Tax on Interest Income & commitment fees earned by DZ Bank from its Indian clients

DZ Bank AG – India Representative Office Vs DCIT (ITAT Mumbai)

Interest Income & commitment fees earned by DZ Bank from its Indian clients could be taxed under article 11 instead of article 7 of Indian Branch under Tax Treaty:

Conclusion: Interest income and commitment fees earned by DZ Bank from its Indian clients could be taxed at the hands of Indian Branch under India Germany Tax Treaty  under article 11 , and not additionally under article 7 also, but the income was taxable nevertheless, subject to the exemptions set out in and under the scheme of article 11, on gross basis.

Held: The issue raised for adjudication was whether the interest income and commitment fees etc. earned by DZ Bank from its Indian clients could be taxed in the hands of the assessee, DZ Bank AG India Representative Office under article 7 of the India German Double Taxation Avoidance Agreement or was 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. In the entirety of the case, it was clear that there was no income, other than the interest income of DZ Bank AG from its clients in India, on which tax liability under article 11 had already been discharged, taxable in the hands of the assessee bank. So far as this taxability was concerned, assessee did not have any obligations to file the income tax return under section 115A(5) as it existed at the relevant point of time. It was difficult not to miss the fact that an income, which had already been brought to tax in the hands of the assessee under a treaty provision, was being sought to be taxed again in the hands of the same assessee, in the same assessment year but only under a different provision in the same tax treaty. This approach could not be approved. Therefore, the interest income and commitment fees in the hands of the assessee bank could not be taxed additionally under article 7 of the Indo German tax treaty also. The income in question could only be taxed under article 11 but the income was taxable nevertheless subject to the exemptions set out in and under the scheme of article 11, on gross basis. It was not even AO’s case that the debt claims in question were effectively connected with the PE, but at best that there was “a real relation between the business carried on by the assessee for which it received interest and processing charges abroad and activities of its representative office in India which contributed directly or indirectly to the earning of income of the assessee (i.e. DZ Bank AG, Germany)- something was much less than the threshold nexus level to trigger article 11(5) exclusion clause The existence of permanent establishment, was not really relevant for determining the issue of taxability under article 7 on the facts of the present case.

FULL TEXT OF THE ITAT JUDGEMENT

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