Case Law Details
Koninklijke Philips N.V C/o Deloitte Touché Tohmatsu India Pvt. Ltd. Vs DCIT (ITAT Kolkata)
ITAT Kolkata held that interest on income tax refund is a ‘debt claim’ payable by the Revenue in terms of Article 12(3)(a) of the India-Italy Treaty and thus such interest is not taxable and no TDS ought to be done by the AO.
Facts- Assessee is based out of Netherlands and does not have a permanent establishment (PE) in India. After filing the original return of income on 03.09.2008, it was revised return by reporting total income at Rs.25,40,79,858/- on 29.03.2010. Assessment was completed u/s. 143(3) r.w.s. 144C(13) on 18.10.2012 assessing total income at Rs.162,74,89,392/- wherein additions were made in respect of Management Support Service Agreement (MSSA) and Research and Development Co-operation Agreement (RDCA). The matter travelled in appeal before the Coordinate bench of ITAT, Kolkata in ITA No. 1889/Kol/2012 in respect of these additions which was allowed vide order dated 25.10.2018 by holding the receipts in MSSA and RDCA as not taxable in India.
Subsequently, Ld. AO passed the order giving effect to the order of Coordinate Bench of ITAT, Kolkata (supra) on 23.07.2019 u/s. 143(3) r.w.s. 254 of the Act determining total income at Rs.25,57,77,930/- and refund including interest u/s. 244A(1) payable to the assessee at Rs.25,22,16,230/-. From the order giving effect to the appellate order of ITAT, assessee raised the issue before Ld. CIT(A) in not granting of interest u/s. 244A(1A) of the Act and deduction of tax at source on interest payment u/s. 244A(1) of the Act of Rs.11,50,45,854/-.
Conclusion- Hon’ble High Court of Madras in the case of Ansaldo Energio SPA Vs. CIT (IT) has held that the interest on income tax refund is a ‘debt claim’ payable by the Revenue in terms of Article 12(3)(a) of the India-Italy Treaty and thus such interest is not taxable and no TDS ought to be done by the AO.
Held that in the present case of the assessee, the beneficial provision restricting the scope of taxability of interest in terms of Article 12(3)(a) of the India-Italy DTAA namely, non-taxability of interest on income tax refund by virtue of it being a ‘debt claim’ from the Government of India as held by the Hon’ble Madras High Court would be applicable in view of the Protocol to the India-Netherlands DTAA and, therefore, the interest in question received by the assessee u/s. 244A(1) from the Government of India will not be taxable. Consequently, no tax was required to be deducted thereon by the Ld. AO while remitting the said interest to the assessee and thus AO is directed to grant the refund of the TDS so done.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
All these appeals by assessee are directed against the separate orders of Ld. CIT(A), Kolkata-22 vide Order Nos. ITBA/APL/S/250/2021-22/1035034204(1) dated 23.08.2021 for A.Y. 2008-09, ITBA/APL/S/250/2021-22/1035162630(1) dated 28.08.2021 for AY 2009-10, ITBA/APL/S/250/2021-22/1035162589(1) dated 28.08.2021 for AY 2010-11, ITBA/APL/S/250/2021-22/1035162672(1) dated 28.08.2021 for AY 2011-12 & ITBA/APL/S/250/2021-22/1035162702(1) dated 28.08.2021 for AY 2012-13 passed against the assessment order u/s 254 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) by ACIT(IT), C-1(2), Kolkata dated 23.07.2019, 13.11.2019 (for AYs 2008-09 and 2009-10) and 07.02.2020 (for AYs 2010-11 to 2012-13).
2. Shri Ketan Ved, CA appeared on behalf of the assessee and Shri G. H. Sema, Addl. CIT appeared on behalf of the revenue.
3. Common grounds of appeal except variance in amount raised by the assessee in all the assessment years i.e. ground nos. 1 to 3 read as under:
“1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Commissioner of Income-tax (Appeals) [‘CIT(A)’] dated 28 August 2021 under section 250 of the Income-tax Act, 1961 (‘IT Act’) against the impugned order passed by the Learned Assessing Officer (‘Ld. AO’) under section 143(3) r.w.s. 254 of the IT Act dated 23 July 2019, is bad in law and on facts.
2.1 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in remanding back the matter to the Ld. AO for verifying the applicability of the provisions of section 153(5) of the IT Act, in relation to granting of additional interest under section 244A( 1 A) of the Act on the refunds determined by the Ld. AO in the impugned order under section 143(3) r.w.s. 254 of the IT Act dated 23 July 2019, without appreciating the fact that said order was passed by the Ld. AO considering the order of the Hon’ble Kolkata Tribunal under section 254 dated 25 October 2018 wherein no specific directions were given to the Ld. AO for conducting active verification on any of the issues.
2.2 That the Ld. CIT(A) failed to appreciate that the Ld. AO did not mention the cause of delay in passing the order under section 143(3) r.w.s. 254 of the IT Act dated 23 July 2019 and whether necessary approval for delay in passing the order was obtained from Ld. Principal CIT as required under section 153(5) of the Act which was incumbent upon the Ld. AO to do so as per facts and circumstances of the case and in Law.
3.1 That on the facts and in the circumstances of the case and in law, the Ld. AO erred in deducting taxes at source under section 195 of the IT Act, on payment of interest under section 244A of the IT Act of Rs. 11,50,45,080 to the Appellant as determined in the impugned order under section 143(3) r.w.s. 254 of the IT Act dated 23 July 2019, and the Ld. CIT(A) has further erred in confirming such deduction of taxes at source on interest under section 244A.
3.2 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that no tax should be deducted at source on payment of interest under section 244A to the Appellant, being, a tax resident of the Netherlands, by application of the Most Favoured Nation (MFN) Clause contained in India-Netherland double Taxation Avoidance Agreement (‘DTSS’/’tax treaty’) read with the restricted scope of taxation of ‘Interest’ under Article 12 of the India-Italy DTAA.”
3.1. Common ground i.e. ground no 4 in respect of AYs. 2009-10 to 2012-13 reads as under:
“4.1. That on the facts and in the circumstances of the case and in law, the Ld. AO erred in not granting interest under section 244A(I) of the Act to the Appellant for the period from the passing of the impugned order under section 143(3) r.w.s. 254 being 7 February 2020 till the date of actual grant of refund to the Appellant being 28 May 2020, and the Ld. CIT(A) further erred in confirming such short grant of interest under section 244A.
4.2. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in inferring the words ‘date on which refund is granted’ as contained in the provisions of section 244A of the IT Act, to mean the date of passing of the order granting such refund instead of the date of actual receipt of such refund to the bank account of the Appellant.
4.3. That on the facts and in-the circumstances of the case and in law, the Ld. CIT(A) erred in not allowing interest under section 244A(I) of the Act, to be granted to the Appellant till the date of receipt of the refund by holding that the Appellant had failed to submit evidence to show that refund was credited several days after the order granting such refund was passed, without appreciating that details of such delay in credit of refund was duly provided in the submissions filed before him.”
3.2. Ground nos. 5 and 6 in respect of AY. 2010-11 reads as under:
“5.1. That on the facts and in the circumstances of the case and in law, the Ld. AO erred in levying interest under section 234C of the Act amounting to Rs.49,80,400 and the ld. CIT(A) further erred in confirming such levying of interest u/s. 234C without appreciating that the entire income of the Appellant was subjected to tax deduction at source and no tax liability for computation of interest u/s. 234C would arise.
5.2. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not deleting the levy of interest by the Ld. AO under section 234C of the Act, by holding that the Appellant had failed to show how the calculations of the interest by the Ld. AO was erroneous, without appreciating the fact that the impugned order under section 143(3) r.w.s. 254 dated 7 February 2020 itself reflected that the entire income of the Appellant was subjected to tax deduction at source thereby making the levy of interest under section 234C erroneous.
6.1. That on the facts and in the circumstances of the case and in law, the Ld. AO erred in adjusting other payments amounting to Rs.3,16,027 from the refund arising to the company and the Ld. CIT(A) further erred in confirming adjustment without considering the fact that no such payment was made to the Company.
6.2. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not deleting the adjustment of other payments amounting to Rs.3,16,027 as made by the Ld. AO in the computation of refund by holding that the Appellant had failed to provide any details for the same, without appreciating that the entire contention of the Appellant itself was the failure on part of the Ld. AO in providing the details or reasons for making such adjustment whilst computing the refunds due to the Appellant.”
4. At the outset, we dispose of the common grounds of appeal for all the assessment years under appeal i.e. ground nos. 1 to 3. For arriving at the conclusion, we are taking the lead case for AY 2008-09 and the result of which will be applied in all the assessment years.
5. Brief facts of the case are that assessee is a non-resident company incorporated under the laws of Netherlands. It is the parent company of Philips Group which operates in the areas of consumer electronics domestic appliances, components and medical systems. Assessee is based out of Netherlands and does not have a permanent establishment (PE) in India. After filing the original return of income on 03.09.2008, it was revised return by reporting total income at Rs.25,40,79,858/- on 29.03.2010. Assessment was completed u/s. 143(3) r.w.s. 144C(13) on 18.10.2012 assessing total income at Rs.162,74,89,392/- wherein additions were made in respect of Management Support Service Agreement (MSSA) and Research and Development Co-operation Agreement (RDCA). The matter travelled in appeal before the Coordinate bench of ITAT, Kolkata in ITA No. 1889/Kol/2012 in respect of these additions which was allowed vide order dated 25.10.2018 by holding the receipts in MSSA and RDCA as not taxable in India.
5.1. Subsequently, Ld. AO passed the order giving effect to the order of Coordinate Bench of ITAT, Kolkata (supra) on 23.07.2019 u/s. 143(3) r.w.s. 254 of the Act determining total income at Rs.25,57,77,930/- and refund including interest u/s. 244A(1) payable to the assessee at Rs.25,22,16,230/-. From the order giving effect to the appellate order of ITAT, assessee raised the issue before Ld. CIT(A) in not granting of interest u/s. 244A(1A) of the Act and deduction of tax at source on interest payment u/s. 244A(1) of the Act of Rs.11,50,45,854/-.
5.2. Before the Ld. CIT(A) detail and exhaustive submission was made in respect of the applicable law and the relevant provisions to substantiate its claim. Ld. CIT(A) principally agreed with the contentions of the assessee on the issue of not granting of interest u/s. 244A(1A) of the Act but in absence of the relevant information relating to various dates from which the infringement of time limits could be worked out, he disposed of the matter by giving a direction to the Ld. AO for verification of records, based on which additional interest be granted as envisaged in section 244A(1A) of the Act. Ld. CIT(A) thus allowed this ground for statistical purpose which was subject to verification by the Ld. AO.
5.3. On the issue relating to TDS done on interest paid u/s. 244A(1)(a) of the Act, Ld. CIT(A) did not find favour with the detailed submission made by the assessee on the double taxation avoidance treaty application and dismissed the relevant grounds on this issue.
5.4. In respect of appeal relating to AY 2009-10, apart from the other two issues referred above another issue relating to short granting of interest u/s. 244A of the Act i.e. not granting interest upto the date of granting of refund, has been raised by the assessee. This issue was raised before the Ld. CIT(A) by way of an additional ground which was dismissed. On this issue it was submitted by the assessee that the date from which the grant of interest on refund starts is not in dispute, the only dispute is whether the interest should be granted up to the date of preparation of order giving effect to the order passed by ITAT i.e. on 13.11.2019 or up to the date of actual receipt of refund by the assessee i.e. on 02.03.2020. This issue has been raised for other three assessment years also i.e. AYs 2010-11, 2011-12 and 2012-13.
5.5. Further, in respect of AY 2010-11 there are two other grounds in respect of erroneous levy of interest u/s. 234C of the Act and erroneous adjustment of other payments against the refund determined by the Ld. AO. Aggrieved by all the above issues in the respective assessment years, assessee is in appeal before the Tribunal.
6. Before us, Ld. Counsel Shri Ketan Ved has placed on record brief note on the issues involved in these five appeals along with arguments for each of the respective assessment years. Ld. Counsel at the outset referred to the provisions of section 244A(1A) of the Act which provides for additional interest @3% p.a. on the amount of refund determined vide order giving effect to the order of Hon’ble ITAT for the period beginning from the date following the date of expiry of the time allowed u/s. 153(5) of the Act up to the date on which the refund is granted. He further stated that section 153(5) of the Act provides for giving effect to the order u/s. 254 within a period of three months from the end of the month in which the order is received by the Pr. Commissioner/Commissioner of Income Tax.
6.1 He also referred to the first proviso to section 153(5) of the Act and submitted that according to it, if it is not possible for the AO to give effect to such order for reasons beyond his control, the AO may request the Pr. Commissioner or Commissioner in writing to provide additional period of six months. Based on this proposition of law, Ld. Counsel submitted that in the instant case, Hon’ble ITAT had passed the order on 25.10.2018, copy of which is placed on record. Ld. AO has passed the order giving effect to the said order (impugned order only on 23.07.2019). Considering these two relevant dates, Ld. Counsel submitted that since more than six months have elapsed after the passing of the order by the Hon’ble ITAT and since there is nothing on record suggesting granting of additional six months for extension of time line by the Pr. Commissioner or Commissioner for passing the effect order Ld. Counsel believes that the time limit prescribed u/s. 153(5) of the Act has been breached. Accordingly, assessee is entitled for additional interest u/s. 244(1A) from the period beginning from the date following the date of expiry of the time allowed u/s. 153(5) to the date on which the refund has been actually granted to the assessee. The refund has been actually credited to the bank account of the assessee on 26.08.2019.
7. Per contra, Ld. Sr. DR placed reliance on the order of the Ld. CIT(A) wherein the direction has been given to the Ld. AO for verification of certain facts.
8. We have heard the rival contentions and perused the material available on record. Before adverting on the issue raised before us in respect of claim of interest u/s. 244A(1A) of the Act, we apprise ourselves with the provisions of section 244A(1A) and section 153(5) of the Act, which are reproduced as under :
8.1. “[Interest on refunds.
6 244A. (1) 7[Where refund of any amount becomes due to the assessee under this Act], he shall, subject to the provisions of this section, be entitled to receive, in addition to the said amount, simple interest thereon calculated in the following manner, namely :—
(a) where the refund is out of any tax 8[paid under section-115WJ or] 9 [collected at source under section-206C or] paid by way of advance tax or treated as paid under section-199, during the financial year immediately preceding the assessment year, such interest shall be calculated at the rate of 10[one-half per cent] for every month or part of a month comprised in the period from the 1st day of April of the assessment year to the date on which the refund is granted:
Provided that no interest shall be payable if the amount of refund is less than ten per cent of the tax as determined 11[under 12 [sub-section (1) of section-115WE or] subsection (1) of section-143 or] on regular assessment;
(1A) In a case where a refund arises as a result of giving effect to an order under section 250 or section 254 or section 260 or section 262 or secti9on 263 or section 264, wholly or partly, otherwise than by making a fresh assessment or reassessment, the assessee shall be entitled to receive, in addition to the interest payable under subsection (1), an additional interest on such amount of refund calculated at the rate of three per cent per annum, for the period beginning from the date following the date of expiry of the time allowed under sub-section (5) of section 153 to the date on which the refund is granted.”
8.2. “153(5) Where effect to an order under section 250 or section 254 or section 260 or section 262 or section 263 or section 264 is to be given by the Assessing Officer or the Transfer Pricing Officer, as the case may be, wholly or partly, otherwise than by making a fresh assessment or reassessment or fresh order under section 92CA, as the case may be, such effect shall be given within a period of three months from the end of the month in which order under section 250 or section 254 or section 260 or section 262 is received by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, as the case may be, the order under section 263 or section 264 is passed by the Principal Commissioner or Commissioner:
Provided that where it is not possible for the Assessing Officer or the Transfer Pricing Officer, as the case may be, to give effect to such order within the aforesaid period, for reasons beyond his control, the Principal Commissioner/Commissioner on receipt of such request in writing from the Assessing Officer or the Transfer Pricing Officer, as the case may be, if satisfied, may allow an additional period of six months to give effect to the order:
Provided further that where an order under section 250 or section 254 section 260 or section 262 or section 263 or section 264 requires verification any issue by way of submission of any document by the assessee or any other person or where an opportunity of being heard is to be provided to the assessee the order giving effect to the said order under section 250 or section 254 or section 260 or section 262 or section 263 or section 264 shall be made within the time specified in sub-section (3).”
9. From the perusal of section 244A(1A) of the Act, we note that additional interest under this section is attracted only if the conditions of section 153(5) of the Act are breached. Therefore, from the perusal of section 153(5) of the Act, it emerges that an order giving effect to an order of Hon’ble ITAT u/s. 254 of the Act shall be passed by an AO within a period of three months from the end of the month in which the order u/s. 254 is received by the Pr. Commissioner or Commissioner. It is also a fact on record that the order of Co-ordinate Bench of ITAT allowed the appeal of the assessee on the issue of taxability of MSSA and RDCA receipts and, therefore, it was not a case of fresh/de novo assessment as noted in para 39 of the said order placed on record.
10. Thus, on a combined reading of section 244A(1A) and section 153(5) of the Act, undoubtedly, assessee is entitled to additional interest on the refund that may be determined as a consequence of appeal effect order, if a delay occurs in passing an order giving effect to the order of ITAT u/s. 254 of the Act. In order to calculate the number of days of delay for granting of additional interest as claimed by the assessee u/s. 244A(1A) of the Act, certain relevant information which are germane to the issue are required to be looked into, such as the date on which the office of the Pr. Commissioner or Commissioner received the order of the Tribunal and any request made by the Ld. AO seeking approval from the Pr. Commissioner or Commissioner for additional period of six months to give effect to the order. While disposing of this ground, we note that Ld. CIT(A) has given a direction to the AO for verification in this respect and has allowed it for statistical purposes.
10.1. In our considered understanding, powers of the Commissioner Appeals are contained in section 251 of the Act which does not give him the power to set aside the matter to Ld. AO and allow the ground of appeal for statistical purposes. Accordingly, what the Ld. CIT(A) has done is not in accordance with the provisions of section 251 of the Act. However, we note that as in the case of appeal before the Ld. CIT(A), even before us, Ld. Counsel for the assessee has not brought on record any information/document to demonstrate that there is a delay in passing the appeal effect order which has breached the time limits prescribed in section 153(5) of the Act so as to entitle the assessee for claim of additional interest u/s.244A(1A) of the Act. From the submissions made by the Ld. Counsel of the assessee which are more in the nature of apprehensions, we find it proper to remit the matter on this issue to the file of Ld. AO for the limited purpose of verification of records to take note of the date on which the office of the Pr. Commissioner/Commissioner received the order of the Tribunal and if any approvals as required under the proviso to section 153(5) of the Act were obtained by the Ld. AO for the additional period of six months for giving effect to the order. Thus, Ld. AO is directed to grant additional interest as envisaged u/s. 244A(1A) of the Act by ascertaining the delay beyond three months from the end of the month in which the order of ITAT was received in the office of Pr. Commissioner/Commissioner. Further, in case, an extension was obtained by the Ld. AO for giving effect to the order of ITAT, then the delay, if any, in granting the refund will be calculated from the end of the month in which the cumulative time available to the Ld. AO for giving appeal effect expired i.e. the initial time of three months as well as the additional extended time granted by the Pr. Commissioner/Commissioner, to the date on which the actual refund was granted to the assessee. We also direct the assessee to provide all of its cooperation to the Ld. AO as and when called for in this respect. Needless to say that the assessee be given reasonable opportunity to put up its case. Accordingly, this ground of appeal for all the five years before us is allowed for statistical purposes.
11. On the second issue relating to TDS done by the Ld. AO on the interest granted u/s. 244A(1) of the Act, Ld. AO while assessing the refund amount along with interest u/s. 244A(1) of the Act, did TDS on the interest portion of the said refund. Total refund determined by the Ld. AO vide the appeal effect order is of Rs.25,22,16,230/- which includes interest u/s. 244A(1) of the Act amounting to Rs.11,50,45,084/- Ld. AO has done TDS on behalf of the Govt. of India amounting to Rs.1,20,86,636/- on the interest portion of Rs.11,50,45,080/-. Aggrieved on the TDS done by the Ld. AO the assessee went in appeal before the Ld. CIT(A). Before the Ld. CIT(A), it was contended by the assessee that Ld. AO has failed to appreciate that no tax should have been deducted on the interest portion by virtue of the Most Favoured Nation (MFN) clause contained in the India-Netherlands Double Tax Avoidance Agreement (DTAA) and thereby applying the restrictive scope of taxation for interest under Article 12 of the Indo-Itally DTAA into the Article 11 on interest in the India-Netherlands DTAA.
11.1. Before us, Ld. Counsel for the assessee referred to the findings of the Ld. CIT(A) on this issue dealt at page 28 to 32 of his order and submitted that Ld. CIT(A) in his order has not disputed on the applicability of the protocol/MFN clause of India-Netherlands DTAA to import the provisions under India-Itally DTAA to the extent they are more beneficial to the assessee. Ld. Counsel further pointed out that despite the said acceptance by the Ld. CIT(A), he has observed that it would be erroneous to allow for the application of the deeming provision created in the context of the reading of the provisions i.e. interest on refund would be a debt obligation owed by the Government within the ambit of India-Itally DTAA to the case of the assessee, who is in reality governed by India-Netherlands DTAA and not India-Itally DTAA. By observing so, Ld. CIT(A) dismissed the ground raised by the assessee on this issue for all the five years. Aggrieved, the assessee is in appeal before this Tribunal.
12. Before us, Ld. Counsel reiterated the submissions made before the Ld. CIT(A) and referred to the India-Netherlands DTAA which came into force on 21.01.1989. He referred to Article 11 of the said treaty dealing with taxation of interest, relevant extract of which are reproduced as under:
“1. Interest arising in one of the States and paid to a resident of the other state may be taxed in that other State.
2. However, such interest may also be taxed in the Contracting State in which it arises and according to laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of gross mount of the interest.
………..
6. The term “interest” as used in this Article means income from debt-claim of every kind, whether or not secured by mortgage, but not carrying a right to participate in the debtor’s profits, and in particular, income from the Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article.”
13. By applying the above provisions of Article 11, ld. Counsel for the assessee submitted that refund of tax by the department qualifies as a debt claim and interest paid for delay on such refund u/s. 244A being “income from debt claim” would qualify as “interest” as per Article 11(6) of the Indian-Netherlands DTAA and accordingly, the said interest would be taxed in India @ 10%. However, in furtherance to this, Ld. Counsel invited the attention to the Most Favoured Nation (MFN) clause by virtue of Protocol IV(2) to the India-Netherlands tax treaty whereby Netherlands has been recognized as one of the most favoured nations by the Indian Government.
“IV. 1. Where tax has been levied at source in excess of the amount of tax chargeable under the provisions of Article 10, 11 or 12, applications for the refund of the excess amount of tax have to be lodged with the competent authority of the State having levied the tax, within a period of three years after the expiration of the calendar year in which the tax has been levied.
2. If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention.”
14. On our specific query on the binding force of the protocol to a tax treaty, ld. Counsel referred to the decision of Coordinate Bench of ITAT, Kolkata in the case of DCIT Vs. ITC Ltd. (2002) 82 ITD 239 (Kol) and also to the decision of Hon’ble High Court of Delhi in the case of Steria India Ltd. Vs. CIT (2016) 386 ITR 390 (Del.). He also invited attention to the decision of Hon’ble High Court of Delhi in the case of Concentrix Services Netherlands Vs. ITO TDS in Appeal No. WP(C) No.9051/2020 dated 22.04.2021 wherein it was held that protocol is an integral part of the tax treaty and no separate notification is required for applicability of provisions of protocol. Similar view was taken by the Hon’ble High Court of Karnataka in the case of Apollo Tyres Ltd. Vs. CIT (IT) in W.P. No. 31737 of 2016. In this context, Ld. Counsel thus pointed out that India had entered into a tax treaty with Italy who is a member of OECD on 23.11.1995 i.e. after the date of signing of India-Netherlands Tax Treaty, which was on 21.01.1989. Thus, ld. Counsel submitted that provisions under the India Italy Tax Treaty are to be imported into the India-Netherlands Tax Treaty to the extent they are more beneficial pursuant to the MFN clause in protocol to the India-Netherlands DTAA. Accordingly, Ld. Counsel referred to Article 12 of the India Italy DTAA which deals with the taxability of interest, relevant extract of which are reproduced as under:
“1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in both the Contracting States.
2. Notwithstanding the provisions of paragraph I, the tax chargeable in a Contracting State or interest arising in that State and paid to a resident’ of the other Contracting State in respect of loans or debts shall not exceed 15 per cent of the gross amount of such interest.
3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be exempt from in that State if:
(a) the payer of the interest is the Government of that Contracting State or a local authority thereof, or
(b) the interest is paid to any agency or instrumentality (including a financial institution) which may be agreed upon in this behalf by the two Contracting States.
4. The term “interest” as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises.”
15. Based on the above reference, ld. Counsel submitted that under the India Italy Treaty, definition of interest under Article 12(4) includes “debt claim of every kind” which is akin to the India-Netherlands DTAA and, therefore, interest on the income tax refund u/s. 244A is covered within the definition of interest under the India Italy DTAA. He thus, claimed that interest is exempted in accordance with the provisions of Article 12(3)(a) of the said DTAA where the payer of such interest is the Government of the contracting state. Ld. Counsel thus contended that taxation of interest income has a restricted scope under the India Italy DTAA wherein interest received from government of contracting state i.e. India in the present case, is excluded from the ambit of taxation. He, thus submitted that Ld. AO in the present case has paid the interest on refund to the assessee on behalf of the Government of India under the provisions of section 244A(1) of the Act and thus by applying the MFN clause contained in India-Netherlands DTAA with restrictive scope of taxation of interest in the India-Italy DTAA, the said interest income is exempt from tax in India.
16. To buttress his contention, he placed reliance on the decision of Hon’ble High Court of Madras in the case of Ansaldo Energio SPA Vs. CIT (IT) (2016) 384 ITR 312 (Mad.) wherein it was held that interest on income tax refund is a ‘debt claim’ payable by revenue and in terms of Article 12(3)(a) of the India Italy DTAA such interest is not taxable and no TDS ought to be done by the AO. He pointed out to the substantial question of law dealt with by the Hon’ble Madras High Court in the case, which is reproduced as under:
“(i) Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that interest under section 244A of the Act on refund of income tax is not covered within the term ‘interest’ under Article 12(4) and accordingly, the same is not outside the purview of taxation by India as provided in Article 12(3)(a) of the Double Taxation Avoidance Agreement between India and Italy?”
17. The findings given by the Hon’ble Court on the above referred substantial question of law are dealt with in para 24 and 25 wherein it was concluded that what was due as a refund and what was payable as interest on such refund are ‘debt claim’ within the meaning of Article 12(4) and as a consequence, they satisfy the parameters of Article 12(3)(a) and answered the first substantial question of law in favour of the assessee. Relevant extracts reproduced as under:
“24. As an alternative submission, it was contended by Mr. T. Ravikumar, learned Standing Counsel that the question whether the interest payable by the Government was a debt claim within the meaning of Article 12.4, did not arise for consideration in Tata Chemicals Ltd’s case (supra) at all and that what was found in paragraph 38 of Tata Chemicals Ltd’s case (supra) was only a passing reference. Therefore, relying upon the decision of the Supreme Court in CCE v. Srikumar Agencies AIR 2008 SCW 942, it was contended by the learned Standing Counsel that stray observations found in judgments cannot be taken to be an expression of a proposition of law and that judgments are not to be read as Euclid’s theorem.
25. For a moment, we will keep aside the decision of the Supreme Court in Tata Chemicals Ltd.’s case (supra) and have a plain look at Section 244-A of the Income Tax Act. Under Sub-section (1) of Section 244-A, an assessee is made entitled to receive in addition to any amount of refund that has become due to him, simple interest calculated in the manner provided therein. Subsection (1) of Section 244-A uses two important expressions, namely (i) becomes due, and (ii) be entitled to. The expression “becomes due” is a clear indication that an assessee will be entitled to the benefit of Section 244-A only if the refund of any amount has become due. If a refund has become due, interest on the refund is also automatic subject to the satisfaction of other conditions. Anything that is due and which a person is entitled to collect, is naturally in the nature of a debt claim. Therefore, we do not think that the Supreme Court made a very stray observation in paragraph 38 of its decision in Tata Chemicals Ltd.’s case (supra) without realising what they were actually indicating. The statement found in paragraph 38 of the decision in Tata Chemicals Ltd.’s case (supra) to the effect “refund due and payable to the assessee is debt owed payable by the revenue” is actually a perfect statement of law. It is certainly a theorem, but not Euclid’s theorem. Therefore, the law as we see is well settled to the effect that what was due as a refund and what was payable as interest on such refund are debt claims within the meaning of Article 12.4. As a consequence, they satisfy the parameters of Article 12.3(a). Hence, the first question of law is answered in favour of the appellant. Consequently, the second question of law does not arise for consideration. The appeal stands allowed. There will be no order as to costs.”
17.1. He thus finally submitted that though the Ld. CIT(A) has accepted the applicability of the provisions of India-Italy DTAA but held that the decision of Hon’ble Madras High Court (supra) interpreting the provisions of the said DTAA cannot be applied as it would be equivalent to applying another “deeming provisions”.
18. Per contra, Ld. Sr. DR strongly countered the submissions made by the Ld. Counsel for the assessee by submitting that DTAA is specific to each country and a Treaty with one country cannot be imported into the Treaty with another country which is applicable to the assessee. According to him, the exemption is available in respect of a Treaty which is country to country and not otherwise. Further, he referred to Article 11 of the India Netherlands Treaty in para 3 and 4 to submit that the exemption is available where the interest payment is to a person other than the Government. He further placed strong reliance on the finding given by the Ld. CIT(A) to submit that assessee’s case if allowed, will be equivalent to applying a ‘deeming provisions’. He thus, stated that Ld. AO has rightly deducted tax at source on the interest paid to the assessee u/s. 244A(1) of the Act.
19. We have heard the rival contentions and perused the material available on record. Admittedly, it is a fact on record that assessee is covered by the India-Netherlands DTAA. It is also a fact undisputed that by virtue of Protocol IV(2) which is a part of the India-Netherlands Treaty gives benefits of Most Favoured Nation clause to the assessee. On the perusal of the said Protocol, it is evident that if the provisions of a tax treaty entered into by India after signing of India-Netherlands DTAA i.e. after 21.01.1989 with another OECD member country is more beneficial either in terms of its scope and coverage or tax rate vis-à-vis the India-Netherlands DTAA then the said provisions shall also apply into the India-Netherlands DTAA. Factually, it is noted that India Italy DTAA came into force on 23.11.1995 i.e. post 21.01.1989 and hence, the beneficial provisions available to the assessee under the India-Italy Treaty on the aspect of taxability of interest as in the present case will get force of attraction and becomes available into the India-Netherlands DTAA by virtue of MFN clause under the said Protocol. Thus, by harmonious reading of the two treaties it follows that the beneficial provision of the India-Italy DTAA will be imported into the reading of India-Netherlands DTAA resulting into accrual of benefit to the assessee.
19.1. Provisions of Article 12(3)(a) of India-Italy DTAA specifies that interest earned by a resident of Italy will not be taxable in India where the payer of such interest is Government of India. Under the treaty negotiations with Italy, India has agreed to a restrictive scope of taxation of interest and thus applying the provisions of India-Italy Treaty read with Protocol of the India-Netherlands treaty the restricted scope of taxability of interest becomes applicable in the present case.
19.2. We note that it is an undisputed fact that Ld. CIT(A) has agreed and found favour with the contention of the assessee on this aspect, however, has dismissed the ground of the assessee by bringing into his observation on the aspect of ‘deeming provision’ to negate the treatment of interest on income tax refund as a ‘debt claim’ payable by revenue and making it covered for deduction of tax at source. In our considered understanding, we do not ascribe to the view taken by the Ld. CIT(A) on his observation of bringing in the aspect of ‘deeming provision’ so as to make the interest on income tax refund subject to deduction of tax at source.
19.3. We note that protocol to a treaty is an integral part of the treaty under consideration and carries the same binding force as the MFN clause therein. The DTAA are the agreements between the two jurisdictions at a country level which are based on negotiations which are real between the two countries for reciprocatory and mutual benefits. By bringing the MFN Clause in the Protocol to the India-Netherlands Treaty, the two countries have negotiated between themselves for more restrictive scope of taxation on certain incomes including interest. Thus, it is based on this negotiated terms that Netherlands has accepted to restrict its rights of taxation on the interest components among other things vis-à-vis its treaty with India.
19.4. Section 90 of the Act provides that where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax or as the case may be, for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to the assessee. Thus, in the conspectus of the MFN clause by virtue of Protocol to India-Netherlands Treaty, the more beneficial provisions of India-Italy Treaty becomes available to the assessee to which even the Ld. CIT(A) has not disputed. In our considered view, there is nothing which has been deemed under the Treaty provisions and the provisions of section 90 of the Act, which are all based on the negotiated terms between the countries to arrive at the double taxation avoidance agreement between themselves. We further note that Hon’ble High Court of Delhi in the case of Steria (India) Ltd. Vs. CIT in W.P.(C) 4793/2014 and CM Appl. 9551/2014 dated 28.07.2016 observed that in terms of the Protocol there can be a benefit to the assessee either of a lower rate or a more restricted scope and one does not mean to exclude the other.
“15. The Court finds no warrant for the above restrictive interpretation placed on Clause 7 of the Protocol. The words ‘a rate lower or a scope more restricted’ occurring therein envisages that there could be a benefit on either score i.e. a lower rate or more restricted scope. One does not exclude the other. The other expression used is ‘if under any Convention/ Agreement or Protocol signed after 1-9-1989 between India and a third State which is a member of the OECD’. This also indicates that the benefit could accrue in terms of lower rate or a more restrictive scope under more than one Convention which may be signed after 1st September 1989 between India and a State which is an OCED member. The purpose of Clause 7 of the Protocol is to afford to a party to the Indo-France Convention the most beneficial of the provisions that may be available in another Convention between India and another OCED country.”
19.5. Hon’ble High Court of Madras in the case of Ansaldo Energio SPA Vs. CIT (IT) (supra) has held that the interest on income tax refund is a ‘debt claim’ payable by the Revenue in terms of Article 12(3)(a) of the India-Italy Treaty and thus such interest is not taxable and no TDS ought to be done by the AO. We note that Ld. CIT(A) has wrongly interpreted this finding of the Hon’ble Madras High Court as application of ‘deeming provisions’ and, therefore, we set aside the finding of the Ld. CIT(A) on this aspect. Accordingly, we direct the Ld. AO to refund the TDS done on the interest paid to the assessee on the Income Tax refund under section 244A(1) of the Act. To sum up, we hold that in the present case of the assessee, the beneficial provision restricting the scope of taxability of interest in terms of Article 12(3)(a) of the India-Italy DTAA namely, non-taxability of interest on income tax refund by virtue of it being a ‘debt claim’ from the Government of India as held by the Hon’ble Madras High Court (supra) would be applicable in view of the Protocol to the India-Netherlands DTAA and, therefore, the interest in question received by the assessee u/s. 244A(1) from the Government of India will not be taxable. Consequently, no tax was required to be deducted thereon by the Ld. AO while remitting the said interest to the assessee and thus AO is directed to grant the refund of the TDS so done. This ground of appeal for all the five years is allowed.
20. Taking up ground in respect of short granting of interest u/s. 244A(1) of the Act for assessment years 2009-10 to 2012-13, we refer to the facts of assessment year 2009-10. This issue was raised before the Ld. CIT(A) by way of an additional ground, wherein it was contended that AO has not granted interest in 244A(1) from the date of order giving effect i.e. 13.11.2019 up to the date on which actual refund was received by the assessee i.e. 02.03.2000. It is noted that the date from which the grant of interest on refund starts is not in dispute. The only dispute is in respect of whether the interest should be granted up to the date of preparation of order giving effect or it should be granted up to the date on which actual refund was received by the assessee. In this respect Ld. Counsel for the assessee placed reliance on the decision of Coordinate Bench of ITAT, Mumbai in the case of Small Industries Development Bank of India Vs. DCIT in ITA No. 3707/Mum/2012 dated 15.09.2017 wherein it was held that assessee was justified in seeking interest u/s. 244A up to the date of receipt of the refund voucher. Relevant portion of the said decision in para 7 is reproduced as under:
“We have carefully considered the rival submissions. Notably, the only issue in dispute is the period for which assessee is entitled to interest u/s 244A of the Act. According to the assessee, the CIT(A) erred in granting interest upto the date of issuance of refund voucher, i.e. 29.3.2010 whereas as per the assessee, it is entitled to interest upto April, 2010 (i.e. upto the date of receipt of refund voucher on 6.4.2010). In this context, we find that the Hon’ble Bombay High Court in the case of Pfizer Limited. 191 ITR 626 (Bom) has held that assessee is entitled to interest upto the date of receipt of the refund order. Similarly, our coordinate bench in the case of M/s. Novartis India limited, ITA No. 1249/Mum/2010 dated 18.3.2011 has decided a similar issue in favour of the assessee by referring to an unreported judgement of the Hon’ble Bombay High Court in the case of Citi Bank vs. c/T in ITA No.6 of 2001 dated 17.7.2003, wherein the claim of the assessee for interest was upheld upto the date when the Pay Order is “actually received by the assessee pursuant to the order sanctioning the refund”. Therefore, following the aforesaid precedents, in our view, the assessee is justified in seeking interest u/s 244A of the Act upto the date of receipt of the refund order, i.e. 6.4.2010. Thus, on this aspect, assessee succeeds.”
21. Considering the facts on record and the judicial precedents, in our view the ground raised by the assessee for claiming interest u/s. 244A(1) up to the date on which actual refund was received i.e. 02.03.2020 is justified. Accordingly, we direct the Ld. AO to recompute the interest due to the assessee in compliance with our aforesaid decision. Accordingly, this ground of appeal for all the four years is allowed.
22. In respect of AY 2010-11 for the grounds relating to erroneous levy of interest u/s. 234C of the Act and erroneous adjustment of other payments against the refund determined by the Ld. AO, assessee has contended that no interest u/s. 234C of the Act is leviable in view of the fact that entire income of the assessee, who being a non-resident, was subjected to TDS. By referring to the provisions of section 234C of the Act, ld. Counsel contended that levy of interest is in respect of ‘tax due on the returned income’ of the assessee which is towards shortfall in the payment of advance tax on the respective due dates. He placed reliance on the decision of the Hon’ble High Court of Bombay in the case of DIT(IT) Vs. WNS Global Services (UK) ltd. (2013) 32 taxmann.com 54 (Bom.), wherein he invited our attention to the substantial question of law placed at Sl. No. 6 which is reproduced as under:
“(6) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the assessee being non-resident and the entire income of the assessee subject to TDS u/s. 195 of the Act and hence no liability arises u/s. 234B and 234C of the Act?”
22.1. Hon’ble High Court answered this question in favour of the assessee. The relevant extract of the decision is reproduced as under:
“6. So far as Question (6) is concerned, the Counsel for the parties state that the issue raised therein stands covered in favour of the Respondent-Assessee and against the Revenue by the decision of this Court in the matter of DIT (International Taxation) vs. NGC Network Asia LLC (2009) 313 ITRR 187 (Bom.) Since the Tribunal in the impugned order has followed the decision of this Court in the matter of NGC Network Asia LLC (supra) in granting relief to the Respondent-Assessee, we see no reason to entertain Question (6).”
22.2. In view of the judicial precedent above and the provisions of section 234C of the Act, we find it proper to direct the AO to verify and ascertain that the return of income filed by the assessee was entirely subject to TDS and its tax liability on the returned income was in entirety covered by the TDS done. If found so, the interest charged u/s. 234C of the Act be deleted and the refund recomputed accordingly. Thus, this ground of appeal is allowed for statistical purposes.
22.3. In respect of ground taken for erroneous adjustment of other payments against the refund determined by Ld. AO, we direct the Ld. AO to provide the necessary details to the assessee in respect of adjustment made, for its verification and rebuttal. Based on the clarifications submitted by the assessee in respect of the other adjustments, the Ld. AO is directed to re-consider the adjustment in accordance with the provisions of law. Accordingly, this ground of appeal is allowed for statistical purposes.
23. In the result, all the appeals of the assessee are partly allowed for statistical purpose.
Order is pronounced in the open court on 02 September, 2022.
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