By GEETA JANI | DHISHAT B. MEHTA
Chartered Accountants
19. JP Morgan Chase Bank N.A. vs. DCIT
ITA No. 3747/Mum/2018 & 363/Mum/2019
A.Ys.: 2011-12 and 2012-13
Date of order: 30th December, 2019
Article 7 of India-US DTAA – Explanation (a) to section 9(1)(v)(c) of the Act – Interest paid by an Indian branch of a foreign bank to its head office / overseas branches was not taxable under the Act – Explanation (a) to section 9(1)(v)(c) deeming such interest as income is prospective in nature
FACTS
The assessee, an Indian branch (BO) of a US banking company, paid interest to its head office (HO) and sister branches abroad. The HO contended that the payment by the BO to the HO was payment to self and was covered under the principle of mutuality. Hence, interest received by it was not taxable in India. The AO accepted the contention of the assessee and completed the assessment on that basis.
Administrative CIT exercises power u/s 263 of the Act. According to the CIT, under the India-USA DTAA, interest is taxable in the source country. Since the assessee had its PE in India (i.e., the BO), interest was taxable in India. He further held that since the assessee had opted to be governed under beneficial provisions of the DTAA, the single entity approach under the Act gave way to the distinct and independent entity or separate entity approach under the DTAA. Hence, the BO and the HO were two separate entities. The CIT further referred to Explanation (a) to section 9(1)(v)(c) of the Act which was effective from 1st April, 2016 and mentioned that since the amendment was clarificatory in nature, it applied retrospectively. He also referred to the CBDT Circular No. 740 dated 17th April, 1996 mentioning that a branch of a foreign company in India is a separate entity for taxation under the Act. The CIT distinguished the Tribunal Special Bench decision in Sumitomo Mitsui Banking Corporation vs. DDIT [2012] 19 taxmann. com 364 (Mum.) on the ground that the Tribunal had no occasion to consider the reasoning mentioned by him in the context of the DTAA. The CIT concluded that interest received by the HO and other branches abroad was taxable in India.
Aggrieved, the assessee filed an appeal with the Tribunal.
HELD
The Special Bench of the Tribunal in the case of Sumitomo Mitsui Banking Corporation vs. DCIT1 held that since the interest paid by the BO to the HO is in the nature of payment made to self, it will be governed by the principle of mutuality. Hence, it was not taxable under the Act. Applying the same principle, interest received by the HO (and other branches) from the BO was not taxable in India.
Explanation (a) to section 9(1)(v)(c) of the Act, which deems that interest paid by the BO of a bank to its HO is taxable in India, applies prospectively from 1st April, 2016 and cannot be invoked to tax interest of any earlier financial year.
