Article 7(3), India-Japan DTAA – Having regard to Article 7(3), read with Protocol thereto, of India-Japan DTAA, interest paid by Indian branch of a foreign bank to HO was allowable as a deductible expenditure

7.  DCIT vs. Mizuho
Corporate Bank Ltd.

ITA No.: 4711/Mum/2016 & 4710/Mum/2016

Date of Order: 13^th August, 2018

A.Ys. 2007-08 & 2008-09

Article 7(3), India-Japan DTAA – Having regard to Article 7(3),
read with Protocol thereto, of India-Japan DTAA, interest paid by Indian branch
of a foreign bank to HO was allowable as a deductible expenditure

Facts       

The Taxpayer
was a bank incorporated in Japan. It was carrying on banking operations in
India through its branches at Mumbai and Delhi. It had furnished its return of
income for the relevant year. Subsequently, it furnished a revised return and
reduced the income. During the relevant year, the branch had paid interest to
Head Office (HO) on the funds that the HO had advanced to the branches in the
normal course of banking business. The branch had also withheld tax from the
interest payment. The Taxpayer had claimed the interest paid as a deduction by
relying on the protocol to Article 7(3) of India-Japan DTAA. In terms of the
said Protocol, interest on moneys lent by a banking institution to its PE is
allowable as a deduction.

In the course of assessment proceedings,
the AO observed that the branch in India constituted PE of the Taxpayer in
India and concluded as follows.

•    The AO noted the interest
  paid by branch to HO. According to the AO, the branch and HO were not separate
  entities for the tax purpose. Hence, payment made by branch to HO was payment
  to self. Therefore, AO disallowed the deduction of interest paid to the HO. In
  this respect, the AO relied on the decision in ABN Amro Bank NV vs. ADIT
  [2005] 97 ITD 89 (SB).

•    The AO further concluded
  that the source of the interest earned by HO was the branch in India. Hence, in
  terms of section 9(1)(v)(c) of the Act, the interest was deemed to have accrued
  or arisen in India. Therefore, it was taxable in India as per the Act.

•    Further, as the payer of the
  income to a non-resident, the AO treated the branch as a representative
  assessee/agent of the Taxpayer in terms of section 163(1)(c) of the Act.

•    Finally, the AO concluded
  that the interest received by HO was taxable in India @10% in terms of Article
  11(2)(a) of India-Japan DTAA on gross basis.

In appeal, CIT(A) ruled in favour
of the Taxpayer. Hence, the tax authority preferred an appeal before the
Tribunal.

Held²

•    The Special bench decision in ABN Amro Bank
  case was reversed by Kolkata High Court in ABN Amro Bank NV vs. CIT [2012]
  343 ITR 81 (Cal). Further, in Sumitomo Mitsui Banking Corporation vs.
  DDIT [2012] 136 ITD 66 (SB) (Mum), Special Bench of Mumbai Tribunal had
  deviated from the view of Kolkata Tribunal. The tax authority has not brought
  on record any decision to the contrary.

•    In case of the Taxpayer in
  earlier year, relying on the decision in Sumitomo Mitsui banking corporation
  case, the Tribunal had held that the interest paid by Indian branch of the
  Taxpayer to HO was not chargeable to tax in India.

•    While reversing the
  Tribunal decision in ABN Amro bank case, the High Court had observed that
  though a branch and HO are same person under general law, Articles 5 and 7 of
  India-Netherlands DTAA provided for assessment of PE as a separate entity.
  Hence, the High Court allowed interest paid by the branch to HO as a deduction
  from income of PE.

•    Since Article 7(3) of
  India-Japan DTAA, read with Protocol thereto, provides for deduction of interest
  on moneys lent by HO of a banking institution to its branch in India, interest
  paid by branch to HO was allowable as a deduction.

_______________________________________________

2   The
Tribunal had issued notice of hearing to the Taxpayer. The Taxpayer neither
sought adjournment nor did it represent before the Tribunal. Accordingly,
Tribunal delivered its decision ex parte.