TaxTMI 
TaxTMI 
TaxTMI 
2022 (6) TMI 953
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....eceived by the assessee company from its customer Tata Hitachi Construction Co Ltd (earlier known as Telco Construction Equipment Co Ltd) on suppliers" credit on the sale of Excavator CKD and CBU manufactured by Hitachi Sumitomo Heavy Industries Construction Crane Co Ltd Japan and sold by the assessee company or one of its controlled entities. The terms of this supplier credit, as evident from the details placed before us at page 3 of the paper book indicate, for suppliers credit of up to 15 billion Japanese Yens at the interest rate of 6 months Japanese Yen LIBOR plus 0.90%. This interest income was offered to tax at the rate of 10% in terms of the provisions of Article 11(2) of India Japan Double Taxation Avoidance Agreement [(1990) 182 ITR (Stat) 380- as amended from time to time; Indo Japanese tax treaty in short]. When this issue came up for consideration before the Assessing Officer, in the course of scrutiny assessment proceedings, he noted that the assessee admittedly has a permanent establishment in India and that, in terms of the provisions of Article 11(6) of Indo-Japanese tax treaty, the provisions of Article 11(2), which provide for a lower rate of 10%, will not come i....
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.... per Article 11(2) of the India-Japan DTAA especially because the assessee had a Permanent Establishment in India during the said time. 3. Whether on facts and circumstances of the case and in law, the Ld. CIT(A) has grossly erred in holding that the interest income on loans in the form of suppliers credit given to Indian parties is taxable at special rates as per Article 11(2) of the India-Japan DTAA especially because the Indian parties from whom the assessee has received interest income are also the clients of the assessee in India with whom contracts were executed through the Permanent Establishment in India and assessee has received fees for technical services in a previous year from them. 3. We have heard the rival contentions, perused the material on record and duly considered the facts of the case in the light of the applicable legal position. 4. Let us first take a careful look at the relevant treaty provisions, i.e. Article 11, Article 7 and Article 14, and try to understand the scheme of source jurisdiction taxation of interest income as envisaged therein. These provisions are reproduced below for ready reference: ARTICLE 11- INTEREST 1. Interest arising in a Con....
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....nd income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. 6. 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 Contracting 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. 7. Interest shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political sub-division or a local authority thereof or a resident of that Contracting State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such....
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....ts, nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article. 5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 6. For the purposes of the provisions of the preceding paragraphs of this Article, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 7. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. Article 14 - INDEPENDENT PERSONAL SERVICES 1. Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that Contracting State unless he has a fixed base regu....
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....n the business, the provisions of Article 11 will have to make way for the applicability of Article 7. 6. Let us now turn to the scheme of Article 7(1) and Article 14(1). Article 7(1) provides that if an enterprise of one of the treaty partner jurisdictions carries on business in the other jurisdiction, say a Japanese enterprise carrying on business in India, the profits of such an enterprise may be taxed in the source jurisdiction, i.e. India, but only to the extent, such profit is directly or indirectly attributable to that permanent establishment in the source jurisdiction, i.e. in India. What follows is that unless the profit earned by an enterprise in the other jurisdiction is directly or indirectly attributable to that permanent establishment in the source jurisdiction, it cannot be taxed even under article 7. Article 14(1), inter alia, provides that if a person providing independent personal services has "a fixed base or remains in that other Contracting State for the aforesaid period or periods, the income may be taxed in that Contracting State but only so much of it as is attributable to that fixed base or is derived in that other Contracting State during the aforesaid pe....
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....inciple of interpretation ut res magis valeat quam pereat, i.e., to make a legal provision workable rather than redundant- a principle which has been consistently approved by Hon"ble Courts above, such as in the case of Tinsukhia Electricity Supply Co Ltd Vs State of Assam [(1989) 45 Taxman 29 (SC)/ 1989 SCR (2) 544]. In our considered view, the scheme of Article 11(6) does not visualise a situation in which the source jurisdiction taxability of an interest income under Article 11(2) will be ousted because of the enterprise having a permanent establishment in the source jurisdiction, and such an interest income will also not be taxable under article 7(1) as the interest income is not attributable to the permanent establishment or under article 14(1) as the interest income attributable to the fixed base available to the assessee. Such a no man"s land between the domain of Article 11(2) vis-à-vis Article 7(1), or between Article 11(2) vis-à-vis Article 14(1) will be an apparent incongruity. Therefore, the connotations of the expression "effectively connected", in respect of Article 11(6) read with Article 7(1), must be such that unless the interest income cannot be held....
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.... prima facie indicate that the connection was such that it could result in the debt claim in question, i.e. the debt claim on which the impugned interest income is earned by the assessee, being treated as effectively connected with the permanent establishment to the extent that income from such debt claim could be brought within the ambit of Article 7(1). The basic finding of taxability under article 7(1) is missing, but then, as we have concluded earlier, such a finding is the foundational requirement triggering the exclusion clause under Article 11(6). As far as interest income is concerned, it can happen, for example, when the debt claim in respect of which interest is paid is forming part of the assets of the permanent establishment, when economic ownership of the debt claim is allocated to the permanent establishment or when the permanent establishment plays a critical role in earning of that interest income. None of these conditions is satisfied in the present case, and there is nothing more than the mere existence of a permanent establishment of the assessee company in India, which is being put against the assessee. Unless Article 7 comes into play, the jurisdiction of Artic....