSESSEE BANK, A FOREIGN E NTERPRISE BEING PAY M ENT TO' SELF WHICH CANNOT GIVE RISE TO INCOME THAT IS TAXABLE IN INDIA AS PER THE DOMESTIC LAW, EVEN OTHERWISE, THERE IS NO EXPRESS PROVISION CONTAINED IN THE RELEVANT TAX TREATY WHICH IS CONTRARY TO THE DOMESTIC LAW IN INDIA ON THIS IS SUE, THIS POSITION APPLICABLE IN THE CASE' OF INTEREST PAID BY INDIAN BRANCH OF A FOREIGN BANK TO ITS HEAD OFFICE EQUALLY HOLDS GOOD FOR THE PAYMENT OF INTEREST MADE BY THE INDIAN BRANCH OF A FOREIGN BANK TO ITS BRANCH OFFICES ABROAD AS THE SA M E STANDS ON THE SAME FOOTING AS THE PAYMENT OF INTEREST MADE TO THE HEAD OFFICE, AT THE TIME OF HEARING BEFORE US, THE LEARNED REPRESENTATIVES OF BOTH THE SIDES HAVE ALSO NOT MADE ANY SEPARATE SUBMISSIONS ON THIS ASPECT OF THE MATTER SPECIFICALLY. HAVING HELD THAT THE INTEREST PAID BY THE INDIAN BRANCH OF THE ASSESSEE BANK TO ITS HEAD OFFICE A ND OTHER BRANCHES OUTSIDE INDIA IS NOT CHARGEABLE TO TAX IN INDIA, IT FOLLOWS THAT THE PROVISIONS OF S. 195 WOULD NOT BE ATTRACTED AND THERE BEING NO FAILURE TO DEDUCT TAX AT SOUR CE FROM THE SAID PAYMENT OF INTEREST MADE BY THE PE, TH E QUESTION OF DISALLOWANCE OF THE SAID ITA NO. 339 / 10 9 INTEREST BY INVOKING THE PROVISIONS OF S. 40 (A) (I) DOES NOT ARISE, ACCORDINGLY WE ANSWER QUESTION NO. 1 REFERRED TO THIS SPECIAL BENCH IN THE NEGATIVE I.E. IN FA VOUR OF THE ASSESSEE AND QUESTION NO . 2 IN AFFIRMATIVE I.E. AGAIN IN FAVOUR .OF THE ASSESSEE. 4. 6 IN VIEW OF THE ABOVE, SINCE THE ISSUE UNDER CONSIDERATION IS COVERED NOT ONLY BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY 2001 - 02 TO 20 03 - 04 BUT ALSO BY THE ORDER OF THE ITATS SPECIAL BENCH IN THE CASE OF SUMITOMO MITSUI BANKING CORPORATION (SUPRA) , WE HOLD THAT THE DEPARTMENT WAS NOT JUSTIFIED IN SUBJECTING TO TAX THE INTEREST PAID BY THE INDIAN BRANCH OF THE ASSESSEE TO ITS HEAD OFFICE AND OVERSEAS BRANCHES APPLYIN G THE PROVISIONS OF ARTICLE 12 OF INDIA - FRANCE TAX TREATY. 5 . GROUND NO.3 PERTAINS TO SUBJECTING THE DATA PROCESSING CHARGES PAID TO THE SINGAPORE BRANCH OF THE ASSESSEE AMOUNTING TO RS. 132,335,594/ - APPLYING THE PROVISIONS OF ARTICLE 13(ROYALTIES, FEES FOR TECHNICAL SERVICES AND PAYMENTS FOR USE OF EQUIPMENT) OF THE INDIA - FRANCE TAX TREATY. THIS ISSUE IS ALSO COVERED BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2001 - 02 TO 2003 - 04 WHEREIN INTEREST PAID BY ASSES SEE TO HEAD OFFICE/OVERSEAS BRANCHES WAS HELD TO BE NOT LIABLE TO TAX , F OLLOWING WAS THE PRECISE OBSERVATION OF THE TRIBUNAL IN ITS ORDER DATED 20 - 6 - 2012 FOR AY 2002 - 03 : - 3. THE SOLITARY ISSUE INVOLVED IN THE APPEAL OF THE ASSESSEE FOR, THE A.Y. 2002 - 03 R ELATES TO THE ADDITION OF RS. 1,48,30,613/ - MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT (A) ON ACCOUNT OF 'INTEREST' PAID BY THE INDIAN BRANCHES OF THE ASSESSEE BANK TO ITS HEAD OFFICE AND OTHER OVERSEAS BRANCHES. 4. THE ASSESSEE, IN THE PRESENT CASE IS A COMMERCIAL BANK HAVING ITS HEAD OFFICE IN FRANCE. IT CARRIES ON THE NORMAL BANKING ITA NO. 339 / 10 10 ACTIVITIES INCLUDING FINANCING OF FOREIGN TRADE AND FOREIGN EXCHANGE TRANSACTIONS IN INDIA THROUGH ITS EIGHT BRANCHES SITUATED AT MUMBAI, NEW DELHI, KOLKATA, BANGALORE, PU NE, AHMEDABAD, CHENNAI AND HYDERABAD. DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2002 - 03, THE INDIAN BRANCHES OF THE ASSESSEE BANK HAVE PAID TOTAL INTEREST OF RS. 1,48,30,613/ - TO ITS HEAD OFFICE AND OVERSEAS BRANCHES AND THE SAME WAS CLAIMED AS A DEDUCTION WHILE DETERMINING THE PROFITS ATTRIBUTABLE TO INDIAN BRANCHES, WHICH WAS CHARGEABLE TO TAX IN INDIA. THE SAID INTEREST WAS TREATED BY THE A.O. AS INCOME OF THE ASSESSEE'S HEAD OFFICE / OVERSEAS BRANCHES CHARGEABLE TO TAX IN INDIA. THIS DECISION OF THE A.O. WAS CHALLENGED BY THE ASSESSEE IN THE A PPEAL FILED BEFORE THE LD. CIT (A ) AND THE CONTENTION RAISED BEFORE THE LD. CLT (A) IN THIS REGARD WAS THAT THE HEAD OFFICE OF THE ASSESSEE BANK AS WELL AS ALL ITS BRANCHES BEING THE SAME PERSON AND ONE TAXABLE ENTITY AS PER THE INDIAN INCOME - TAX ACT, INTEREST PAID BY INDIAN BRACHES TO HEAD OFFICE AND OCHER OVERSEAS BRANCHES WAS PA YMENT TO SELF, WHICH DID NOT GIV E RISE TO ANY INCOME AS PER THE INCOME - TAX ACT. IN SUPPORT OF THIS CONTENTION, RELIANCE WAS PLACED ON BEHALF OF THE ASSESSEE ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF SIR KIKABHAI PREMCHAND VS. CT (CENTRAL) 24 ITR 506 AS WELL AS THE DECISION OF KOLKATA SPECIAL BENCH OF THE ITAT IN THE CASE OF ABN AMRO BANK NV VS. ASST. DIRECTOR OF INCOME - TAX 98 TIJ 295. THE CONTENTION OF THE ASSESSEE, HOWEVER, WAS NOT ACCEPTED BY THE LD. CIT (A) AND RELYING ON THE DECISION OF MU M BAI BENCH OF THE ITAT IN THE CASE OF DRESDNER BANK AG VS. ADD1. CIT 108 ITD 375, HE HELD THAT THE INTEREST PAID BY THE INDIAN BRANCHES OF T HE ASSESSEE BANK TO ITS HEAD OFFICE AND OVERSEAS BRANCHES WAS CHARGEABLE TO TAX IN INDIA. ACCORDINGLY, THE ADDITION MADE BY THE A.O. ON THIS ISSUE WAS CONFIRMED BY THE LD. CIT (A). 5. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND PERUSED THE RELEVANT M ATERIAL ON RECORD. AS AGREED BY THE LD. REPRESENTATIVES OF BOTH THE SIDES, THE ISSUE INVOLVED IN THIS APPEAL OF THE ASSESSEE NOW STANDS SQUARELY COVERED BY THE DECISION OF SPECIAL BENCH OF THE ITAT IN THE CASE OF SUMITOMO BANKING CORP. MUMBAI WHEREIN IT WA S HELD, AFTER ELABORATELY DISCUSSING THE LEGAL POSITION EMANATING FROM THE INTERPRETATION OF RELEVANT PROVISIONS OF INDIAN INCOME - TAX ACT AS WELL AS TREATY, THAT INTEREST PAID TO THE HEAD OFFICE OF THE ASSESSEE BANK AS WELL AS ITS OVERSEAS BRANCHES BY THE INDIAN BRANCH CANNOT BE TAXED IN INDIA BEING PAYMENT TO SELF WHICH DOES NOT GIVE RISE TO INCOME THAT IS TAXABLE IN INDIA AS PER THE DOMESTIC LAW OR EVEN AS PER THE RELEVANT 'TAX TREATY'. RESPECTFULLY FOLLOWING THE SAID DECISION OF SPECIAL BENCH OF THE ITA T I WHICH IS DIRECTLY APPLICABLE IN THE PRESENT CASE, WE DELETE THE ADDITION OF RS.1,48,30,613/ - MADE BY THE A. O . AND CONFIRMED BY THE LD. CIT (A) ON THIS ISSUE AND ALLOW THE APPEAL OF THE ASSESSEE. ITA NO. 339 / 10 11 5.1 THE ISSUE HAS ALSO BEEN DEALT BY THE SPECIAL BENCH O F THE TRIBUNAL IN THE CASE OF SUMITOMO MITSUI BANKING CORPORATION (SUPRA), WHEREIN THE OBSERVATION OF THE BENCH AT PARA 88 IS AS UNDER : - 88. KEEPING IN VIEW ALL THE FACTS OF THE CASE AND THE LEGAL POSITION EMANATING FROM THE INTERPRETATION OF THE RELEVAN T PROVISIONS OF DOMESTIC LAW AS WELL AS THAT OF THE TREATY AS DISCUSSED ABOVE, WE ARE OF THE VIEW THAT ALTHOUGH INTEREST PAID TO THE HEAD OFFICE OF THE ASSESSEE BANK BY ITS INDIAN BRANCH WHICH CONSTITUTES ITS PE IN INDIA IS NOT DEDUCTIBLE AS EXPENDITURE UN DER THE DOMESTIC LAW BEING PAYMENT TO SELF, THE SAME IS DEDUCTIBLE WHILE DETERMINING THE PROFIT ATTRIBUTABLE TO, THE PE WHICH IS TAXABLE IN INDIA AS PER THE PROVISIONS OF ART. 7(2) AND 7(3) OF THE INDO- JAPANESE TREATY READ WITH, PARA 8 OF THE PROTOCOL WHI SH ARE MORE BENEFICIAL TO THE ASSESSEE, THE SAID INTEREST, HOWEVER, CANNOT BE TAXED IN INDIA IN THE HANDS OF ASSESSEE BANK, A FOREIGN ENTERPRISE BEING PAYMENT TO' SELF WHICH CANNOT GIVE RISE TO INCOME THAT IS TAXABLE IN INDIA AS PER THE DOMESTIC LAW, EVEN OTHERWISE, THERE IS NO EXPRESS PROVISION CONTAINED IN THE RELEVANT TAX TREATY WHICH IS CONTRARY TO THE DOMESTIC LAW IN INDIA ON THIS ISSUE, THIS POSITION APPLICABLE IN THE CASE' OF INTEREST PAID BY INDIAN BRANCH OF A FOREIGN BANK TO ITS HEAD OFFICE EQUALLY HOLDS GOOD FOR THE PAYMENT OF INTEREST MADE BY THE INDIAN BRANCH OF A FOREIGN BANK TO ITS BRANCH OFFICES ABROAD AS THE SAME STANDS ON THE SAME FOOTING AS THE PAYMENT OF INTEREST MADE TO THE HEAD OFFICE, AT THE TIME OF HEARING BEFORE US, THE LEARNED REPRES ENTATIVES OF BOTH THE SIDES HAVE ALSO NOT MADE ANY SEPARATE SUBMISSIONS ON THIS ASPECT OF THE MATTER SPECIFICALLY. HAVING HELD THAT THE INTEREST PAID BY THE INDIAN BRANCH OF THE ASSESSEE BANK TO ITS HEAD OFFICE AND OTHER BRANCHES OUTSIDE INDIA IS NOT CHARG EABLE TO TAX IN INDIA, IT FOLLOWS THAT THE PROVISIONS OF S. 195 WOULD NOT BE ATTRACTED AND THERE BEING NO FAILURE TO DEDUCT TAX AT SOURCE FROM THE SAID PAYMENT OF INTEREST MADE BY THE PE, THE QUESTION OF DISALLOWANCE OF THE SAID INTEREST BY INVOKING THE PR OVISIONS OF S. 40 (A)(I) DOES NOT ARISE, ACCORDINGLY WE ANSWER QUESTION NO. 1 REFERRED TO THIS SPECIAL BENCH IN THE NEGATIVE I.E. IN FAVOUR OF THE ASSESSEE AND QUESTION NO. 2 IN AFFIRMATIVE I.E. AGAIN IN FAVOUR .OF THE ASSESSEE. AS THE FACTS AND CIRCUMST ANCES OF THE CASE DURING THE YEAR UNDER CONSIDERATION ARE PERI MATERIA , WHERE PAYMENT MADE BY ASSESSEE TO SINGAPORE BRANCH FOR DATA PROCESSING, WAS BROUGHT TO TAX. R ESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE AS WELL AS THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SUMITOMO ITA NO. 339 / 10 12 MITSUI BANKING CORPORATION (SUPRA) , WE HOLD THAT THE DEPARTMENT WAS NOT JUSTIFIED IN TAXING THE DATA PROCESSING CHARGES TO THE SINGAPORE BRANCH OF THE ASSESSEE BY APPLYING THE PROVISIONS OF ARTI CLE 13 OF THE INDIA - FRANCE TAX TREATY. 6 . IN GROUND NO.4 , THE ASSESSEE IS AGGRIEVED FOR NOT GRANTING CREDIT FOR TAX DEDUCTED AT SOURCE AMOUNTING TO RS. 2,689,177/ - ON INTEREST ON SUB - ORDINATED DEBT, PAID BY INDIAN BRANCHES OF THE ASSESSEE TO ITS HEAD OFFIC E. THIS ISSUE HAS BEEN DEALT BY THE AO AT PAGE 13 PARA 5.3.3 AND THE CIT(A) HAS CONFIRMED THE ORDER OF THE AO AT PAGE 36, PARA 9.2 OF ITS APPELLATE ORDER. 6 .1 WE HAVE HEARD RIVAL CONTENTIONS AND FOUND THAT IN THE COMPUTATION OF INCOME OF THE BRANCH, THE I NTEREST WAS ALLOWED AS TAX HAS BEEN DEDUCTED ON PAYMENT OF INTEREST TO THE OVERSEAS/HEAD OFFICE. THE AO HELD THAT COMPUTATION OF PROFIT OF PE IS TO BE DONE AS PER ARTICLE 7(3)(A) OF THE DTAA. AS PER THE AO, THE INCOME OF OVERSEAS/HEAD OFFICE, WOULD BE TAXA BLE UNDER ARTICLE 12 OF THE TREATY. ACCORDINGLY, HE ADDED AN AMOUNT OF RS. 3,09,48,018/ - TO THE TOTAL INCOME OF THE ASSESSEE AS INTEREST INCOME OF THE OVERSEAS BRANCHES/HEAD OFFICE. THE AO HELD THAT ASSESSEE WILL BE ALLOWED CREDIT OF TAX DEDUCTED ON PAYMENT TO HEAD OFFICE/OVERSEAS BRANCHES. HOWEVER, IN SPITE OF SUCH OBSERVATION, NO CREDIT FOR TDS WAS ALLOWED. IN THE INTEREST OF JUSTICE, WE RESTORE THIS ISSUE TO THE FILE OF THE AO WITH ITA NO. 339 / 10 13 A DIRECTION TO VERIFY THE TAX DEDUCTED AT SOURCE AND TO GIVE RESPECTIVE CREDIT AFTER ALLOWING PROPER OPPORTUNITY TO THE ASSESSEE. 7 . GROUND NO.5 IS CONSEQUENTIAL IN NATURE, SINCE THE AO IS TO RECOMPUTED THE INTEREST U/S. 234C. WE DIRECT ACCORDINGLY. 8 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED IN PART IN TERMS INDICATE D HEREIN ABOVE . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 16 TH JU LY . 201 4 . 16 TH JULY ,2014 SD/ - SD/ - ( ) ( AMIT SHUKLA ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 16 /0 7 /2014 /PKM , PS COP Y OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A), MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD F ILE. //TRUE COPY//