2025 (4) TMI 474 - AT - Income Tax

Income deemed to accrue or arise in India - Interest income on loans in the form of suppliers credit given to Indian parties by a Japanese tax resident company - presence of a Permanent Establishment (PE) in India - Whether taxable at special rates as per Article 11(2) of the India-Japan DTAA? - HELD THAT - We find that merely having a permanent establishment in India is not sufficient to exclude the applicability of Article 11(2) and invoke Article 11(6) r/w Article 7(1) of India-Japan DTAA. There is nothing on record which can remotely demonstrate that the interest income on providing supplier s credit is directly or indirectly attributable to assessee s permanent establishment in India and which can be brought to tax under Article 7(1) of India-Japan DTAA. Nothing has been brought on record which could demonstrate any distinguishing facts and circumstances of the case as compared to earlier year where the matter has been examined by the Coordinate Benches. Similar situation arises in terms of other interest income which has been offered by the assessee in its return of income under Article 11(2) of India-Japan DTAA as there is nothing on record to demonstrate how such interest income is attributable to permanent establishment in India. Decided against revenue.

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered in this judgment is whether the interest income on loans in the form of suppliers' credit given to Indian parties by a Japanese tax resident company is taxable at special rates as per Article 11(2) of the India-Japan Double Taxation Avoidance Agreement (DTAA) or whether it should be taxed at 40% as per Article 11(6) read with Article 7 of the DTAA due to the presence of a Permanent Establishment (PE) in India.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The legal framework revolves around the interpretation of Articles 11 and 7 of the India-Japan DTAA. Article 11(2) allows for a concessional tax rate of 10% on interest income if the recipient is the beneficial owner. However, Article 11(6) provides that if the interest income is effectively connected to a PE in the source country, then Article 7 applies, which could lead to higher taxation.

Court's Interpretation and Reasoning

The Tribunal examined whether the interest income from suppliers' credit was effectively connected to the PE in India. It emphasized that merely having a PE does not automatically trigger Article 11(6) unless the interest income is directly or indirectly attributable to the PE.

Key Evidence and Findings

The Tribunal noted that the Assessing Officer (AO) failed to establish a specific link between the interest income and the PE. The AO's argument was based on the mere existence of a PE without demonstrating how the interest income was attributable to it. The Tribunal relied on previous decisions where similar issues were resolved in favor of the assessee, emphasizing the need for consistency in the absence of changed circumstances.

Application of Law to Facts

The Tribunal applied the principles from previous cases, highlighting that the interest income from suppliers' credit was not linked to the PE's activities. The lack of evidence showing that the interest income was attributable to the PE led to the conclusion that Article 11(6) was not applicable, thus allowing the concessional rate under Article 11(2).

Treatment of Competing Arguments

The Revenue's argument that the interest income was connected to the PE was dismissed due to the absence of evidence. The Tribunal reiterated that the burden of proving the connection lies with the Revenue, which it failed to discharge.

Conclusions

The Tribunal concluded that the interest income should be taxed at 10% under Article 11(2) of the DTAA, as there was no effective connection with the PE.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning

The Tribunal stated, "The effectiveness of connection thus lies in the taxability under article 7 or article 14. Unless that taxability comes into play, there cannot be any overlapping in the scope of article 11 vis-`a-vis Article 7 or vis-`a-vis article 14, and, unless there is such an overlapping of the treaty provisions, there is no occasion for exclusion of one of the overlapping treaty provision by Article 11(6)."

Core Principles Established

The judgment reinforces the principle that the mere existence of a PE does not suffice to apply Article 11(6). There must be a demonstrable link between the interest income and the PE's activities.

Final Determinations on Each Issue

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, dismissing the Revenue's appeal.

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