By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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Article 7, 11 of India-Belgium DTAA – (i) interest paid by Indian branch of foreign bank deductible for computing profit attributable to PE; (ii) interest paid by branch to HO being payment to self, no taxable income in hands of HO.
Facts:
The taxpayer was Indian branch of a Belgian bank. During the relevant assessment year, the taxpayer had made payments to its Head Office (“HO”) towards interest on subordinate debts and term borrowing and had claimed the interest as an expense of the branch. The said interest was offered for taxation in the hands of the HO in terms of Article 11 of India-Belgium DTTA.
Relying on the decision in ABN AMRO Bank NV vs. ADIT [2005] 97 ITD 89, the AO disallowed interest paid to the HO. CIT(A) confirmed the order of the AO.
Held:
The decision relied on by the AO and CIT(A) has been reversed in Sumitomo Mitsui Banking Corpn. vs. DDIT [2012] 136 ITD 66 (Mum.) (SB), which was in the context of India-Japan DTAA. The Tribunal in Sumitomo case held that although interest paid to the HO by Indian branch (which constitutes PE in India) is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the taxable profit attributable to the PE in India in terms of DTAA. As per the domestic law, the said interest, being payment to self, cannot give rise to taxable income in India in the hands of HO. The same position also applies to payment of Interest by Indian branch of a foreign bank to its sister branch offices abroad.
