2015 (12) TMI 686 - AT - Income Tax

Deduction of tax at source u/s.195(1) in respect of refund including the interest u/s.244A - DTAA - contention of the assessee is that interest on refund of tax is exempt from tax in India - Held that - When we go through the definition of interest under Article 12(4) of of DTAA between India and Italy, this kind of interest is not envisaged in the definition of interest, therein. Being so, the lower authorities are justified in imposing TDS u/s. 244A of the Act, on the income tax refund and the case laws relied on by the ld. AR are not delivered with reference to DTAA between Government of India and Government of Italy. As such, those case laws relied on by the assessee have no relevance. In view of this, we are inclined to uphold the arguments of ld. DR and confirm the order of the CIT(Appeals). - Decided against assessee

Summary

Issues:
Interpretation of DTAA provisions on taxation of interest on income-tax refund under Article 12, applicability of TDS under section 244A of the Income Tax Act, relevance of case laws in DTAA context.

Analysis:
1. Interpretation of DTAA Provisions: The primary issue in this case pertains to the interpretation of Article 12 of the DTAA between India and Italy concerning the taxation of interest. The CIT(Appeals) observed that the interest on income-tax refund payable to the assessee falls within the ambit of Article 12 of the DTAA. The contention was that this interest is not covered by the definition of 'interest' provided in Article 12(4) of the DTAA. The CIT(Appeals) held that taxing the interest under section 244A of the Income Tax Act is justified under the DTAA provisions. The assessee challenged this interpretation, leading to the appeal.

2. Applicability of TDS under Section 244A: The Assessing Officer (AO) had imposed Tax Deducted at Source (TDS) under section 195(1) of the Act on the interest amount, including interest under section 244A, payable to the assessee. The issue raised was whether the TDS deduction was appropriate in the context of the DTAA provisions and the specific nature of the interest on income-tax refund. The assessee contested this deduction, leading to the appeal before the ITAT Chennai.

3. Relevance of Case Laws in DTAA Context: The assessee relied on various case laws, including the decision of the Tribunal in the case of M/s. Clough Engineering Ltd. and the Mumbai Bench decision in the case of M/s. DHL Operations B.V., to support the argument that the interest on income-tax refund is not effectively connected with the Permanent Establishment (PE) and hence not taxable under the DTAA between India and Italy. On the other hand, the Departmental Representative (DR) cited the order of the Tribunal, Delhi Bench in the case of BJ Services Company Middle East Ltd. to support the imposition of TDS on such interest.

In conclusion, the ITAT Chennai dismissed all three appeals of the assessee, upholding the order of the CIT(Appeals) regarding the taxation of interest on income-tax refund under the DTAA provisions. The tribunal found the TDS deduction under section 195(1) of the Act to be justified, considering the specific provisions of the DTAA between India and Italy. The decision was based on the interpretation of Article 12 of the DTAA and the applicability of TDS in the context of interest on income-tax refund, as outlined in the judgment.