R And B Falcon A Pvt Ltd Vs ACIT (ITAT Dehradun)
Interest on Income-tax Refund Taxable at DTAA Rate When No PE in Year of Receipt: ITAT Dehradun Allows Treaty Benefit to Australian Company
The Dehradun Bench of the Income Tax Appellate Tribunal, Dehradun Bench allowed the appeal of R & B Falcon A Pty Ltd. (Australia) for AY 2022-23, holding that interest on income-tax refund of ₹2.02 crore is taxable at 15% under Article 11 of the India–Australia DTAA, and not as business income at normal rates.
The assessee had received interest u/s 244A during AY 2022-23 relating to refunds for AYs 2010-11 and 2014-15, years in which it admittedly had a Permanent Establishment (PE) in India. The AO and CIT(A) taxed the interest as business income, relying on the Uttarakhand High Court decision in BJ Services Company Middle East Ltd., holding that the interest was effectively connected with the earlier PE, even though no PE existed in the year of receipt.
The ITAT rejected this approach and held that existence of PE has to be examined in the year of receipt of interest income, not in the year to which the refund pertains. Relying on the coordinate-bench decision in Dolphin Drilling Ltd. and the Supreme Court ruling in Samsung Heavy Industries Ltd., the Tribunal held that mere past existence of a PE is insufficient to deny treaty benefit if no business activity or PE exists in the relevant year.
Since it was undisputed that the assessee did not have any PE in India during AY 2022-23, the interest on refund could not be treated as effectively connected with a PE. Consequently, Article 11(1) & (2) of the India–Australia DTAA applied, capping Indian taxation at 15% of the gross interest.
Accordingly, the ITAT set aside the orders of the lower authorities, accepted the assessee’s claim, and allowed the appeal in full.
FULL TEXT OF THE ORDER OF ITAT DEHRADUN
