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2020 (12) TMI 224 - AT - Income TaxIncome accrued in India - interest income and commitment fees earned by DZ Bank from its Indian clients - PE in India - whether can be taxed in the hands of the assessee under article 7 of the India German Double Taxation Avoidance Agreement - Indo German tax treaty? - HELD 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. 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 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 hypothetically independent entity, in the cases of banks where entire interest revenues are taxed on gross basis, is ruled out. Once entire interest revenues earned in India in the hands of the foreign enterprise is taxed in its hands under article 11- as is the undisputed position in this case, nothing survives for taxation under article 7, and, given the fact that entire related revenues are taxed in the hands of the assessee on gross basis under article 11, directly or indirectly, nothing more than entire business receipts can be brought to tax in India. Taxability of interest income and commitment fees - It is clear that, on the facts and in the circumstances of this case and in law, there is no income, other than the interest income of DZ Bank AG from its clients in India, on which tax liability under article 11 has already been discharged, taxable in the hands of the assessee bank - this taxability is concerned, the assessee did not have any obligations to file the income tax return under section 115A(5) as it existed at the relevant point of time. It is difficult not to miss the fact that we are looking at a situation in which an income, 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 and commitment fees 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. 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.
Issues Involved:
1. Determination of Permanent Establishment (PE) of DZ Bank AG in India. 2. Taxability of interest income under Article 11 vs. Article 7 of the Indo-German Double Taxation Avoidance Agreement (DTAA). 3. Taxability of commitment fees and agency fees under Article 11 vs. Article 7 of the Indo-German DTAA. 4. Whether the income should be taxed in the hands of DZ Bank AG or its India Representative Office. Detailed Analysis: 1. Determination of Permanent Establishment (PE) of DZ Bank AG in India: The primary issue was whether DZ Bank AG’s India Representative Office constituted a PE under Article 5 of the Indo-German DTAA. The Assessing Officer (AO) held that the representative office engaged in activities that were more than preparatory or auxiliary, such as approaching Indian banks, negotiating credit facilities, and assisting in recovery of delayed payments. These activities were deemed significant enough to constitute a PE. However, the Tribunal found that even if the representative office contributed to the business, it did not amount to carrying on the business itself, which is a requirement for establishing a PE under Article 5(4)(e). 2. Taxability of Interest Income under Article 11 vs. Article 7: The Tribunal examined whether the interest income of ?29,41,57,201 earned by DZ Bank AG from its Indian clients should be taxed under Article 7 (Business Profits) or Article 11 (Interest) of the Indo-German DTAA. Article 11(5) states that interest income is taxable under Article 7 only if the debt claim is effectively connected with the PE. The Tribunal found that the AO did not establish that the debt claim was effectively connected with the PE. Therefore, the interest income should be taxed under Article 11, which limits the tax to 10% of the gross amount, rather than under Article 7. 3. Taxability of Commitment Fees and Agency Fees: The AO taxed the commitment fees of ?1,91,08,038 and agency fees of ?7,06,900 under Article 7, reasoning that these were connected to the PE. The Tribunal, however, noted that these fees were part of the loan arrangements and should be treated as interest under Article 11. Since the principal transaction (interest income) was not taxable under Article 7, the subsidiary transactions (commitment and agency fees) should also not be taxable under Article 7 but under Article 11, provided they meet the definition of interest. 4. Taxation in the Hands of DZ Bank AG or its India Representative Office: The Tribunal addressed whether the taxable entity should be DZ Bank AG or its India Representative Office. It was clarified that the taxable unit is the foreign enterprise, DZ Bank AG, and not its PE or representative office. The Tribunal emphasized that the income must be taxed in the hands of DZ Bank AG, and not separately in the name of the India Representative Office. The Tribunal found that the AO’s approach of treating the representative office as a separate taxable entity was incorrect. Conclusion: The Tribunal concluded that: - The interest income and related fees should be taxed under Article 11 of the Indo-German DTAA, not Article 7. - DZ Bank AG and its India Representative Office are one taxable entity; therefore, the income should be taxed in the hands of DZ Bank AG. - The AO’s approach of taxing the same income under different articles of the DTAA was incorrect and led to double taxation. - The appeal was allowed, and the impugned demands were deemed unsustainable in law.
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