Barclays Bank PLC vs ACIT (ITAT Mumbai): Interest from Head Office and Overseas Branches Not Taxable as Income of Indian PE

Case Overview

Case Name: Barclays Bank PLC Vs ACIT
Forum: Income Tax Appellate Tribunal, Mumbai
Assessment Years: 1998-99, 1999-2000, and 2000-01
Order Date: 30/06/2026

This landmark ruling by the ITAT Mumbai comprehensively addressed a cluster of significant tax disputes involving the Indian permanent establishment of a UK-incorporated non-resident banking entity. The appeals and cross-objections spanning three consecutive assessment years raised interconnected questions touching upon the taxability of interest income, disallowance of expenditure under Section 14A, broken period interest, levy of interest under Section 234B, and the procedural maintainability of departmental appeals and cross-objections.

Background and Factual Matrix

Barclays Bank PLC, a non-resident banking company incorporated in the United Kingdom, operates branches in Mumbai and New Delhi, which together constitute its permanent establishment (PE) in India for the purposes of the India-UK Double Taxation Avoidance Agreement (DTAA).

For Assessment Year 1998-99, the assessee initially filed its return of income on 30.11.1998 declaring income of Rs. 7,38,03,150/-. This was subsequently revised on 30.03.2000, with the revised return declaring income of Rs. 3,66,09,620/-.

During the assessment proceedings, the Assessing Officer (AO) observed that the assessee had claimed interest income earned by the Indian branch as non-taxable in India. In the original return, this claim stood at Rs. 2,81,48,207/-, which was revised upward to Rs. 6,68,50,601/- in the revised return.

The interest income in question was broadly categorized as follows:

Issue 1: Taxability of Interest from Head Office, Overseas Branches, and Other Overseas Banks

The Assessee's Position

The assessee advanced a two-pronged argument:

1. On interest from head office and overseas branches: The Indian branch and its head office/overseas branches constitute a single legal entity under domestic law. A legal person cannot earn income from itself. Accordingly, any receipt between the Indian PE and the head office or overseas branches is a payment from self to self, governed by the principle of mutuality, and does not constitute taxable income.

2. **On interest from other overseas banks (Rs. 6,68,50,601/-)😗* The conditions prescribed under Section 9(1)(v)(c) of the Income-tax Act, 1961 were not satisfied, since the overseas banks paying the interest had not carried on any business or profession in India.

The Revenue's Position

The AO rejected the assessee's contentions on both fronts. He held that under the India-UK DTAA, the PE and the head office are treated as distinct entities, and therefore interest received by the Indian branch from the head office and overseas branches was taxable. Further, the AO maintained that the interest income was taxable both under Section 9(1)(v)(c) and under the general provision contained in Section 9(1)(i) of the Act. The first appellate authority upheld the AO's additions.

ITAT's Analysis and Decision

Interest from Head Office and Overseas Branches

The Tribunal found substantial merit in the assessee's position. It unequivocally held that the Indian branch and its head office cannot be treated as distinct and separate entities under the domestic tax law. While the PE concept under a treaty provision may create a notional distinction for the limited purpose of attributing profits to the PE, this distinction does not extend to treating payments between the same entity as income-generating transactions.

The Tribunal placed considerable reliance on the decision of the Hon'ble Jurisdictional High Court in DIT(IT) vs. Credit Agricole Indosuez [2016] 69 com 285 (Bom) and the ITAT Special Bench ruling in Sumitomo Mitsui Banking Corporation vs. DDIT [2012] 19 com 364 (Mum.)(SB), both of which had conclusively settled this principle.

The Special Bench in Sumitomo Mitsui Banking Corporation had observed:

"50. As regards the deduction of interest payable to the head office in the hands of Indian PE for the purpose of computing profits attributable to the said PE, there is no dispute that such deduction is not permissible under the Indian Income-tax Act (domestic law) being the payment made to self. Both the Indian PE and the foreign GE of which it is a part are not separate entities for the purpose of taxation under the domestic law and the same being one and the same entity recognized as one assessee under the domestic law, interest payable by Indian PE to foreign GE of which it is a part, cannot be treated as expenditure allowable as deduction being payment to self..."

The Jurisdictional High Court in Credit Agricole Indosuez (supra), while examining whether interest payable by the Indian PE to its head office and overseas branches was deductible, had reinforced the settled position that: