Assessee non-resident bank claimed deduction for interest paid by Indian PE to head office with respect to funds borrowed by PE from head office. Assessing Officer denied said claim on ground that branch and head office constituted same legal entity. Assessing Officer held that interest income received from head office was to be accounted for in profits attributable to PE. Tribunal held that profits attributable to PE were to be computed on basis of hypothetical independence of PE from head office as provided in article 7(2), thus, interest paid by PE was to be allowed as deduction and interest received by PE from head office was to be treated as its income.

Fiction of hypothetical independence as determined under article 7(2) was for limited purpose of profits attributable to PE and could not be used for computation of profits of assessee, thus, interest paid by PE to head office could not be brought to tax in hands of assessee-bank, even though it was allowed as deduction in computation of profits attributable to PE.  (AY.2007-08)