2015 (5) TMI 1036 - HC - Income Tax

Interest paid on refund - treated as a business income taxable at 42 per cent OR 15 per cent. as provided in paragraph (2) of article 12 of the DTAA between India and the United Kingdom - Held that - The words in connection with are relatable to the provision of services and facilities of supply of plant and machinery. We would think that it will be impermissible being too farfetched to include the amount received from the Income-tax Department in the circumstances which we have already set out as falling within the same. No doubt, a question may arise as to whether after providing for a deeming provision in sub-section (1) providing that notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, 10 per cent. of the amounts in sub-section (2) shall be deemed to be the profits and gains chargeable to tax and yet the amount under clause (6) of article 12 of the Treaty is to be taxed as business profits. But we also asked the learned counsel for the Revenue whether the tax is premised under section 28, or is taxable under section 56 (the income from other sources), the answer was, it is under section 56 of the Act. Learned counsel for the Revenue would submit that the appellant had been taxed under clause (6) of article 12 of the Treaty. Income-tax Appellate Tribunal was legally justified in upholding the order of the learned Commissioner of Income-tax (Appeals) and of the Assessing Officer that the interest paid to the assessee on its refund is a business income and, therefore, it is taxable at 42 per cent. instead of 15 per cent. as provided in paragraph (2) of article 12 of the DTAA between India and the United Kingdom

Summary

Issues Involved:
1. Taxability of interest on refund as business income.
2. Applicability of Article 12(2) vs. Article 12(6) of the DTAA between India and the United Kingdom.
3. Inclusion of interest income under Section 44BB of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Taxability of Interest on Refund as Business Income
The primary contention revolves around the taxability and the rate at which the interest received by the appellant on the refund of excess tax paid on behalf of its employees should be taxed. The appellant argued that the interest should be taxed at 15% as per Article 12(2) of the Double Taxation Avoidance Agreement (DTAA) between India and the United Kingdom. However, the Assessing Officer assessed the interest income under Article 12(6) of the DTAA, treating it as business income taxable at 42%. The court upheld this assessment, stating that the interest income is effectively connected with the appellant's permanent establishment in India and thus falls under Article 12(6), making it business income taxable at the higher rate.

Issue 2: Applicability of Article 12(2) vs. Article 12(6) of the DTAA
The appellant contended that the interest should be taxed under Article 12(2) of the DTAA, which limits the tax rate to 15% on the gross amount of interest. However, the court noted that Article 12(6) overrides Article 12(2) in cases where the beneficial owner of the interest carries on business in the other Contracting State through a permanent establishment. Given that the appellant was carrying on business through a permanent establishment in India, the court concluded that Article 12(6) applies, thereby making the interest income taxable as business profits under Article 7 at the rate of 42%.

Issue 3: Inclusion of Interest Income under Section 44BB of the Income-tax Act, 1961
The appellant raised a new substantial question of law, arguing that the interest income should be assessed under Section 44BB of the Income-tax Act, which provides a special provision for computing profits and gains in connection with the business of exploration of mineral oils. The court formulated the question: "Whether the interest received on the refund by the Income-tax Department should be included in the amount on which the appellant was taxed under Section 44BB?" The court analyzed Section 44BB and concluded that the interest income from the Income-tax Department does not fall within the scope of amounts specified in Section 44BB(2). The amounts specified are those paid or payable for the provision of services and facilities or supply of plant and machinery used in the prospecting for, or extraction or production of, mineral oils. The court held that the interest on the refund is not connected to these activities and thus cannot be included under Section 44BB.

Conclusion:
The court dismissed the appeals, holding that the interest income is taxable as business income under Article 12(6) of the DTAA at the rate of 42% and not under Section 44BB of the Income-tax Act. The court found no merit in the appellant's contentions and answered all the questions of law against the appellant.