2022 (6) TMI 953 - AT - Income Tax

Tribunal affirms CIT(A) decision on taxing interest income under India-Japan DTAA

Deputy Commissioner of Income Tax International Tax Circle 3 (2) (1), Mumbai Versus Marubeni Corporation, Japan Care of Marubeni India Pvt Ltd

Deputy Commissioner of Income Tax International Tax Circle 3 (2) (1), Mumbai Versus Marubeni Corporation, Japan Care of Marubeni India Pvt Ltd - TMI Issues Involved:1. Taxability of interest income under Article 11(2) of the India-Japan DTAA.2. Applicability of Article 11(6) of the India-Japan DTAA in relation to the Permanent Establishment (PE) in India.3. Connection and attribution of interest income to the Permanent Establishment under Article 7 of the India-Japan DTAA.Issue-wise Detailed Analysis:1. Taxability of Interest Income under Article 11(2) of the India-Japan DTAA:The assessee, a Japanese company with various income streams from its Indian operations, declared interest income received from Tata Hitachi Construction Co Ltd. This interest income was taxed at a concessional rate of 10% as per Article 11(2) of the India-Japan Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) challenged this, arguing that due to the presence of the assessee's Permanent Establishment (PE) in India, the provisions of Article 11(2) were not applicable.2. Applicability of Article 11(6) of the India-Japan DTAA in Relation to the Permanent Establishment (PE) in India:Article 11(6) of the DTAA stipulates that the concessional rate under Article 11(2) does not apply if the interest income is effectively connected with the PE in India. The AO contended that the interest income was connected with the PE and thus should be taxed under Article 7, which deals with business profits. However, the CIT(A) upheld the assessee's plea, stating that there was no connection between the interest income and the PE, and thus, the interest should be taxed at 10% under Article 11(2).3. Connection and Attribution of Interest Income to the Permanent Establishment under Article 7 of the India-Japan DTAA:The tribunal examined the provisions of Article 11, Article 7, and Article 14 of the DTAA to understand the scheme of taxation of interest income. Article 11(6) provides an exception to the 10% tax rate if the debt-claim generating the interest is effectively connected with the PE. However, for Article 7 to apply, the interest income must be directly or indirectly attributable to the PE. The tribunal noted that mere existence of a PE does not suffice; there must be a clear connection that leads to the interest income being attributable to the PE.The tribunal concluded that the AO failed to demonstrate the necessary connection between the interest income and the PE. The AO's argument was based on generalities without specific evidence showing that the interest income was attributable to the PE. The tribunal emphasized that the onus was on the AO to establish this effective connection, which was not done in this case.Conclusion:The tribunal upheld the CIT(A)'s decision, confirming that the interest income should be taxed at the concessional rate of 10% under Article 11(2) of the India-Japan DTAA. The appeal by the AO was dismissed due to the lack of evidence showing that the interest income was effectively connected with the PE in India, which is a prerequisite for applying Article 7 over Article 11(2). The tribunal's decision was pronounced on June 17, 2022.