Tribunal allowed set-off of PE loss against ECB interest taxable on gross basis .19 June 2025

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Tribunal allowed set-off of PE loss against ECB interest taxable on gross basis .19June 2025

Tribunal allowed set-off of PE loss against ECB interest taxable on gross basis 19 June 2025

In the case of Abu Dhabi Commercial Bank PJSC, the Mumbai Bench of Income-tax Appellate Tribunal held that business loss attributable to the Permanent Establishment (PE) in India can be set off against interest income earned on External Commercial Borrowings (ECB), extended directly by the overseas head office to Indian customers (i.e., which was not attributable to the PE).
The Revenue contended that the India-UAE tax treaty (treaty) mandates taxation of interest on a gross basis, without allowing for deduction of any expenses or losses, and lacks any enabling provision for such set-off of losses.
However, the Tribunal rejected the Revenue’s argument, holding that the treaty allows computation of interest income in accordance with the provisions of the Income-tax Act, 1961 (the Act). Accordingly, the set-off provisions under the Act must be applied to determine total income, upon which the beneficial tax rate under the treaty is to be levied.
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