ITAT supports lower tax rate on income interest under Indo-Japan tax treaty

ITAT supports lower tax rate on income interest under Indo-Japan tax treaty

The AO erred by imposing a 40 percent tax due to the permanent establishment of the assessee in India

The Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) has upheld a lower tax rate on interest income under the Indo-Japan Tax Treaty. That is because there is no connection between interest income and permanent establishment (PE).

The assessee, Marubeni Corporation, Japan is a company incorporated in and fiscally domiciled in the Republic of Japan.

The assessee offered the interest income to tax at the rate of 10 percent in terms of the provisions of the India Japan Double Taxation Avoidance Agreement (DTAA).

During the scrutiny of the assessment proceedings, the assessing officer (AO) noted that the assessee had a permanent establishment in India. Therefore, under DTAA, the lower rate of 10 percent tax did not apply. He imposed a 40 percent tax, taking into account the presence of the permanent establishment in the year under consideration.

On an appeal, the Commissioner of Income Tax (Appeals) upheld the plea of the assessee and concluded that the interest income was to be taxed at 10 percent. He ruled that there was no connection between the interest income and the permanent establishment.

Aggrieved by the order, the AO filed an appeal before ITAT.

The assessee submitted that it earned the interest income on suppliers credit for funding the purchase of the excavator CKD and CBU manufactured by Hitachi Sumitomo Heavy Industries Construction Crane Co Ltd Japan. It was sold by the assessee's company or one of its controlled entities. This transaction had nothing to do with its permanent establishment in India.

The Coram of Pramod Kumar (Vice President) and Sandeep S Karhail (Judicial Member) observed that there had to be cogent material to establish the fact that the interest income was attributable to the permanent establishment.

Relying on its earlier decision in the DCIT vs Marubeni Corporation, Japan, it held, "We approve the conclusion arrived at by the CIT(A) and decline to interfere in the matter."

While advocate Milind Chavan appeared for the appellant, the respondent was represented by advocate Ravi Sharma.