2018 (5) TMI 344 - AT - Income Tax

PE - taxability of income earned in India - transactions entered in to by the German Bank with the Indian borrowers - whether the functions performed by the DZ India Bank were of preparatory /auxiliary nature or it was working as an agent of the German Entity? - Held that - We nowhere find any reference to the contracts entered in to by the German bank with its borrowers and the terms and conditions of such transactions. The assessee claims that Indian Bank was performing certain function that were auxiliary or preparatory. The claim has not been tested with reference to the loan transactions for the year under consideration. Tax has to be determined on the basis of peculiar facts of a year. General observations/general submissions about the theory is not sufficient to levy taxes or claim a particular deduction. Thus, in our opinion both of them have not done their job satisfactorily. The matter needs further verification of facts. It becomes more important, when we find that assessments of earlier three years have been re-opened. So, we hold that in the interest of justice matter should be restored back to the file of the AO for fresh adjudication. Direct the AO to go through the various transactions entered in to by the German Bank with the Indian borrowers and find out as to whether the functions performed by the DZ India Bank were of preparatory /auxiliary nature or it was working as an agent of the German Entity. The correspondence between the borrowers, the lender and the Indian Bank as well as the documents related with money lending transactions should to examined to arrive at a definite conclusion

Issues Involved:
1. Existence of Permanent Establishment (PE) in India.
2. Taxability of interest income and commitment fees.
3. Nature of functions performed by the Indian representative office.
4. Applicability of section 9(1)(i) and section 115A of the Income-tax Act, 1961.
5. Relevance of RBI's permission and reports.

Detailed Analysis:

1. Existence of Permanent Establishment (PE) in India:
The primary issue in the appeal is whether DZ Bank India Representative Office (DZBI) constitutes a Permanent Establishment (PE) of DZ Germany in India. The AO concluded that DZBI is a PE based on its activities, which include scouting customers, negotiating with clients, signing loan agreements, and following up on recovery of interest and principal amounts. The DRP upheld this view, emphasizing that DZBI's functions were integral to the business of the German entity and not merely auxiliary or preparatory. The Tribunal found that the matter required further verification of facts, particularly the contracts and transactions between DZ Germany and Indian borrowers, to determine if DZBI's functions were indeed auxiliary or if it acted as an agent of the German entity.

2. Taxability of Interest Income and Commitment Fees:
The AO and DRP held that the interest income and commitment fees earned by DZ Germany from Indian clients are taxable in India due to the existence of a PE. The DRP further stated that the taxability of interest income at the rate of 10% under Article 11 of the India-Germany tax treaty was not relevant because DZBI constituted a PE. The commitment fees were also deemed assessable as income of the PE, being part and parcel of the money-lending business.

3. Nature of Functions Performed by the Indian Representative Office:
The AO detailed various activities performed by DZBI, such as initiating discussions with potential customers, providing necessary information for due diligence, and assisting in recovery efforts. The DRP reinforced that these functions were significant and directly contributed to the business income of DZ Germany, thus constituting a PE. The Tribunal noted that the exact nature of these functions needed further examination to ascertain if they were auxiliary or preparatory.

4. Applicability of Section 9(1)(i) and Section 115A of the Income-tax Act, 1961:
The DRP and AO applied section 9(1)(i) of the Act, which deals with income deemed to accrue or arise in India to non-residents through a business connection. The assessee argued that section 115A, which exempts foreign companies from furnishing a return of income in India if they only earn interest income from foreign currency loans with appropriate TDS, should apply. The Tribunal directed the AO to re-examine the transactions to determine the appropriate application of these sections.

5. Relevance of RBI's Permission and Reports:
The assessee contended that DZBI was established with RBI's permission, which restricted it from undertaking business activities in India. The DRP dismissed this argument, stating that RBI's permission and routine reports did not reflect the true nature of DZBI's activities. The Tribunal agreed that RBI's permission was not decisive in determining the taxability and the existence of a PE, and the actual functions performed by DZBI needed thorough verification.

Conclusion:
The Tribunal restored the matter to the AO for fresh adjudication, emphasizing the need for a detailed examination of the contracts and transactions to determine the true nature of DZBI's functions and the existence of a PE. The appeal was partly allowed, with the main issue being sent back for further verification.

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