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2022 (6) TMI 953 - AT - Income TaxIncome accrued in India - taxation of interest income - assessee is a company incorporated and fiscally domiciled in the Republic of Japan - streams of income from its India operations - income from its permanent establishment in India - HELD THAT:- Taxability under Article 7 or Article 14 is a sine qua non for triggering the exclusion clause under Article 11(6). There is no finding to, or even indication of, that effect. Unless the AO gives that finding, excluding interest income from gross basis taxation under Article 11(6) cannot come into play. In any event, triggering of exclusion under Article 11(6) does not, by itself, result in taxation of interest income at the normal rate of tax-unless the interest income is taxable under Article 7(1) or under Article 14(1). AO has simply proceeded on the basis that since the assessee has a permanent establishment in India, it can be said to be connected with such a PE, and, accordingly, taxation at the normal rate at which business profits are taxed in the hands of the foreign companies is permissible. That approach is inherently flawed. Even if the interest income is connected with the assessee company's permanent establishment, it can only be brought to tax in India, under Article 7, when the interest income is directly or indirectly attributable to the permanent establishment. It is not even the case of the AO that the permanent establishment played any role in the supplier credit, which is the debt claim leading to the impugned interest income, being extended to the Indian customers who have paid interest on the suppliers” credit. As such, no part of interest income, by any stretch of logic, can be said to be directly or indirectly attributable to the Indian permanent establishment of the assessee company. As alleged that the Indian parties from whom the assessee has received interest income are also the clients of the assessee in India with whom contracts were executed through the Permanent Establishment in India and the assessee has received fees for technical services in a previous year from them, but then the performance of contracts through the PE or receipt of fees for technical services from such clients is irrelevant as long as the interest income is not demonstrated to be attributable to the permanent establishment. Such an attribution cannot be inferred or assumed; there has to be cogent material to establish the fact that the income in question, i.e. interest income in this case, is attributable to the permanent establishment. There is not even a whisper of a suggestion to that effect. For interplay of Article 11(6) and Article 7(1), in our considered view, the expression “effectively connected with such permanent establishment” must mean a situation in which the interest income in question can be said to be “directly or indirectly attributable to the permanent establishment” and can be brought to tax under article 7(1) as such. That is not even the case of the Assessing Officer before us. - Decided in favour of assessee.
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