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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 ..... 994 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 was no income from the said project during the previous year. The contract with DPC was also termination w.e.f. 17.6.2001 due to default in payments by DPC. However the Assessee entered into a fresh contract to restart Dabhol Power Project (DPP) on 27.3.2006 and the same was completed by 31.3.2007 and the entire income was offered to tax in 07-08. Though during the previous year there was no business carried by the project office yet the project office continued to exist. 3. The Assessee received during the previous year interest on income tax refund of Rs. 64,01,113/- relating to excess payment of taxes relating to business income. The aforesaid interest income was offered to tax in the income tax return filed by the Assessee for AY 08-09. The Assessee claimed that the said interest income has to be taxed u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 it relates to interest on income tax refund were that the assessee-company was incorporated under the laws of Australia. (As far as interest on Fixed deposits is concerned, the special bench held that it was effectively connected with the PE and had to be taxed under Article 7 of the Indo-Austrialian DTAA). It was an admitted fact that the assessee-company was carrying on business through the Permanent Establishment (the PE) in India. The assessee has declared contract receipts from ONGC Ltd., Cairn Energy India (P.) Ltd. and Niko Resources Ltd. The income declared by the assessee-company inter alia included interest on income-tax refund. It has been submitted that this interest income is taxable at the rate of 15 per cent on gross basis in view of the provision contained in paragraph No. 2 of Article XI of the Indo-Australian Double ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 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 fundamental question as to whether the debt-claim in this case can be said to be effectively connected with the PE. We have already held that the claim is connected with the PE in the sense that it has arisen on account of tax deduction at source from the receipts of the PE. However, it is also a fact that payment of tax is the responsibility of the foreign company. The same is determined after computation of its income and the tax forms not an expenditure for earning the income but an item of appropriation of profit. Therefore, even if the debt is connected with the receipts of the PE, it cannot be said to be effectively connected with such receipts because the responsibility to pay the tax lies on the shoulders of the assessee-company from the final profit ascertained as on the last date of the previous year and on closing the books of account. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cent. of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2 of this article, interest arising in a Contracting State: (a) and derived and beneficially owned by the Government of the other Contracting State, a political sub-division or local authority thereof, the Reserve Bank of India, or the Federal Reserve Bank of the United States, as the case may be, and such other institutions of either Contracting State as the competent authorities may agree pursuant to article 27 (Mutual Agreement Procedure); (b) with respect to loans or credits extended or endorsed (i) by the Export Import Bank of the United States, when India is the first-mentioned Contracting State; and (ii) by the EXIM Bank of India, when the United States is the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blishment. [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 commentary by Klaus Vogel, South Asian reprint edition at page /para 569 sub-para (dd) which reads as follows: "(dd) What US MC looks at in order to determine whether the dividends (etc.) form part of the permanent establishment, is whether the payments concerned are attributable to the establishment rather than whether the right or property giving rise to the payment is "effectively connected" with it. In choosing this wording-and in this respect deviating from OECD and UN MCs- US MC takes account of the fact that "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) [See Dale, H., 42 T.L.R. 689 (1987)], whereas "attributable", though used in US domestic tax law as well, is not defined [see, for instance, I.R.C. Sec.864( c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-USA DTAA has therefore to be construed as equivalent to "Effectively connected". The technical explanation referred to by the learned counsel for the Assessee whereby it has been observed that the term "Attributable" is to be given a narrower meaning than the expression "Effectively Connected", we find that the said technical explanation is in the context of attribution of profits of the PE and is relevant to taxation of an Indian enterprise having PE in USA. Nevertheless, the expression "attributable" even if held to be equivalent to the expression "effectively connected" in the light of the commentary by Klaus Vogel, referred to above, then the case of the Assessee would stand squarely covered in favour of the Assessee by the decision of the Special Bench in the case of Clough Engineering Ltd. (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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