AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (6) TMI 1109
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.... with the Permanent Establishment of the assessee in India and the interest income thereon was taxable as per Article 11(6) read with Article 7 of the DTAA." 2. "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 specially 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 specially 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 previous year from them" 4. "The Appellant prays that the order of the Ld. CIT(A) on the above ground(s) be set aside and that of the A....
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....d sold by the assessee company or one of its controlled entities, and that this transaction had nothing to do with the permanent establishment in India. The Assessing Officer did not even analyze this plea in much detail but implicitly rejected it nevertheless by proceeding on the basis that since the assessee had a permanent establishment, the exclusion clause under Article 11(6) was triggered, and the assessee was no longer eligible for the concessional rate of gross basis taxation @ 10%. He thus proceeded to hold, as he had originally proposed in the show cause notice, that interest income of Rs 2,25,89,136 "at 40% as per the India Japan DTAA taking into account the presence of the permanent establishment in the year under consideration". Aggrieved, the assessee carried the matter in appeal before the CIT(A) who upheld the plea of the assessee and concluded that the interest income in question is required to be taxed @10% in terms of the provisions of the Article 11(2) as there is no connection between the interest income and the permanent establishment. The Assessing Officer is aggrieved and is in appeal before us on the following grounds which are raised in the form of questio....
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....the interest. 3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be taxable only in the other Contracting State if: (a) the interest is derived and beneficially owned by the Government of that other Contracting State, a political sub-division or local authority thereof, or the central bank of that other Contracting State or any financial institution wholly owned by that Government; or (b) the interest is derived and beneficially owned by a resident of that other Contracting State with respect to debt-claims guaranteed, insured or indirectly financed by the Government of that other Contracting State, a political sub-division or local authority thereof, or the central bank of that other Contracting State or any financial institution wholly owned by that Government. 4. For the purposes of paragraph 3, the terms "the central bank" and "financial institution wholly owned by that Government" mean: (a) in the case of Japan: (i) the Bank of Japan; (ii) the Japan Bank for International Cooperation; (iii) the Japan International Cooperation Agency; (iv) the Nippon Export and Investment Insurance; and (v) such other financial in....
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....t-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. ARTICLE 7- BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which i....
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....me 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 period or periods. 2. The term 'professional services' includes incredibly independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. [Emphasis, by underlining, supplied by us] 5. As is evident even from a plain reading of the above treaty provisions, the scheme of the Indo-Japanese tax treaty, so far as taxability of interest income in the source jurisdiction is concerned, is like this. When the enterprise of one of the contracting states (such as Japan, as in this case) earns interest, as a beneficial owner, from the other contracting state (such as India, as in this case), the source jurisdiction has the right to tax it, barring in the cases of specified exception- which have no application on the facts of this case, at the rate of 10% on a gross basis. Article 11(2) is unambiguous on this aspect, and there is no dispute on this fundamental position. Article 11....
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....isdiction cannot, therefore, be reason enough to invoke the taxability of an interest income under Article 7(1) unless such an income is directly or indirectly attributable to such a permanent establishment. As we say so, we may add that a connection per se of an income with the permanent establishment cannot always and inevitably lead to the attribution of such income in the hands of the permanent establishment, as "attribution of an income to the permanent establishment" is a degree higher than mere "connection of an income with the permanent establishment". While every income attributable to a permanent establishment inherently has a connection with that permanent establishment, the converse is not necessarily and universally correct, inasmuch as there can be incomes which may have some connection with the permanent establishment and yet the connection may not be material enough to hold that such an income is attributable to that permanent establishment. The connotations of the expression "effectively connected" are to be seen in this light. It is also equally important to bear in mind the fact that the Article 11(6) does not explicitly provide for taxation of interest income at....
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....ht of the above discussions, an interest income can only be said to be effectively connected with a permanent establishment or with a fixed base only when the connection is such that it leads to taxability in the hands of the taxpayer under article 7 or article 14. 7. In view of the above discussions, to term a connection of the interest income with the permanent establishment or the fixed base, as "effectively connected", one has to see whether, by virtue of such a connection, the interest income in question is taxable as an income attributable to the permanent establishment or the fixed base in question. The effectiveness of connection thus lies in the taxability under article 7 or article 14. Unless that taxability comes into play, there cannot be any overlapping in the scope of article 11 vis-à-vis Article 7 or vis-à-vis article 14, and, unless there is such an overlapping of the treaty provisions, there is no occasion for exclusion of one of the overlapping treaty provision by Article 11(6). In other words, the taxability under Article 7 or Article 14 is a sine qua non for triggering the exclusion clause under Article 11(6). There is no finding to, or even indi....
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....en the debt claim with the permanent establishment is on the Assessing Officer, and, to this end, all that is expected of the assessee is to reasonably comply with the requisitions, for relevant information, made by the Assessing Officer. The assessee has not even been faulted on this count. The Assessing Officer has simply proceeded on the basis that since the assessee has a permanent establishment in India, it can be said to be connected with such a PE, and, accordingly, taxation at the normal rate at which business profits are taxed in the hands of the foreign companies is permissible. That approach is inherently flawed. Even if the interest income is connected with the assessee company's permanent establishment, it can only be brought to tax in India, under Article 7, when the interest income is directly or indirectly attributable to the permanent establishment. It is not even the case of the Assessing Officer that the permanent establishment played any role in the supplier credit, which is the debt claim leading to the impugned interest income, being extended to the Indian customers who have paid interest on the suppliers" credit. As such, no part of interest income, by an....
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....re in the matter. 5. In the result appeal filed by the Assessing Officer is dismissed. 6. Now we take up the cross objection filed by the assessee. 7. The assessee has raised the following grievance: On the facts & circumstances of the case and in law, the Assessing Officer [DCIT(IT-3(2)(1), Mumbai] has erred in levying surcharge and health and education cess on FTS income when the same is table at the rate of 10% as prescribed in Article 12 of the India -Japan Tax Treaty. 8. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 9. On a perusal of assessment order, we find that in the last paragraph of the assessment order, the Assessing Officer has specifically mentioned that the FTS "income of Rs. 30,92,20,199 is to be taxed @10% as per the DTAA" whereas the income said to be attributable to the PE "is to be taxed at the rates applicable to foreign companies, i.e. 40% plus surcharge and cess as per the Income Tax Act." Yet, in the computation of tax liability, the surcharge as also health and education is also levied. That is certainly incorrect. In any event, this issue is c....
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....remaining portion of this article is not relevant for the present purposes) 6. A plain reading of these provisions show that while interest and royalties can indeed be taxed in the source state, the tax so charged on the same, under Articles 11 and 12, cannot exceed 15% and 10% respectively. The expression 'tax' is defined in Article 2(1) to include 'income tax' and is stated to include 'surcharge' thereon, so far as India is concerned. Article 2(2) further extends the scope of the 'tax' by laying down that it shall also cover "any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Agreement in addition to, or in place of, the taxes referred to in paragraph 1". 7. We find that education cess was introduced in India by the Finance Act, 2004, and Section 2(11) of the Finance Act, 2004 described it as follows: (11) The amount of income-tax as specified in sub-sections (4) to (10) and as increased by a surcharge for purposes of the Union calculated in the manner provided therein, shall be further increased by an additional surcharge for purposes of the Union, to be calle....