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Tax Publishers 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."

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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."