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| DATE: | March 14, 2011 (Date of publication) |
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| Click here to download the judgement (abn_amro_PE_HO_interest.pdf) |
Interest paid by a branch of a Foreign Bank to its HO is deductible in the hands of the branch. Such interest is not taxable in the HO’s hands
The assessee, a Netherlands Bank, carried on banking business through a PE in India. The PE borrowed funds from its HO on which interest was paid. The assessee claimed that in the computation of profits of the PE under Article 7(3)(b) of the India-Netherlands DTAA, the interest paid to the HO was deductible. The AO & CIT (A) held that while the interest was deductible in principle in the hands of the PE, it was taxable in the hands of the HO and as there was no TDS u/s 195, the interest had to be disallowed u/s 40(a)(i). The result was that the interest paid by the PE to the HO was disallowed in the hands of the PE while being assessed in the hands of the HO. On appeal, the Special Bench (98 TTJ Kol 295) held that the PE and the HO were the same person and the interest paid was neither deductible in the hands of the PE nor assessable in the hands of the HO. On appeal by the assessee, HELD reversing the Special Bench:
(i) As regards deductibility of the interest in the hands of the PE, though a branch and the HO are the “same person” in general law, Articles 5 & 7 of the DTAA provide that the PE shall be assessable as a separate entity. Under Article 7(3)(b) payment of interest by a bank’s PE to its HO is allowed as a deduction. The result is that the interest paid by the PE to the HO is deductible in computing the PE’s profits (Betts Hartley Huett 116 ITR 425 (Cal) distinguished);
(ii) As regards taxability in the hands of the HO & obligation for TDS u/s 195, in accordance with the principles of apportionment of profits between the PE & the HO as laid down in Hyundai Heavy Industries 291 ITR 482 (SC) & Morgan Stanley 162 TM 165 (SC), only the PE is to be taken as the assessee and not the HO. As the interest was not chargeable to tax in the hands of the HO, the PE was under no obligation to deduct tax u/s 195 and consequently no disallowance u/s 40(a)(i) can be made in the hands of the branch.
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