Delhi HC Rules Interest Earned by Indian PE on Deposits with HO/Overseas Branch Not Taxable in India
Issue:
Whether the interest received by the Indian Permanent Establishment (PE) on deposits maintained with the Head Office/Overseas Branch is taxable in India.
Facts:
The Court dismissed the prayer for admission of Question Nos. (i) to (iv) and confined the appeal to Question (v) regarding the taxability of interest received by the Indian PE. The ld CIT(A) argued that the claim is not eligible based on the decision in Goetz India Ltd Vs. CIT 284 ITR 323. However, the appellant relied on Article 7(3) and Clause 8 of the Protocol to the India-Japan Double Taxation Avoidance Agreement (DTAA) to support their claim.
Holding:
The Court found that under domestic law, branches do not have separate legal entities, and thus, the taxability of the interest received must be answered in favor of the assessee. The Court cited the principle that one cannot make a profit out of oneself and referred to the case law of Sir Kikabhai Premchand v. CIT (1953) 24 ITR 506 (SC) to support this position.
Rationale:
The Court considered the Special Bench decision in Sumitomo Mitsui Banking Corporation and held that the Indian PE and the foreign general enterprise are not separate entities for taxation purposes under domestic law. Therefore, interest payable by the Indian PE to the foreign general enterprise cannot be treated as an expenditure allowable as a deduction. The Court also noted that the PE in India is obligated to deduct tax at source on any interest payable to the head office or any other branch of the non-resident outside India.
Conclusion:
The Court found no merit in the appeals and dismissed them based on the settled position that no person can make a profit out of itself. The amendments introduced from April 1, 2016, make the PE of a banking enterprise in India a separate and independent person from the non-resident entity.
Impact
This case clarifies the taxability of interest received by an Indian PE and emphasizes the obligation to deduct tax at source on such payments. It also highlights the importance of tax treaties and domestic laws in determining the tax treatment of transactions involving permanent establishments.