Case Law Details
Interest earned on Income-tax refund from tax department cannot be considered as arising from indebtedness that is effectively connected with Permanent Establishment and is therefore taxable at 15 percent as per Article XI of India-Australia tax treaty.
ACIT Vs. Clough Engineering Ltd (ITAT Delhi – Special Bench)- Under Article 11(4) of the DTAA, interest from indebtedness “effectively connected” with a PE of the recipient is taxable under Article 7 and not under Article 11. Though the interest was connected with the PE in the sense that it has arisen on account of TDS from the receipts of the PE, it was not “effectively connected” with the PE either on the basis of asset-test or activity-test. The payment of tax was the responsibility of the foreign company and the fact that it was discharged by way of TDS did not establish effective connection of the indebtedness with the PE. In order to be “effectively connected”, it is not necessary that the interest income has to be necessarily business income in nature. Even interest assessable under “other sources” can qualify.
IN THE INCOME TAX APPELLATE TRIBUNAL
SPECIAL BENCH ‘B’ DELHI
BEFORE SHRI R.V. EASWAR : HON’BLE PRESIDENT,
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