Case Law Details
Aker Solutions India SDN BHD Vs DCIT (International Taxation) (ITAT Mumbai)
The assessee in appeal has assailed the order of CIT(A) in upholding the assessment order taxing the interest on income tax refund as business income under Article-7 of the India- Malaysia Double Taxation Avoidance Agreement (DTAA) @40% + surcharge @ 5% + cess @ 3%.
We find that issue of taxability of interest on income tax refund was considered by the Special Bench in the case of Clough Engineering Ltd. (supra). The Special Bench held that interest on income tax refund would be taxable under Article-11 and not as business profits connected with the PE of assessee. The relevant extract of the findings of Special Bench reads as under:-
“11.4 Thus, we are again left with the fundamental question as to whether the debt-claim in this case can be said to be effectively connected with the PE. We have already held that the claim is connected with the PE in the sense that it has arisen on account of tax deduction at source from the receipts of the PE. However, it is also a fact that payment of tax is the responsibility of the foreign company. The same is determined after computation of its income and the tax forms not an expenditure for earning the income but an item of appropriation of profit. Therefore, even if the debt is connected with the receipts of the PE, it cannot be said to be effectively connected with such receipts because the responsibility to pay the tax lies on the shoulders of the assessee-company from the final profit ascertained as on the last date of the previous year and on closing the books of account. It is for the company to pay the tax from any source available with it. It so happened in this case that the tax got automatically deducted from the receipts of the PE by operation of law. Such collection of tax by force of law would not establish effective connection of the indebtedness with the PE as ultimately it is only the appropriation of profit of the assessee company. However, we may add that we do not venture to say that the interest income has to be necessarily business income in nature for establishing the effective connection with the PE because that would render provision contained in paragraph 4 of Article XI redundant. Thus, there may be cases where interest may be taxable under the Act under the residuary head and yet be effectively connected with the PE. The bank interest in this case is an example of effective connection between the PE and the income as the indebtedness is closely connected with the funds of the PE. However, the same cannot be said in respect of interest on income-tax refund. Such interest is not effectively connected with PE either on the basis of asset-test or activity-test. Accordingly, it is held that this part of interest is taxable under paragraph No. 2 of Article XI. Thus, the ground referred to the Special Bench is partly allowed. The Division Bench shall dispose off the appeal in conformity with this order.”
Accordingly, the Assessing Officer is directed to tax interest on income tax refund under Article 11(2) of India- Malaysia DTAA. Consequently, ground no.1 to 3 of appeal are allowed.
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