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2010 (12) TMI 282 - AT - Income TaxDTAA - Interest - During the course of assessment proceedings the Assessing Officer noted that the assessee received Income-tax refund which included interest on such Income-tax refund amounting to Rs. 12, 44, 428 - The Assessing Officer opined that interest earned on Income-tax refund could not be said to be the interest on funds connected with the operation of ships in international traffic - The interest on Income-tax refund is includible under Article 11 and the authorities below were justified in repelling the contention of the assessee for its inclusion in Article 8(3) interest on Income-tax refund is chargeable to tax in the hands of the non-resident assessee as the same is arising in India.
Issues Involved:
1. Taxability of interest on Income-tax refund under Article 11 or Article 8 of DTAA between India and Germany. Detailed Analysis: 1. Taxability of Interest on Income-tax Refund: The primary issue revolves around whether the interest of Rs. 12,44,428 on Income-tax refund is taxable under Article 11 or Article 8 of the Double Taxation Avoidance Agreement (DTAA) between India and Germany. Arguments by the Assessee: The assessee, a non-resident engaged in the operation of ships in international traffic, argued that the interest on Income-tax refund should be covered under Article 8(3) of the DTAA. The assessee claimed that since the funds for paying Income-tax originated from profits derived from the operation of ships, the interest on such refund should also be considered as profits derived from the operation of ships in international traffic. The assessee relied on the Supreme Court judgments in Donald Miranda And Others v. CIT and CIT v. Govinda Choudhury and Sons to support the view that the interest on refund should assume the same character as the original funds. Arguments by the Department: The Department contended that the interest on Income-tax refund is covered under Article 11(4) of the DTAA. The Department relied on the ruling of the Authority for Advance Rulings, which held that Income-tax refund falls within the expression "debt-claims of every kind" under Article 12(5) of DTAA with the UK, analogous to Article 11(4) of DTAA with Germany. Therefore, such interest is taxable in India. Tribunal's Analysis: The Tribunal noted that the core issue is whether the interest on Income-tax refund falls under Article 8 or Article 11. Article 8(3) states that interest on funds connected with the operation of ships in international traffic shall be regarded as profits derived from such operations and not subject to Article 11. Article 11, however, specifies that interest arising in a Contracting State and paid to a resident of the other Contracting State is taxable in the State where it arises. The Tribunal emphasized that the interest on Income-tax refund does not have a direct and immediate connection with the operation of ships in international traffic. The Tribunal referred to the Supreme Court judgment in Bharat Commerce Industrial v. CIT, which clarified that Income-tax is payable after determining the profits and is not deductible as a business expense. The Tribunal also examined the Authority for Advance Rulings' decision in ABC, which held that excess tax paid becomes a "debt-claim" and interest on such refund qualifies as "income from debt-claims of every kind" under Article 12 of DTAA with the UK, analogous to Article 11(4) of DTAA with Germany. Conclusion: The Tribunal concluded that the interest on Income-tax refund is not "interest on funds connected with the operation of ships in international traffic" and thus does not fall under Article 8(3). Instead, it falls under Article 11, making it taxable in India. The Tribunal upheld the Assessing Officer's decision to tax the interest at the rate of 10% as per Article 11(2). Judgment: The appeal was dismissed, and the interest on Income-tax refund was held to be taxable in India under Article 11 of the DTAA between India and Germany. The Tribunal upheld the order of the Commissioner of Income-tax (Appeals), confirming the taxability of the interest at the rate of 10%.
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