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Mumbai Tribunal rules that foreign bank’s interest income from External Commercial Borrowings (ECBs) will be characterized as interest income, instead of business profits and taxable at lower rate of 10% under the tax treaty
The taxpayer[1] is an Indian branch of a foreign bank incorporated in Netherlands. During the tax year under consideration, taxpayer had earned interest income from ECBs. The tax authority sought to tax such income as business income of taxpayer (i.e., a permanent establishment of the foreign bank) at 40% (rate as applicable to foreign company), instead of applying rate of 10% as prescribed under Interest income Article in the India-Netherlands double taxation avoidance agreement (DTAA).
Mumbai Tribunal noted that it is not in dispute that the Indian branch results in emergence of permanent establishment (PE) in India and that the nature of income is interest. The limited issue under consideration is on the applicable rate of tax on such interest income under the DTAA.
The Tribunal observed that the business profits article of the DTAA expressly excludes any item of income which is separately provided in other Articles of the DTAA. India-Netherlands DTAA specifically has interest income article which also provides taxation rights to source jurisdiction (India) at a rate not exceeding 10%. Thus, based on the provisions of DTAA and noting that there is no dispute regarding the nature of income to be taxed is interest, the Tribunal held that interest income is taxable at the rate of 10%.
[1] Cooperative Rabobank UA [TS-152-ITAT-2023 (Mum)], Assessment Year 2012-13