DZ Bank AG India Representative Office v. Dy.
CIT [ITA No. 1815/Mum/18, dt. 4-12-2020] : 2020 TaxPub(DT) 5140 (Mum-Trib)
Interest income and commitment fees earned by a German bank
-- Taxability in India alleging PE -- Certain concepts on international taxation
Facts:
Assessee was a German Bank and they had a representative
liaison office under RBI regulations. The liaison office as it is was not
permitted to carry on any commercial activities. Assessee foreign bank was in
receipt of interest income and commitment fees from Indian corporates by way of
ECB loans. These were already taxed under section 115A and vide 115A(5) there
was no obligation on the assessee to offer the same as income. They filed a NIL
income. The case of the revenue was --
1. The liaison office was a PE
and was not limited to doing only preparatory and auxiliary tasks.
2. By virtue of this the
interest income was to be taxed as business profits under Article 7 read with
Article 11(5) of the Indo-German DTAA.
3. Accordingly tax was levied @
40% on the interest income and on the commitment fees.
On higher appeal --
Held in favour of the assessee that once the interest
income fell in the scope of Article 11 (Interest) of the DTAA. To tax these as
business profits there has to be an extension of the business of the assessee
in India. Accordingly the exclusion clause of Article 11(5) would not apply to
the assessee as the liaison/representative office was only in a limited role.
The special provision in Article 11 will override the general provision in
Article 11 as confirmed by Article 7(7). The commitment fees also would fall in
the scope of Interest clause and thus would be exempt from tax.
The principles of international taxation which are
discussed in this verdict are --
1. There cannot be two separate
entities in the assessment of the foreign enterprise viz the foreign German
bank and then its representative office. Such a reading would be incongruous.
What is sought to be taxed is the portion of the profits of the non-resident in
India in his name or in its representative name. Hence two separate assessments
also cannot exist.
2. Special provision in Article
11 will override business profits clause.
3. To bring the exclusion clause
of Article 11(5) there has to be something more than mere preparatory/auxiliary
function of the representative office in India. The income has to be rising out
of the effective connection with the representative/liaison entity. It cannot
be a remote or a "thin line" connection which is why the preparatory/auxiliary
exclusion clause is there in PE.
4. The representative/liaison
office will need to be paid its Arm's length and to that extent additions can
be done but fail in this case the total gross interest if this is "x"
it has already been taxed under section 115A. The ALP component also has to be
within the "x" and it cannot be "x" plus something. So
telescoping TP provisions into this case was also unwarranted.
5. Treaty protection cannot be
extending to TP provisions as held in Shell Global Solutions BV v. DDIT
(2016) 75 taxmann.com 234 (Ahd) : 2016 TaxPub(DT) 4823 (Ahd-Trib).
6. To fall into the interest
clause there must be some nexus to the debt or indebtedness.
7. The commitment/agency charges
will take colour of the original income to which they relate to so will be part
of the already taxed interest income with no further tax possible.
8. Once the entire income is
taxed under Article 11 read with 115A thereafter to interpret existence of a PE
is not warranted.
"13. As is glaring from a plain reading of the
above provision, under article 7(7), where profits sought to be taxed under
article 7 include any item of income which is dealt with separately in other
articles of the Indo German tax treaty, article 7 will yield to those specific
provisions in respect of that income. That treaty approach is in consonance
with the well settled principle 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 interest income, in the hands of a resident of one
contracting state, from the other contracting state. We must, therefore, deal
with the provisions of article 11, and examine the scheme of taxability of
interest income in the hands of the assessee before us.
22. It is also important to bear in mind the fact that
the exclusion clause under article 11(5) will be triggered only when the twin
conditions that the foreign enterprise carried on business in the source
jurisdiction and that the debt claim being effectively connected with the
permanent establishment are satisfied. So far as the debt claim being
effectively connected with the PE is concerned, that cannot come into play only
merely because the PE had a supporting role in creation of the debt claim.
Unless a debt claim is part of the assets of the PE or income arising therefrom
can be said to be income of the PE, it cannot normally be treated as
effectively connected with the PE. In any case, the Assessing Officer has not
brought on record any material to establish, or even indicate, that the debt
claim is effectively connected with the PE, save and except for the supporting
services rendered by the Indian Representative office in connection with
dealing with that debt claim but then rendition of service by the PE, in
connection with a debt claim, by itself would not make the debt claim
effectively connected with the PE. What essentially follows is that unless the
foreign enterprise, i.e., DZ Bank AG Germany, carries on business through the
permanent establishment in India, even if there be any, interest income earned
by the foreign enterprise, even if earning of the said income is on account of
a significant contribution from the activities of such a permanent
establishment, cannot be taken out of taxability under article 11(5). Clearly,
therefore, the conditions laid down under article 11(5) are not satisfied on
the facts of this case, and, the entire interest income, therefore, is required
to be taxed under article 11. For this reason alone, the interest income cannot
be brought to tax under article 7 because the condition precedent for an
interest income being brought to tax under article 7, i.e. fulfilling the twin
conditions set out in article 7, are not satisfied."