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| DATE: | April 2, 2012 (Date of publication) |
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| Click here to download the judgement (sumitomo_interest_branch_HO.pdf) |
While interest paid by PE of foreign bank to H.O. is deductible in hands of PE, same interest is not taxable in hands of H.O.
The assessee, a Japanese bank, carrying on business through a PE in India, paid interest of Rs. 5 crores to its H.O. & other branches. The assessee, in computing the profits assessable to tax in India, claimed that while the interest received by the H.O. & other branches from the PE was not chargeable to tax in India on the principle that the PE & H.O. were one & the same entity, the PE was entitled to claim a deduction under Article 7 of the DTAA. The AO held that the PE & the H.O. were deemed to be separate entities and that while the interest received by the H.O. from the PE was taxable under Article 11, deduction for that interest could not be allowed to the PE u/s 40(a)(i) as it had failed to deduct TDS. The CIT (A) followed the verdict of the Special Bench in ABN Amro Bank 98 TTJ 295 (Kol) (partly affirmed in ABN AMRO 198 TM 376) and held that the interest was neither chargeable to tax nor allowable as a deduction. On appeal to the Tribunal, the matter was referred to a 5 Member Special Bench. HELD by the Special Bench:
(i) On the question whether the interest paid by the PE to the H.O. is deductible, while such interest is not deductible under the Act because the payer & payee are the same person, Article 7(2) and 7(3) of the DTAA & its Protocol makes it clear that for the purpose of computing the profits attributable to the PE in India, the 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 allowed for, inter alia, interest on moneys lent by the PE of a bank to its H.O.
(ii) On the question of taxability of the interest received by the H.O. from the PE, such interest is not taxable under the Act as both are, under the Act, the same person and not separate entities & one cannot make profit out of himself. The fiction created in Article 7(2) of the DTAA treating the PE as separate and independent entity does not extend to Article 11. Also, the interest paid by the PE is not interest paid in respect of debt claims forming part of the assets of the PE so as to attract Article 11(6). The DTAA, even assuming that it does create a liability, cannot be applied u/s 90(2) as it is contrary to the Act and less favourable to the assessee (Q whether the interest paid by the PE should be netted off against the interest received left open).
THERE CANNOT BE A MORE STUPID LAW OR INTERPRETATION OF THE LAW, WHERE EXPENDITURE INCURRED IN THE HAND OF PAYER IS DEDUCTIBLE BUT NOT CHARGEABLE TO TAX IN THE HAND OF RECIPIENT. The fiction created in Article 7(2) of the DTAA treating the PE as separate and independent entity SHOULD BE MATCHED WITH REALITY FAST.
The rationale seems to be somewhat warped. The DTAA should be structured, and read, in whole. If, for the purpose of exempting an expense, the figment of law assumes dual entity (HO and PE), the same logic should consistently applied for taxing the income. Also, while we try to avoid double taxation of the same item, it is reasonable and fair to consider the same item taxable in another entity’s hands, if it is exempted from tax (via deduction as payment) from another entity.
In my considered view the decision of the hon. Itat (SB) in the case of SUmitomo suffers from obvious fallacy of using double standards. It’s a settled principle of treaty interpretation that u can’t blow hot n cold in the same breath… Meaning thereby that either u either use the treaty provisions or the IT Act provisions, but u can’t use both of thm together for the same issue. This is wht the hon tribunal has done, which doesn’t lay down the correct law.