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2010 Supreme(Cal) 1476
High Court Of Calcutta
K.J. Sengupta, I.P. Mukerji, JJ.
Abn Amro Bank, N.V. : Appellant
Versus
Commissioner Of Income Tax West Bengal-Iii, Kolkata : Respondent
I.T.A. No. 458 of 2005
Decided On : Dec 23,2010
The provisions of a double taxation avoidance agreement will prevail over the provisions of the Income Tax Act, 1961, to the extent of inconsistency, and the head office and permanent establishment of a foreign company will be treated as separate entities for the purpose of assessment under such an agreement.
Headnote:
INCOME TAX - International Agreement - Avoidance of Double Taxation - Convention between India and Netherlands - Interpretation - Deduction of Interest Paid to Head Office - Tax Deduction at Source - Separate Taxable Entities - Permanent Establishment - Computation of Profits - Applicability of Section 40(a)(i) of the Income Tax Act, 1961.
Fact of the Case:
The appellant, a foreign company incorporated in Netherlands with its principal branch office in India, made substantial remittances of interest to its head office. The issue arose as to whether such interest payment was deductible in computing the profits of the appellant's branch in India and whether tax deduction at source was required under section 195 of the Income Tax Act, 1961.
Finding of the Court:
The court held that the interest payment made by the Indian branch to its head office abroad was deductible as an expense in computing the profits of the appellant's branch in India. The court further held that no tax was required to be deducted at source under section 195 of the Act, as the head office was not liable to pay any tax under the Act by virtue of the convention.
Issues: 1. Whether interest payment made by the Indian branch of the appellant to its head office abroad was to be allowed as a deduction in computing the profits of the appellant's branch in India? 2. Whether in making such payment to the head office, the appellant's said branch was required to deduct tax at source under section 195 of the said Act?
Ratio Decidendi: 1. The court interpreted the convention between India and Netherlands, which had the effect of overriding the provisions of the Income Tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of the convention. 2. The court held that the head office and the permanent establishment in India were to be treated as separate entities for the purpose of assessment under the convention. 3. The court interpreted section 195(1) of the Act to mean that tax should be deducted at source only if the interest was chargeable under the provisions of the Act, which was not the case in this instance as the head office was not liable to pay any tax under the Act by virtue of the convention.
Final Decision: The appeal was partly allowed. The assessment of the income of the appellant for the relevant period was to be done in accordance with the findings made in the judgment.
I.P. Mukerji, J.
1. THIS is an Appeal under section 260A of the Income Tax Act, 1961 (in short "the Act") against the Order of the Income Tax Appellate Tribunal (in short "the tribunal") dated 22nd August 2005.
2. BEFORE discussing the merits of this Appeal, a reference to section 90 of the Act is necessary. It empowers the Central Government to enter into an agreement with a foreign government to interalia avoid double taxation in India as well as in that foreign country. In such case where an agreement has been entered into, the said Act will only apply to the assessee, if the Act is more beneficial than the agreement.
The appellant before us is a foreign company incorporated in Netherlands, and having its principal branch office in India at ITC Center, 4th floor, Russel Street, Kolkata 71.
3. WE are here concerned with only a limited transaction made by this bank and the effects thereof, for the purpose of computing its income. In course of its banking activities the appellant's said branch in India remits substantial funds to its head office as payment of interest. While the appeal was being argued, it was submitted by Mr. R.N. Bajoria, learned senior Advocate for the appellant, that there is a continuous process of the said branch receiving interest from its head office and other branches and remitting of interest by the branch to the head office and other branches. This interest accrues according to him on funds of the head office or the branch as the case may be, treated to be held by the other unit.
4. THERE was a convention between the Governments of India and Netherlands for inter alia avoidance of double taxation. The said convention became operational from 21st January 1989. In exercise of powers under section 90 of the Act the Central Government by a notification dated 27th March 1989 amended by a notification dated 30th August 1999 gave effect to it.
Now, the articles of this convention have assumed great significance in deciding the issues in this appeal. There are principally only two issues in this appeal, namely, 1. Whether interest payment made by the Indian branch of the appellant to its head office abroad was to be allowed as a deduction in computing the profits of the appellant's branch in India? 2. Whether in making such payment to the head office, the appellant's said branch was required to deduct tax at source under section 195 of the said Act?
5. FOR deciding the above issues detailed considerations have to be made of the Act and the convention. But before discussing the effect of the convention some very important provisions of the Act have to be noted.
6. FIRST is the definition of "person" in section 2(31) of the Act. Sub section (vii) includes an artificial juridical person within the definition of "person". Section 2(42) defines "resident" as a person who is resident in India within the meaning of section 6. Non resident has been defined in section 2(30) as a person who is not a "resident" and includes a person who is not ordinarily resident within the meaning of clause (6) of section 6. Section 5 of the Act deals with total income. Sub section 2 of section 5 defines the income of a non resident as income received or deemed to be received in India or accrues or arises or deemed to accrue or arise in India. The charging section is section 4. The total income of a person who is resident in India is defined in section 5 as all income received or accrued in India or deemed to have been so in this country. Under section 9(1)(i) explanation (1)(a) the income of a business which arises or accrues in India attributable to operations into this country are to be taken as income. Under section 40(a)(i), interest which is payable out side India on which tax has not been deducted is not to be deducted in computing the income chargeable under the head profits and gains of business. Rival Contentions
The following submissions were made on behalf of the Appellant by Mr R.N. Bajoria, learned Senior Advocat
