Interest Income earned by enterprises in Other Jurisdictions is Taxable, if attributable to the PE: ITAT [Read Order]

In a ruling, in favour of Marubeni Corporation India Pvt. Ltd, the Mumbai bench of Income Tax Appellant Tribunal has held that Interest income earned by the enterprise in other jurisdictions is taxable if it is attributable to the permanent establishment.

The Assessing Officer has challenged the correctness of the order dated 4th October 2021 passed by CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961.

The assessee company was incorporated and fiscally domiciled in, the Republic of Japan. It has various streams of income from its India operations- income from its permanent establishment in India, income earned from India as fees from technical services, income from shipping business and income from interest on suppliers‟ credit, apart from other incidental incomes.  The interest of Rs 2,25,89,136 is received by the assessee company from its customer Tata Hitachi Construction Co Ltd on supplier’s creditand sold by the assessee company.

It was evident that for supplier’s credit of up to 15 billion Japanese Yens at the interest rate of 6 months Japanese Yen LIBOR plus 0.90%.  This interest income was offered to tax at the rate of 10% in terms of the provisions of Article 11(2) of the India Japan Double Taxation Avoidance Agreement.

The Assessing Officer(AO)triggered the exclusion clause under Article 11(6)and held the assessee as not eligible for the concessional rate of gross basis taxation @ 10%. The AO hold the interest income of Rs 2,25,89,136 “at 40% as per the India Japan DTAA taking into account the presence of the permanent establishment in the year under consideration”.

CIT(A)upheld the plea of the assessee and held to tax the interest income in question @10% in terms of the provisions of Article 11(2) as there is no connection between the interest income and the permanent establishment.

It was evident that as taxability of interest income in the source jurisdiction, when the enterprise of one of the contracting states earns interest, as a beneficial owner, from the other contracting state the source jurisdiction has the right to tax it, barring in the cases of specified exception- which have no application on the facts of this case, at the rate of 10% on a gross basis. Article 11(6) is an exception to this taxation @ 10% on the gross basis.

It was observed that unless the profit earned by an enterprise in the other jurisdiction is directly or indirectly attributable to that permanent establishment in the source jurisdiction, it cannot be taxed even under article 7.

Pramod Kumar (Vice President), and Sandeep S Karhail (Judicial Member upheld the order of CIT(A) and dismissed the appeal filed by the revenue. Milind Chavan appeared for the appellant and Ravi Sharma appeared for the respondent.

To Read the full text of the Order CLICK HERE

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