The Bank of Tokyo- Mitsubishi UFJ Ltd vs. ADIT (ITAT Delhi)

(i) The decision of Spl. Bench in the case of Sumotomo Mitsubishi Banking Corporation (supra) which is a five member bench decision has elaborately considered the issue regarding deduction of interest paid by PE to head office and the interest income payable by the Indian PE of a foreign bank to its HO and branch offices abroad for the purpose of computing the income of HO liable to be taxed in India. The issue of interest received from HO by PE was not before Special Bench. It has been held that in view of the provisions contained in Article 7(2) and 7(3) of DTA between India and Japan, the interest paid by PE to head office is to be allowed as the PE is to be treated as a distinct and separate enterprise. However, as far as interest received by head office is concerned, it has been held that the same cannot be taxed in the hands of non resident banking company on the ground of mutuality. The Department’s view point is that assessee can either be assessed under the domestic law or under the treaty. The department’s stand is that the assessee has to compute its tax liability separately under both the provisions and whichever course is beneficial to it, the same can be adopted by assessee. In support of its contention ld. CIT(DR) has, inter-alia, relied on the decision of Special Bench in the case of Clogue Engineering Ltd. (supra). The contention of ld. CIT(DR) is that this Spl. Bench has not been considered by the 5 member bench in the case of Sumoto Mitsubishi Banking Corporation (supra). Therefore, the first issue to be decided is whether the decision in the case of Sumitomo Mitsui Banking Corporation (supra) holds the field on this issue in the backdrop of decision in the case of Clough Engineering Ltd. or not. We find that in Clogue Engineering Ltd. Tribunal has observed that proper appreciation of the words “more beneficial” as found u/s 90(2) needs to be appreciated for proper adjudication of the dispute before it. The Tribunal further observed, as noted earlier in the arguments advanced by ld. DR, that this point had not been elaborated upon by any of the contending parties, but Tribunal came to the conclusion that application of this provision can be made after ascertaining the tax payable by the assessee under the double taxation avoidance agreement and then tax payable by the assessee under the Act. Thus, it is evident that this issue per se was not before the Spl. Bench and, therefore, these observations are only in the nature of obiter dicta and not ratio decendi. Be that as it may, Tribunal has primarily taken the same view as was taken by Tribunal in the case of Dresdner Bank AG, wherein also Tribunal had taken a similar view We find that the Spl. Bench in the case of Sumitomo Mitsui Banking Corporation (supra) has specifically considered the decision in the case of Dresdner Banking AG and has observed as under ….. Thus, impliedly the decision of Spl. Bench in the case of Clough Engineering has not been approved by the Spl. Bench in the case of Sumitomo Mitsui Banking Corporation (supra). The, Spl. Bench in Sumitomo Mitsui Banking Corporation has not considered this issue as is evident from the following two grounds which were answered by Special Bench: ….. A distinction has to be kept in mind between banking and financial institutions and non-banking and financial institutions. If entity is not in the business of giving commercial loans, no notional interest charged is allowed as a deduction to the intra entity borrowing. If the entity is a bank or other financial institution and, therefore, in the business of giving commercial loans, the current interest rate applicable to the funds lend to the PE is deductible to the borrower (PE). However, as far as assessability in the hands of lender (HO) is concerned the same has to be excluded on the ground of mutuality as held by Special Bench in the case of Sumitomo Corporation (supra).

(ii) This makes the intention of legislature very clear that the MAT provisions are applicable only to domestic companies and not to the foreign companies. Even if for sake of argument ld. CIT(DR)’s contention is accepted still in view of the provisions of section 90(2), the assessee’s claim for lower impost of tax will have to be accepted because the provisions of section 115JB are subordinate to section 90(2) and have no overriding effect on the said section.