2012 (9) TMI 365 - AT - Income Tax

Interest on refund of income tax received by the PE of the assessee - taxability - applicability of Article 12(5) or Article 12(2) of DTAA between India and France - Held that - Tribunal in the case of the assessee itself for the AY 2002-03 and 2003-04 after detailed deliberation has held that interest on income tax refund is liable to tax @ 10% as per Article 12(2) of DTAA between India and France. It has been observed that assessee is not in the business of obtaining interest income tax refund therefore, the interest is neither derived from nor attributable to the business activity of the assessee. It is merely fall out of the profits earned by the assessee and is an appropriation of profit and when excess amount then what is due under the Act is appropriated, assessee get refund thereto, and when there is a delay in granting such refund, assessee is granted interest thereon which is taxable under the head income from other sources . Therefore, interest earned by the assessee cannot be held to be related to activity of PE. Thus cannot be related to Article 12(5) of the DTAA - Decided against Revenue

Summary

Issues:
1. Taxability of interest on income tax refund under Article 12 vs. domestic law.
2. Connection of interest on income tax refund to the business of the assessee.

Issue 1: Taxability under Article 12 vs. domestic law
The revenue challenged the first appellate order, arguing that the interest on the income tax refund received by the Permanent Establishment (PE) of the assessee should be taxable under domestic law, not under Article 12. The Ld. AR contended that the issue was settled in favor of the assessee by previous Tribunal decisions and that the interest on income tax refund should be taxed at 10% as per Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and France. The Ld. DR, however, tried to justify the assessment order, stating that the interest income should be taxed as business income at 40% under Article 12(5) of the DTAA. The Tribunal, after considering the arguments and previous decisions, upheld that the interest on income tax refund is taxable at 10% under Article 12(2) of the DTAA between India and France, as it is not directly related to the business activity of the assessee but rather an appropriation of profit.

Issue 2: Connection to the business of the assessee
The Ld. AR argued that the interest on the income tax refund was not connected to the business activity of the assessee and should be taxed at 10% as per the DTAA. The AO contended that the interest was related to the business of the assessee as it was allowed on tax deducted from contract receipts. However, the Tribunal found that the interest earned on the refund of taxes was not related to the activity of the permanent establishment and should be taxed under the head "income from other sources." The Tribunal also referred to a previous Supreme Court decision and upheld the rate applied by the assessee, rejecting the rate applied by the AO.

In conclusion, the Tribunal dismissed the appeal, upholding the first appellate order and confirming that the interest on income tax refund should be taxed at 10% under the DTAA between India and France. The Tribunal found that the interest income was not directly related to the business activity of the assessee and should be treated as income from other sources.