Interest Payments to China Development Bank Aren’t Taxable in India Under Article 11 of India-china DTAA | ITAT

Case Details: Income Tax Officer vs. Tata Teleservices Ltd. - [2024] 165 taxmann.com 603 (Delhi - Trib.)

Judiciary and Counsel Details

• Dr. B.R.R. Kumar, Accountant Member & Sudhir Pareek, Judicial Member
• Vijay B. Vasanta, CIT-DR for the Appellant.
• Tarun Gulati, Sr. Adv. & Ms Ananaya Kapoor, Adv. for the Respondent.

Facts of the Case

The assessee paid interest to the China Development Bank (CDB) in the relevant assessment year. The assessee contended that Article 11(3) of the India-China DTAA provides that interest derived by any financial institution wholly owned by the Government of China shall be exempt from tax in India. Considering CDB as a financial institution wholly owned by the Government of China, the assessee did not withhold taxes on the interest payment to CDB.

The Assessing Officer (AO) contended that the Government’s share in the bank was only 36.54%, and other entities held the remaining shareholding. Thus, CDB cannot claim the benefit of the DTAA; hence, the assessee was liable to deduct tax under section 195.

On appeal, the CIT(A) allowed the assessee’s appeal. Aggrieved by the order, the AO preferred an appeal to the Delhi Tribunal.

ITAT Held

The Tribunal held that the shareholding of the bank comprised as follows:

a) Ministry of Finance, China (36.5% of shareholding)

b) Central Huijin Investment Ltd.: a wholly state-owned limited liability company

c) Buttonwood Investment Company: limited liability company solely funded by the State Administration of Foreign Exchange

d) National Council for Social Security Fund – operation arm of the National Social Security Fund

The bank’s audited financial statements for the relevant year clearly stated that Central Huijin Investment is a wholly-owned subsidiary of China Investment Corporation. Buttonwood Investment Holding Company Ltd. is a wholly-owned subsidiary of the State Administration of Foreign Exchange of China. The bylaws of the National Council for Social Security Fund clearly provided that it was a public institution directly under the state council and, accordingly, wholly owned by the Government of China.

Even the Protocol to India-China DTAA specifically provided that CDB was a financial institution wholly owned by the Government of China. Thus, CDB, being a financial institution wholly owned by the Government of China, is covered under the exemption provided by Article 11 of India-China DTAA. Accordingly, the interest payment made by the assessee to CDB was not taxable in India.