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Issues: Whether interest on income-tax refund received by a non-resident having a project office in India was taxable at the concessional rate under Article 11(2) of the India-USA DTAA or was attributable to the permanent establishment and taxable under Article 11(5) read with Article 7 of the India-USA DTAA.
Analysis: The determining question was whether the interest was effectively connected with the permanent establishment. The expression "attributable to" in Article 11(5) was held to be equivalent in substance to "effectively connected", and the Tribunal followed the reasoning of the Special Bench decision on identical treaty language and facts. On that approach, interest on income-tax refund did not have the requisite effective connection with the permanent establishment merely because the underlying tax had been deducted from business receipts. The interest therefore remained taxable as interest under the specific treaty article governing interest income.
Conclusion: The interest on income-tax refund was taxable only under Article 11(2) of the India-USA DTAA and not under Article 11(5) read with Article 7. The issue was decided in favour of the assessee.
Ratio Decidendi: Where treaty language excludes interest from the general interest article only if it is attributable to a permanent establishment, the decisive test is effective connection with the permanent establishment, and interest on income-tax refund is not so connected merely because the refund arises from tax deducted from business receipts.
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