Case Law Details
DCIT Vs Marubeni Corporation (ITAT Mumbai)
On the facts of this case, however, all that the Assessing Officer has indicated is that the assessee had a permanent establishment (PE) in India during the relevant period and that there was presumably some connection between the interest income of the assessee and the existence of the permanent establishment. There is nothing to elaborate upon the nature of the connection, except for the vague generalities, or to even 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 Article 11(2) is not ousted, Article 7 cannot come into play unless the interest income is directly or indirectly attributable to the permanent establishment, and there is not even an effort, on the part of the revenue, to demonstrate the nexus between the permanent establishment and the interest income. It is only elementary that the onus of establishing the „effective connection‟ between 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 any stretch of logic, can be said to be directly or indirectly attributable to the Indian permanent establishment of the assessee company.
In the grounds of appeal raised before us, it is alleged that 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 the assessee has received fees for technical services in a previous year from them, but then the performance of contracts through the PE or receipt of fees for technical services from such clients is irrelevant as long as the interest income is not demonstrated to be attributable to the permanent establishment. Such an attribution cannot be inferred or assumed; there has to be cogent material to establish the fact that the income in question, i.e. interest income in this case, is attributable to the permanent establishment. There is not even a whisper of a suggestion to that effect. In view of the above discussions and the context of the interplay of Article 11(6) and Article 7(1), in our considered view, the expression „effectively connected with such permanent establishment’ must mean a situation in which the interest income in question can be said to be “directly or indirectly attributable to the permanent establishment” and can be brought to tax under article 7(1) as such.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. By way of this appeal, the Assessing Officer has challenged the correctness of the order dated 4th October 2021 passed by the learned CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2016-17.
Please become a Premium member. If you are already a Premium member, login here to access the full content.
