DZ BANK INDIA REPRESENTATIVE OFFICE,MUMBAI vs. DCIT (IT) RG 2(1)(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद"य सद"य ,राजे"" राजे"" केकेकेके अनुसार अनुसार -PER RAJENDRA, AM- लेखा लेखा लेखा सद"य सद"य राजे"" राजे"" अनुसार अनुसार Challenging the order of the Assessing Officer(AO),passed u/s. 143(3) r.w.s. 144C(13) of the Act,in pursuance of the Directions,dtd.02.11.2015 of the Dispute Resolution Panel(DRP)-2, Mumbai,the assessee has filed the present appeal.The assessee had filed its return of income,on 29/11/2011,declaring total income at Rs.NIL.The assessment was completed on 18/12/ 2015, determining its income at Rs.21.20 crores.Main issue in the appeal is about existence of Permanent Establishment(PE) and taxability of certain items of income. Brief Facts:

2.DZ Bank AG Deutshce Zentral Genossenschaftsbank(DZ Germany) a tax resident of Germany. It obtained permission from the Reserve Bank Of India (RBI), on 20/02/0996,to establish a representative office in India. Accordingly, DZ Bank, India Representative Office (DZBI)was established.As per the approval of the RBI,DZBI was not allow to undertake any business activity in India and could not earn any income.The expenses incurred by it were to be met entirely through inward remittances foreign exchange from the head office. During the year under consideration,DZ Germany provided foreign currency loans to Indian companies that were in the nature of External Commercial Borrowings(ECB),as permitted under the foreign exchange regulations.On perusal of the ITS details the assessee found that you sums of TDS had been 692/M/16-DZ Bank made on the interest paid/payable by Indian customers to the assessee. Accordingly he directed the assessee to submit details of all incomes and in India and to reconcile the same with the income appearing in the ITS details.It submitted before the AO that it’s had office and overseas branches and income from Indian clients under the two heads i.e. interest income and processing charges.,that the income reflected in the ITS details was in the nature of interest on ECB provided by the head office/overseas branches(OB.s)to Indian entities,that TDS on the interest payable was borne by the Indian entities i.e. the borrowers,that as per the provisions of section 115 A (5) of the act of foreign company was exempt from furnishing a return of income in India where it only and interest income from foreign currency loans provided to Indian entities and appropriate taxes had been deducted at source on the aforesaid income, that accordingly DZ Bank India did not report the aforesaid income. 3.After considering the nature of the activities carried out by the assessee for its head office in Germany,the AO asked it to explain as to why DZ-Bank-India-Representative-Office should not be considered a Permanent Establishment(PE)of the head office in India and that the interest income/any other income and by the head office from the operations in India should not be taxed at the rate of 40% as per the provisions of the Act.Vide its letter,dated 19/03/2015,the assessee filed detailed submissions and relied upon certain case laws. The AO,after considering the letter of the assessee, held that DZ bank India as a representative of the German entity was actually involved in various activities on be of its head office, that DZ bank India would approach Indian banks/financial institutions/corporate entities and would appraise them about the products and services that the German entity would offer, that it would initiate discussion with the potential customers, that DZ bank India would approach its head office/overseas branches with the funding opportunity, that it would collect from the customers and provide the necessary information to facilitate that due diligence at the head office/overseas branches, that it would collect and provide information in respect of the financial statements of the clients, revenue projections, history and background of the company for the head office/ overseas branches, that the head office/overseas branches would examine the documents and for further information would contact DZ bank India, that DZ bank India would also provide the local market opinion on the clients, that it would be contacted by the clients if they had some query on the terms of credit facility, that DZ bank India was also involved in discussing the terms of the credit facility on the instructions of head office/overseas branches, that post this 692/M/16-DZ Bank percent of the credit facility the head office/overseas branches would ascertain the reason for the delay in the payments and interest payments as per the agreed repayment schedule through DZ bank India, that it would also assist in recovery where there were such delays, that business of the assessee with Indian customer could not be done without involvement of the representative office, there was real and intimate relation between the German entity and the representative office,that DZ bank India contributed directly and indirectly and earning the business income and the processing fees. He further held that income had accrued to the German entity from business connection in India, that some of the functions of the representative office could be regarded as auxiliary in character,On the above lines, the AO issued a draft order to the assessee.

4.Challenging the draft order, the assessee filed various objections before the DRP and made elaborate submissions. It also relied upon several case laws. After considering the available material, the DRP held that the AO had recorded the functions of the assessee that included identifying potential borrower in India and initiating discussion in connection with the banking business of the German entity, that the India office would inform the head office and would receive instructions from German entity, that it used to collect necessary information and documentation from the clients and would forward the same to the headquarter,that it would participate in the discussion with the clients on behalf of the head office and would finalise the terms of credit, that it would also act as signatory on the credit facility documents,that it would follow up with the customers after lending for the timely payment of interest and recovery of principal amount. The DRP further held that the actual functions performed by the assessee proved that India office constituted a PE for the German entity,that taxability of interest under the Act was not in dispute,that the only dispute regarding taxability under the act was whether the provisions of section 9 (1) (i) or section 9 (1) (v) would apply, that provisions of section 9 would apply only in the cases of non-residents and that it had no relevance in case of a resident, that the assessee had PE in India, that all the provisions of the Act would apply as they would apply to a resident. With regard to Article 11 of the India Germany tax treaty, the DRP held that taxability of interest income at the rate of 10% in the hands of head office was not relevant as the India office constituted a PE.With regard to the order of Clough Engineering Ltd.(2011-64-ITAT-DEL-SB-INTL)and the judgment of the Hon’ ble Bombay High Court in the case of DHL OperationsB.V. (TS-439-HC-2014), relied upon by 692/M/16-DZ Bank the assessee,the DRP held that both the decisions were in relation to taxability of interest on income tax refund granted to a PE in India under section 244 A of the Act,that the responsibility of paying tax on the income of a PE was the responsibility of the assessee and not that of the PE, that tax payable on the income earned by the PE was not a part of the income earning activity of the PE,that income tax was not a business income but was appropriation of profits of the PE, that the payment of income tax was not in the course of business transaction, that it was never held in the above referred two cases that all interest incomes of the PE was assessable in the hands of the HO or that even the interest income earned as part of business of the PE was also assessable in the hands of the actual,that in the case under consideration the interest income had been earned by the PE as part of business of money lending carried on by it. Referring to the asset test and activity test laid down in the above referred two decisions, the DRP observed that from the functions and activities done by the India office proved that it was actively involved in the business of money-lending,that India office was restrained by RBI from receiving funds in its account for money-lending,that the funds were transferred directly by the schedule to the account of the borrower,that the interest and repayment was received by the PE directly,that there was no difference between the funds of the PB and the funds of the HO/ overseas branches,that the funds of the PE and HO were one and the same,that they were inseparable and indistinguishable from each other,that all the funds of the PE belonged to the HO, that it would make no difference whether the money was lent in India by the HO was routed to the Indian office/PE or was given directly, that the India office constituted PE,that interest income earned from business of money- lending in India either by the head office or the branch would be assessable as income of such PE, that both the decisions cited by the assessee had no application to the facts of the present case.With regard to report filed with the RBI, the DRP held that it was not shown that the facts of different activities including participation discussion for money-lending, negotiating the deal,signing of the agreement played by Indian office in recovery and repayment was ever brought to the notice of the RBI, that the RBI had never applied its mind in that regard,that the reports were filed in a routine manner,that it was not shown that same were verified for were enquired into,that such reports were done early accepted on face value, that the permission granted by the RBI was irrelevant to determine the true character of the activities and the functions of India office, that the relation between the money-lending by head office/branch offices and the function done by the India office was real, intimate and intricate,that the money- 692/M/16-DZ Bank lending business could not have been conducted by the head office or the branch in the manner it was being done without the active role of the Indian office,that the Indian entity was not a mere communication channel but played a serious and significant role that included even signing of agreements and also taking steps for recovery in case of delay in default, the India office would participate actively in the deal-making including signing of agreements though in the name of head office/branch, that it participated in the discussion and negotiations, that it also constituted an agency PE,that the name on whose behalf the agreement was signed was not important to prove the existence or absence of a PE,that the mere fact that the terms of the deal were approved by the age of before it resulted into an agreement was irrelevant, that there was no denial that India office played the significant role, that the services rendered by the assessee could not be termed as auxiliary or preparatory, that the activities performed were carried out in relation to furtherance of the main object of the head office i.e. money-lending to Indian enterprises,that the interest income received was effectively connected with such a PE. With regard to the arguments advanced by the assessee that the commitment fees received was not interest under the treaty, the DRP held that fees was also inextricably linked to India office and that it was part and parcel of money-lending business, that it was the service charges for non-utilisation of the funds committed to a borrower, that it was also assessable as income of the PE,that it was received for money-lending business only, that the same was assessable as interest income of the PE,that once it was held that assessee had a PE the Act would be applied to all the incomes effectively connected to the PE.Finally,the DRP approved the draft order submitted by the AO. In pursuance of the directions of the DRP, the AO finalised the assessment, as stated earlier. 5.Before us,The Authorised Representative (AR)contended that the German bank had no branch office in India, that only a representative office was established as per the permission of the RBI, that the representative office was not allowed carry on banking business, that Indian entity was doing liasoning work only, that the German bank would lend money to Indian borrowers, that the entire funding was from Germany, that the German bank had no PE in India. He referred to the provisions of section 9 (1) (v) and section 115 A of the Act and stated that there was no business connection between the German bank and the Indian entity. Referring to the Article 11 of the India Germany tax treaty,he stated that the assessee had no PE in India. He also argued that the activity report was filed to RBI every year, that the RBI never raised any objection in that regard, he referred cases of Mitusi & Company(399 ITR 505),Nagase & Co.(ITA/1800/ 692/M/16-DZ Bank Mum/2007,dt.12/01/2017), Jamshedpur Motor Accessories Stores(313 ITR 95),Sumitomo Mitsui Banking Corporation(136 ITD 66)and stated that even if there was PE debt claim had to be connected to PE, that the AO had failed to establish the connection, that even if Article 7 of the Treaty was applicable what was taxable was the part of income that was connected with PE. On a query by the Bench,it was stated that assessment for the earlier three years i.e. assessment years 2008-09,2009-10 and 2010-11,were reopened by the department. 5.1.The Departmental Representative (DR)stated that the involvement of the representative office in scouting the customers, giving specific inputs to the HO and its branches about the prospective clients, negotiating with the clients, signing loan agreements and follow up in recovery of interest and principals were the functions of main business of banking of the assessee, that those functions could not be regarded as auxiliary or preparatory,as claimed by the assessee,that the India Representative office habitually exercised authority to conclude contracts for and on behalf of the head office or the overseas branches,that it also secured orders for the head office/overseas branches, that the AO had rightly held that representative office was the PE of the assessee in India that any business transaction of head office in India was incomplete without active participation and involvement of the assessee, that the India office constituted a business connection, that the Indian entity was actively participating in the business of the head office and its other branches, that the RBI was not authorised to decide the taxability of income, that provisions of section 9 (1) (i) were applicable, that entire moneylending work was being done by the assessee in India, that the existence of PE and business connection was established by the AO/DRP conclusively.He relied upon the ruling of the AAR in the case of UAE Exchange Centre,LLC,dated 26/05/2004. 6.We have heard the rival submissions and perused the material before us.We find that the DRP/AO had held that DZ India Bank was the PE of the German Entity, that the services rendered by the Indian Bank were not auxiliary or preparatory. They also held that the Indian bank was authorised to execute contracts on behalf the German entity,that the German Bank, having PE in form of the Indian entity was liable to tax for the interest income and commitment fees.In our opinion,the whole controversy revolves around the status of Indian entity i.e. as to whether it could be treated PE of the German bank or not.If the answer is positive the order of 692/M/16-DZ Bank the AO has to be upheld.But,in case of a negative reply the claim of the assessee had to be approved. 6.1.We find that the AO/DRP as well as the assessee have discussed theories about the PE and taxability of income earned by the assessee at length i.e.concept of PE and the basic ingredients of the PE.But,we nowhere find any reference to the contracts entered in to by the German bank with its borrowers and the terms and conditions of such transactions.The assessee claims that Indian Bank was performing certain function that were auxiliary or preparatory.But,the claim has not been tested with reference to the loan transactions for the year under consideration.Tax has to be determined on the basis of peculiar facts of a year.General observations/general submissions about the theory is not sufficient to levy taxes or claim a particular deduction.Thus, in our opinion both of them have not done their job satisfactorily. The matter needs further verification of facts.It becomes more important,when we find that assessments of earlier three years have been re-opened.So,we hold that in the interest of justice matter should be restored back to the file of the AO for fresh adjudication.As far as cases relied upon by the assessee are concerned,it is suffice to say that in absence of basic facts no case law is of any help.Cases are decided on their particular facts.It has not been proved that similar facts were there in the case under considera - tion.So,we would direct the AO to go through the various transactions entered in to by the German Bank with the Indian borrowers and find out as to whether the functions performed by the DZ India Bank were of preparatory /auxiliary nature or it was working as an agent of the German Entity.The correspondence between the borrowers,the lender and the Indian Bank as well as the documents related with money lending transactions should to examined to arrive at a definite conclusion.As the main issue i.e. existence of PE in India is being restored back to the file of the AO, so,we are not adjudicating the other issues.

As a result,appeal filed by the assessee stands partly allowed. फलतः िनधा"रती "ारा दािखल क" गई अपील अंशतः मंजूर क" जाती है Order pronounced in the open court on 2nd May,2018. आदेश क" घोषणा खुले (यायालय म) *दनांक 2 मई,2018 को क" गई । (रामलाल नेगी रामलाल नेगी / Ramlal Negi) (राजे(+ / Rajendra) रामलाल नेगी रामलाल नेगी (याियक सद-य / JUDICIAL MEMBER लेखा लेखा सद"य सद"य / ACCOUNTANT MEMBER लेखा लेखा सद"य सद"य मुंबई Mumbai; "दनांक/Dated : 02.05.2018. Jv.Sr.PS.