Our Indian branch earned interest on balances kept with the head office and overseas branches. Is that taxable in India?
No, on the years before the 2015 amendment. A branch is not a separate legal personality, and one cannot make a profit out of oneself, so interest received by the Indian permanent establishment from its own head office or overseas branches is not chargeable to tax in India. The Explanation to s.9(1)(v), which deems a banking permanent establishment to be a separate and independent person, took effect only from 1 April 2016 and had no application.
Decided by the High Court (Yashwant Varma J and Purushaindra Kumar Kaurav J) on 2024-05-28, reported as ITA 773/2018 and ITA 887/2018 (High Court of Delhi); reserved 19 March 2024, pronounced 28 May 2024; assessment year 2003-04. It bears on section 9(1)(v), section 9, section 5(2), section 2(31) of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the entry point to s.9(1)(v) and the branch fiction, and the distinction it draws is the one that matters. The Finance Act 2015 Explanation, applicable from AY 2016-17, deems interest PAYABLE by the Indian permanent establishment of a non-resident bank to its head office or another part of the enterprise to accrue or arise in India, chargeable in addition to the income attributable to the permanent establishment, and treats the permanent establishment as a separate person for that purpose — with the consequence, as CBDT Circular No. 19/2015 sets out, that the permanent establishment must deduct tax at source on that interest, non-deduction attracting disallowance, interest and penalty. This case is about the other direction: interest RECEIVED by the permanent establishment from the head office. The Explanation does not reach that, so the payment-to-self reasoning continues to govern it even after AY 2016-17. The judgment also sets out the whole legislative history — CBDT Circular No. 740 of 17 April 1996, the Special Bench in Sumitomo Mitsui Banking Corporation, the Bombay High Court in Credit Agricole Indosuez and Antwerp Diamond Bank — in one place.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The Revenue appealed against the order of the Income Tax Appellate Tribunal dated 30 January 2018. Five questions had been proposed; by order of 20 December 2023 the Court had declined to admit questions (i) to (iv), taking note of its decision inter partes in ITA 604/2015 and ITA 605/2015 dated 8 April 2016. The appeal was therefore confined to question (v): whether the interest received by the Indian permanent establishment on deposits maintained with the head office or overseas branch is not taxable in India. The issue arose in the context of interest earned by the Indian branches of the Bank of Tokyo-Mitsubishi UFJ Ltd., now MUFG Bank, on balances maintained with its head office and other overseas branches, quantified for AY 2003-04 at Rs 70,02,160. The Tribunal had decided the point in favour of the assessee. The judgment records that the parties were agreed that the India-US treaty would govern, and it was undisputed before the Court that the Explanation to s.9(1)(v) had no application because it took effect only from 1 April 2016.
The appeals were dismissed. The branch office does not partake of the character or attribute of a separate legal personality, so the Tribunal's view that the interest received by the Indian permanent establishment from its head office and overseas branches is not taxable was unexceptional; and in any event it would be the exception carved out in the treaty in respect of banking enterprises that would govern (paragraphs 17 and 19). The Explanation to s.9(1)(v), which introduces the statutory fiction that a permanent establishment of a banking enterprise in India is deemed a person separate and independent of the non-resident of which it is a permanent establishment, had no application, having come into effect only from 1 April 2016 by virtue of the Finance Act 2015 (paragraphs 15 and 16).
The Court accepted the submission that a branch or subsidiary office of a parent entity is not a separate legal personality, and drew on the Bombay High Court's judgment in DIT (I.T.) v. Credit Agricole Indosuez, which had declined to entertain the same question on the settled position that no person can make a profit out of itself, relying on Sir Kikabhai Premchand v. CIT and on the Special Bench decision in Sumitomo Mitsui Banking Corporation (paragraphs 12 and 13). It then set out CBDT Circular No. 19/2015 explaining the Finance Act 2015, which records the Board's earlier Circular No. 740 of 17 April 1996 treating an Indian branch of a foreign company as a separate entity for tax purposes, the judicial rulings that had not accepted that view, the concern that a limited reading of the treaty fiction would lead to base erosion, the recognition of the source-rule position in Article 14(3) of the Indo-US treaty, and the resulting amendment applicable from AY 2016-17 (paragraph 14). Having set out the text of the Explanation itself (paragraph 15), the Court noted that it is principally concerned with entities engaged in banking and with remittances by a permanent establishment to its head office, and that it was undisputed that it did not apply to the year in question (paragraph 16). What remained was the settled position that a person cannot profit out of himself, and the Court closed by extracting the Supreme Court's reasoning in Kikabhai Premchand that it is wholly unreal and artificial to separate a business from its owner and to introduce a fictional profit by a fictional sale (paragraph 18).
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.
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Handle my notice → Ask a CA on WhatsAppNo, on the years before the 2015 amendment. A branch is not a separate legal personality, and one cannot make a profit out of oneself, so interest received by the Indian permanent establishment from its own head office or overseas branches is not chargeable to tax in India. The Explanation to s.9(1)(v), which deems a banking permanent establishment to be a separate and independent person, took effect only from 1 April 2016 and had no application. This was decided by the High Court (Yashwant Varma J and Purushaindra Kumar Kaurav J) and bears on section 9(1)(v), section 9, section 5(2), section 2(31) of the Income Tax Act 1961. It is reported as ITA 773/2018 and ITA 887/2018 (High Court of Delhi); reserved 19 March 2024, pronounced 28 May 2024; assessment year 2003-04. This is the entry point to s.9(1)(v) and the branch fiction, and the distinction it draws is the one that matters. The Finance Act 2015 Explanation, applicable from AY 2016-17, deems interest PAYABLE by the Indian permanent establishment of a non-resident bank to its head office or another part of the enterprise to accrue or arise in India, chargeable in addition to the income attributable to the permanent establishment, and treats the permanent establishment as a separate person for that purpose — with the consequence, as CBDT Circular No. 19/2015 sets out, that the permanent establishment must deduct tax at source on that interest, non-deduction attracting disallowance, interest and penalty. This case is about the other direction: interest RECEIVED by the permanent establishment from the head office. The Explanation does not reach that, so the payment-to-self reasoning continues to govern it even after AY 2016-17. The judgment also sets out the whole legislative history — CBDT Circular No. 740 of 17 April 1996, the Special Bench in Sumitomo Mitsui Banking Corporation, the Bombay High Court in Credit Agricole Indosuez and Antwerp Diamond Bank — in one place. If it applies to you, the first step is this: Separate the two flows in the computation before anything else: interest payable by the Indian permanent establishment to the head office, and interest receivable by it from the head office. They are governed by different law after AY 2016-17.
The Revenue appealed against the order of the Income Tax Appellate Tribunal dated 30 January 2018. Five questions had been proposed; by order of 20 December 2023 the Court had declined to admit questions (i) to (iv), taking note of its decision inter partes in ITA 604/2015 and ITA 605/2015 dated 8 April 2016. The appeal was therefore confined to question (v): whether the interest received by the Indian permanent establishment on deposits maintained with the head office or overseas branch is not taxable in India. The issue arose in the context of interest earned by the Indian branches of the Bank of Tokyo-Mitsubishi UFJ Ltd., now MUFG Bank, on balances maintained with its head office and other overseas branches, quantified for AY 2003-04 at Rs 70,02,160. The Tribunal had decided the point in favour of the assessee. The judgment records that the parties were agreed that the India-US treaty would govern, and it was undisputed before the Court that the Explanation to s.9(1)(v) had no application because it took effect only from 1 April 2016. The matter was decided on 2024-05-28 by the High Court (Yashwant Varma J and Purushaindra Kumar Kaurav J). On those facts the High Court held as follows. The appeals were dismissed. The branch office does not partake of the character or attribute of a separate legal personality, so the Tribunal's view that the interest received by the Indian permanent establishment from its head office and overseas branches is not taxable was unexceptional; and in any event it would be the exception carved out in the treaty in respect of banking enterprises that would govern (paragraphs 17 and 19). The Explanation to s.9(1)(v), which introduces the statutory fiction that a permanent establishment of a banking enterprise in India is deemed a person separate and independent of the non-resident of which it is a permanent establishment, had no application, having come into effect only from 1 April 2016 by virtue of the Finance Act 2015 (paragraphs 15 and 16).
The Court accepted the submission that a branch or subsidiary office of a parent entity is not a separate legal personality, and drew on the Bombay High Court's judgment in DIT (I.T.) v. Credit Agricole Indosuez, which had declined to entertain the same question on the settled position that no person can make a profit out of itself, relying on Sir Kikabhai Premchand v. CIT and on the Special Bench decision in Sumitomo Mitsui Banking Corporation (paragraphs 12 and 13). It then set out CBDT Circular No. 19/2015 explaining the Finance Act 2015, which records the Board's earlier Circular No. 740 of 17 April 1996 treating an Indian branch of a foreign company as a separate entity for tax purposes, the judicial rulings that had not accepted that view, the concern that a limited reading of the treaty fiction would lead to base erosion, the recognition of the source-rule position in Article 14(3) of the Indo-US treaty, and the resulting amendment applicable from AY 2016-17 (paragraph 14). Having set out the text of the Explanation itself (paragraph 15), the Court noted that it is principally concerned with entities engaged in banking and with remittances by a permanent establishment to its head office, and that it was undisputed that it did not apply to the year in question (paragraph 16). What remained was the settled position that a person cannot profit out of himself, and the Court closed by extracting the Supreme Court's reasoning in Kikabhai Premchand that it is wholly unreal and artificial to separate a business from its owner and to introduce a fictional profit by a fictional sale (paragraph 18). In the words reproduced by the source cited on this page: "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." The decision followed or applied DIT (I.T.) v. Credit Agricole Indosuez (2015 SCC OnLine Bom 8421) — relied on; Sir Kikabhai Premchand v. CIT (1953) 24 ITR 506 (SC) — applied; Sumitomo Mitsui Banking Corpn. v. Deputy DIT (2012) 16 ITR (Trib) 116 (Mumbai) (SB) — referred to through Credit Agricole and through CBDT Circular No. 19/2015; CBDT Circular No. 19/2015 explaining the Finance Act 2015 — set out.
It was decided by the High Court on 2024-05-28 and is reported as ITA 773/2018 and ITA 887/2018 (High Court of Delhi); reserved 19 March 2024, pronounced 28 May 2024; assessment year 2003-04. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 9(1)(v), section 9, section 5(2), section 2(31), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were dismissed. The branch office does not partake of the character or attribute of a separate legal personality, so the Tribunal's view that the interest received by the Indian permanent establishment from its head office and overseas branches is not taxable was unexceptional; and in any event it would be the exception carved out in the treaty in respect of banking enterprises that would govern (paragraphs 17 and 19). The Explanation to s.9(1)(v), which introduces the statutory fiction that a permanent establishment of a banking enterprise in India is deemed a person separate and independent of the non-resident of which it is a permanent establishment, had no application, having come into effect only from 1 April 2016 by virtue of the Finance Act 2015 (paragraphs 15 and 16). It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 9(1)(v), section 9, section 5(2), section 2(31) of the Income Tax Act 1961, and was decided by Yashwant Varma J and Purushaindra Kumar Kaurav J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For interest received by the permanent establishment, run the payment-to-self argument on Kikabhai Premchand and Credit Agricole Indosuez, and point out that the Explanation to s.9(1)(v) is confined to interest payable by the permanent establishment. For any year from AY 2016-17 onwards, check whether the permanent establishment deducted tax at source on interest paid to the head office; CBDT Circular No. 19/2015 records that non-deduction results in disallowance of the interest claimed by the permanent establishment as well as interest and penalty. Do not carry the deduction and the exemption at the same time: the Bombay High Court recorded in Credit Agricole that the assessee there had accepted, to bring about parity, that it would not claim deduction of interest paid to its head office. Read the applicable treaty article for banking enterprises before advising — the Court said that in any event it would be the exception carved out in the treaty in respect of banking enterprises that would govern.
Validity check could not be completed. Validity check could not be completed. I did not check whether a special leave petition has been filed against this judgment or how it has been treated since. Independently of that, its reach is limited by its own terms: it concerns interest RECEIVED by the Indian permanent establishment from the head office, in AY 2003-04, and the Court records that the Explanation to s.9(1)(v) inserted by the Finance Act 2015 applies only from 1 April 2016. Anyone relying on it for interest PAYABLE by a banking permanent establishment to its head office in AY 2016-17 or later must deal with that Explanation. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
There is an oddity in the report that a reader should know about. The assessee is a Japanese bank, but the judgment records at paragraph 5 that it was not in dispute that the India-US Double Taxation Avoidance Agreement would govern, and paragraphs 6 to 8 discuss Articles 7(2), 7(3) and 14(3) of that treaty. I re-read paragraphs 5 and 6 through /docfragment/ and the text does say India-US, with a footnote marker, so this is what the judgment states and not a transcription slip on my part; I have not been able to explain it. Because of that I have not tagged any treaty article in the sections field. It does not disturb the ratio, which rests on the domestic-law proposition that a branch is not a separate legal personality and that no person can profit out of himself. Paragraphs 12 to 19 were transcribed from the plain /doc/ URL and paragraph 19 is the last, with the disposal. Paragraph 12 reproduces a long passage from the Bombay High Court in Credit Agricole Indosuez, which in turn reproduces paragraphs 50 and 52 of the Special Bench in Sumitomo Mitsui Banking Corporation; those inner paragraph numbers belong to those decisions and not to this judgment. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed. The branch office does not partake of the character or attribute of a separate legal personality, so the Tribunal's view that the interest received by the Indian permanent establishment from its head office and overseas branches is not taxable was unexceptional; and in any event it would be the exception carved out in the treaty in respect of banking enterprises that would govern (paragraphs 17 and 19). The Explanation to s.9(1)(v), which introduces the statutory fiction that a permanent establishment of a banking enterprise in India is deemed a person separate and independent of the non-resident of which it is a permanent establishment, had no application, having come into effect only from 1 April 2016 by virtue of the Finance Act 2015 (paragraphs 15 and 16).
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