2017 (4) TMI 1635 - AT - Income Tax

Taxability of interest on income tax refund received - PE in India or not? - AO held that the assessee had derived interest income on refund of TDS made out of business receipts as also the interest from bank was on business funds, thus directly connected with the business receipts and was therefore assessable under Article VII of Indo Australia DTAA as business income to be subjected to normal rate of tax - HELD THAT - Special Bench in own case 2011 (5) TMI 562 - ITAT, DELHI decided the question as we do not venture to say that the interest income has to be necessarily business income in the nature for establishing the effective connection with the PE because that would render provision contained in paragraph 4 of Article XI redundant. Thus, there may be cases where interest may be taxable under the Act under the residuary head and yet be effectively connected with the PE. The bank interest in this case is an example of effective connection between the PE and the income as the indebtedness is closely connected with the funds of the PE. However, the same cannot be said in respect of interest on income tax refund. Such interest is not effectively connected with PE either on the basis of asset test or activity test. Accordingly, it is held that this part of interest is taxable under paragraph No. 2 of Article XI - Decided in favour of assessee. Addition in respect of the Hazira project - HELD THAT - It is a settled position that PE has to be reckoned project wise. As decided in Ishikama Heavy Industries Ltd 2007 (1) TMI 91 - SUPREME COURT to attract the taxing provisions of I.T. Act, there has to be some activities conducted to permanent establishment (PE). There would be no tax liability with regard to overseas services even under the DTAA. From the invoices, it is clear that engineering services were sub contracted to a Singapore-based company and services were performed in Singapore only. As the work in respect of Hazira project was performed outside India, the AO was not right in treating 2% of the receipts as income. Reliance is also placed on the decision of Supreme Court in the case of CIT versus Hyundai Industries Co Ltd 2007 (5) TMI 196 - SUPREME COURT The AO is directed to delete the addition. Cancellation of interest u/s 234B - HELD THAT - As seen that the CIT (A) has observed correctly that since the entire income of the assessee was subject to deduction of tax at source, the assessee had no liability to pay advance tax. CIT (A) has placed reliance of the judgment of the Hon ble Uttarakhand High Court in the case of CIT vs. Sedco Forex International Drilling Co. 2003 (10) TMI 40 - UTTARANCHAL HIGH COURT and also on another judgment of the Uttarakhand High Court in the case of CIT vs. Haliburton Offshore Services 2004 (7) TMI 74 - UTTARANCHAL HIGH COURT while directing the AO to delete the interest. We do not find any reason to interfere on this issue as the Department could not counter the stand of the Ld. CIT (A) with any judgment to the contrary or bring on record any fact which could prove that the finding of the Ld. CIT (A) was erroneous. Therefore, this ground also stands dismissed.

Summary

Issues Involved:
1. Taxability of interest income as business income connected with Permanent Establishment (PE).
2. Deletion of addition related to Hazira Project receipts.
3. Set off of losses for A.Y. 2001-02.
4. Levy of interest under section 234D of the Income Tax Act, 1961.
5. Cancellation of interest charged under section 234B of the Income Tax Act, 1961.

Detailed Analysis:

1. Taxability of Interest Income:
The assessee contended that interest income on tax refunds and bank interest should be taxed at 15% as per Article XI of the DTAA between India and Australia. The Assessing Officer (AO) held that the interest income was connected with business receipts and should be taxed as business income under Article VII of the DTAA. The CIT (A) upheld this view. However, a Special Bench of the ITAT ruled that while bank interest was effectively connected with the PE, interest on income tax refunds was not. Thus, the latter should be taxed under paragraph 2 of Article XI, not as business income. The Division Bench of ITAT agreed with this finding, allowing the assessee's appeal on this ground.

2. Deletion of Addition Related to Hazira Project Receipts:
The AO added Rs. 1,46,73,467/- to the assessee's income, treating 2% of the receipts from the Hazira project as income, claiming the assessee had a PE in India. The CIT (A) deleted this addition, noting that all activities related to the Niko contract were performed outside India, and thus, there was no PE in India for this project. The ITAT upheld the CIT (A)'s decision, confirming that the activities for the Hazira project were indeed carried out entirely outside India, and therefore, no income from these activities was taxable in India.

3. Set Off of Losses for A.Y. 2001-02:
The AO did not allow the carry forward of losses. The CIT (A) allowed the set off of losses based on an ITAT decision that canceled an order under section 263. The ITAT restored this issue to the AO for verification and examination, as both parties consented to this course of action.

4. Levy of Interest Under Section 234D:
The assessee challenged the levy of interest under section 234D. Since this ground was consequential and not pressed by the assessee, the ITAT dismissed it without adjudication.

5. Cancellation of Interest Charged Under Section 234B:
The CIT (A) canceled the interest charged under section 234B, noting that the assessee's entire income was subject to tax deduction at source, and thus, there was no liability to pay advance tax. The ITAT upheld this decision, referencing judgments from the Uttarakhand High Court in similar cases, and found no reason to interfere with the CIT (A)'s findings.

Conclusion:
The assessee's appeal was partly allowed, with the ITAT ruling in favor of the assessee on the taxability of interest on income tax refunds and confirming the deletion of the addition related to the Hazira project. The department's appeal was partly allowed for statistical purposes, with the issue of set off of losses remanded to the AO for verification. The ITAT upheld the cancellation of interest charged under section 234B and dismissed the ground related to the levy of interest under section 234D.