Section 5, read with section 9, of the Income-tax Act, 1961

Court :
IN THE ITAT MUMBAI BENCH ‘F’

Brief :
Section 5, read with section 9, of the Income-tax Act, 1961 - Income - Accrual of - Assessment year 1998-99 - Whether provisions of section 5(2) make it clear that under Act so far as foreign companies are concerned, taxable unit is a foreign company and not its branch or permanent establishment in India, even though taxability of such foreign companies is confined to (i) an income which ‘accrues or arises in India’ or is ‘deemed to accrue or arise in India’, and (ii) an income which is received or is deemed to be received by or on behalf of such foreign company - Held, yes - Whether to determine income accruing or arising in India to a foreign enterprise [‘GE’], one has to compute income attributable to such branch(es) in India or other form(s) of presence in India such as office, project site, factory, sales outlet etc., [PE] of foreign enterprise - Held, yes - Whether for computation of business profits accruing or arising in India to GE, profits of Indian branch or Indian PE of foreign company have to be computed - Held, yes - Whether for determination of ‘income accruing or arising’ in India in case of a foreign GE operating in India, its Indian operations are to be treated as a hypothetically independent unit and, therefore, intra-organisation interest income would have to be taken into account, to arrive at income accruing or arising to assessee non-resident in India under section 5(2) - Held, yes - Whether proposition that intra-organisation transactions are to be ignored for computing business profits holds good only when profits of organisation as a whole are to be computed, or when these transactions are domestic transactions within one single enterprise and within one tax jurisdiction - Held, yes - Assessee, a non-resident banking company incorporated in Germany and operating in India through its branch office in Mumbai had given a note to computation of income that inter-branch income/expenditure credited/debited to profit and loss account had been excluded while arriving at total income, since bank could not be regarded as trading with itself - Assessee, therefore, claimed that interest income received by it from head office and other branches, i.e., intra- organization interest income, could not be brought to tax in India - Assessing Officer rejected assessee’s claim and applying provisions of section 9(1) assessed interest income in question in hands of assessee - Whether provisions of section 9(1) were not applicable to instant case - Held, yes - Whether it could not be said that since no one could be expected to make profits out of transactions with himself, intra-organization transactions were to be ignored for purposes of computing profits accruing or arising, to an Indian PE of a foreign company, under section 5(2)(b) - Held, yes - Whether interest earnings from head office were to be taken into account for purposes of computing profits arising in or accruing in India - Held, yes - Whether therefore, impugned order was to be upheld though for different reasons -Held, yes Facts The assessee was a non-resident banking company incorporated in Germany and operating in India through its branch office in Mumbai. The assessee in the return of income filed for the relevant assessment year had given a note to the computation of income that inter-branch income/expenditure credited/debited to profit and loss account had been excluded while arriving at the total income since the bank could not be regarded as trading with itself, i.e., having earned income or incurred expenditure by mere reason of Mumbai branch debiting/crediting the ledger account of the other branches outside India. The assessee, therefore, claimed that since the branch and head office transactions were transactions with oneself, the interest income received from the head office and the other branches, i.e., intra-organization interest income could not be brought to tax in India under the Act. The Assessing Officer disallowed the assessee’s claim and held that the income of the assessee would be covered by section 9(1). He further held that if the branch and head office were to be viewed as one and the same thing, then there was no reason to file ‘return in respect of India operations’. The Assessing Officer also observed that it is accepted international tax law practice that income ‘accruing or arising’ in a country is taxed in that country. The Assessing Officer, therefore, brought to tax the intra-organization interest income in the hands of the assessee and made an addition to the returned income of the assessee. On appeal, the Commissioner (Appeals) upheld the impugned order. On second appeal :

Citation :
Dresdner Bank AG v. Additional Commissioner of Income-tax, Special Range 32, Mumbai