Treaty taxation of refund interest prevails over domestic rate for a non-resident with an Indian permanent establishment.

Interest on an income-tax refund received by a non-resident assessee with a permanent establishment in India was held to be taxable under the India-Japan DTAA rather than at the domestic rate. The Tribunal followed the Special Bench decision in Clough Engineering Ltd. and the co-ordinate Bench ruling in Bechtel International Inc., applying the treaty provision to the refund interest and rejecting the Revenue's nexus-based argument tied to the permanent establishment. The treaty-based rate was therefore upheld and the issue was decided in favour of the assessee.

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Issues: Whether interest on income-tax refund earned by a non-resident assessee having a permanent establishment in India was taxable under the domestic law rate or at the concessional rate under the India-Japan DTAA.

Analysis: The issue was treated as covered by the Special Bench decision in Clough Engineering Ltd. and the co-ordinate Bench decision in Bechtel International Inc. The Tribunal followed those decisions and held that the relevant treaty provision governed the taxation of the interest income. The Revenue's contention that the receipt had nexus with the permanent establishment did not persuade the Tribunal to depart from the settled view already taken on the identical question.

Conclusion: The interest on income-tax refund was taxable at the rate provided under the DTAA and not under the domestic rate, and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's appeal failed because the treaty-based taxation of the refund interest was upheld.

Ratio Decidendi: Where interest on income-tax refund is covered by the applicable treaty provision, it is to be taxed in accordance with the DTAA rather than the domestic rate, even if the assessee has a permanent establishment in India.

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