Credit Suisse AG v. DCIT (2023) 103 ITR 38 (Trib) (SN) (Mum)(Trib)

S. 9(1)(v) : Income deemed to accrue or arise in India – Interest-Hypothetical independence of PE and the head office cannot be extended to computation of profit of the head office and the same is restricted only for computation of profit attributable to PE-DTAA-India – Switzerland.[Art. 7(2), 11]

The Assessee is a company incorporated in Switzerland and is a tax resident of Switzerland. The Assessee had a branch in India through which banking operations were undertaken. The Indian branch constituted a PE of Assessee in India, and its income was offered to tax under article 7 of the Indio-Swiss DTAA. During the relevant AY, the Indian branch of the Assessee paid certain interest towards loans procured from the Assessee’s Singapore and London branch. The said interest was not offered to tax by the Singapore branch on the basis that Assessee and the branches are one and the same enterprise by relying on the decision of Sumitomo Mitsui Banking Corporation v. DDIT [2012] 145 TTJ 649 (Mum) (SB). The interest payment was however claimed as deduction while computing business profits of the Indian branch. Assessment proceedings were initiated against the Assessee. The AO was of the view that Explanation to section 9(1)(v) was specifically inserted to overcome the decision in Sumitomo Mitsui (supra) and therefore the concept of payment to self is not an income is no longer valid. Accordingly, the AO classified such interest payments to be income attributable to the head office under article 7(2) of the DTAA and sought to tax the same in the hands of the Assessee.

The Hon’ble Tribunal followed the judgment of the coordinate bench of the Tribunal in the case of BNP Paribas v. ACIT [ITA No. 1076/Mum/2021 and 1670/Mum/2022] held that fiction of hypothetical independence of PE and the head office/overseas branch cannot be extended to the computation of profit of the head office/ overseas branch and the same is restricted only for computation of profit attributable to PE. It was also observed that though Explanation to section 9(1)(v) of the Act can be said to have overcome the findings in Sumitomo Mitsui (supra), however, the independent fiction and separate entity approach under article 7 of the DTAA is only for the purpose of determining profit attributable to the PE and not for the enterprise as a whole. (AY.  2016-17 ,2017-18)