Refund interest under the India-Malaysia tax treaty is taxable as interest income, not as business profits of the permanent establishment.

Interest on income-tax refund under section 244A was treated as interest income under Article 11(2) of the India-Malaysia DTAA, not as business income under Article 7. The Tribunal applied the view that such refund interest is not effectively connected with the permanent establishment in India, whether tested on assets or activities, and therefore cannot be attributed to business profits. Relying on the jurisdictional High Court, it followed the treaty interest article as the correct charging provision. The corresponding grounds were allowed in favour of the assessee.

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Issues: Whether interest on income-tax refund under section 244A of the Income-tax Act, 1961 was taxable as business income under Article 7 of the India-Malaysia DTAA or as interest income under Article 11(2) of the DTAA.

Analysis: The dispute turned on whether the refund interest was effectively connected with the assessee's permanent establishment in India. The Tribunal followed the Special Bench view that interest on income-tax refund is not effectively connected with the permanent establishment either on the asset test or the activity test. It also relied on the jurisdictional High Court decision which accepted that such refund interest is to be taxed with reference to the relevant interest article of the treaty and not as business profits attributable to the permanent establishment.

Conclusion: Interest on income-tax refund was held taxable under Article 11(2) of the India-Malaysia DTAA and not under Article 7. The corresponding grounds were allowed in favour of the assessee.

Ratio Decidendi: Interest on income-tax refund is not, by itself, effectively connected with the permanent establishment and is taxable under the treaty provision governing interest income.

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