TaxTMI 
TaxTMI 
TaxTMI 
2018 (5) TMI 344
X X X X Extracts X X X X
X X X X Extracts X X X X
.... establish a representative office in India. Accordingly, DZ Bank, India Representative Office (DZBI)was established. As per the approval of the RBI, DZBI was not allow to undertake any business activity in India and could not earn any income. The expenses incurred by it were to be met entirely through inward remittances foreign exchange from the head office. During the year under consideration, DZ Germany provided foreign currency loans to Indian companies that were in the nature of External Commercial Borrowings(ECB), as permitted under the foreign exchange regulations. On perusal of the ITS details the assessee found that you sums of TDS had been made on the interest paid/payable by Indian customers to the assessee. Accordingly he directed the assessee to submit details of all incomes and in India and to reconcile the same with the income appearing in the ITS details. It submitted before the AO that it's had office and overseas branches and income from Indian clients under the two heads i. e. interest income and processing charges. , that the income reflected in the ITS details was in the nature of interest on ECB provided by the head office/overseas branches(OB. s)to Indian ent....
X X X X Extracts X X X X
X X X X Extracts X X X X
....branches would ascertain the reason for the delay in the payments and interest payments as per the agreed repayment schedule through DZ bank India, that it would also assist in recovery where there were such delays, that business of the assessee with Indian customer could not be done without involvement of the representative office, there was real and intimate relation between the German entity and the representative office, that DZ bank India contributed directly and indirectly and earning the business income and the processing fees. He further held that income had accrued to the German entity from business connection in India, that some of the functions of the representative office could be regarded as auxiliary in character, On the above lines, the AO issued a draft order to the assessee. 4. Challenging the draft order, the assessee filed various objections before the DRP and made elaborate submissions. It also relied upon several case laws. After considering the available material, the DRP held that the AO had recorded the functions of the assessee that included identifying potential borrower in India and initiating discussion in connection with the banking business of the Ge....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ration the interest income had been earned by the PE as part of business of money lending carried on by it. Referring to the asset test and activity test laid down in the above referred two decisions, the DRP observed that from the functions and activities done by the India office proved that it was actively involved in the business of money-lending, that India office was restrained by RBI from receiving funds in its account for money-lending, that the funds were transferred directly by the schedule to the account of the borrower, that the interest and repayment was received by the PE directly, that there was no difference between the funds of the PB and the funds of the HO/ overseas branches, that the funds of the PE and HO were one and the same, that they were inseparable and indistinguishable from each other, that all the funds of the PE belonged to the HO, that it would make no difference whether the money was lent in India by the HO was routed to the Indian office/PE or was given directly, that the India office constituted PE, that interest income earned from business of moneylending in India either by the head office or the branch would be assessable as income of such PE, tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arcel of money-lending business, that it was the service charges for non-utilisation of the funds committed to a borrower, that it was also assessable as income of the PE, that it was received for money-lending business only, that the same was assessable as interest income of the PE, that once it was held that assessee had a PE the Act would be applied to all the incomes effectively connected to the PE. Finally, the DRP approved the draft order submitted by the AO. In pursuance of the directions of the DRP, the AO finalised the assessment, as stated earlier. 5. Before us, The Authorised Representative (AR)contended that the German bank had no branch office in India, that only a representative office was established as per the permission of the RBI, that the representative office was not allowed carry on banking business, that Indian entity was doing liasoning work only, that the German bank would lend money to Indian borrowers, that the entire funding was from Germany, that the German bank had no PE in India. He referred to the provisions of section 9 (1) (v) and section 115 A of the Act and stated that there was no business connection between the German bank and the Indian entity....
X X X X Extracts X X X X
X X X X Extracts X X X X
....find that the DRP/AO had held that DZ India Bank was the PE of the German Entity, that the services rendered by the Indian Bank were not auxiliary or preparatory. They also held that the Indian bank was authorised to execute contracts on behalf the German entity, that the German Bank, having PE in form of the Indian entity was liable to tax for the interest income and commitment fees. In our opinion, the whole controversy revolves around the status of Indian entity i. e. as to whether it could be treated PE of the German bank or not. If the answer is positive the order of the AO has to be upheld. But, in case of a negative reply the claim of the assessee had to be approved. 6.1. We find that the AO/DRP as well as the assessee have discussed theories about the PE and taxability of income earned by the assessee at length i. e. concept of PE and the basic ingredients of the PE. But, we nowhere find any reference to the contracts entered in to by the German bank with its borrowers and the terms and conditions of such transactions. The assessee claims that Indian Bank was performing certain function that were auxiliary or preparatory. But, the claim has not been tested with reference t....