Interest Received By MUFG Bank From Its Head Office & Overseas Branches Not Taxable: Delhi HC
The Delhi High Court observed that the interest received by the Permanent Establishment (PE) of the Bank of Tokyo Mitsubishi UFJ Ltd. (Bank) from its Head Office and overseas branches was not taxable as stipulated under Double Taxation Avoidance Agreements (DTAA).
The Court had to determine whether the interest received by the Indian PE of the bank on deposits maintained with its Head Office or other overseas branches is taxable in India.
A Division Bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav observed, “It becomes pertinent to note that the Explanation to Section 9(1)(v) of the Act is principally concerned with entities engaged in the business of banking and a PE in India once remitting payments to its Head Office, the statute giving rise to a legal fiction of such remittances being deemed to have accrued or arisen in India.”
SSC Sanjay Kumar represented the appellant, while Sr. Advocate Percy Pardiwalla appeared for the respondent.
The Income Tax Appellate Tribunal (ITAT) had previously stated that the interest accrued on income should not be taxable as it represents payments to oneself, given that the Indian PE and the overseas branches or Head Office are parts of the same entity. The ITAT’s decision was supported by the argument that one cannot earn a profit from oneself.
The tax authority contended that under the provisions of the India-US Double Taxation Avoidance Agreement (DTAA), such interest should be taxable. The appellants argued the need to consider Article 7(3) of the DTAA, which allows deductions of certain expenses but excludes specific payments such as interest unless it pertains to a banking enterprise.
The Bank on the other hand argued that under Articles 7(2) and 7(3) of the India-US DTAA, and similar provisions in other treaties like the India-Japan DTAA, the interest should not be taxable. He highlighted that the DTAA provisions recognise the PE as a distinct and separate entity only for the purpose of profit attribution but not for treating internal payments like interest as taxable income.
The High Court agreed with the ITAT's interpretation that such interest payments do not constitute taxable income under the domestic law or the applicable DTAA provisions. The Court also referred to a similar case adjudicated by the Bombay High Court in DIT (I.T.) v. Credit Agricole Indosuez (2015 SCC OnLine Bom 8421), which reinforced the principle that branches of a foreign bank are not separate legal entities for tax purposes, and one cannot make a profit from itself.
With regard to Section 9(1)(v) of the Income Tax Act, 1961, the Court remarked, “It is the aforenoted provision which introduces a statutory fiction by ordaining that a PE of a banking enterprise in India would be deemed to be a person separate and independent of the non-resident person of which it is a PE. However, it was the undisputed position before us that the said Explanation would have no application since it came into effect only from 01 April 2016 and by virtue of Finance Act, 2015.”
Consequently, the Court held, “Once we come to the firm conclusion that the branch office would not partake the character or attribute of a separate legal personality, the view as taken by the Tribunal is clearly rendered unexceptional. In any event, it would be the exception carved out in the DTAA with respect to banking enterprises which would govern.”
Accordingly, the High Court dismissed the appeal.
Cause Title: The Commissioner Of Income Tax-International Taxation-3 v. The Bank Of Tokyo-Mitsubishi UFJ Ltd. (Neutral Citation: 2024:DHC:4329-DB)
Appearance:
Appellant: SSC Sanjay Kumar; Advocates Hemlata Rawat and Easha Kadian
Respondent: Sr. Advocate Percy Pardiwalla; Advocates Hiten Thakkar, Nikhil Ranjan and Kamal Arya