Interest to overseas HO by Branch allowable as deduction though not taxable in hands of HO

Sumitomo Mitsui Banking Corporation VS DCIT-IT APPEAL Nos. 2720 to 2722 & 2864 to 2866 & 6495 (Mum.) of 2006 Dt 12/10/2012

           
ISSUES INVOLVED :-

1. Whether the interest and commission paid to Head Office and other overseas branches by the assessee bank branch is allowable as deduction ?
2. Whether the interest and commission paid to Head Office and other overseas branches by the assessee bank branch is chargeable to tax in India in the hands of Head Office and other overseas branches ?

FACTS OF THE CASE:-
The assessee bank branch credited/paid interest and commission to its Head Office and other overseas branches. The Assessing Officer did not allow deduction towards interest and commission paid to head office and other overseas branches on the ground that there was failure on the part of the assessee to deduct tax at source. Thus the disallowance was made u/s 40(a)(i) on the premise that the said amount of interest received by head office and other overseas branches was taxable in their hands. The Assessing Officer summed up his view by holding that firstly, the interest income in the hands of head office is liable to tax and further no deduction can be allowed to the Indian branch towards interest paid to head office because of the application of section 40(a)(i).
  Further commission paid/payable by the assessee to head office and other overseas branches was also disallowed.
  The CIT(A) upheld the disallowance of interest paid by the assessee on the ground of mutuality and also directed that the interest income cannot be charged to tax in the hands of the head office because of mutuality.
  

    
          REVENUE'S CONTENTIONS :-

(a) That the amount received as interest and commission by head office and other overseas branches was taxable in their hands and hence assessee was liable to deduct tax at source under section 40(a)(i).

(b) On the principle of mutuality also interest and commission paid to self cannot be allowed as deduction.
 

  ASSESSEE'S CONTENTIONS :-

(a) That since interest and commission has been paid to head office and other overseas branches and not to different entity and hence it was interest and commission paid to self and there was no liability on deduction of tax at source on the same.
(b) Mutuality applies in relation to income earned by the Indian branch from head office/other overseas branches. As such the interest income so earned cannot be charged to tax.
(c) That though the interest and commission paid to head office and other overseas branches is not taxable in hands of recipient on the principle of mutuality but same is allowable as deduction to determine taxable profits of assessee branch in India as per the provisions of DTAA.

HELD:-

Mumbai Bench discussed the relevant provisions of Income Tax Act and observed & held as under :-

(a) That the interest and commission received by the head office and other overseas branches cannot be charged to tax in hands of recipients by the reason of principle of mutuality.
(b) Since the principle of mutuality is applicable on transactions between Indian branch and head office and other overseas branches, there cannot be any income or any expenditure due to such internal transactions.
(c) Though no deduction of any expenditure is allowable on the principle of mutuality ,however as per the provisions of DTAA the assessee is entitled to deduction of interest paid to head office and other overseas branches.
(d) That the principle of mutuality is applicable under domestic law as a result of which no deduction can be allowed in respect of payments made by Indian branch to its head office and other overseas branches. It is only by virtue of the provisions of DTAA read with the relevant clauses of the Protocol that the assessee became entitled to deduction of interest paid to its head office and other overseas branches.
(e) However commission paid by the assessee to its head office and other overseas branches is not covered along with the deductibility of interest as per the provisions of the relevant clauses of the DTAA. Resultantly, the deductibility of commission by the assessee to its head office and other overseas branches would come for consideration under the domestic law alone.
(f) That as the inter office commission has been paid by the assessee to its head office and other overseas branches, it is obviously a transaction with the self. Accordingly the rule of mutuality applies and the assessee cannot be allowed any deduction in regard of commission.

        Comments  :-

  It seems from the above decision that in case of interest the assessee has got double benefit. The recipient of interest has been held to be not taxable on the principles of mutuality in the domestic law and payer of the interest has got deduction while calculating profits in India relying on the provisions of DTAA. But this is the correct legal position. This position has been upheld by the Mumbai Tribunal in an another latest judgement in the case of BNP Paribas SA wherein also the present ruling has been relied upon. However this double benefit is not available in case of commission and hence commission would not be taxable in hands of recipient on the principle of mutuality and it would be allowble as expenditure also in hands of payer on the principle of mutuality.

 

I am sure that your goodself would find the above ruling useful.



 

Disclaimer: Views expressed here are author's personal and  for informational purposes only.

 

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