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2023 (4) TMI 967 - AT - Income TaxTaxability of interest income on external commercial borrowings - Indo Netherlands Tax Treaty - What will be tax rate to be applied as per Indo Netherlands Tax Treaty? - DR argued that the said interest income would become business profit of the Indian branch and hence to be taxed in terms of Article 7 of the Indo Netherlands Tax Treaty - HELD THAT - As perusal of Indo Netherlands Tax Treaty that there is a separate Article provided for taxability of Interest vide Article 11 thereon. There is no dispute that the nature of income that is sought to be taxed is interest income in the instant case. Hence, it would be just and fair to apply the Article 11(2) for the purpose of determining the taxability of the said interest income. Hence, in view of Article 11(2), we direct the Ld. AO to bring to tax interest income @10%. Accordingly, the grounds raised by the Revenue are dismissed.
Issues involved:
The issues involved in this case are: 1. Taxability of interest income in the hands of the assessee. 2. Dispute over the tax rate to be applied as per the Indo Netherlands Tax Treaty. Issue 1: Taxability of interest income: The assessee, an Indian Branch of a company incorporated in Netherlands, filed its return of income for A.Y. 2012-13 declaring total income. The Assessing Officer (AO) observed a difference in income in Form 26AS and the Profit & Loss Account. The AO sought to tax the difference as interest income on external commercial borrowings at 40%. The assessee argued that the interest income should be taxed as per the Indo Netherlands Tax Treaty. The Commissioner of Income Tax (Appeals) (CIT(A)) directed the AO to apply the tax rate prescribed in the treaty. The Revenue appealed this decision. Issue 2: Dispute over tax rate as per Indo Netherlands Tax Treaty: The Revenue contended that the interest income should be taxed as business profit of the Indian branch at 40%. However, the Tribunal found that Article 7(6) of the treaty states that if profits include items of income dealt with separately in other articles, those provisions shall not be affected. Since there is a separate Article 11 for taxability of interest income, the Tribunal directed the AO to tax the interest income at 10% as per Article 11(2) of the treaty. Consequently, the grounds raised by the Revenue were dismissed. In conclusion, the Appellate Tribunal ITAT Mumbai ruled in favor of the assessee, directing the Assessing Officer to tax the interest income at 10% as per the provisions of Article 11(2) of the Indo Netherlands Tax Treaty. The appeal of the Revenue was dismissed.
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