2022 (2) TMI 329 - AT - Income Tax

Taxability of income in India - Interest income on income tax refund - AO has held that the interest income received by the appellant on account of income tax refund is taxable at Maximum Marginal Rate of 40 per cent - PE in India - Interest received on the income- tax refund was claimed to be chargeable in terms of Article 11 of the Indo- US DTAA - HELD THAT - On making the assessment of tax under the treaty and the under the Act, it will be found that tax payable under the Act is more than the tax payable under the treaty. Accordingly, the aforesaid provision will come to the aid of the assessee to come to an automatic conclusion, without exercise of any option, that it should get the benefit under the DTAA. No other consideration is material for this purpose as ultimately what is to be seen is whether the provisions of the Act are more beneficial to the assessee or not. Accordingly, it can be held that the assessee is entitled to the benefit under the treaty. Interest income need not be necessarily business income in 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. As referring to relevant Article 11 of Indo-US DTAA with regard to interest it can be concluded that interest on income tax refund is not effectively connected with the PE either on the basis of asset- test or activity- test. Hence, it is taxable as per the provisions in the Para No. 2 of Article XI of Indo- US DTAA.

Summary

Issues:
1. Reimbursement of expenses
2. Receipts for Demobilization Advance
3. Interest Income

Reimbursement of expenses:
The assessee filed an appeal against the Assessment Order, claiming that receipts of reimbursement of expenses should not be included in gross receipts for tax purposes. The Assessing Officer included the amount under gross receipts chargeable under section 44 BB of the Income Tax Act, 1961. The assessee argued that reimbursement of expenses does not constitute income and cited various case laws to support the claim. The Tribunal held that reimbursements in the nature of material and fuel recharge are taxable, dismissing the appeal.

Receipts for Demobilization Advance:
The Tribunal declined to interfere with the order of the ld. CIT(A) regarding receipts for demobilization advance, citing a previous case judgment against the assessee. The decision was based on the judgment of the Hon'ble Uttarakhand High Court and the Supreme Court.

Interest Income:
The appellant received interest income on an income tax refund and claimed it should be taxed under Article 11 of the Indo-US DTAA. The Assessing Officer taxed the interest income at the Maximum Marginal Rate of 40%. The appellant argued that the interest was not effectively connected with the Permanent Establishment (PE) in India and should be taxed under the DTAA. The Tribunal analyzed the provisions of Sec 90(2) and Article VII of the DTAA, concluding that the interest income was not effectively connected with the PE and should be taxed as per the DTAA provisions. The appeals of the assessee were partly allowed.

In conclusion, the Tribunal's judgment addressed issues related to reimbursement of expenses, receipts for demobilization advance, and interest income, providing detailed analysis and legal interpretations for each issue based on the Income Tax Act and the provisions of the Indo-US DTAA.