TaxTMI 
TaxTMI 
2020 (12) TMI 224
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....German Double Taxation Avoidance Agreement [(1996) 223 ITR (Stat) 130; Indo German tax treaty, in short], or is the said income only required to be taxed in the hands of the DZ Bank AG Germany, if at all held to be taxable, under article 11 of the Indo German tax treaty. That is the issue sought to be agitated by before us, though, in the course of this hearing, many other facets of the matter came up for discussions, and, having heard parties on those aspects at length, have been adjudicated upon. 3. Grounds of appeals, as set out in the memorandum of appeal- for the sake of completeness, are as follows: 1. erred in concluding that the Appellant constitutes a permanent establishment ('PE') of DZ BANK, AG Deutsche Zentral Genossenschafts bank ('DZ BANK AGDZ')/ overseas branches, in India as per the provisions of Article 5 of the India-Germany Double Taxation Avoidance Agreement ('IG treaty'); 2. erred in taxing the interest income earned by DZ BANK AGDZ/ overseas branches from foreign currency loans ('credit facilities') provided to Indian companies/borrowers at the rate of 40% (plus applicable surcharge and education cess) inste....
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....appeal, only a few material facts, as culled out from material on record, need to be taken note of. DZ Bank AG, a company incorporated under the laws of Germany and having its principal place of business in Germany, is engaged in the banking business, and it has, with the permission of the Reserve Bank, a representative office in India. In terms of the Reserve Bank of India's conditions, subject to which this office was permitted, inter alia, "the representative office should function purely as a liaison office without transacting any type of banking business" and "all the expenses of the representative office should be met out of inward remittances from the bank". In effect thus, this office was only a liaison office and was not, on its own, engaged in the core business of the assessee, i.e. banking. 5. On 25th September 2014, the assessee filed an income tax return in the name of "DZ Bank AG- India Representative Office", apparently treating the India Representative Office as a taxable entity, disclosing NIL taxable income. This return was subjected to scrutiny assessment proceedings, and, in the ensuing assessment proceedings, the Assessing Officer noticed that during the rel....
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....nk, AG, in India and is actually involved in the following activities in India on behalf of its head office: a. DZ Bank India approaches Indian banks, financial institutions and corporates and apprises them about the products and services that DZ Bank AGDZ could offer. b. It initiates a discussion with the potential customer. c. DZ Bank India approaches its head office/ overseas branches with the funding opportunity, d. DZ Bank India collects from the customers and provides the necessary information to facilitate the due diligence at the head office/ overseas e. DZ Bank India collects and provides information in respect of the financial statements of the client, revenue projections, history and background of the company, etc for the head office/ overseas branches. f. DZ Bank India collects and provides all additional clarification/ documentation required in a transaction by the head office / overseas branches. g. The head office/ overseas branches examine the documents (including the financial statements) and if specific further information is required, they request the CRO of DZ Bank India to obtain such information. ....
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....ows that the profits of an enterprise of Germany are taxable in that country provided that enterprise does not carry on business through a permanent establishment (PE) in India. If the enterprise carries on business, through a 'PE' in India its profits may be taxed in India but only so much of them as are attributable to that PE. This provision is in line with sub-clause (a) of Explanation (I) to clause (i) of Section (1) of Section 9 of the Act. 7.23 The expression 'permanent establishment1 is defined in Article 5. We shall advert to Paras 1 to 3 thereof, which are relevant for our purpose and are reproduced below: ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially,- (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, includ....
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....by the assessee that it is merely Representative Office solely for the purpose of acting as communication office of its head office and is covered by the exclusionary clause (e). It is emphasized that no income is received in the representative office, no business is entertained and no activity in violation of conditions prescribed by RBI is carried on there. 7.26 The moot question, however, is whether the exclusionary clause (e) of para 4 is attracted; if so, whether the assessee as a representative office would stand excluded from the meaning of the expression 'permanent establishment'. It is often difficult to distinguish between activities which have a preparatory or auxiliary character and those which have not. The decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole. In any case, a fixed place of business whose general purpose is one which is identical to the general purpose of the whole enterprise, does not exercise a preparatory or auxiliary activity. A fixed place of business which has the function of managing even only a part of an en....
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....on it can safely be concluded that so much of the profits as shall be deemed to accrue or arise to the applicant in India which are attributable to the 'permanent establishment', namely, the representative office in India, would be taxable in India even under the DTAA [UAE Exchange Centre LLC in A.A.R. NO. 608 OF 2003 dated 26-05- 2004]. 7.29 Further, it will also be worthwhile to consider the provisions of para (5) of Article 5 of the DTAA. The same is reproduced as under: 5. Notwithstanding the provisions of paragraphs 1 and 2, where a person -'other than an agent of an independent status to whom paragraph 6 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have a permanent establishment in the first- mentioned State, if this person,- (a) has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise f....
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....owever, of the view that as the assessee has a PE in India, and all these amounts pertain to the said PE, these amounts are taxable in the hands of the assessee as business receipts under article 7. The Assessing Officer thus proceeded to tax entire interest income, commitment fees and agency fees as income of the assessee, and, while computing taxable income, allowed a deduction of Rs. 2,77,77,831 being expenses of the representative office. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is aggrieved and is in appeal before us. 7. The hearing in this case was concluded on 20th November 2020, and the matter was refixed thereafter on 24th November 2020 in the light of, inter alia, the following show cause notice issued by us to DZ Bank AG, with a copy thereof to the parties before us: You are hereby required to show cause as to why the income arising on account of DZ Bank AG's India Representative Office, even if any, not be excluded from income, if any and to the extent taxable, in the hands of "DZ Bank AG- India Representative Office", and brought to tax in your hands, as you are the taxable unit, in respect of ....
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....ering the requirements of the present context, in our considered view, the inclusive definition of 'person' under section 2(31) for this purpose also includes any entity on which an assessment under the Income Tax Act, 1961 is framed. The matter is fixed for hearing, through videoconferencing on webex portal, on 24th November 2020 at 2.30 pm. The meeting ID and the password will be placed in the public domain on our official website www.itat.gov.in. 7. We have heard the rival contentions at length, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 8. The first question that arises is whether the assessee before us is a taxable unit, and whether, given the fact that none of the parties has raised this issue before us and having regard to very peculiar facts of this case, we have to essentially take a judicial call on that aspect of the matter and direct that the additions impugned in this appeal may be considered, if at all taxable, in the right hands. 9. Learned counsel fairly accepts that the taxable unit can only be the foreign enterprise, DZ Bank AG, in this case, and not the 'DZ Bank AG- India R....
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....n "person" can indeed be given the extended meaning as proposed by us, and argues at length on that aspect. Learned counsel then explains to us the practical problems that the assessee will have to face in the event of our adopting the proposed course of action inasmuch as fresh income tax returns will have to be filed when, in effect, there is no income other than the interest income in respect of which, by the virtue of Section 115A(5), filing of income tax return under section 139(1) is not required anyway. It is submitted that the income which has been taxed in the impugned assessment has been wrongly taxed, and it deserves to be vacated on merits in any event. We are urged to take a holistic and practical view of the matter. Learned Departmental Representative, on the other hand, does not make any specific submissions and leaves the matter to us. In any case, he is unable to bring on record anything to challenge the legal proposition that the taxable unit in India is only the foreign company, and not its PE or other constituents in India. 10. We have noted that the entire proceedings in this case proceed on the basis that the DZ Bank AG and its Indian representative office ....
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....ntary analysis makes it clear that under the Income-tax Act, so far as foreign companies are concerned, taxable unit is a foreign company and not its branch or permanent establishment in India, even though the taxability of such foreign companies is confined to (i) an income which 'accrues or arises in India' or is 'deemed to accrue or arise in India', and (ii) an income which is received or is deemed to be received by or on behalf of such foreign company......... To determine income accruing or arising in India to a foreign enterprise (hereinafter referred to as 'general enterprise' or as 'GE'), therefore, we have to compute income attributable to such branch(es) in India, or other form(s) of presence in India such as office, project site, factory, sales outlet etc., (hereinafter collectively referred to as 'permanent establishment' or 'PE') of foreign enterprise" [Emphasis, by underlining supplied by us]. Subsequently in the case of CIT Vs Hyundai Heavy Industries Co Ltd [(2007) 291 ITR 482 (SC)] similar were the views of Hon'ble Supreme Court. Their Lordships also observed that "it is clear that under the Act, a taxable unit is a foreign company and not its branch or PE in India....
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....ome under article 7 being decided in favour of the assessee, the filing of income tax return in the name of DZ Bank AG- India Representative Office will end up being nothing but a seemingly inadvertent error without any consequences in terms of loss of revenue, and we must, therefore, adopt a pragmatic approach on the issue, and ensure that our actions do not subject assessee to any avoidable inconvenience- particularly when the income tax department has not really objected to the stand of the assessee at any stage, and when there is no loss to the revenue in terms of the basic tax liabilities. Clearly, the mistake is not of the assessee alone. We will infringe neutrality if we are to do anything which helps revenue make out a new case at this stage or which puts the assessee worse off as a result of his coming in appeal before us. We are alive to these concerns, and we were also alive to these concerns while raising the issue in question, but it is equally important to us that if we are to uphold any part of taxability impugned in appeal before us, we must not do so in the name of an assessee which is not, and cannot be, a taxable unit at all. Of course, in the event of our holdin....
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....le 11, in the same assessment year under the same tax treaty. That is clearly, to put it mildly, incongruous on the first principles, and, as we will see a little later in our analysis, simply contrary to the scheme of taxation in article 7 and article 11. Be that as it may, let us examine the broader question about taxability of the amounts in question, in terms of the treaty provisions, in the hands of the assessee. We may add, at the cost of stating the obvious though, that the provisions of the domestic law come into play, by the virtue of provisions of Section 90(2) of the Income Tax Act, 1961, and, therefore, if case of the Assessing Officer fails on the treaty provisions, there is no need to examine the same in the light of the provisions of the domestic tax law. 12. As the fundamental issue in appeal before us is taxation of interest income under article 7 of the Indo German tax treaty, let us begin by looking at the provisions of Article 7 first. The article is being reproduced below for ready reference: ARTICLE 7- BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries o....
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....ts include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article. [Emphasis, by underlining, supplied by us] 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 ....
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...., whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the interest, being a resident of a 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 State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 6. Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a land or political sub-division, a local authority or a resident of that State. Where, however, the ....
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.... set out in this provision, unless beneficial owner of interest, resident in a contracting state, i.e. the foreign enterprise, "carries on business in the other contracting state in which the interest arises, through a permanent establishment situated therein" and unless "debt claim in respect of which the interest paid is effectively connected with such permanent establishment", the exclusion clause under article 11(5) will not come into play. 19. Let us in the light of the provisions of article 11(5), revert to the facts of this case. 20. As a plain reading of the assessment order would show, it is not even case of the revenue that the business of DZ Bank AG is carried on through its India representative office, but that there is "a real relation between the business carried on by the assessee for which it receives interest and processing charges abroad and activities of its representative office in India which contribute directly or indirectly to the earning of income of the assessee (i.e. DZ Bank AG, Germany)". One has to understand the subtle distinction, as the Assessing Officer has himself so well identified in the assessment order, between carrying on business of bank....
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.... 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. 23. On a conceptual note, there can perhaps be situations in which an interest income from India, in the hands of a foreign enterprise, could be a combined fruit of business carried on by the foreign enterprise outside India, as also in India by the virtue of supporting services provided by its representative office in India. Unless the conditions set out in article 11(5) are not satisfied, as in this case, there cannot be, in the light of preceding discussions, any occasion to take such intere....
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....n the source of income in such a situation will be from the services rendered by 'an enterprise" to its 'associated enterprise', and, in terms of the mandate of section 92, "any income arising from an international transaction shall be computed having regard to the arm's length price". The RBI restrictions are on carrying on of banking business by the India representative offices, but these offices can, and admittedly do, carry on economic activities nevertheless, and it is as a result of these economic activities, ALP adjustments could possibly be made. 25. However, when we put the above propositions to the learned senior counsel, he vehemently opposed the same. His first objection was that such a direction, if made, will broaden the scope of the appeal because the issue regarding ALP adjustment is not even made out by any of the authorities below, and by directing the same, or even obliquely suggesting the same, we will end up enlarging the scope of this appeal. His second objection was that it is incorrect to proceed on the basis that the treaty provisions donot restrict the application of transfer pricing provisions, and he relied upon his analysis about the scope of article....
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....r adjudication in the appropriate cases. 27. In view of the above legal analysis, once entire interest revenues earned in India in the hands of the foreign enterprise is taxed in its hands under article 11- as is the undisputed position in this case, nothing survives for taxation under article 7, and, given the fact that entire related revenues are taxed in the hands of the assessee on gross basis under article 11, directly or indirectly, nothing more than entire business receipts can be brought to tax in India. In any case, under the scheme of taxability in article 7 and by the virtue of specific provisions of article 7(7), as long as an income is taxable under any other specific provisions of the treaty, [such as article 8 (shipping and air transport business income), article 10 (dividends), article 11(interest), article 12 (royalties and fees for technical services), article 13 (capital gains)], and unless it is excluded from the operation of such specific provisions [such as under article 10(4), article 11(5) , article 12(5)], it cannot be taxed under article 7. 28. It is also important to bear in mind the fact that, as we have indicated earlier as well, that the case of ....
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.... thereto (i.e. commitment fees and agency fees relatable thereto) cannot result in an income taxable in India either. We have taken note of the fact that what are termed as commitment charges and agency fees are in fact integral part of the loan arrangements, relatable to the same loan, and part of consideration for the same loan having been extended by DZ Bank AG to India. Unless there is something in a tax treaty to indicate to the contrary, as noted in the case of Hindalco Industries Ltd Vs ACIT [(2005) 94 ITD 242 (Mum)], by a coordinate bench of this Tribunal, subsidiary transaction takes colour from the principal transaction. The coordinate bench had noted that "...........when principal transaction is such that it does not generally give rise to taxability in the source country, the transaction subsidiary and integral to such a transaction also does not give rise to taxability in the source country. In other words, the subsidiary and integral transactions have to take colours from the principal transaction itself and are not to be viewed in isolation". In any event, article 11(4) defines "interest" "as used in this Article means income from debt-claims of every kind" [emphasi....