The Tribunal had to study whether Section 115A would apply to a case where a non-resident had placed deposits with an Indian branch of a foreign bank.
MR MANOJ D. PUROHIT, MANAGER, DELOITTE HASKINS & SELLS, MUMBAI.
Ever since an airline adopted `Indian' as its new name, there is enough confusion among the billion-plus people about the new claimant for their appellation. Be that as it may, what should concern professionals is the cloud that surrounds `Indian concern' in Section 115A of the Income-Tax Act, 1961.
This provision, in the tax law, is about tax on dividends, royalty and technical service fees in the case of foreign companies. It speaks of, among other things, interest received from `an Indian concern', which was the focus of a recent case before the Mumbai Tribunal. Business Line engages in a dialogue with Mr Manoj D. Purohit, Manager, Deloitte Haskins & Sells, Mumbai, about the case...
First, the facts.
The case was about BCC or the Bank of Credit & Commerce (Overseas) Ltd, a non-resident company in liquidation. BCC had placed fixed deposits (FDs) in FCNR (foreign currency non resident) accounts with the Indian branch of a foreign bank. On the FD interest, BCC paid taxes at 20 per cent as per the provisions of Section 115A.
Sounds straightforward. Did the taxman have a different view on the taxability of interest?
Yes. The Assessing Officer (AO) was of the view that Section 115A came into play only when the interest is earned from an Indian concern. He said that the Indian branch of a foreign bank couldn't be treated as an Indian concern. Accordingly, the entire interest income was taxable at 48 per cent, that is, the rate applicable to a company other than a domestic company, because BCC had not incurred any expenditure in earning the interest income, said the AO. Understandably, BCC was aggrieved and appealed to the CIT (Appeals), who only confirmed the action of the AO. Then, BCC approached the Tribunal.
What does Section 115A say?
Section 115A says that where the total income of a non-resident (not being a company) or a foreign company `includes interest received from Government or an Indian concern on monies borrowed or debt incurred by Government or the Indian concern in foreign currency', the income-tax payable on such income will be calculated at the rate of 20 per cent.
Even though Section 115A refers to interest received from an Indian concern, the connotations of the term `Indian concern' are not expressly defined in this section or, for that purpose, anywhere else in the Act, though various other terms such as company, domestic company, and Indian company have been defined.
Thus, the Tribunal had to study whether Section 115A would apply to a case where a non-resident had placed deposits with an Indian branch of a foreign bank.
Does the definition of residential status come in handy in this situation?
The term used in the statute is `Indian concern' and there is nothing to suggest that the scope of this term is confined to an assessee resident in India. The meaning to be assigned to a term must flow from the context. It is in respect of business carried on by the assessee, and not the residential status of the assessee, that interest income is deemed to accrue or arise in India.
Any precedents of relevance?
The case made a reference to the decision of the Bombay High Court in Dr J. M. Mokashi. There, the court had observed that the word `concern' is of wide import and conveys different ideas or meanings depending on the context and setting in which it appears and that it takes within its sweep and ambit all organisations or establishments engaged in business or profession, whether owned by a company, partnership individual or any other entity. This observation clarifies that there can be a distinction between a company and a concern, and that a company can be larger than a concern, inasmuch as a company can own a concern. Therefore, merely because the Indian branch office of a foreign bank is fully owned by a non-resident it could not be said that the Indian branch of a foreign bank is a foreign concern.
How do tax treaties handle the issue?
In international tax treaties a branch office outside the country of domicile is treated as a separate entity so far as computation of profits are concerned. What is really taxed is not the actual profits earned by the branch, but the hypothetical profits which such permanent establishment ,that is, the branch, might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independent of the enterprise of which it is the permanent establishment.
That is the common thread in all the tax treaties and in the US, OECD and UN Model Conventions. Therefore there is a difference in the connotations of a foreign company in India and its permanent establishment in India.
These terms are neither synonymous nor devoid of any distinction. Therefore, a harmonious interpretation would suggest that the meaning of an Indian concern should be taken as a business carried on in India, which may include a business carried on in India even by a non-resident.
How did the Tribunal resolve the BCC case?
A decade-old circular of the Central Board of Direct Taxes (CBDT) proved helpful. This circular, dated April 17, 1996, had taken a view that the branch of a foreign company/concern in India is a separate entity for the purpose of taxation and that 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.
The Tribunal found that what is important from the point of view of Section 115A is whether the payment is made by an Indian concern to a non-resident or not. Also, the CBDT's stand that the interest payable by the branch office of a foreign concern/company to its head office/overseas branches is entitled to be taxed under Section 115A was clear enough, found the Tribunal. So, it would not be open to the AO to decline application of Section 115A only for the reason that the interest was paid by an Indian branch of a foreign bank, ruled the Tribunal.
In sum, therefore?
An `Indian concern' includes a business carried on in India by a non - resident, in the context of Section 115A read with Section 9(1)(v). The phrase also includes Indian branch offices of foreign companies. The correct rate of tax applicable to the income earned by way of interest on foreign currency deposits with the Indian branch of the foreign bank will be 20 per cent as per the provisions of Section 115A of the Act.
Importantly, and reassuringly, the Tribunal affirmed that a beneficial circular is binding on the revenue authorities. For, in the instant case, the circular recognises that the provisions of Section 115A will also govern situations where interest is payable by Indian branches of foreign banks.