India: Tax treatment of interest income under treaty with Japan

The income, while not taxable as business income, was taxable as interest under the India-Japan income tax treaty.

India-Japan income tax treaty

The Mumbai Bench of the Income-tax Appellate Tribunal held that taxpayer’s interest income was not attributable to a permanent establishment (PE) in India.

Rather, the tribunal found that the income, while not taxable as business income, was taxable as interest under the India-Japan income tax treaty.

The tribunal explained that:

  • The mere existence of a PE is not sufficient to invoke taxability of interest income under the interest article of the tax treaty unless this interest income is directly or indirectly attributable to the PE.
  • Interest income is effectively connected to a PE only when the connection is such that it leads to taxability in the hands of the taxpayer under the business income article of the tax treaty.

The case is: DCIT v. Marubeni Corporation, Japan.

Read a June 2022 report [PDF 310 KB] prepared by the KPMG member firm in India

 

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