Thursday, September 27, 2012

Interest paid by a branch of a Foreign Bank to its Head Office is deductible in the hands of the branch?


Interest paid by a branch of a Foreign Bank to its Head Office is deductible in the hands of the branch?

CASE: ABN AMRO Bank NV vs. CIT
Sections: section 90 of the Income-Tax Act, 1961,
 Section 195 of the Income-Tax Act, 1961
section 40(a)(i) the Income-Tax Act, 1961
 
Facts

Calcutta High Court in its verdict opined that the appellant before us is  a foreign company incorporated in Netherlands and having its principal branch office in India. In course of its banking activities the appellant’s said branch in India remits substantial funds to its head office as payment of interest.

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.

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?

Under section 90 of the Income-Tax Act, 1961,the Government of India has entered into the above agreement with the government of Netherland for relief of tax and avoidance of double taxation. The appellant is an assessee to whom such agreement applies. Therefore, for the purpose of relief of tax which is related to avoidance of double taxation, a more beneficial provision amongst rival provisions in the agreement and the Act will apply to the assessee.

Therefore, if no tax is deductible under section 195(1) & section 40(a)(i) of the Income Tax Act , 1961 will not come in the way of the appellant claiming such deduction as from its income. Therefore, in the circumstances the appellant would be entitled todeduct such interest paid, as permitted by the convention or agreement, in the computation of its income.

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