DCIT v. Marubeni Corporation, Japan

Case snapshot

Sections / provisions: 9(1)(i)

Questions before the Court / Tribunal

• S. 9(1)(i) : Income deemed to accrue or arise in India – Permanent establishment – Interest will not be taxed at a higher rate- DTAA- India- Japan. [Art. 7, 11(2), 11(6), 14] Where the assessee is a company incorporated in, and fiscally domiciled in, the Republic of Japan. The assessee, inter alia, earned income from interest on suppliers’ credit. It was held that mere existence of a permanent establishment of the assessee company in India does not attract higher rate of tax. The beneficial rate of tax as per Article 11(2) cannot be denied. (ITA No.: 10/Mum/2022 dated June 17, 2022) (Bench ‘I’ )(AY. 2016 -17).…
• What factual, statutory and procedural conditions control the relief?
• How does the operative order apply to the parties and the challenged proceeding?

Material facts and procedural background

Deputy Commissioner of Income Tax International Tax Circle 3(2)(1), Mumbai .…………………………Appellant

Appearances by: Milind Chavan for the appellant Ravi Sharma for the respondent

2. The assessee before us is a company incorporated in, 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 (Rs 8,47,64,383), income earned from India as fees from technical services (Rs 31,76,15,635), income from shipping business (Rs 1,09,53,179) and

income from interest on suppliers‟ credit (Rs 2,25,89,136), apart from other incidental incomes. This interest of Rs 2,25,89,136 is received by the assessee company from its customer Tata Hitachi Construction Co Ltd (earlier known as Telco Construction Equipment Co Ltd) on suppliers‟ credit on the sale of Excavator CKD and CBU manufactured by Hitachi Sumitomo Heavy Industries Construction Crane Co Ltd Japan and sold by the assessee company or one of its controlled entities. The terms of this supplier credit, as evident from the details placed before us at page 3 of the paper book indicate, for suppliers 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 India Japan Double Taxation Avoidance Agreement [(1990) 182 ITR (Stat) 380- as amended from time to time; Indo Japanese tax treaty in short]. When this issue came up for consideration before the Assessing Officer, in the course of scrutiny assessment proceedings, he noted that the assessee admittedly has a permanent establishment in India and that, in terms of the provisions…

1. Whether on facts and circumstances of the case and in law, the Ld. CIT(A) has grossly erred in holding that the interest income on loans in the form of suppliers' credit given to Indian parties is taxable at special rates as per Article 11(2) of the India-Japan DTAA ignoring the fact that the suppliers' credit in respect of which the interest is paid is effectively connected with the Permanent Establishment of the assessee in India and the interest income thereon was taxable as per Article 11(6) read with Article 7 of the DTAA.

Appellant / assessee submissions

The packaged judgment does not separately label the appellant's submissions in an independently extractable passage. No contention is inferred; read the full order.

Revenue / respondent submissions

The packaged judgment does not separately label the respondent's submissions in an independently extractable passage. No contention is inferred; read the full order.

Court / Tribunal analysis and reasoning

3. We have heard the rival contentions, perused the material on record and duly considered the facts of the case in the light of the applicable legal position.

that such an income is attributable to that permanent establishment. The connotations of the expression “effectively connected” are to be seen in this light. It is also equally important to bear in mind the fact that the Article 11(6) does not explicitly provide for taxation of interest income at a rate higher than the rate under Article 11(2); all it does is to provide that in a situation in which the interest is “effectively connected” with a PE or a fixed base, the provision of Article 7 or Article 14, as the case may be, will come into play. Article 11(6) thus proceeds on an underlying assumption, and the assumption is that when the debt claim in respect of which interest is paid is “effectively connected” with the permanent establishment, it will result in taxability of the said income under Article 7(1). Unless taxability under Article 7(1) or Article 14(1) comes into play, the exclusion clause under article 11(6) is meaningless. An interpretation of Article 11(6) to make the exclusion clause under article 11(6) meaningless will result in an interpretation contrary to the well-settled principle of interpretation ut res magis valeat quam pereat, i.e., to make a legal…

the above discussions and the context of the interplay of Article 11(6) and Article 7(1), in our considered view, the expression „effectively connected with such permanent establishment‟ must mean a situation in which the interest income in question can be said to be “directly or indirectly attributable to the permanent establishment” and can be brought to tax under article 7(1) as such. That is not even the case of the Assessing Officer before us.

Operative decision and relief

10. In view of these discussions, as also bearing in mind the entirety of the case, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. Even though we may have traversed a different path, vis-à-vis the path taken by the coordinate bench in the assessee‟s own case for the earlier year, our conclusions are the same as arrived at by the coordinate bench, and that‟s what matters. All the three grounds of appeal centre around this fundamental issue regarding triggering of exclusion clause under Article 11(6), which, as above, we have decided in favour of the assessee, and all the three grounds of appeal must, therefore, be dismissed accordingly. We order so.

11. In the result, the appeal is dismissed. Pronounced in the open court today on the 17th day of June, 2022.

Ratio and legal principle

• The packaged judgment addresses S. 9(1)(i) : Income deemed to accrue or arise in India – Permanent establishment – Interest will not be taxed at a higher rate- DTAA- India- Japan. [Art. 7, 11(2), 11(6), 14] Where the assessee is a company incorporated in, and fiscally domiciled in, the Republic of Japan. The assessee, inter alia, earned income from interest on suppliers’ credit. It was held that mere existence of a permanent establishment of the assessee company in India does not attract higher rate of tax. The beneficial rate of tax as per Article 11(2) cannot be denied. (ITA No.: 10/Mum/2022 dated June 17, 2022) (Bench ‘I’ )(AY. 2016 -17).…. The precise proposition must be read with the Court/Tribunal's reasoning and operative directions.
• Reliance depends on matching the statutory version, jurisdiction, procedural stage and material evidence recorded in the judgment.

Why this judgment matters

This decision is relevant to practitioners and affected parties dealing with s. 9(1)(i) : income deemed to accrue or arise in india – permanent establishment – interest will not be taxed at a higher rate- dtaa- india- japan. [art. 7, 11(2), 11(6), 14] where the assessee is a company incorporated in, and fiscally domiciled in, the republic of japan. the assessee, inter alia, earned income from interest on suppliers’ credit. it was held that mere existence of a permanent establishment of the assessee company in india does not attract higher rate of tax. the beneficial rate of tax as per article 11(2) cannot be denied. (ita no.: 10/mum/2022 dated june 17, 2022) (bench ‘i’ )(ay. 2016 -17).… Its value lies in showing how the adjudicating forum connected the applicable rule to the proved facts and procedural posture.

Practitioner action points

• Match the statutory version, jurisdiction, procedural stage and decisive evidence before relying on the result.
• Verify current appellate, review and SLP history and any later amendment or controlling authority.
• Attach the complete judgment to the working paper or filing and cite the paragraph/page supporting the proposition.

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Section / provision impact

• 9(1)(i) - apply the exact version considered in the judgment.

Case network

Similar issue / useful comparison

• Addl. CIT v. Tejal Ashis Mehta - Court / Tribunal to be verified
• Narayan Devarajn Iyengar v. ITO - ITAT Mumbai
• B. Braun Medical (India) Pvt. Ltd. v. DCIT - ITAT Mumbai

Different outcome / possible distinction

• National Petroleum Construction Co. v. DCIT (International Taxation) - Quashed / set aside
• Shinhan Bank v. DCIT - Partly allowed

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