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Can Sumitomo Special Bench Decision Be Overruled?

While computing income of an Indian branch (being a PE) of a Foreign bank chargeable to tax in India under the Income Tax Act, 1961 (‘the Act’), the Indian PE claims deduction of interest payable by the branch it to the head office abroad. While interest expenditure of a PE paid to the head office is generally not allowed as a tax deductible expense, PEs of Banks enjoy special treatment as explained by the OECD in its commentary, where such interest expense is considered in determining taxable income in the source state. On the other hand, the interest so received by the head office is claimed as not taxable in India. These ostensibly self-contradictory claims found favour by with the Special Bench of Income tax Appellate Tribunal (ITAT) in the case of Sumitomo Mitsui Banking Corporation [136 ITD 66 (Bom)(SB)]. However Finance Bill 2015 has made an unsuccessful attempt to overturn this decision. This article seeks to highlight the arguments to support the view that Sumitomo decision may still hold good even after the amendment.