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Company paying tax in Germany can claim tax concessions in India
September, 16th 2008

In what could open a floodgate to tax concession claims, a tax tribunal has ruled that if a company, irrespective of its location, pays trade tax in Germany, it can claim concessions provided by the tax treaty with Germany.

The ruling was given by a division bench of Income-tax Appellate Tribunal (ITAT). Delivered by KC Singhal and RS Syal, the ruling was on an appeal filed by the Income-tax department in the case of Chiron Behring GMBH & Co.

The limited partnership firm, registered in Germany, has been allowed by ITAT to claim a lower interest rate of 10% on the royalty and technical services fee received from India. The ITAT ruled that Chiron Behring is a resident in Germany because it was paying trade tax in Germany and was, therefore, entitled to tax concession provided under the Indo-German tax treaty.

The issue here was whether the company was entitled to a lower tax rate of 10% of royalty and fees for technical services generated in India, on the basis of the Double Taxation Avoidance Agreement (DTAA) between Indian and Germany. The Indo-German DTAA allows a lower tax rate of 10% on a German company while the rate of taxation under the Indian I-T Act is 20%.

The assessing officer held that the company was not a German resident for tax purposes as it was not paying tax in Germany. To this, the German company replied that it was a resident of Germany on the strength of the fact that it was paying trade tax in Germany. The assessing officer differed on this point saying the trade tax paid by the company in Germany is not a tax mentioned in DTAA.

According to him, it is like a turnover tax. From this, the assessing officer construed that since it did not pay in Germany the kind of tax mentioned in DTAA, the company was not entitled to be considered a resident of Germany and the concession provided under DTAA.

Mr Singhal, in his order, pointed out that the assessing officer himself had accepted that the company is a resident of Germany by his admission that the company is a limited partnership firm under German Law. Secondly, Mr Singhal pointed out that trade tax is among the four kinds of tax that figure in the Indo-German DTAA. ITAT also pointed out that the assessing officers charge that trade tax in Germany is tantamount to a turnover tax, was made without any foundation.

Gewerbesteuer is somewhat similar to the Indian municipal tax paid by every business in Germany, irrespective of his residential status, to the local town or village council. The tax is computed as a percentage of profit.

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