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2022 (6) TMI 1109 - AT - Income TaxIncome accrued in India - interest income on loans in the form of suppliers credit given to Indian parties - interest is paid is effectively connected with the Permanent Establishment of the assessee in India and the interest income thereon was taxable as per Article 11(6) read with Article 7 of the DTAA - whether taxable at special rates as per Article 11(2) of the India-Japan? - CIT(A) held that the interest income on loans in the form of suppliers credit given to Indian parties is taxable at special rates as per Article 11(2) of the India-Japan DTAA specially because the assessee had a permanent Establishment in India during the said time - HELD THAT - As decided in MARUBENI CORPORATION, JAPAN CARE OF MARUBENI INDIA PVT LTD 2022 (6) TMI 953 - ITAT MUMBAI 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. Levying surcharge and health and education cess on FTS income - HELD THAT - We find that in the last paragraph of the assessment order, the Assessing Officer has specifically mentioned that the FTS income of Rs. 30,92,20,199 is to be taxed @10% as per the DTAA whereas the income said to be attributable to the PE is to be taxed at the rates applicable to foreign companies, i.e. 40% plus surcharge and cess as per the Income Tax Act. Yet, in the computation of tax liability, the surcharge as also health and education is also levied. That is certainly incorrect. In any event, this issue is covered, in favour of the assessee, by co-ordinate bench decisions, including in the case of DIC Asia Pacific Pte Ltd 2012 (6) TMI 686 - ITAT, KOLKATA as held expression tax is defined in Article 2(1) to include income tax and is stated to include surcharge thereon, so far as India is concerned. Article 2(2) further extends the scope of the tax by laying down that it shall also cover any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Agreement in addition to, or in place of, the taxes referred to in paragraph 1 . Education cess, introduced by the Finance Act, 2004, described in Section 2(11) of the Finance Act 2004, is nothing but in the nature of an additional surcharge. Accordingly, the education cess being in the nature of an additional surcharge is covered by Article 2. Accordingly, education cess cannot indeed be levied in respect of tax liability of the appellant company - Decided in favour of assessee.
Issues Involved:
1. Taxability of interest income on loans in the form of suppliers' credit under the India-Japan Double Taxation Avoidance Agreement (DTAA). 2. Applicability of surcharge and health and education cess on Fees for Technical Services (FTS) income. Detailed Analysis: Issue 1: Taxability of Interest Income on Loans in the Form of Suppliers' Credit The primary contention revolves around whether the interest income on loans in the form of suppliers' credit given to Indian parties should be taxed at special rates as per Article 11(2) of the India-Japan DTAA or under Article 11(6) read with Article 7 due to the existence of a Permanent Establishment (PE) in India. Arguments by the Assessing Officer: - The Assessing Officer argued that the interest income should be taxed under Article 11(6) read with Article 7 of the DTAA because the suppliers' credit is effectively connected with the PE of the assessee in India. - It was contended that since the assessee had a PE in India, the interest income should be taxed at the normal rate applicable to foreign companies, i.e., 40%. Arguments by the Assessee: - The assessee contended that the interest income was earned on suppliers' credit for funding the purchase of Excavator CKD and CBU manufactured by Hitachi Sumitomo Heavy Industries Construction Crane Co Ltd Japan and sold by the assessee or its controlled entities. - The assessee argued that this transaction had no connection with the PE in India and should be taxed at the concessional rate of 10% as per Article 11(2) of the DTAA. Tribunal's Findings: - The Tribunal analyzed the relevant treaty provisions, particularly Articles 11, 7, and 14, to understand the scheme of source jurisdiction taxation of interest income. - Article 11(2) allows for a lower tax rate of 10% on interest income, whereas Article 11(6) provides an exception if the interest is effectively connected with a PE or fixed base. - The Tribunal emphasized that the mere existence of a PE does not automatically trigger the exclusion under Article 11(6); there must be a direct or indirect attribution of the interest income to the PE. - The Tribunal found no evidence to suggest that the interest income was attributable to the PE. The Assessing Officer had not demonstrated the necessary nexus between the interest income and the PE. - Consequently, the Tribunal upheld the CIT(A)'s decision that the interest income should be taxed at the concessional rate of 10% under Article 11(2) of the DTAA. Issue 2: Applicability of Surcharge and Health and Education Cess on FTS Income The second issue pertained to whether surcharge and health and education cess should be levied on FTS income when taxed at the rate of 10% as prescribed in Article 12 of the India-Japan Tax Treaty. Arguments by the Assessee: - The assessee argued that the FTS income should be taxed at 10% as per the DTAA without the additional levy of surcharge and cess. Tribunal's Findings: - The Tribunal noted that the Assessing Officer had mentioned in the assessment order that the FTS income was to be taxed at 10% as per the DTAA, yet surcharge and cess were levied in the tax computation. - The Tribunal referred to previous decisions, including DIC Asia Pacific Pte Ltd vs ADIT, which held that the term "tax" in the DTAA includes surcharge and cess. - The Tribunal concluded that the levy of surcharge and cess was incorrect and directed the Assessing Officer to delete these levies on the FTS income. Conclusion: - The appeal filed by the Assessing Officer was dismissed, and the Tribunal upheld the CIT(A)'s decision to tax the interest income at the concessional rate of 10% under Article 11(2) of the India-Japan DTAA. - The cross-objection filed by the assessee was allowed, directing the deletion of surcharge and health and education cess on the FTS income.
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