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ITAT Affirms the Non-Taxability of Interest Payments by Indian Bank Branches to their Head Offices under the India-France DTAA


The Income Tax Appellate Tribunal, Mumbai (‘ITAT’) in BNP Paribas v. Assistant Commissioner of Income Tax (IT)[i], has recently addressed the recurring issue of taxability of interest payments made by Indian branch offices of foreign banks to their overseas head offices (‘HOs’). The case revolved around the applicability of specific provisions of the Income-tax Act 1961 (‘Act’), the India-France double taxation avoidance agreement (‘DTAA’), and procedural aspects involving the National Faceless Assessment Centre (‘NaFAC’). The ITAT’s decision heavily relies on earlier precedents on the issue of foreign interest payments by bank branches. It gives certain clear findings, especially regarding a. 7 and a. 12 of the DTAA and s. 9(1)(v)(c) of the Act.

Brief Facts

  • The Assessee, a commercial bank with its HO in France, had eight branches in India in Mumbai, New Delhi, Kolkata, Bangalore, Pune, Ahmedabad, Chennai, and Hyderabad. It was engaged in regular banking activities, including financing foreign trade and foreign exchange transactions.

  • For assessment year (‘A.Y.’) 2020-21, the Assessee filed its return of income (‘ROI’) on 15.02.2021, declaring a total income of Rs. 546,63,91,110. The case was subjected to scrutiny assessment, and the assessing officer (‘AO’) issued a draft assessment order on 29.09.2022, making variations, inter alia, on the issue of taxability of interest income paid by Indian bank branches of the Assessee to its overseas HO. The Assessee objected to these variations before the Dispute Resolution Panel, which dismissed the objections.

  • Aggrieved by the same, the Assessee preferred the appeal before the ITAT challenging the initiation of assessment, application of tax rate for foreign companies, taxing data processing fees, interest, and other amounts paid by the Indian branches of the Assessee bank to its overseas HO as incomes taxable in India, amongst other grounds.


  • Regarding the challenge to the authority of NaFAC to issue notice under s. 143(2) of the Act, the ITAT examined the statutory provision, as amended by the Finance Act 2016, which allows ‘Prescribed Income Tax Authorities’ (as per r. 12E) to issue notices under s. 143(2) of the Act, alongside the jurisdictional AO. The ITAT also considered CBDT Notification No. 25/2021 dated 31.03.2021, which authorized AC/DCIT (NaFAC) to act as the prescribed income-tax authority from 01.04.2021. On a conjoint consideration of the above, the ITAT held that NaFAC was authorized to issue notices under s. 143(2) in accordance with the Act.

  • With regard to the challenge to the higher tax rate applicable to foreign companies being levied on the Assessee bank, in light of the non-discrimination provision contained in a. 26 of the DTAA, the ITAT held that the application of a higher tax rate does not violate the non-discrimination provisions of such DTAA. It held, following earlier decisions, that the applicable tax rate would be the rate applicable to foreign companies.

  • The primary issue in the appeal was concerned with the taxability of interest payable/paid by the Indian branch offices of the Assessee bank to its HO and its other overseas branches. On this issue, the ITAT concluded as follows:

    • The provisions of the DTAA or the provisions of the Act, whichever are beneficial to an Assessee, could be opted to be applied in the Assessee’s case. S. 90(2) of the Act provides for this flexibility.

    • S. 9(1)(v)(c) of the Act, inserted by way of the Finance Act, 2015, is a provision of the Act. Though it was introduced in 2015, no corresponding amendment was made in the DTAA. Thus, the provisions of the DTAA would continue to be applicable irrespective of this new provision in the Act. Further, the ITAT held that because of the beneficial provision contained in a. 12(5) of the DTAA, s. 9(1)(v)(c) of the Act would not apply. Also, the Revenue could not establish how a permanent establishment (‘PE’) can pay interest on the debt/loan given by the PE itself.

    • As per a. 12(5) of the DTAA, interest would not be taxable in India if the beneficial owner of the interest is carrying on business in India through a PE and the debt claim in respect of which the interest is paid is effectively connected with such PE. The applicable provision would be a. 7 of the DTAA in such cases. In the present case, the Assessee being an HO of the banking company and having branches in the form of PE in India, the provisions of a. 7 of the DTAA are to be applied and not a. 12.

    • Regarding a. 7 of the DTAA, the ITAT held that such an article only deals with the taxability of profit attributable to the PE branches of overseas HO. Further, the debt regarding claim means the money due from one person to another. Since, in the case of the Assessee branch, it has borrowed from overseas HO; therefore, the debt claim of the HO is connected to the PE branch in India. Thus, the interest received by the HO from its branches in India is not taxable in the hands of the HO.

Our Analysis

The issue of taxability of interest payments by Indian bank branches to their respective HOs located abroad has seen enormous litigation in the past. The decision of the Special Bench of the Tribunal in the case of Sumitomo Mitsui Banking Corporation[ii] is a landmark decision on this issue, wherein it was held that while the interest paid by the PE of a foreign bank (i.e., the bank branches) to its HO is deductible in the hands of the PE, such interest is not taxable in the hands of the HO. This led to the amendment of s. 9(1)(v) of the Act, providing that the interest would be taxable in the hands of the HO. However, as noted in the above-digested decision, corresponding changes were not made in the DTAA.

The present decision, thus, is notable primarily on the ground that s. 9(1)(v) of the Act would not be applicable in cases where beneficial treaty provisions exist. However, regarding the doctrine of effective connection of a debt claim that gives rise to interest, the present decision states that in cases where the HO has given monies/loans to its Indian PE, such debt claims are effectively connected with the Indian PE, the decision did not accurately capture the legal position. A debt claim or loan can only be said to be effectively connected with an entity (be it the PE or the HO) if that entity has the right to receive interest on it. To illustrate, in cases where the PE itself has lent out monies to, say, an Indian company and such company pays interest to the PE, the loan given by the PE to the Indian company would be treated as effectively connected with the PE (and not to the HO). Evidently, the loans given by the HO to its PE are not effectively connected with the PE.

In any case, the legal position is reiterated by the present decision – in cases where the treaty provisions are favourably existing for the Assessee: (i) the payment of interest from the Indian bank branch to its HO would be deductible while computing the taxable profits of the Indian branch, and (ii) such interest would not be taxable in the hands of the HO because it is a payment to itself and no entity can make profits from its own self.

End Notes

[i] [2024] 162 671 (Mumbai - Trib.)

[ii] [2012] 136 ITD 66/19 364 (Mum.) (SB)

Authored by Prashant Singh, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.


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