INCOME TAX ACT, 1961

Section 90(2) Article 7/11

Double taxation - Business profits - Interest and commitment fees and agency fee earned by PE -

DZ Bank AG, a company incorporated under the laws of Germany and having its principal place of business in Germany, was engaged in the banking business and it had, with the permission of the Reserve Bank, a representative office in India. This office was only a liaison office and was not, on its own, engaged in the core business of assessee, i.e., banking. 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. AO was, however, of the view that as the assessee had a PE in India, and all amounts pertain to the said PE, these amounts were taxable in the hands of the assessee as business receipts under article 7. AO thus proceeded to tax entire interest income, commitment fees and agency fees as income of 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. Held: AO had not brought on record any material to establish, or even indicate, that the debt claim is effectively connected with the PE, save and except for supporting services rendered by the Indian Representative Office in connection with dealing with that debt claim but then rendition of service by the PE, in connection with a debt claim, by itself would not make the debt claim effectively connected with the PE. 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, was 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, were not satisfied. Any occasion to take such interest out of the ambit of article 11, and, when entire interest revenues were taxable under article 11, nothing survived for taxation, or was permitted to be taxed, under article 7. Unambiguous position that the DZ Bank AG and DZ Bank India Representative Office were only one taxable unit, that the same income cannot be taxed in the hands of the same assessee twice-once under one article of the treaty, i.e., article 11, and then under another article of the treaty, i.e., article 7. The scheme of taxability under article 7 and article 11, does not visualize, or permit, such incongruous situations. The Bench therefore, upheld the plea of the assessee against taxability of interest income of Rs 29,41,57,201 and commitment fees, etc. of Rs 1,98,14,938, in the hands of the assessee bank, additionally under article 7 of the Indo German tax treaty also. That finding is, however, without prejudice to the taxability of the interest income under article 11 of the Indo-German Tax Treaty. The income in question could only be taxed under article 11, and not additionally under article 7 also, but the income is taxable nevertheless, subject to the exemptions set out in and under the scheme of article 11, on gross basis.

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