M/s. DEUTSCHE BANK A.G., MUMBAI V. ADIT (I.T) 1(2), MUMBAI

ITA 3412/MUM/2005

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79226 (ITAT-MUMBAI)
• Duration Of Justice: 9 year(s) 1 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 23-06-2014
• Assessment Year: 2001-2002
• Appeal Filed On: 06-05-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDER KUMAR
• Assessee Lawyers: P J PARDIWALA AW MR NIRAJ SETH
• Keywords: Permanent establishment; Non-deduction of tax

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI . . , , , BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEMBER . / ITA NO. 3412 /MUM./ 2005 ( / ASSESSMENT YEAR : 2 0 01 02 ) DEUTCHE BANK A.G. 5 TH FLOOR, NICHOLAS PIRAMAL TOWER PENINSULA CORPORATE PARK LOWER PAREL, MUMBAI 400 013 .. / APPELLANT V/S ASSTT. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 1(2) SCINDIA HOUSE, NAROTTAM MORARJEE MARG BALLARD ESTATE, MUMBAI 400 038 .... / RESPONDENT ./ PERMANENT ACCOUNT NUMBER AAACD1390F / ASSE SSEE BY : MR. P.J. PARDIWALA A/W MR. NIRAJ SETH / REVENUE BY : MR. NARENDER KUMAR / DATE OF HEARING 24 .06.2014 / DATE OF ORDE R 24.06.2014 / ORDER , / PER AMIT SHUKLA , J.M. THE AFORESAID APPEAL WAS HEARD BY THE TRIBUNAL ALONG WITH THE APPEALS FOR OTHER ASSESSMENT YEARS AND CONSOLIDATED ORDER DATED 17 TH JULY 2013, WAS PASSED. HOWEVER, WHILE ADJUDICATING THE VARIOUS DEUTCHE BANK A.G. 2 GROUNDS, THE TRI BUNAL OMITTED TO DECIDE GROUND NO.4, AS RAISED BY THE ASSESSEE. THEREAFTER, IN THE MISCELLANEOUS APPLICATION FILED BY THE ASSESSEE, THE TRIBUNAL VIDE ORDER DATED 26 TH MARCH 2014, HAS RECALLED THE ORDER FOR THE LIMITED PURPOSE OF ADJUDICATION OF GROUND NO.4 . ACCORDINGLY, GROUND NO.4, IS TO BE ADJUDICATED BY US. THE SAID GROUND, READS AS UNDER: 4 THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE A.O. IN NOT ALLOWING A DEDUCTION FOR ` 70,97,938, BEING INTEREST PAID TO HEAD OFFICE / OVERSEAS BRANCHES. (I) T HE AMOUNT IS NOT TAXABLE AS ONE CANNOT DERIVE INCOME FROM SELF AND NO TAX IS REQUIRED TO BE DEDUCTED AT SOURCE. (II) ARTICLE 7(1) OF THE TREATY PROVIDES THAT IF AN ENTERPRISE CARRIED ON BUSINESS IN INDIA, PROFITS THAT CAN BE ATTRIBUTED TO ITS PERMANENT ES TABLISHMENT (PE) MAY ONLY BE TAXED IN INDIA. ARTICLE 7(2) OF THE TREATY CREATED A FICTION BY WHICH A PE IS DEEMED TO BE SEPARATE AND DISTINCT FROM THE ENTERPRISE OF WHICH IT IS A PE. CARRYING THE FICTION TO ITS LOGICAL CONCLUSION, CHARGE BY HO/APHO AND OVE RSEAS BRANCHES COULD BE TREATD AS A PAYMENT BY INDIAN PE TO THIRD PARTIES. HOWEVER, AS THESE THIRD PARTIES DO NOT HAVE A PE IN INDIA TO WHICH PROFIT IF ANY CAN BE ATTRIBUTED, AS PER ARTICLE 7(1), SUCH PROFITS WOULD NOT BE CHARGEABLE TO TAX IN INDIA. (II I) WITHOUT PREJUDICE AND IN ANY EVENT, TAX PAID BY APPELLANT IS ADEQUATE TO COVER TAX IF ANY, PAYABLE THEREON AND HENCE, SECTION 40(A)(I) IS NOT ATTRACTED. 2 . FACTS IN BRIEF : THE ASSESSEE COMPANY HA S PAID SUM OF ` 70,97,738, BY WAY OF INTEREST TO HEAD OFF ICE AND OTHER OVERSEAS BRANCHES ON NOSTRO ACCOUNT LYING WITH THE HEAD OFFICE AND THE OTHER OVERSEAS BRANCH. ON SUCH PAYMENT, NO TAX HAS BEEN DEDUCTED AT SOURCE BY THE ASSESSEE. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE SUBMITTED THAT THE PAYMENT M ADE BY THE INDIAN BRANCH TO THE HEAD OFFICE AND OTHER OVERSEAS BRANCH IS NOT A PAYMENT IN LEGAL TERMS AS THE PAYER AND THE PAYEE ARE THE SAME AND, THEREFORE, THE DEUTCHE BANK A.G. 3 PROVISIONS OF SECTION 195, WILL NOT ATTRACT AND, HENCE, NO DISALLOWANCE CAN BE MADE UNDER SECT ION 40(A)(I). THE ASSESSING OFFICER REJECTED THE ASSESSEES CONTENTION AND DISALLOWED THE SAID AMOUNT OF ` 40(A)(I) AS PER THE REASONING GIVEN IN PARA 5.13. 3 . BEFORE THE LEARNED COMMISSIONER (APPEALS), THE ASSESSEE REITERATED THE SAME CONTENTION WHICH HAS BEEN DEALT BY THE LEARNED COMMISSIONER (APPEALS) IN PARA 8.4. HOWEVER, THE LEARNED COMMISSIONER (APPEALS) TOO REJECTED THE ASSESSEES CONTENTION THAT SUCH AN INTEREST PAYMENT TO THE HEAD OFFICE SHOULD BE IGNORED BECAUSE IT IS A PAYMENT TO SELF ONLY. THE S UM AND SUBSTANCE OF HIS REASONING WAS THAT THE GLOBAL INCOME OF THE ASSESSEE BANK IS NOT A SUBJECT MATTER OF DETERMINATION BUT ONLY FOR PART OF ITS INCOME WHICH HAS ACCRUED OR ARISEN IN INDIA . HE ALSO DISTINGUISH THE DECISION OF THE HON'BLE CALCUTTA HIGH C OURT AS RELIED UPON BY THE ASSESSEE IN BETTS HARTLEY HUTTE AND CO., [ 1979 ] 116 ITR 425 (CAL.) . 4 . BEFORE US, THE LEARNED SENIOR COUNSEL, MR. P.J. PARDIWALA, ON BEHALF OF THE ASSESSEE, SUBMITTED THAT NOW THIS ISSUE STANDS COVERED BY THE DECISION OF THE SPECIA L BENCH OF THE TRIBUNAL, MUMBAI, IN SUMITOMO MITSUI BANK CORP. V/S DDIT, [2012] 136 ITD 66 (SB), WHEREIN IT HAS BEEN HELD THAT WHERE ANY INDIAN BRANCH OF A FOREIGN BANK PASSING INTEREST TO ITS HEAD OFFICE AND OTHER OVERSEAS BRANCHES OF THE SAID FOREIGN BAN K ON ADVANCE RECEIVED BY IT, THE SAID INTEREST IS NEITHER DEDUCTIBLE IN THE HANDS OF THE INDIAN BRANCH NOR CHARGEABLE TO TAX IN THE HANDS OF THE HEAD OFFICE AND OVERSEAS BRANCHES , AS ALL BEING SINGLE ENTITY. IN THE DOMESTIC LAW, SUCH AN INCOME CANNOT BE TA XED. DEUTCHE BANK A.G. 4 5 . THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, FAIRLY ADMITTED THAT THIS ISSUE STANDS COVERED BY THE DECISION OF THE TRIBUNAL, SPECIAL BENCH, MUMBAI, CITED SUPRA. 6 . AFTER HEARING BOTH THE PARTIES AND ON A PERUSAL OF THE ORDERS OF THE AUTH ORITIES BELOW AND THE CASE LAW RELIED UPON BY THE LEARNED SENIOR COUNSEL FOR THE ASSESSEE, WE FIND THAT THIS ISSUE HAS BEEN DECIDED BY THE SPECIAL BENCH, IN FAVOUR OF THE ASSESSEE, INTER ALIA, BY HOLDING THAT INTEREST PAID TO THE HEAD OFFICE OF THE ASSESSE E BANK BY ITS INDIAN BRANCH WHICH CONSTITUTES ITS P.E. IN INDIA, IS NOT DEDUCTIBLE AS EXPENDITURE UNDER THE DOMESTIC LAW BEING PAYMENT TO SELF, THE SAME IS DEDUCTIBLE WHILE DETERMINING THE PROFIT TO THE P.E. WHICH IS TAXABLE IN INDIA AS PER THE PROVISIONS OF ARTICLE 7(2) AND 7(3) BECAUSE, IT AMOUNTS TO PAYMENT TO SELF WHICH IS NOT TAXABLE UNDER THE DOMESTIC LAW. THUS, THE PRINCIPLES OF MUTUALITY WERE INVOKED FOR NON DEDUCTION OF TAX. THE RELEVANT OBSERVATION AND THE CONCLUSION OF THE SPECIAL BENCH IN SUMI TOMO MITSUI BANK CORP. ARE AS UNDER: 50. AS REGARDS THE DEDUCTION OF INTEREST PAYABLE TO THE HEAD OFFICE IN THE HANDS OF INDIAN PE FOR THE PURPOSE OF COMPUTING PROFITS ATTRIBUTABLE TO THE SAID PE, THERE IS NO DISPUTE THAT SUCH DEDUCTION IS NOT PERMISSIB LE UNDER THE INDIAN INCOME - TAX ACT (DOMESTIC LAW) BEING THE PAYMENT MADE TO SELF. BOTH THE INDIAN PE AND THE FOREIGN GE OF WHICH IT IS A PART ARE NOT SEPARATE ENTITIES FOR THE PURPOSE OF TAXATION UNDER THE DOMESTIC LAW AND THE SAME BEING ONE AND THE SAME E NTITY RECOGNIZED AS ONE ASSESSEE UNDER THE DOMESTIC LAW, INTEREST PAYABLE BY INDIAN PE TO FOREIGN GE OF WHICH IT IS A PART, CANNOT BE TREATED AS EXPENDITURE ALLOWABLE AS DEDUCTION BEING PAYMENT TO SELF. THIS POSITION WHICH IS WELL SETTLED UNDER THE DOMESTI C LAW HAS NOT BEEN DISPUTED EVEN BY THE LEARNED REPRESENTATIVES OF THE ASSESSEES DURING THE COURSE OF HEARING BEFORE US. XXX XXX XXX 52. A COMBINED READING OF ARTICLE 7(2) AND 7(3) OF THE TREATY AND PARAGRAPH NO. 8 OF THE PROTOCOL THUS MAKES IT CLEAR T HAT FOR THE DEUTCHE BANK A.G. 5 PURPOSE OF COMPUTING THE PROFITS ATTRIBUTABLE TO THE PE IN INDIA, THE SAID PE IS TO BE TREATED AS A DISTINCT AND SEPARATE ENTITY WHICH IS DEALING WHOLLY INDEPENDENTLY WITH THE GENERAL ENTERPRISE OF WHICH IT IS A PART AND DEDUCTION HAS TO BE ALL OWED FOR ALL THE EXPENSES WHICH ARE INCURRED FOR THE PURPOSE OF PE WHETHER IN INDIA OR ELSEWHERE BARRING THE AMOUNT PAID BY A PERMANENT ESTABLISHMENT TO THE HEAD OFFICE OF GE OR ANY OTHER OFFICES THEREOF, INTER ALIA, BY WAY OF INTEREST ON MONEYS LENT TO TH E PERMANENT ESTABLISHMENT EXCEPT WHERE THE ENTERPRISE IS A BANKING INSTITUTION. IN THE CASE OF A BANKING ENTERPRISE LIKE THE ASSESSEE IN THE PRESENT CASE, PROFIT ATTRIBUTABLE TO THE PE IN INDIA THUS IS TO BE COMPUTED TREATING THE SAME AS A DISTINCT AND SEP ARATE ENTITY WHICH IS DEALING WHOLLY INDEPENDENTLY WITH THE GE OF WHICH IT IS A PART AND DEDUCTION IS TO BE ALLOWED FOR ALL THE EXPENSES WHICH ARE INCURRED FOR THE PURPOSE OF PE, WHETHER INCURRED IN INDIA OR ELSEWHERE, INCLUDING THE INTEREST PAID OR PAYABL E BY A PE TO THE HEAD OFFICE OR ANY OTHER OFFICES OF THE GE BY WAY OF INTEREST ON MONEYS LENT TO THE PE. IN THE PRESENT CASE, THE INTEREST IN QUESTION IS PAYABLE BY THE PE IN INDIA TO THE HEAD OFFICE OF THE GE ABROAD ON THE MONEYS LENT TO IT AND THE SAME B EING UNDISPUTEDLY THE EXPENDITURE INCURRED FOR THE PURPOSE OF PE, WE HAVE NO HESITATION TO HOLD THAT THE SAME IS ALLOWABLE AS DEDUCTION WHILE COMPUTING THE PROFITS OF THE PE IN INDIA FOR THE PURPOSE OF TAXATION IN INDIA AS PER ARTICLE 7(2) AND 7(3) OF THE TREATY READ WITH PARAGRAPH NO. 8 OF THE PROTOCOL. XXX XXX XXX 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 A BOVE, 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 UNDER 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 ARTICLE 7(2) & 7(3) OF THE INDO - JAPANESE TREATY READ WITH PARAGRAPH 8 OF THE PROTOCOL WHICH ARE MORE BENEFICIAL TO THE ASSESSEE. THE SAID INTEREST, HOWEVER, CA NNOT 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 DEUTCHE BANK A.G. 6 BY THE INDIAN BRANCH OF A F OREIGN 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 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 AND OTHER BRANCHES OUTSIDE INDIA IS NOT CHARGEABLE TO TAX IN INDIA, IT FOLLOWS THAT THE PROVISIONS OF SECTION 195 WOU LD 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 PROVISIONS OF SECTION 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. THUS, RESPECTFULLY FOLLOWING THE JUDICIAL PRECEDENCE OF THE AFORESAID DECISION OF THE SPEC IAL BENCH, WE HOLD THAT NO DISALLOWANCE UNDER SECTION 40(A)(I) CAN BE MADE ON THE PAYMENT OF INTEREST PAID TO THE HEAD OFFICE / OVERSEAS BRANCHES AS THE SAME IS NOT TAXABLE , BEING PAYMENT TO SELF I.E., ON THE GROUND OF PRINCIPLES OF MUTUALITY AND, ACCORDIN GLY, NO TDS WAS REQUIRED TO BE DEDUCTED. ACCORDINGLY, GROUND NO.4, AS RAISED BY THE ASSESSEE IS TREATED AS ALLOWED. 7 . 4 7. IN THE RESULT, GROUND NO.4 OF THE ASSESSEES APPEAL IS ALLOWED 24 TH JUNE 2014 ORDER PRONOUNCED IN THE OPEN COURT O N 24 TH JUNE 2014 SD/ - . . B.R. BASKARAN ACCOUNTANT MEMBER SD/ - AMIT SHUKLA JUDICIAL MEMBER MUMBA I, DATED : 24 TH JUNE 2014 DEUTCHE BANK A.G. 7 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY ORDER . / PRADEEP J. CHOWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI