BNP PARIBAS SA,MUMBAI vs. DCIT (IT) 1(3)(1), MUMBAI

आदेश / O R D E R Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 30/08/2016 of the Ld. First Appellate Authority, Mumbai. The first ground raised

26. (Non- discrimination) of the India-France Tax Treaty.

2.1. We have considered the rival submissions and perused the material available on record. In view of the above, we are reproducing hereunder, the order of the Tribunal for Assessment Year 2010-11 in order dated 16/10/2017 (Page-83 of the paper book filed by the assessee) for ready reference and analysis:-

“ Challenging the orders dated 27/11/2014 of CIT(A)-55, Mumbai the assessee and the Assessing Officer (A.O.) are in appeal for the above mentioned assessment year (A.Y). Assessee, engaged in banking operations, having head office in France, filed its return of income on 15/10/2010 declared total income at Rs.37.14 crores. The case was selected for scrutiny upon service of notice u/s. 143(2) dated 07/09/2011. The A.O completed assessment u/s. 143(3) r.w.s. 144C(3) of the Act vide order dated 30/04/2014 and determined the total income at Rs.38.45 crores. 2.During the course of hearing before us, the Authorised Representative (AR) and the Departmental Representative (DR) fairly conceded that issue raised by the assessee as well as the AO have been dealt with and decided by the Tribunal while adjudicating the appeals for the earlier years. ITA/1182/Mum/2015:

3.The solitary Ground of appeal

, raised by the assessee is about not accepting its claim about rate of taxes. The assessee had objected to the rate of tax applicable to domestic companiesand co-operative banks were also applicable to it in accordance with the provisions of Article

26. (non discrimination) of Indo French Tax Treaty. We find that while deciding the appeal for the AY 1996

97. (ITA/2760/Mum/2000 dt.28/8/2013) the Tribunal has decided the issue as under : “4.The third issue is relating to tax rate. The assessee has submitted that the tax levied at higher rate in the case of foreign companies is discriminatory in nature and, accordingly, relief has been sought on this account. The claim has been rejected by the authorities below. 4.1 We have heard both the parties in the matter. We find that this issue has already been examined by the Tribunal in the case of M/s BNP Paribas, decided in & 4602/ M/

2004,vide order dated 1-7-2013. In that case also the tax rate applied in the case of the assessee, a foreign company was 48% compared to 38% applied in case of domestic companies. The assessee had argued that it was discriminatory and not in accordance with law. Reference was made to non-discrimination clause in the Treaty, as per which there should not be any discrimination between the domestic and the non-resident company. The Tribunal, however, referred to the Explanation in the Section 90, inserted in the IT Act with retrospective effect from 01-04- 1962 as per which the higher tax rate in case of foreign company, should not be regarded as violation of non- discrimination clause. The Tribunal also referred to the judgment of the Hon’ble Supreme Court in the case of ACIT Vs. J.K. Synthetics. The Tribunal accordingly, rejected the ground raised by the assessee. The facts in the present appeal are identical and, therefore, respectfully following the decision of the Tribunal in the case of M/s BNP Paribas(supra), we dismiss this ground raised by the assessee.

5. Resultantly, appeal of the assessee is partly allowed. Following the above, effective Ground of appeal raised by the assessee is decided against it.” 2.2. We note that for Assessment Year 2004-05 (Pages 28 -29 of the paper book), Assessment Year 2005-06 (page-41), Assessment Year 2006-07 and 2007-08 (page- 53-54), Assessment Year 2008-09 (page-67), Assessment Year 2009-10 (page-76) and for Assessment Year 2010-11 (reproduced hereinabove), the Tribunal has decided this against the assessee and fairly agreed by the ld. counsel for the assessee. No contrary decision was brought to our notice, therefore, respectfully following the aforesaid order of the Tribunal, this issue is decided against the assessee, accordingly, dismissed.

3. The next ground raised by the assessee pertains to taxability of interest paid by Indian Branch Office of the assessee to its head office, subject to proving the assessee that it made such claim in its return of income filed in original for Assessment Year 2011-12 by way of notes to return that were uploaded with the same return of income.

3.1. During hearing, the ld. counsel for the assessee claimed that this issue has been decided in favour of the assessee by the Tribunal for earlier Assessment Years. The assessee has also filed various orders in its paper book.

The Ld. CIT-DR though defended the order of the Ld. Commissioner of Income Tax (Appeal) but did not controvert the factual matrix that the issue has been decided in favour of the assessee by the earlier orders of the Tribunal.

3.2. We have considered the rival submissions and perused the material available on record. In view of the above, we are reproducing hereunder, the order of the Tribunal for Assessment Year 2010-11 in order dated 16/10/2017 (Page-85 to 87 of the paper book filed by the assessee) for ready reference and analysis:-

“ 4.1.Second Ground of appeal about interest paid by Indian Branch offices to the assessee , amounting to Rs.4,19,26,420/-.It was brought to our notice that identical issue was decided by the Tribunal in AY 2005-06(ITA/339/Mum/2010 ;16/07/2014) which reads as under :-

4. In ground No.2, the assessee is aggrieved by the action of the lower authorities for taxing the interest paid by the Indian branch of the assessee to its head office and overseas branches amounting to Rs.3,09,48,018/-, applying the provisions of Article 12 (Interest of IndiaFrance Tax Treaty). In this regard, learned AR placed on record the order of the Tribunal in assessee’s own case for the AYs. 2001-02 to 2002-03. In AY 2001-02, the Tribunal has dealt with the issue at para 13, 14, 15 & 16 at page 5 and decided the issue in favour of the assessee. Similarly the Tribunal in assessee’s own case in the AY 2002-03 & 2003- 04 decided the issue at page 2, 3 & 6 at para 3,4,5, &

13. Learned AR also placed reliance on the decision of ITAT Special Bench in the case of Sumitomo Mitsui Banking Corporation Vs. DDIT(IT), reported in (2012) 145 TTJ (Mumbai)(SB) 649, wherein exactly similar issue has been dealt at para 88 page 700 & 701. 4.1 On the other hand, it was contended by the learned DR that mutuality issue was not argued before the lower authorities, whether transaction is covered by the Special Bench, the issue of mutuality was not considered by the Special Bench. He also relied on the observation made by Hon’ble Supreme Court in the case of Bangalore Club Vs. CIT, reported in (2013) 350 ITR 509 (SC) and our attention was invited to para

23. It was contended by the learned DR that taking loan from HO at interest itself shows that borrowing is on commercial basis, therefore, there is no question of applying principle of mutuality. He further contended that if principle of mutuality is applied in all the cases, Section 44C will be redundant. The CITDR Mr. Ajay Kumar Shrivastava further contended that the ITAT SB in case of Sumitomo Mitsui banking corporation 136 ITD 66(Mum)(SB) has held that the interest received by HO(GE) is not taxable in hands of GE in India under domestic law on principles of mutuality as the interest paid by PE to GE is payment to self. As per learned DR, before the SB, the counsels from both the sides did not dispute the position that such interest payments were covered by principles of mutuality being payment to self, though the revenue argued that for purpose of taxation under domestic laws also the PE and GE should be treated as separate entities. This argument was rejected by ITAT on grounds that under the domestic law there is only one assessable entity i.e. GE and PE is not an independent person and it is part of GE. 4.2 In view of the above, learned CITDR strongly defended the order of the AO on the plea that the decision of SB hinges on the assumption that the impugned transactions are covered by principles of mutuality being payment to self whereas the non applicability of mutuality to such transaction was neither argued by any side nor was any objection raised to such assumption. 4.3 By referring to the decision of the Hon’ble Supreme Court in the case of Bangalore Club (supra), ld. DR submitted that following principles were followed by apex court in Bangalore club(supra) with regard to applicability of principles of mutuality: (i) There should be complete identity between the contributors and participators. (ii) The mutual activity is restricted to within members of mutual group (contributors and participators) and not with outsiders. (iii) Only that surplus which is earned out of the transactions between the closed group of members only as a class is exempt but income arising from operations with third parties was outside of the mutuality, rupturing the 'privity of mutuality', consequently, violating the one to one identity between the contributors and participators. (iv) The transactions resulting in income are not in nature akin to business, or tainted with commerciality. (v) It cannot be said that incorporation which brings into being a legal entity separate from its constituent members is to be disregarded always and that the legal entity can never make a profit out of its own members ... " The principle that no one can make a profit out of himself is true enough but may in its application easily lead to confusion, At what point, does the relationship of mutuality end and that of trading begin" is a difficult and vexed question. As per learned DR the next test of mutuality to apply is that all transactions must be within the members of mutual group.

The assessee being in banking business is dealing with third parties as well as its own branches to earn its business income. The money advanced by BO to HO or HO to BO are during the course and part of regular banking activities which are also carried in similar fashion with third parties. Hence these are commercial transactions not limited amongst the mutual entities but extended to third parties also and the privity of mutuality gets diluted for this reason. Again referring to the decision of Hon’ble Supreme Court, learned DR contended that all transactions between legal entity and its constituent members (such as BO and HO) are not always covered by principles of mutuality. The principle that no one can trade with himself is not universally applicable. It might here be pointed out that it has been held by the House of Lords in Sharkey Vs. Wernher (1956) AC 58 ; (1956) 29 lTR 962 (HL) that the general proposition that no one could trade with himself and make in its true sense or meaning taxable profits by dealing with himself is not universally true and that there are situations in which a man could be said to make a profit out of the consumption of his own goods. The Hon’ble Supreme Court in Bangalore club (supra) also bas held that this maxim is not universally applicable. When the business activity of banking by assessee bank comprises of continuous/integrated inflows and outflows of money with several entities including customers, other banks and its own branches, then the profit of the bank’s business would depend on net inflows out of all operations and it cannot be said that a part of such transactions are governed by mutuality by disintegrating some of the constituent transactions between BO and HO out of the one composite business of banking and then to say that such transactions are governed by mutuality. When the total profit of a bank represents the resultant aggregation of different items of activity then how could it be said that the profit from each item of activity (including from activity between BO & HO) which makes up that total is only a notional one to the extent it arises from transactions between BO & HO and not the actual or real profit. If the profits from multiple activity as a banking by BO or HO is considered in its entirety as two independent operating entities, then the principle that no one can trade with itself will not arise at all. The applicability of principle of mutuality has to be tested qua the entire activity of banking business and not quo. the part of business activity comprising of transactions between BO and HO only when the ultimate business profit is sum total of all the activities carried by the BO or HO in its jurisdiction of operation of banking business, The principle of trading with one self has to be seen w. r. t. whole activity comprising of the business and not by disintegrating various integrated operations of a common business. 4.5 We have carefully considered the arguments of rival parties, gone through the orders of authorities below as well as orders of the Tribunal in assessee’s own case and also the order of the Special Bench in the case of Sumitomo Mitsui Banking Corporation (supra). Decision of the Hon’ble Supreme Court in the case of Bangalore Club (supra) is distinguishable on facts where interest income was earned by assessee club from third party i.e. banks with which deposit was made. However, in the instant case HO has given funds to its branch i.e. assessee. Following were the observations at para of Special Bench 88 :- XXXXX 4.6 In view of the above, since the issue under consideration is covered not only by the order of the Tribunal in assessee’s own case for the AY 2001-02 to 2003-04 but also by the order of the ITAT’s Special Bench in the case of Sumitomo Mitsui Banking Corporation (supra), we hold that the department was not justified in subjecting to tax the interest paid by the Indian Branch of the assessee to its head office and overseas branches applying the provisions of Article 12 of India-France Tax Treaty.” Considering the above second Ground is decided against the AO. As a result appeals filed by the assessee and the AO stand dismissed.” 3.3. We find that the issue taxability of interest paid by the assessee to its head office has been decided in favour of the assessee by the Tribunal for Assessment Year 2000-01 and 2001-02 (page-20 of the paper book), Assessment Year 2002-03 and 2003-04 (page-27 ), Assessment Year 2004-05 (page-36), Assessment Years 2006-07 & 2007-08 (pages 54-56) and for Assessment Year 2010-11, reproduced hereinabove. No contrary decision was brought to our notice by either side and more specifically the Revenue, therefore, following the aforesaid order of the Tribunal, this is issue is decided in favour of the assessee.

Finally, the appeal of the assessee is partly allowed.

This order was pronounced in the open court in the presence of the ld. representatives from both sides at the conclusion of the hearing on 29/08/2018.