9911796707
TMI Blog2020 (12) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... 996) 223 ITR (Stat) 130; Indo German tax treaty, in short], or is the said income only required to be taxed in the hands of the DZ Bank AG Germany, if at all held to be taxable, under article 11 of the Indo German tax treaty. That is the issue sought to be agitated by before us, though, in the course of this hearing, many other facets of the matter came up for discussions, and, having heard parties on those aspects at length, have been adjudicated upon. 3. Grounds of appeals, as set out in the memorandum of appeal- for the sake of completeness, are as follows: 1. erred in concluding that the Appellant constitutes a permanent establishment ('PE') of DZ BANK, AG Deutsche Zentral Genossenschafts bank ('DZ BANK AGDZ')/ overseas branches, in India as per the provisions of Article 5 of the India-Germany Double Taxation Avoidance Agreement ('IG treaty'); 2. erred in taxing the interest income earned by DZ BANK AGDZ/ overseas branches from foreign currency loans ('credit facilities') provided to Indian companies/borrowers at the rate of 40% (plus applicable surcharge and education cess) instead of taxing it as per Article 11 of the IG treaty at the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porated under the laws of Germany and having its principal place of business in Germany, is engaged in the banking business, and it has, with the permission of the Reserve Bank, a representative office in India. In terms of the Reserve Bank of India's conditions, subject to which this office was permitted, inter alia, "the representative office should function purely as a liaison office without transacting any type of banking business" and "all the expenses of the representative office should be met out of inward remittances from the bank". In effect thus, this office was only a liaison office and was not, on its own, engaged in the core business of the assessee, i.e. banking. 5. On 25th September 2014, the assessee filed an income tax return in the name of "DZ Bank AG- India Representative Office", apparently treating the India Representative Office as a taxable entity, disclosing NIL taxable income. This return was subjected to scrutiny assessment proceedings, and, in the ensuing assessment proceedings, the Assessing Officer noticed that during the relevant previous year "DZ Bank AG provided foreign currency loans to Indian companies' and "these loans were in the nature of exter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Indian banks, financial institutions and corporates and apprises them about the products and services that DZ Bank AGDZ could offer. b. It initiates a discussion with the potential customer. c. DZ Bank India approaches its head office/ overseas branches with the funding opportunity, d. DZ Bank India collects from the customers and provides the necessary information to facilitate the due diligence at the head office/ overseas e. DZ Bank India collects and provides information in respect of the financial statements of the client, revenue projections, history and background of the company, etc for the head office/ overseas branches. f. DZ Bank India collects and provides all additional clarification/ documentation required in a transaction by the head office / overseas branches. g. The head office/ overseas branches examine the documents (including the financial statements) and if specific further information is required, they request the CRO of DZ Bank India to obtain such information. h. The CRO also provides the local market opinion on the client such as rating by the local rating agencies, historical reputation of the client, declared future plans, etc. and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits may be taxed in India but only so much of them as are attributable to that PE. This provision is in line with sub-clause (a) of Explanation (I) to clause (i) of Section (1) of Section 9 of the Act. 7.23 The expression 'permanent establishment1 is defined in Article 5. We shall advert to Paras 1 to 3 thereof, which are relevant for our purpose and are reproduced below: ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially,- (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, including an installation or structure used for the exploration or exploitation (g) a warehouse or sales outlet; (h) a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on; and (i) a building site or construction, installation or assembly project or supervisory activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nary clause (e) of para 4 is attracted; if so, whether the assessee as a representative office would stand excluded from the meaning of the expression 'permanent establishment'. It is often difficult to distinguish between activities which have a preparatory or auxiliary character and those which have not. The decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole. In any case, a fixed place of business whose general purpose is one which is identical to the general purpose of the whole enterprise, does not exercise a preparatory or auxiliary activity. A fixed place of business which has the function of managing even only a part of an enterprise cannot be regarded as doing a preparatory or auxiliary activity. The function of a representative office, even if it only covers a certain area of the operations of the concern which constitutes an essential part of the business operations of the enterprise, it can in no way be regarded as an activity which has a preparatory or auxiliary character within the meaning of subparagraph (e) of paragraph 4 of Article 5 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 of the DTAA. The same is reproduced as under: 5. Notwithstanding the provisions of paragraphs 1 and 2, where a person -'other than an agent of an independent status to whom paragraph 6 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have a permanent establishment in the first- mentioned State, if this person,- (a) has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise. 7.30 One would appreciate that the provisions of the aforesaid para are the same as Explanation 2 to clause (i) of sub-section (1) of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the CIT(A) but without any success. The assessee is aggrieved and is in appeal before us. 7. The hearing in this case was concluded on 20th November 2020, and the matter was refixed thereafter on 24th November 2020 in the light of, inter alia, the following show cause notice issued by us to DZ Bank AG, with a copy thereof to the parties before us: You are hereby required to show cause as to why the income arising on account of DZ Bank AG's India Representative Office, even if any, not be excluded from income, if any and to the extent taxable, in the hands of "DZ Bank AG- India Representative Office", and brought to tax in your hands, as you are the taxable unit, in respect of any of your offices or any other form of presence in India, in terms of the provisions of the Income Tax Act, 1961, as is highlighted below by Hon'ble Supreme Court's judgment in the case of CIT Vs Hyundai Heavy Industries Co Ltd [(2007) 291 ITR 482 (SC)]: Therefore, it is clear that under the Act, a taxable unit is a foreign company and not its branch or PE in India. A non-resident assessee may have several incomes accruing or arising to it in India or outside India but so far as taxability under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uly considered facts of the case in the light of the applicable legal position. 8. The first question that arises is whether the assessee before us is a taxable unit, and whether, given the fact that none of the parties has raised this issue before us and having regard to very peculiar facts of this case, we have to essentially take a judicial call on that aspect of the matter and direct that the additions impugned in this appeal may be considered, if at all taxable, in the right hands. 9. Learned counsel fairly accepts that the taxable unit can only be the foreign enterprise, DZ Bank AG, in this case, and not the 'DZ Bank AG- India Representative office' per se. He, however, seeks to rationalize the present situation by submitting that the permanent account number, under which the return in question is filed is allotted to DZ Bank AG, and, therefore in substance the present assessment is framed on DZ Bank AG. He relies upon section 292B to plead that the mistake of the income tax return having been filed in the name of 'DZ Bank AG- India representative office', if that be so, ignored. However, when asked whether the interest income earned by the DZ Bank AG was included in this r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been taxed in the impugned assessment has been wrongly taxed, and it deserves to be vacated on merits in any event. We are urged to take a holistic and practical view of the matter. Learned Departmental Representative, on the other hand, does not make any specific submissions and leaves the matter to us. In any case, he is unable to bring on record anything to challenge the legal proposition that the taxable unit in India is only the foreign company, and not its PE or other constituents in India. 10. We have noted that the entire proceedings in this case proceed on the basis that the DZ Bank AG and its Indian representative office are two distinct taxable entities. So far as the interest income taxable in India under article 11 of the Indo German tax treaty is concerned, it has been contended that in view of the provisions of Section 115A (5), as it stood at the relevant point of time, DZ Bank AG was not required to file the income tax return under section 139(1) because the tax deductible under chapter XVII B was duly deducted from such income. The assessee has filed the income tax return in the name of DZ Bank- India representative office, and has not disclosed therein the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to as 'general enterprise' or as 'GE'), therefore, we have to compute income attributable to such branch(es) in India, or other form(s) of presence in India such as office, project site, factory, sales outlet etc., (hereinafter collectively referred to as 'permanent establishment' or 'PE') of foreign enterprise" [Emphasis, by underlining supplied by us]. Subsequently in the case of CIT Vs Hyundai Heavy Industries Co Ltd [(2007) 291 ITR 482 (SC)] similar were the views of Hon'ble Supreme Court. Their Lordships also observed that "it is clear that under the Act, a taxable unit is a foreign company and not its branch or PE in India........, as far as the income accruing or arising in India, an income which accrues or arises to a foreign enterprise in India can be only such portion of income accruing or arising to such a foreign enterprise as is attributable to its business carried out in India" [Emphasis, by underlining supplied by us]. The expression "PE", as used here, is not in the strict treaty sense but it also covers any form of presence leading to taxation in source jurisdiction. A foreign enterprise may have several types of income taxable in India, including, of course, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue in terms of the basic tax liabilities. Clearly, the mistake is not of the assessee alone. We will infringe neutrality if we are to do anything which helps revenue make out a new case at this stage or which puts the assessee worse off as a result of his coming in appeal before us. We are alive to these concerns, and we were also alive to these concerns while raising the issue in question, but it is equally important to us that if we are to uphold any part of taxability impugned in appeal before us, we must not do so in the name of an assessee which is not, and cannot be, a taxable unit at all. Of course, in the event of our holding that no part of the income brought to tax in the impugned assessment is sustainable in law, the aspect as to in whose hands it could have been taxed will be rendered academic anyway. We, therefore, accept learned senior counsel's suggestion to take a call on taxability, as impugned in appeal before us, on merits first. Today, when ease of doing business, demystification of tax system, and an emphasis on catching tax evaders rather than getting bogged down to the technicalities, are the key mantras and top priorities of all the organs of the State, we c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 90(2) of the Income Tax Act, 1961, and, therefore, if case of the Assessing Officer fails on the treaty provisions, there is no need to examine the same in the light of the provisions of the domestic tax law. 12. As the fundamental issue in appeal before us is taxation of interest income under article 7 of the Indo German tax treaty, let us begin by looking at the provisions of Article 7 first. The article is being reproduced below for ready reference: ARTICLE 7- BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iple of law contained in the Latin maxim generalia specialibus non derogant, i.e. general provisions do not override the specific provisions. Quite clearly, therefore, when a particular type of income is specifically covered by a treaty provision, the taxability of that type of income is governed by the specific provisions so contained in the treaty. Of course, even in the scheme of taxability of such specific incomes under the treaty provisions, as we will see a little later, the situations are specified in which the taxability under those specific provisions cease to come into play, and the taxability can shift to the general provisions of article 7. 14. The question then we must ask ourselves before embarking upon examining taxability of an income under article 7 is whether such an income can be taxed under any other specific provisions of the treaty, and, if so, whether there any situations in those specific provisions of the treaty which provide for taxation of the said income under article 7. There is no dispute that what has been earned by the assessee bank from Indian clients is in the nature of 'interest' income, and that article 11 has specific provisions for taxation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 6. Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a land or political sub-division, a local authority or a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive office, but that 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 (i.e. DZ Bank AG, Germany)". One has to understand the subtle distinction, as the Assessing Officer has himself so well identified in the assessment order, between carrying on business of banking vis-a-vis carrying on activities which contribute directly or indirectly earning of income by the banking business. The case of the revenue authorities is best confined to the latter category, but then, even if that be a correct claim, that can not be reason enough to invoke exclusionary clause in article 11(5). 21. Under article 5(4)(e), on a somewhat parallel note, even when an assessee maintains a fixed place of business but that place is so maintained solely for the purpose of an activity or preparatory character, the maintenance of such a place of business does not amount to a permanent establishment, and, therefore, to taxation of business profits under article 7. In other words, therefore, even if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, there can perhaps be situations in which an interest income from India, in the hands of a foreign enterprise, could be a combined fruit of business carried on by the foreign enterprise outside India, as also in India by the virtue of supporting services provided by its representative office in India. Unless the conditions set out in article 11(5) are not satisfied, as in this case, there cannot be, in the light of preceding discussions, any occasion to take such interest out of the ambit of article 11, and, when entire interest revenues are taxable under article 11, nothing survives for taxation, or is permitted to be taxed, under article 7. 24. In certain situations, the fruits of services rendered by the Indian liaison office to the foreign enterprise, could at best be taxed by making an ALP adjustment to free services rendered by the Indian liaison office. The line of reasoning, in support of this proposition, could be as follows. The domestic law definition of the expression "enterprise" under section 92F(iii) includes "a permanent establishment" which, for that purpose and as further defined in section 92F(iiia), includes "a fixed place of business through which the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, will broaden the scope of the appeal because the issue regarding ALP adjustment is not even made out by any of the authorities below, and by directing the same, or even obliquely suggesting the same, we will end up enlarging the scope of this appeal. His second objection was that it is incorrect to proceed on the basis that the treaty provisions donot restrict the application of transfer pricing provisions, and he relied upon his analysis about the scope of article 9 with respect to 'associate enterprise'. His third point was that when profits of the liaison office are not taxable in India, there cannot be any question of ALP adjustment with respect to so called free rendition of services by the Indian representative or liaison office to the foreign enterprise. His last point was that when what is to be eventually taxed in the hands of the foreign enterprise in India can never exceed the receipts of the foreign enterprise from India, and when entire receipts on account of interest are taxed in the hands of the foreign enterprise, under article 11, there cannot be further attribution of income on account of ALP adjustment in respect of related services. The fact that this income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 8 (shipping and air transport business income), article 10 (dividends), article 11(interest), article 12 (royalties and fees for technical services), article 13 (capital gains)], and unless it is excluded from the operation of such specific provisions [such as under article 10(4), article 11(5) , article 12(5)], it cannot be taxed under article 7. 28. It is also important to bear in mind the fact that, as we have indicated earlier as well, that the case of the revenue proceeds on the fallacy that Indian representative office of DZ Bank AG and DZ Bank AG are two distinct entities, and that is apparently conceptual justification for accepting taxability of the entire related interest income in the hands of the DZ Bank AG on gross basis under article 11 and then seeking to tax profits relating to earning of such income in the hands of DZ Bank AG- India Representative Office, under article 7. It is only a corollary of the unambiguous position that the DZ Bank AG and DZ Bank India Representative Office are only one taxable unit, that the same income cannot be taxed in the hands of the same assessee twice- once under one article of the treaty i.e. Article 11, and then under another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot generally give rise to taxability in the source country, the transaction subsidiary and integral to such a transaction also does not give rise to taxability in the source country. In other words, the subsidiary and integral transactions have to take colours from the principal transaction itself and are not to be viewed in isolation". In any event, article 11(4) defines "interest" "as used in this Article means income from debt-claims of every kind" [emphasis, by underlining, supplied by us], in most exhaustive manner and covering all income from a debt claim. The commitment fee and agency fee clearly fit in this description, and nothing to the contrary has been even brought to our notice by the learned DR or in the material on record. 30. In the light of the above discussions, as also bearing in mind entirety of the case, 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. So far as this taxability is concerned, the assessee did not have any obligat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings above, the question that we had raised on our own, with respect to the right hands in which impugned demands could be brought to tax, is rendered infructuous, and it does not call for our adjudication as on now and in this case. Suffice to say that the tax demands raised in the impugned assessments, for the detailed reasons set out above, are wholly unsustainable in law, and it is, therefore, wholly academic question as to, if at all these were demands could be lawfully raised, whether these demands could have been lawfully raised in the impugned assessment or whether separate proceedings were required to be initiated in the hands of the DZ Bank AG. For this reason, we also do not see need to deal with the scope of Section 153 on the facts of this case, as also the question whether, given the present context, appellant before us could be treated as a 'person' in the inclusive definition of Section 2(31) under the Income Tax Act, 1961. All these issues are rendered academic in the present situation.
33. In the result, the appeal is allowed in the terms indicated above. Pronounced in the open court today on the 04 day of December, 2020. X X X X Extracts X X X X X X X X Extracts X X X X
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