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TMI Blog2012 (4) TMI 206X X X X Extracts X X X X X X X X Extracts X X X X ..... itendra Yadav for the Respondent. ORDER N.V. Vasudevan, Judicial Member ITA No.5198/Mum/10 is an appeal by the Assessee against the order dt. 27-04-2010 of CIT(A)-10, Mumbai, relating to AY 07-08. This appeal arises out of proceedings arising out of issue of intimation u/s.143(1) of the Act relating to AY 08-09. ITA No.6998/Mum/11 is an appeal by the Revenue against the order dt. 18.7.2011 of CIT(A)-10, Mumbai, relating to AY 07-08. This appeal arises out of proceedings arising out of an order u/s.143(3) of the Act relating to AY 08-09. 2. The facts and circumstances giving raise to these appeals are as follows: The Assessee is a non-resident company incorporated in the United States of America (USA). It is a tax resident of USA. The Assessee set up a project office in India in the year 1994 after due approval by the Reserve Bank of India (RBI). The project office was set up to execute contract with Dabhol Power Company (DPC) for setting up a power plant in Maharashtra and also to execute contract with Haldia Petrochemical (HPL) in connection with setting up petrochemical plant in West Bengal. The petrochemical plant in West Bengal had been completed and there wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Article 11(5) read with 7 of the India-US DTAA. 4.2 Though elaborate submissions were made before us by referring to several decided cases, we shall refer to only the decision of the Special Bench of ITAT in the case of Asstt. CIT v. Clough Engineering Ltd. [2011] 130 ITD 137/11 taxmann.com 70 (Delhi) as this case was decided on identical facts and after taking into consideration all the cases to which reference was made before us in the course of arguments by the learned DR as well as the learned counsel for the Assessee. The question which was referred for consideration by the Special Bench in the case of Clough Engineering Ltd. ( supra ), the facts of the case and the reasoning of the SB and its decision are set out in the following paragraphs. 5. The question that was referred for consideration by the Special Bench was as to "Whether, on the facts and in the circumstances of the case, interest on income-tax refund and fixed deposits with the bank is liable to tax with reference to Article 7 read with paragraph No. 4 of Article 11 or paragraph No. 2 of Article 11 of Indo-Australia Double Taxation Avoidance Agreement?" 6. The facts of the case in so far as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the indebtedness in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. [Emphasis supplied] 7. The Special Bench held that the real test for deciding the controversy is not as to whether interest income was business income or not, but whether the indebtedness is effectively connected with the PE. The Special Bench further held that the jurisprudence under the Income-tax Act, which nowhere contains similar words, cannot be taken recourse to for interpreting the provision. The Special Bench further held that the words "Effectively connected with such permanent establishment" did not find place in the Act anywhere, therefore the decided cases thereunder cannot form the basis for understanding the real import of the expression. 7.1 On the question whether indebtedness was effectively connected with the PE, the Special Bench ruled thus: "11.4 Thus, we are again left with the fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the terms of the treaty between India and USA were differently worded as the expression used in the same was "attributable to the PE". He relied on the decisions rendered under the Income Tax Act, 1961 on the scope of the words "Attributable to" being an expression having a broader connection and submitted that the interest income in the present case should be held to be connected with the PE and taxed under Article 11(5) read with Article 7 of the Indo-USA DTAA. The relevant clauses of the Indo-USA DTAA are as follows: Article 11 Interest 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed: ( a ) 10 per cent. of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company); and ( b ) 15 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle 15 (Independent Personal Services), as the case may be, shall apply. Article 7 Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment . [Emphasis supplied] 8. On the above submission of the learned DR that the terms of the treaty between India and USA were differently worded as the expression used in the same was "attributable to the PE" and his reliance on the decisions rendered under the Income Tax Act, 1961 on the scope of the words "Attributable to", the learned counsel for the Assessee brought to our notice the commenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecial bench in the case of Clough Engineering ( supra ) will squarely apply. 10. We have given a careful consideration to the rival submissions. We are of the view that in the light of the commentary of Klaus Vogel on the reason for use of the word "attributable" in the US conventions, they are in no way different from the expression "effectively connected". US Model convention deviates from OECD and UN Model Conventions (MCs) because the term "effectively connected" is a technical term of US domestic tax law and that it is defined in detail in I.R.C. Sec.864 (c) whereas "attributable", though used in US domestic tax law as well, is not defined. If US MC were to refer to "effectively connected", the question would arise whether that term would be required by Article 3(2) MC to be interpreted on the US side in accordance with its definition under US tax law, Use of the term "attributable" avoids that problem and that is the reason the expression "Attributable" is used in US Model Conventions. Therefore the term appearing in US Model Conventions have the same meaning as the expression "Effectively Connected". The expression "Attributable" as used in Article 11(5) of the India-U ..... X X X X Extracts X X X X X X X X Extracts X X X X
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