TMI Blog2020 (12) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest income is taxable on gross basis, in the source jurisdiction- subject to, of course, certain exemptions which are not relevant in the present context as on now. Even if there is a real relation between the business carried on by the assessee for which it receives interest and processing charges abroad and activities of its representative office in India which contribute directly or indirectly to the earning of income of the assessee , as is stated in the assessment order, that relationship per se will not make it taxable in India. Conditions laid down under article 11(5) are not satisfied on the facts of this case, and, the entire interest income, therefore, is required to be taxed under article 11. For this reason alone, the interest income cannot be brought to tax under article 7 because the condition precedent for an interest income being brought to tax under article 7, i.e. fulfilling the twin conditions set out in article 7, are not satisfied. It is an undisputed fact that the entire related interest income has been brought to tax in the hands of the foreign enterprise, even though on gross basis under article 11. In case any income is brought to tax on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee bank, additionally under article 7 of the Indo German tax treaty also. That finding is, however, without prejudice to the taxability of the interest income under article 11 of the Indo German tax treaty. We make it clear that the income in question could only be taxed under article 11, and not additionally under article 7 also, but the income is taxable nevertheless, subject to the exemptions set out in and under the scheme of article 11, on gross basis. Given our line of reasoning, as above, it is wholly academic issue as to whether or not the assessee had a permanent establishment in India, because PE or no PE, the debt claim in question could not be said to be effectively connected to the alleged PE, and, therefore, neither the exclusion article 11(5) could have been triggered, nor the taxability under article 7 could not have come into play. - ITA No. 1815/Mum/18 - - - Dated:- 4-12-2020 - Pramod Kumar, Vice President And Pavan Kumar Gadale, Judicial Member P J Pardiwalla and Nitesh Joshi, for the appellant S S Iyengar, for the respondent ORDER Per Pramod Kumar, VP: 1. By way of this appeal, the assessee appellant has called into questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by Hermes Deckung, even though the same would not be taxable in India under the provisions of Article 11 of the IG treaty as interest and in the absence of a PE in India, the same should not be chargeable to tax under Article 7 of the IG treaty. Even assuming without admitting that commitment fees constitutes 'interest', the said income should not be chargeable to tax in India under the provisions of Article 11 (3)(b) of the IG treaty. 5. Without prejudice to the above grounds, erred in not taxing the interest income from credit facilities as per the provisions of section 115A(1) of the Act at the rate of 20%; 6. Without prejudice to the above grounds, erred in bringing to tax the entire income from credit facilities earned by DZ BANK AGDZ instead of only that which can be said to be attributable to the alleged PE in India; 7. Without prejudice to the above grounds, while bringing to tax whole of the income from credit facilities, the learned AO in the OGE to the CIT(A) order erred in not allowing expenses incurred outside India by DZ BANK AGDZ in relation to the credit facilities on account of non-furnishing of documentary evidence; 8. erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income Tax Act, 1961, a foreign company is exempt from furnishing a return of income in India when it only earns interest income from foreign currency loans provided to Indian companies, and the appropriate taxes have been deducted at source from the same. The Assessing Officer was, however, not content with the said explanation. He required the assessee to show cause as to why DZ Bank India Representative Office not be considered a permanent establishment, of the head office, in India, and the interest income and any other income earned by the head office from the operations in India should not be taxed @ 40% as per the provisions of the Income Tax Act . It was explained by the assessee that under article 7 of Indo German tax treaty, only so much of the business profits of a German enterprise can be brought to tax in India as are attributable to its permanent establishment in India, that the representative assessee did not constitute PE of the DZ Bank AG inasmuch as no business activities were carried out from the same, which is a sine qua non for PE coming into existence under the basic rule, that maintenance of a fixed place of business inter alia for any activity of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy approved by them for execution of the credit facilities. l. Post disbursal of the credit facility, the head office/ overseas branches ascertain the reasons for the delay in repayments and interest payments as per the agreed repayment schedule through DZ Bank India, and DZ Bank India even assists in recovery where there are such delays. 7.20 Thus, the business transaction by the assessee's head office and overseas branches with its Indian clients would not be complete without the involvement and actions by its Representative Office in India, DZ Bank India. There is, therefore, a real relation between the business carried on by the assessee for which it receives interest and processing charges abroad and the activities of its Representative Office in India, which contributes directly or indirectly to the earning of the income by the assessee. Therefore, it follows that income shall be deemed to accrue/arise to the assessee in Germany from 'business connection' in India. 7.21 As far as the contention of the assessee based on DTAA is concerned, reference to the relevant provisions of Article 7 of DTAA which deal with the business profits would be necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or extraction or exploitation of mineral oils in that State. 4. Notwithstanding the preceding provisions of this Article, the term permanent establishment shall be deemed not to include,- (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to- the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;auxiliary', 'Ancillary', 'Aid' and 'Prepare' in support of its contention that its representative office in India is covered by the exclusionary clause (e). It is unnecessary to refer to all of them here. Suffice it to say that the word 'auxiliary' in common English usage means helping, assisting or supporting the main activity. Therefore, the only task at hand is to ascertain whether the activities carried on in the representative office in India are only supportive of the main business or form one of the main functions of the business. In the instant case of the assessee, however, it is seen that even if some of the function of the representative office may be auxiliary character, the involvement of representative office in scouting for customers in India, giving specific inputs to the head office and its overseas branches about the prospective client and then negotiating with them, signing loan agreements and following up on delayed repayments of principal and delayed payments of interest, are all functions which play an important role in its main business. These roles of the representative office are nothing short of performing a major role ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erseas branches. 7.31 Thus, even if the provisions of the DTAA between India and Germany are applied to the case of the assessee, the assessee is a permanent establishment of DZ Bank AGDZ in India, and all the income earned by its head office from clients in India is taxable as its business income in India @40% + surcharge + education cess. 7.32 The Assessee vide its letter dated 21/12/2016 has submitted that during the year DZ Bank India earned interest income on overseas credit facilities provided to India clients amounting to ₹ 43,18,31,765/- which includes an amount of ₹ 10,78,74,218 as interest received on loans given to Indian Companies/borrowers and ₹ 32,39,57,547 as interest on loans guaranteed by Hermes Deckung and hence they are exempt from taxation in India as per Article 11 (3)(b) of India_Germany Double Taxation Avoidance Agreement. An amount of, ₹ 18,62,82,983 has been submitted by the assessee vide letter dated 9/12/2016. Accordingly, in view of the above facts and discussion, this interest income of ₹ 29,41,57,201 shall be subject to tax @40% along with surcharge and education cess. 6. The Assessing Officer further noted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise in India can be only such portion of income accruing or arising to such a foreign enterprise as is attributable to its business carried out in India. This business could be carried out through its branch(es) or through some other form of its presence in India such as office, project site, factory, sales outlet etc. (hereinafter called as PE of foreign enterprise ). It is, therefore, important to note that under the Act, while the taxable subject is the foreign general enterprise (for short, GE ), it is taxable only in respect of the income including business profits, which accrues or arises to that foreign GE in India. [Emphasis, by underlining, supplied by us] It may be clarified that the use of expression permanent establishment in the above context was with reference to the provisions of the Indian Income Tax Act, 1961, under which permanent establishment has been assigned an inclusive definition which includes, under section 92F(iiia), a fixed place of business through which the business of the enterprise is wholly or partly carried on . This reference to permanent establishment does not, therefore, prejudice your argument that you did not have a perman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the taxes withheld from those interest payments will technically become refundable to the DZ Bank AG, if so claimed, learned senior counsel did not have much to say beyond submitting that it is a hypothetical situation as no such refund is, and will be, claimed. He submits that such an approach is too technical an approach to the subject matter, and the lapse of the assessee, if at all a lapse, is an inadvertent and trivial procedural mistake which must not obstruct the path of substantial justice. Learned counsel submits that, if the foreign enterprise and its representative entity are to be treated as the same unit- as is the correct position, in substance what is being sought to be taxed is interest income under article 7 which has already been offered to tax under article 11, and this claim is patently incorrect. Therefore, in case we agree with that proposition on merits, there is no point in prolonging the agony of the foreign enterprise by further delaying the matter being decided on merits in a different set of proceedings. Learned counsel submits that section 153 cannot come into play in this case because that would be applicable only when an income is excluded from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manent account number allotted to the DZ Bank AG, which is used for filing the income tax return of DZ Bank AG- India Representative Office. That position, on the first principles, is unsustainable in law. It is only elementary that the tax subject is only the foreign enterprise and not its PE in India, though, so far as profit attributable to the PE are concerned, the same are taxable in the hands of the foreign enterprise. That is what a coordinate bench of this Tribunal, speaking through one of us (i.e. the Vice President) in the case of Dresdner Bank AG Vs ACIT [(2006) 11 SOT 158 (Mum)] has held by observing, inter alia, that Under section 4 of the Act, it is total income of every person which is taxable. Section 2(31), in turn, defines person as including a company , which in terms of the provisions of section 2(23A), includes a foreign company as well. Section 6(4) of the Act lays down that a company, unless it is an Indian company or unless it is controlled or managed entirely from India, cannot be said to be resident in India. A foreign company, which is not wholly controlled or managed in India, is therefore a non-resident so far as residential status under the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e chose to file the income tax return, it would seem to us that the assessee could have filed the income tax return only for DZ Bank AG, and not for India office of DZ Bank AG, and all the income, under whichever article of the applicable tax treaty- article 11, article 7 or any other article, were liable to be disclosed therein, and the income was required to be computed in accordance with the applicable legal provision, including the transfer pricing provisions, if applicable. In the present case, though the assessee has used the PAN number as was allotted to the DZ Bank AG, it has apparently filed the income tax return in the name of DZ Bank AG- India Representative Office, the income tax return is verified by the India Representative Officials and created an artificial demarcation of income of the HO and Branch by excluding the interest income received by DZ Bank AG directly and taxed under article 11, and declaring that the assessee, styled as DZ Bank AG- India Representative office, did not have any taxable income. The Assessing Officer has categorically noted that the assessee has filed an income tax return disclosing NIL income- something which is ex facie incorrect, if DZ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losing this income in the hands of correct entities are purely academic delights. It is also important to understand that once we appreciate the fundamental position that the foreign enterprise and its representative office in India are one and the same thing, so far taxation of income in India is concerned, what essentially follows is that the income being sought to be taxed under article 7, on net basis, in the impugned assessment, has already been taxed in the hands of the same assessee under article 11, on gross basis, and that aspect of the matter has reached finality. It is also not in dispute that in terms of the provisions of Section 115A(5), as they then stood, the assessee did not have obligation to file any income tax return in respect of the said taxability. Viewed thus, the assessee may not be at fault, on that score, on technicalities either. Coming to the substance of the matter, we find that what has already been taxed, as such, under article 11 is entire interest revenue relatable to India operations of DZ Bank AG, and what is now being sought to be taxed, under article 7, is the profit element in respect of these interest revenues received by DZ Bank AG relatable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the profits of a permanent establishment, there shall be allowed as deductions, expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, and according to the domestic law of the Contracting State in which the permanent establishment is situated. 4. Insofar as in a Contracting State and in exceptional cases the determination of the profits to be attributed to a permanent establishment in accordance with paragraph 2 is impossible or gives rise to unreasonable difficulties, nothing in paragraph 2 shall preclude the determination of the profits to be attributed to a permanent establishment by means of either apportioning the total profits of the enterprise to that permanent establishment or estimating on any other reasonable basis; the method of apportionment or estimation adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article. 5. No profits shall be attributed to a permanent establishment by reason of the mere purchase b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re us. 15. Let us, therefore, move on to deal with, and examine, the taxability of interest income under article 11. The related treaty provision is set out below for ready reference: ARTICLE 11- INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraphs 1 and 2- (a) interest arising in the Federal Republic of Germany and paid to the Government of the Republic of India, the Reserve Bank of India, the Industrial Finance Corporation of India, the Industrial Development Bank of India, the Export-Import Bank of India, National Housing Bank and Small Industries Development Bank of India shall be exempt from German tax; (b) interest arising in the Republic of India and paid to the Government of the Federal Republic of Germany, the Deutsche Bundesbank, the Kreditan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement. [Emphasis, by underlining, supplied by us] 16. There cannot be, and there is no, dispute that interest income is specifically covered by article 11 which, inter alia, provides that interest income arising in a contracting state and paid to a resident of the other contracting state may be taxed in the other contracting state and restricts the taxability of such interest income, in the cases in which recipient of the interest income is beneficial owner thereof, to 10% of the gross amount of interest. There is also no dispute that the interest revenues relating to the India operations of the DZ Bank AG have been offered to tax under article 11, and the matter has reached finality as such. In the assessment order itself, that aspect of the matter has been categorically noted by the Assessing Officer. 17. Clearly, therefore, the interest income is taxable on gross basis, in the source jurisdiction- subject to, of course, certain exemptions which are not relevant in the present context as on now. We will deal with one of these exemptions a little later, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectly or indirectly to the earning of income of the assessee , as is stated in the assessment order, that relationship per se will not make it taxable in India. 22. It is also important to bear in mind the fact that the exclusion clause under article 11(5) will be triggered only when the twin conditions that the foreign enterprise carried on business in the source jurisdiction and that the debt claim being effectively connected with the permanent establishment are satisfied. So far as the debt claim being effectively connected with the PE is concerned, that cannot come into play only merely because the PE had a supporting role in creation of the debt claim. Unless a debt claim is part of the assets of the PE or income arising therefrom can be said to be income of the PE, it cannot normally be treated as effectively connected with the PE. In any case, the Assessing Officer has not brought on record any material to establish, or even indicate, that the debt claim is effectively connected with the PE, save and except for the supporting services rendered by the Indian Representative office in connection with dealing with that debt claim but then rendition of service by the PE, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business, carried on through its fixed place of business in India, such an establishment could qualify to be a permanent establishment for the purposes of the transfer pricing regulations. There is also a school of thought that whatever be the treaty protection under section 90, such a treaty protection does not extend to transfer pricing regulations. As noted by a coordinate bench of this Tribunal, in the case of Shell Global Solutions BV Vs DDIT [(2016) 75 taxmann.234 (Ahd)], the profit adjustment mechanism, envisaged in tax treaties, do not deal with supra national income determination, and, therefore, the provisions of tax treaties cannot be seen as restricting, or overriding, domestic law mechanism on this aspect . It is not even in dispute that India representative offices of foreign enterprise do perform certain services which are part of the business activities, even though such services are at best preparatory and auxiliary activities. As a corollary to this legal and factual position, a suitable arm s length price adjustment for the free services rendered by the Indian office to the foreign enterprise could probably be in order. Such an ALP adjustment could factor fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of taxation. Learned Departmental Representative, on the other hand, relies upon his stand that at least some income must be attributed to the operations of the India representative office. 26. We see merits in the stand of the learned senior counsel for a very short reason. It is an undisputed fact that the entire related interest income has been brought to tax in the hands of the foreign enterprise, even though on gross basis under article 11. In case any income is brought to tax on account of ALP adjustment, and bearing in mind the fact that such an income will also be relatable to earning the same interest income, it will indeed result in a situation that for revenue of x amount earned from India, what will become taxable in India will be an amount more than x amount- something which is clearly incongruous. The taxable amount in a tax jurisdiction cannot, under any circumstances, be more than the entire revenue itself in that jurisdiction. In this view of the matter, even an income on account of ALP adjustment for free rendition of services by the Indian representative office to the foreign enterprise itself- even if that be treated as an associated enterprise and a hy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of commitment fee of ₹ 1,91,08,038 and agency fees of ₹ 7,06,900. So far as these receipts are concerned, the Assessing Officer, in paragraph 9.1 of the assessment order, has noted the claim of the assessee that these were in connection with a loan guaranteed by HERMES-Deckung, Germany, and for that reason not taxable under article 11(3)(b) of the Indo German tax treaty. While he did not dispute the claim of the assessee that these amounts these amounts are in the nature of interest, and as such eligible for exemption under article 11(3)(b), he rejected the claim for the short reason that it has been held that the assessee is a permanent establishment of DZ Bank AG in India, and all the income earned by the head office from clients in India is taxable as its business income in India . That reason is clearly incorrect. As we repeatedly emphasized, the DZ Bank AG and DZ Bank AG- India representative office are one and the same thing so far as taxation in India is concerned. These payments to DZ Bank AG were subject matter of remittances by Indian clients to the DZ Bank AG. If these were not taxable at that stage, there is nothing further by way of DZ Bank India Repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome, which has already been brought to tax in the hands of the assessee under a treaty provision, is being sought to be taxed again in the hands of the same assessee, in the same assessment year but only under a different provision in the same tax treaty. We cannot, and donot, approve such an approach. The impugned demands are, thus, also devoid of legally sustainable merits from this point of view as well. We, therefore, uphold the plea of the assessee against taxability of interest income of ₹ 29,41,57,201 and commitment fees etc of ₹ 1,98,14,938, in the hands of the assessee bank, additionally under article 7 of the Indo German tax treaty also. That finding is, however, without prejudice to the taxability of the interest income under article 11 of the Indo German tax treaty. We make it clear that the income in question could only be taxed under article 11, and not additionally under article 7 also, but the income is taxable nevertheless, subject to the exemptions set out in and under the scheme of article 11, on gross basis. 31. Given our line of reasoning, as above, it is wholly academic issue as to whether or not the assessee had a permanent establishment in I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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