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India-France DTAA: ITAT Clarifies Taxation of PE-Related Interest Income

Introduction

In the realm of international taxation, disputes often arise concerning the interpretation and application of double taxation avoidance agreements (‘DTAA’). Such agreements aim to prevent double taxation of the same income in two different jurisdictions. The case of M/s Corning SAS India v. Deputy/Assistant Commissioner of Income Tax[i] is a notable illustration of one such dispute, where the Income Tax Appellate Tribunal, Delhi Bench (‘ITAT’) has rendered a decision concerning the taxation of interest on income tax refund received by a foreign entity operating in India.

Brief Facts

  • M/s Corning SAS India (‘CSI’), a French entity engaged in selling ophthalmic and life science products, established a branch office (‘BO’) in India in 1997. Effective from 01.02.2012, the entire business operations in India were transferred to a group company, rendering its Indian BO inactive during the assessment year (‘AY’) 2018-19.

  • During previous AYs (2001-02 and 2003-04), when its Indian BO was operational, CSI overpaid income tax (‘IT’) on its business profits, resulting in a refund. Further, CSI received Rs. 1,79,47,179/- as interest from the IT department on such IT refunds during the AY under consideration i.e. 2018-19. In its IT return, CSI offered the interest income for taxation in India under the provisions of the India-France DTAA at the rate of 10%.

  • The Assessing Officer (‘AO’) sought to tax such interest income at a higher rate of 40%, treating it as business income under a. 7 of the India-France DTAA, based on the premise that the BO constituted a Permanent Establishment (‘PE’) of CSI in India. The dispute resolution panel affirmed the AO’s decision, leading to an appeal by CSI before the ITAT wherein the central argument was whether the interest income is effectively connected with the PE of the assessee in India.

Held

The ITAT allowed the appeal by the assessee, setting aside the order of the AO and directed that the interest income on the IT refund be taxed at the rate of 10% under a. 12(2) of the India-France DTAA. This decision was based on the following findings:

  • The interest on IT refund received by the company is not effectively connected with the PE in India, as the BO had ceased business activities since February 2012.

  • A. 12(5) of the India-France DTAA, which deals with the taxation of interest income, does not apply in this case since the interest income is not effectively connected with the PE.

  • The ITAT also noted precedent-setting decisions and jurisprudential principles, including the Clough Engineering Ltd v. ACIT[ii] case, to support its conclusion.

Analysis

The ITAT’s decision underscores the importance of determining the effective connection of income with a PE for tax purposes, especially in the context of DTAA provisions. It emphasizes that the mere existence of a PE does not automatically subject all income to taxation under a. 7 of the DTAA.

The analysis provided by the ITAT elucidates the nuanced interpretation of treaty provisions, the necessity to examine the factual matrix of each case to ascertain the correct tax treatment and the application of treaty provisions to specific income streams.

Moreover, the ITAT’s reliance on precedent and legal principles highlights the consistency and coherence in international tax jurisprudence, providing clarity to taxpayers and tax authorities alike.


End Notes:

[i] [2024] 159 taxmann.com 359 (Delhi - Trib.), dated 06.02.2024.

[ii] [2017] 83 taxmann.com 170 (Delhi - Trib.), dated 13.04.2017.

 


Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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