A Representative Office of a Foreign Enterprise is Not a Taxable Unit. Foreign Enterprise is the Taxable Unit: ITAT Mumbai

In the case of DZ Bank AG – India Representative Office vs. DCIT, ITAT Mumbai has held that:

30.) In the light of the above discussions, as also bearing in mind entirety of the case, it is clear that, on the facts and in the circumstances of this case and in law, 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. It is difficult not to miss the fact that we are looking at a situation in which an income, which has already been brought to tax in the hands of the assessee under a treaty provision, is 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. We cannot, and donot, approve such an approach. The impugned demands are, thus, also 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 of Rs 29,41,57,201 and commitment fees etc of Rs 1,98,14,938, in the hands of the assessee bank, additionally under article 7 of the Indo German tax treaty also. That finding is, however, without prejudice to the taxability of the interest income under article 11 of the Indo German tax treaty. We make it clear 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.

31.) Given our line of reasoning, as above, it is wholly academic issue as to whether or not the assessee had a permanent establishment in India, because PE or no PE, the debt claim in question could not be said to be effectively connected to the alleged PE, and, therefore, neither the exclusion article 11(5) could have been triggered, nor the taxability under article 7 could not have come into play. 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 existence of permanent establishment, in the light of our analysis of ITA No.: 1815/Mum/18 Assessment year: 2014-15 legal position, is not really relevant for determining the issue of taxability under article 7 on the facts of the present case.

32.) In view of our detailed findings above, the question that we had raised on our own, with respect to the right hands in which impugned demands could be brought to tax, is rendered infructuous, and it does not call for our adjudication as on now and in this case. Suffice to say that the tax demands raised in the impugned assessments, for the detailed reasons set out above, are wholly unsustainable in law, and it is, therefore, wholly academic question as to, if at all these were demands could be lawfully raised, whether these demands could have been lawfully raised in the impugned assessment or whether separate proceedings were required to be initiated in the hands of the DZ Bank AG. For this reason, we also do not see need to deal with the scope of Section 153 on the facts of this case, as also the question whether, given the present context, appellant before us could be treated as a ‘person’ in the inclusive definition of Section 2(31) under the Income Tax Act, 1961. All these issues are rendered academic in the present situation.

33.) In the result, the appeal is allowed in the terms indicated above. Pronounced in the open court today on the 04 day of December, 2020.

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