Branches of foreign banks are separate tax entities

FOREIGN ENTERPRISES

Whether interest paid by a branch in India to its head office abroad should be included while calculating the profits of the branch for tax purposes has long been a subject of controversy.

Likewise, it is also debatable as to whether interest paid by an Indian branch to its foreign office will constitute taxable income of a foreign company in India or not.

These issues invariably arise in case of foreign banks which have branches in India. To set doubts at rest, the Central Board of Direct Taxes in its Circular No. 714 dated 17.4.96 says, "It is clarified that the branch of a foreign company/concern in India is a separate entity for the purposes of taxation.

"Interest paid/payable by such branch to its head office or any branch located abroad would be liable to tax in India and would be governed by the provisions of Section 115A of the Act.

"If the double taxation avoidance agreement with the country where the parent company is assessed to tax provides for a lower rate of taxation, the same would be applicable.

"Consequently, tax would have to be deducted accordingly on the interest remitted as per the provisions of Section 195 of the Income-tax Act, 1961"

Whether a branch of a foreign bank in India constitutes a separate taxable entity, different from its head office, was also considered by the Kolkata Tribunal in the case of Bank of Tokyo Mitubushi Ltd (I.T. Appeal No. 899 (Kol) of 2002). The tribunal relying on Circular No. 714 (supra) held that the branch of a foreign bank will be considered a separate entity for purposes of taxation in India.

It was, therefore, held that the interest debited from an Indian permanent establishment of a foreign bank by way of corresponding credit of their head office account was not an allowable deduction unless the tax is deducted at source from the same.

On the other hand, in a large number of cases it has been held that nobody can make profit out of self nor can trade with self nor earn from self. Therefore, neither the income from self can be assessed nor any expenditure for the payment to self can be allowed as deduction.

In Betts Hartley Huett & Co. Ltd. versus CIT (1979) 116 ITR 425, the Calcutta High Court held that "one cannot earn income from one's own self and that interest charges made by head office/other branches outside India to the assessee does not result in any income chargeable to tax under the Act in the head office or the branches."

The controversy narrated above was recently considered by the Special Bench, Kolkata Tribunal in case of ABN Amro Bank (97 ITD 89). The Special Bench after analysing the different views expressed by different courts held that when a branch in India pays interest to its head office aboard, it is a payment to self and, therefore, the same does not require any deduction of tax at source. The interest paid is not to be allowed as an expenditure.

However, when the non-resident head office receives interest from its Indian branch, whether the amount remitted are subject to income-tax in India or not was unfortunately not decided clearly by the Special Bench.

Therefore, the view expressed by Calcutta High Court that the head office will not be liable to tax should be accepted as the correct view.

agar@nda.vsnl.net.in