2024 (8) TMI 1043 - AT - Income Tax

TDS u/s 195 - Interest payment made to China Development Bank (CDB) - eligibility for Exemption from taxation under Article 11(3) of India China DTAA - HELD THAT - Uses the word means and not 'includes' or 'deemed to be included which suggests that CDB is and has always been a financial institution wholly owned by the Government. Also, with the inclusion of the above definition and for the purpose of defining the term financial institution wholly owned by the Government, the protocol restricted the scope of the financial institutions covered under Article 11(3) of India-China DTAA to include the specified institutions or any other institution wholly owned by the Government of China as may be agreed from time to time between the competent authorities of the Contracting States. Therefore, the specific institutions listed in the protocol for both India and China, were always covered as a government owned financial institution for the purpose of Article 11(3) of India- China DTAA. Article as if stood during the relevant FY was more expansive and after the definition of financial institution wholly owned by the Government in the protocol, wherein China Development Bank is specifically included, it is clear and beyond doubt that China Development Bank is and has always been a financial institution wholly owned by the Government and hence, eligible for the benefit for the provisions of Article 11(3) of India-China DTAA and therefore, the appellant cannot be treated assessee in default with respect to non-deduction of tax u/s 195 of the Act on interest payments made to China Development Bank. Appeal of the Revenue is dismissed.

Summary

Issues:
Interpretation of Article 11(3) of India-China DTAA regarding exemption of interest payment to China Development Bank based on ownership structure.

Analysis:
The Revenue challenged the order of the CIT(A) allowing the appeal of the assessee, contending that China Development Bank (CDB) did not qualify as a financial institution wholly owned by the Government of China, thus not eligible for DTAA benefits. The Revenue argued that since only 36.45% shares of CDB were held by the Ministry of Finance, the bank could not claim the DTAA benefit. However, it was highlighted that the Ministry of Finance, Central Huijin Investment, Buttonwood Investment Company, and National Council for Social Security Fund were all entities closely linked to the government, supporting the contention that CDB was government-owned.

The Tribunal examined the nature of Central Huijin Investment, Buttonwood Investment Holding Company, and National Council for Social Security Fund, emphasizing their government affiliations and roles. The financial statements of CDB for 2016 confirmed the government ownership of these entities, reinforcing the argument that CDB was a financial institution wholly owned by the Government of China.

The Tribunal referred to the amended Article 11(3) of the India-China DTAA, which explicitly included CDB as a financial institution wholly owned by the Government of China. It was noted that even prior to the amendment, the original Article 11(3) covered interest income derived by such financial institutions. The Protocol to the DTAA further clarified the definition of 'financial institution wholly owned by the Government,' explicitly listing CDB among other institutions, affirming its government ownership status.

In light of the above analysis, the Tribunal upheld the decision of the CIT(A) and dismissed the Revenue's appeal, affirming that CDB qualified as a financial institution wholly owned by the Government of China, making the interest payments exempt from taxation under the India-China DTAA.