Interest Income and commitment fees earned by DZ Bank from its Indian clients can be taxed at the hands of Indian Branch under Indo German Tax Treaty: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) held that interest income and commitment fees earned by DZ Bank from its Indian clients can be taxed at the hands of Indian Branch under India German Tax Treaty.

The issue raised for adjudication was whether the interest income and commitment fees etc. earned by DZ Bank from its Indian clients can 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 is 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.

The DZ Bank AG, a company incorporated under the laws of Germany and having its principal place of business in Germany, is engaged in the banking business, and it has, with the permission of the Reserve Bank, a representative office in India.

In terms of the Reserve Bank of India’s conditions, subject to which this office was permitted, inter alia, “the representative office should function purely as a liaison office without transacting any type of banking business” and “all the expenses of the representative office should be met out of inward remittances from the bank”. In effect thus, this office was only a liaison office and was not, on its own, engaged in the core business of the assessee, i.e. banking.

The Coram headed by Vice President Pramod Kumar and Pawan Kumar Gadale clarified that there is no income, other than the interest income of DZ Bank AG from its clients in India, on which tax liability under article 11 has already been discharged, taxable in the hands of the assessee bank. So far as this taxability is concerned, the 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.

The ITAT stated that the demands are devoid of legally sustainable merits from this point of view as well. We, therefore, uphold the plea of the assessee against taxability of interest income 1 and commitment fees etc., in the hands of the assessee bank, additionally under article 7 of the Indo German tax treaty also.

The ITAT clarified that 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.

“It is not even Assessing Officer’s case that the debt claims in question are effectively connected with the PE, but at best that there is “a real relation between the business carried on by the assessee for which it receives interest and processing charges abroad and activities of its representative office in India which contribute directly or indirectly to the earning of income of the assessee (i.e. DZ Bank AG, Germany)- something is much less than the threshold nexus level to trigger article 11(5) exclusion clause,” the ITAT said.