ECB Loans to Indian Clients linked to PE in India: ITAT directs Tax Levy at 10% on Interest Income [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that External Commercial Borrowings (ECB) loans to Indian clients linked to PE in India and directed the tax levy at 10% on interest income.

The revenue challengedthe order by the Commissioner of Income Tax (Appeals)-55, Mumbai in appeal No.CIT(A)-55, Mumbai/10319/2017-18 dated 24/06/2022 (CIT(A)) against the order of assessment passed u/s. 143(3) r.w.s. 144C of the Income Tax Act, 1961 dated 29/04/2016 by the ld. Dy. Commissioner of Income Tax, International Taxation – 4(1)(1), Mumbai (AO).

M/s. Cooperative Rabobank UA, the respondent-assessee is an Indian Branch of Cooperative Centrale Raiffeisen Boerenleen Bank B.A., Netherlands (Rabobank, Netherlands), a company incorporated in the Netherlands.  It received approval from the Reserve Bank of India (RBI) to commence its branch banking activities in India in March 2011. 

The assessee branch filed a return of income for the assessment year 2012-13 on 30/11/2012 declaring a total income of Rs.24,03,58,720/-.  The AO observedthat the assessee had an undisclosed TDS credit amounting to Rs.6,96,33,878/- and the assessee was directed to explain the reasons for the difference in income appearing in Form 26AS vis-a-vis the Profit & Loss Account and the return of income filed.  The assessee submitted that in its Form 26AS, a tax credit of Rs.11,47,62,334/- is reflected, out of which the assessee has claimed a tax credit of Rs.4,96,90,703/- in the return of income.

 Further out of the aforesaid total tax credit claimed by the assessee, payment of Rs.48,35,26,691/- was made to the assessee as a reimbursement of expenses incurred by the assessee on behalf of the head office and other group company (i.e. Rabo India Finance Ltd) (RIF). 

It was submitted that such recovery of expenses by the assessee is pure cost recoveries from the head office / RIF without any markup on the same.  Accordingly, it was submitted that the said cost is not chargeable to tax in India and credit for taxes deducted at source amounting to Rs.4,83,52,670/- has been claimed in the return of income.

The assessee has various branches around the world which operate independently and these branches have separate businesses; hence conducting lending and other business activities. The assessee also furnished the details of the balance amount of taxes deducted at the source which were not claimed by it in the return.  It was also submitted that taxes were deducted at the source at the rate prescribed in terms of the specific Article for Interest provided in the Indo-Netherlands Tax Treaty. 

The AObrought to tax the difference of undisclosed gross receipts as per Form 26AS and the return of income in the sum of Rs.63,27,60,316/- as an addition while framing the assessment.  This addition represents interest income on external commercial borrowings. On appeal, the CIT(A) held that interest income earned by the assessee would be chargeable to tax @20% in A.Y. 201011 and further directed the AO to apply the tax rate prescribed in Indo Netherlands Tax Treaty.

It was vehemently argued by the department that the said interest income would become the business profit of the Indian branch and hence be taxed in terms of Article 7 of the Indo-Netherlands Tax Treaty.

From the perusal of Indo Netherlands Tax Treaty,thetwo-member bench comprising Shri M Balaganesh, (Accountant) &  Shri Sandeep Singh Karhail,(Judicial) observed that there is a separate Article provided for taxability of Interest vide Article 11 thereon. 

It was observed that there is no dispute that the nature of income that is sought to be taxed is interest income so it would be just and fair to apply Article 11(2) to determine the taxability of the said interest income. The ITAT directed AO to bring to tax interest income @10% and dismissed the appeal of the Revenue.

To Read the full text of the Order CLICK HERE

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