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TMI Blog2022 (6) TMI 1109X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it given to Indian parties is taxable at special rates as per Article 11(2) of the India-Japan ignoring the fact that the suppliers credit in respect of which DTAA the 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. 2. Whether on facts and circumstances of the case and in law, the Ld.CIT(A) has grossly erred in holding 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. 3 Whether on facts and circumstances of the case and in law, the Ld.CIT(A) has grossly erred in holding 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 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 Es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee was that the interest income was earned by the assessee on suppliers credit for funding purchase of Excavator CKD and CBU manufactured by Hitachi Sumitomo Heavy Industries Construction Crane Co Ltd Japan and sold by the assessee company or one of its controlled entities, and that this transaction had nothing to do with the permanent establishment in India. The Assessing Officer did not even analyze this plea in much detail but implicitly rejected it nevertheless by proceeding on the basis that since the assessee had a permanent establishment, the exclusion clause under Article 11(6) was triggered, and the assessee was no longer eligible for the concessional rate of gross basis taxation @ 10%. He thus proceeded to hold, as he had originally proposed in the show cause notice, that interest income of Rs 2,25,89,136 at 40% as per the India Japan DTAA taking into account the presence of the permanent establishment in the year under consideration . Aggrieved, the assessee carried the matter in appeal before the CIT(A) who upheld the plea of the assessee and concluded that the interest income in question is required to be taxed @10% in terms of the provisions of the Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be taxable only in the other Contracting State if: (a) the interest is derived and beneficially owned by the Government of that other Contracting State, a political sub-division or local authority thereof, or the central bank of that other Contracting State or any financial institution wholly owned by that Government; or (b) the interest is derived and beneficially owned by a resident of that other Contracting State with respect to debt-claims guaranteed, insured or indirectly financed by the Government of that other Contracting State, a political sub-division or local authority thereof, or the central bank of that other Contracting State or any financial institution wholly owned by that Government. 4. For the purposes of paragraph 3, the terms the central bank and financial institution wholly owned by that G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 8. 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 agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. ARTICLE 7- BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting 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 that other Contracting State but only so much of them as is directly or indirectly attributable to that permanen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of performing his activities or he is present in that other Contracting State for a period or periods exceeding in the aggregate 183 days during any taxable year or 'previous year' as the case may be. If he has such a fixed base or remains in that other Contracting State for the aforesaid period or periods, the income may be taxed in that Contracting State but only so much of it as is attributable to that fixed base or is derived in that other Contracting State during the aforesaid period or periods. 2. The term 'professional services' includes incredibly independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. [Emphasis, by underlining, supplied by us] 5. As is evident even from a plain reading of the above treaty provisions, the scheme of the Indo-Japanese tax treaty, so far as taxability of interest income in the source jurisdiction is concerned, is like this. When the enterprise of one of the contracting states (such as Japan, as in this case) earns interest, as a beneficial owner, from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if a person has a fixed base for providing independent personal services, and an interest income can be said to be connected with the same, it cannot be brought to tax under Article 14(1) unless such an interest income is attributable to that fixed base. What essentially follows is that the mere existence of a permanent establishment in the source jurisdiction cannot, therefore, be reason enough to invoke the taxability of an interest income under Article 7(1) unless such an income is directly or indirectly attributable to such a permanent establishment. As we say so, we may add that a connection per se of an income with the permanent establishment cannot always and inevitably lead to the attribution of such income in the hands of the permanent establishment, as attribution of an income to the permanent establishment is a degree higher than mere connection of an income with the permanent establishment . While every income attributable to a permanent establishment inherently has a connection with that permanent establishment, the converse is not necessarily and universally correct, inasmuch as there can be incomes which may have some connection with the permanent establishment a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E , or attributable to the fixed base of the assessee, the taxation of such an interest income, at a rate higher than article 11(2), does not come into play, and, in such a situation also, such an interest income is to be taxed on a net basis as a part of the business profits or income from independent personal services. Viewed in the light of the above discussions, an interest income can only be said to be effectively connected with a permanent establishment or with a fixed base only when the connection is such that it leads to taxability in the hands of the taxpayer under article 7 or article 14. 7. In view of the above discussions, to term a connection of the interest income with the permanent establishment or the fixed base, as effectively connected , one has to see whether, by virtue of such a connection, the interest income in question is taxable as an income attributable to the permanent establishment or the fixed base in question. 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- -vis Article 7 or vis- -vis article 14, and, u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay unless the interest income is directly or indirectly attributable to the permanent establishment, and there is not even an effort, on the part of the revenue, to demonstrate the nexus between the permanent establishment and the interest income. It is only elementary that the onus of establishing the effective connection between the debt claim with the permanent establishment is on the Assessing Officer, and, to this end, all that is expected of the assessee is to reasonably comply with the requisitions, for relevant information, made by the Assessing Officer. The assessee has not even been faulted on this count. The Assessing Officer has simply proceeded on the basis that since the assessee has a permanent establishment in India, it can be said to be connected with such a PE, and, accordingly, taxation at the normal rate at which business profits are taxed in the hands of the foreign companies is permissible. That approach is inherently flawed. Even if the interest income is connected with the assessee company's permanent establishment, it can only be brought to tax in India, under Article 7, when the interest income is directly or indirectly attributable to the permanent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee, and all the three grounds of appeal must, therefore, be dismissed accordingly. We order so. 4. We see no reasons to take any other view of the matter than the view so taken by the co-ordinate bench. Respectfully following the same, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. 5. In the result appeal filed by the Assessing Officer is dismissed. 6. Now we take up the cross objection filed by the assessee. 7. The assessee has raised the following grievance: On the facts circumstances of the case and in law, the Assessing Officer [DCIT(IT-3(2)(1), Mumbai] has erred in levying surcharge and health and education cess on FTS income when the same is table at the rate of 10% as prescribed in Article 12 of the India Japan Tax Treaty. 8. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 9. On a perusal of assessment order, 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 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent. (remaining portion of this article is not relevant for the present purposes) 6. A plain reading of these provisions show that while interest and royalties can indeed be taxed in the source state, the tax so charged on the same, under Articles 11 and 12, cannot exceed 15% and 10% respectively. The 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 . 7. We find that ed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese cases include Capgemini SA v. Dy. CIT (International Taxation) [2016] 72 taxmann.com 58/160 ITD 13 (Mum. - Trib.), Dy. DIT v. J.P. Morgan Securities Asia (P.) Ltd. [2014] 42 taxmann.com 33/[2015] 152 ITD 553 (Mum. - Trib.), Dy. DIT v. BOC Group Ltd. [2015] 64 taxmann.com 386/[2016] 156 ITD 402 (Kol. - Trib.), Everest Industries Ltd. v. Jt. CIT [2018] 90 taxmann.com 330 (Mum. - Trib.), Soregam SA v. Dy. DIT (Int. Taxation) [2019] 101 taxmann.com 94 (Delhi - Trib.) and Sunil v. Motiani v. ITO (International Taxation) [2013] 33 taxmann.com 252/59 SOT 37 (Mum. - Trib.). We may add that no contrary decision was cited before us nor any specific justification assigned for the levy of surcharge and education cess. The provisions of the India Japan Double Taxation Avoidance Agreement are in pari materia with the provisions of India Singapore DTAA which was subject matter of consideration in DIC Asia Pacific's case (supra). We, therefore, have no reasons to take any other view of the matter than the view so taken by the coordinate benches. Respectfully following the same, we uphold the plea of the assessee and direct the Assessing Officer to delete the levy of surcharge and health an ..... 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