Tax Refund Interest Not ‘Effectively Connected’ With PE

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 ...