2008 (9) TMI 410 - AT - Income Tax

Summary

Issues:
The judgment involves the issue of taxing interest income at a higher rate applicable to non-residents under para 6 of art. 12 of the DTAA between India and the United Kingdom, as opposed to the lower rate under para 2 of art. 12.

Details of the Judgment:

Issue 1: Taxing Interest Income
The appellant, a non-resident company tax resident in the UK, offered interest income for taxation at 15% under para 2 of art. 12 of the DTAA. However, the AO applied para 6 of art. 12, taxing the interest income as business profits due to earning it in India through a permanent establishment (PE). The CIT(A) upheld this decision, stating that since the appellant earned interest through a PE in India while carrying on business, it should be taxed as business income at the applicable rate. The appellant contended that para 2 of art. 12 should apply, not para 6. The Tribunal held that as per para 6 of art. 12, the interest income, connected with the PE in India, should be taxed as business profits under art. 7, not at the lower rate under para 2 of art. 12.

Issue 2: Applicability of DTAA Provisions
The Tribunal considered the provisions of para 6 of art. 12 of the DTAA between India and the UK, which state that if the beneficial owner of interest carries on business in the state where the interest arises through a PE, the interest is to be taxed as business profits. Since the appellant, a UK resident, conducted business in India through a PE and the interest was connected with the PE, para 6 of art. 12 applied, overriding the provisions of paras 1, 2, and 3(a) of art. 12. The Tribunal distinguished the case from a previous ruling of the Authority for Advance Rulings, emphasizing that the appellant had a PE in India, making para 6 applicable.

Conclusion:
The Tribunal dismissed the appeal, ruling that the interest income earned through a PE in India by the UK resident appellant should be taxed as business profits under art. 7, as per para 6 of art. 12 of the DTAA between India and the UK, and not at the lower rate under para 2 of art. 12.