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TMI Blog2025 (4) TMI 474X X X X Extracts X X X X X X X X Extracts X X X X ..... t in respect of which 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. Briefly the facts of the case are that the assessee company, a tax resident of Japan, filed its return of income declaring total income of Rs. 20,78,37,270/- on 29/11/2018. The case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued calling for necessary information and documentation. With respect to interest income of Rs 3,10,17,336/- on loan and trade finances offered for taxation by the assessee company @10%, the assessee company was asked to submit the necessary details and was also issued a show-cause as to why the interest income of Rs. 3,10,17,336/- be not taxed @40% as per Article 11 of India Japan DTAA taking into consideration the presence of permanent establishment in India in the year under consideration. In response, the assessee company submitted that it has charged interest from TATA Hitachi Construction Machinery Co. Ltd. amounting to Rs. 30,068,480/-, from TDT Copper Limited amounting to Rs. 301,178/-, from Rashtriya Me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that during the year under consideration, it has provided trade finance/supplier's credit to Tata Hitachi Construction Machinery Co. Ltd (Tata Hitachi") [erstwhile known as Teleo Construction Equipment Co. Ltd. (TELCO)], Rashtriya Metal Industries Ltd. ('Rashtriya Metal'), TDT Copper Limited (TDT Copper') in relation to the goods supplied from outside India and charged interest for the same. In addition to this, interest has been charged from L&T- MHPS Turbine Generators Private Limited ('L&T Turbine) on late payment of consideration in relation to training services. It was submitted that the assessee company, accordingly, has received interest income on providing trade finance to Tata Hitachi and interest from Rashtriya Metal, TDT Copper and L&T Turbine on account of delay in payment of consideration under the contract. The aggregate amount of interest charged during the year was INR 31,017,336 with breakup as below: S. No. Name of the Party Amount (in INR) 1. Tata Hitachi 30,068,480(equivalent to JPY 50524382) 2. TDT Copper 301,178(equivalent to USD 4,651) 3. Rashtriya Metal 529,560(equivalent to USD 8,340) 4. L&T Turbine 118,118(equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplier credit for funding purchase of excavator etc. and sold by the appellant had nothing to do with the permanent establishment in India. The ITAT has noted that the AO did not analyses this plea of the appellant 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 appellant was no longer eligible for the concessional rate of gross basis taxation at 10%. On the contrary, the appellant had claimed that there is no connection between the interest income and the permanent establishment. The ITAT has thereafter analysed the relevant treaty provisions of Indo-Japan DTAA that is Article 11, Article 7 and Article 14. The ITAT has stated that the provisions of paragraph 1, 2 and 3 shall not apply if the beneficial owner of the interest being a resident of contracting state carries on business in the other contracting state in which the interest arises through a permanent establishment situated therein or performs in that other contracting state independent personal services from a fixed base situated therein and a debt claim in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances as compared to earlier years where the matter has been examined at length by the Coordinate Benches and controvert the findings of the ld CIT(A) that the impugned issue is recurring in nature and facts of instant years are on similar footing as in earlier years. 9. The ld AR in her submissions supported the order and findings of the ld CIT(A) and submitted that the ld CIT(A) has rightly followed the orders passed by the Coordinate Benches for the earlier years and given that there are no change in facts and circumstances of the case, the earlier orders so passed by the Coordinate Benches may be followed and the appeal so filed by the Revenue be dismissed. 10. We have heard the rival contentions and pursued the material available on record. We draw reference to the decision of the Coordinate Bench for A.Y. 2016-17 (in ITA No. 10/Mum/2022) wherein the matter relating to interest income on supplier's credit relating to supply to Tata Hitachi was examined in detail and given that, for the year under consideration, interest on supplier credit to Tata Hitachi is one of the major revenue streams in the hands of the assessee company and is subject matter of dispute before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tail 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 Article 11(2) as there is no connection between the interest income and the permanent establishment. The Assessing Officer is aggrieved and is in appeal before us on the following grounds which are raised in the form of questions requiring our adjudication: 1 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Government" mean: (a) in the case of Japan: (i) the Bank of Japan; (ii) the Japan Bank for International Cooperation; (iii) the Japan International Cooperation Agency; (iv) the Nippon Export and Investment Insurance; and (v) such other financial institution the capital of which is wholly owned by the Government of Japan as may be agreed upon from time to time between the Governments of the Contracting States; (b) in the case of India: (i) Reserve Bank of India; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned 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 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 which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices' 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. 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 other contracting state (such as India, as in this case), the source jurisdiction has the right to tax it, barring in the cases of specified exception- which have no application on the facts of this case, at the rate of 10% on a gross basis. Article 11(2) is unambiguous on this aspect, and there is no dispute on this fundamental position. Article 11(6), however, provides an exception to this taxation @ 10% on the gross basis. This article provides that where such an enterprise (i) carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome 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 and yet the connection may not be material enough to hold that such an income is attributable to that permanent establishment. The connotations of the expression "effectively connected" are to be seen in this light. It is also equally important to bear in mind the fact that the Article 11(6) does not explicitly provide for taxation of interest income at a rate higher than the rate under Article 11(2); all it does is to provide that in a situation in which the interest is "effectively connected" with a PE or a fixed base, the provision of Article 7 or Article 14, as the case may be, will come into play. Article 11(6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-à-vis Article 7 or vis-àvis 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). In other words, the taxability under Article 7 or Article 14 is a sine qua non for triggering the exclusion clause under Article 11(6). There is no finding to, or even indication of, that effect. Unless the Assessing Officer gives that finding, excluding interest income from gross basis taxation under Article 11(6) cannot come into play. In any event, triggering of exclusion under Article 11(6) does not, by itself, result in taxation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 establishment. It is not even the case of the Assessing Officer that the permanent establishment played any role in the supplier credit, which is the debt claim leading to the impugned interest income, being extended to the Indian customers who have paid interest on the suppliers" credit. As such, 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. 9. In the grounds of appeal raised before us, it is alleged that the Indian parties from whom the assessee has received interest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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