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of <h1>Foreign company's bank interest taxable as business income while refund interest falls under DTAA Article XI paragraph 2</h1> <h3>Clough Engineering Ltd., Versus Asstt. Commissioner of Income Tax</h3> Clough Engineering Ltd., Versus Asstt. Commissioner of Income Tax - TMI Issues Involved:1. Taxability of interest income as business income connected with Permanent Establishment (PE).2. Deletion of addition related to Hazira Project receipts.3. Set off of losses for A.Y. 2001-02.4. Levy of interest under section 234D of the Income Tax Act, 1961.5. Cancellation of interest charged under section 234B of the Income Tax Act, 1961.Detailed Analysis:1. Taxability of Interest Income:The assessee contended that interest income on tax refunds and bank interest should be taxed at 15% as per Article XI of the DTAA between India and Australia. The Assessing Officer (AO) held that the interest income was connected with business receipts and should be taxed as business income under Article VII of the DTAA. The CIT (A) upheld this view. However, a Special Bench of the ITAT ruled that while bank interest was effectively connected with the PE, interest on income tax refunds was not. Thus, the latter should be taxed under paragraph 2 of Article XI, not as business income. The Division Bench of ITAT agreed with this finding, allowing the assessee's appeal on this ground.2. Deletion of Addition Related to Hazira Project Receipts:The AO added Rs. 1,46,73,467/- to the assessee's income, treating 2% of the receipts from the Hazira project as income, claiming the assessee had a PE in India. The CIT (A) deleted this addition, noting that all activities related to the Niko contract were performed outside India, and thus, there was no PE in India for this project. The ITAT upheld the CIT (A)'s decision, confirming that the activities for the Hazira project were indeed carried out entirely outside India, and therefore, no income from these activities was taxable in India.3. Set Off of Losses for A.Y. 2001-02:The AO did not allow the carry forward of losses. The CIT (A) allowed the set off of losses based on an ITAT decision that canceled an order under section 263. The ITAT restored this issue to the AO for verification and examination, as both parties consented to this course of action.4. Levy of Interest Under Section 234D:The assessee challenged the levy of interest under section 234D. Since this ground was consequential and not pressed by the assessee, the ITAT dismissed it without adjudication.5. Cancellation of Interest Charged Under Section 234B:The CIT (A) canceled the interest charged under section 234B, noting that the assessee's entire income was subject to tax deduction at source, and thus, there was no liability to pay advance tax. The ITAT upheld this decision, referencing judgments from the Uttarakhand High Court in similar cases, and found no reason to interfere with the CIT (A)'s findings.Conclusion:The assessee's appeal was partly allowed, with the ITAT ruling in favor of the assessee on the taxability of interest on income tax refunds and confirming the deletion of the addition related to the Hazira project. The department's appeal was partly allowed for statistical purposes, with the issue of set off of losses remanded to the AO for verification. The ITAT upheld the cancellation of interest charged under section 234B and dismissed the ground related to the levy of interest under section 234D.
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