2016 (5) TMI 945 - HC - Income Tax

Tax Refund Interest Covered by DTAA: Court Rules in Favor of Appellant

Ansaldo Energia SPA, C/O N. Madhan Versus The Commissioner of Income Tax, (International Taxation), Chennai

The Court held that the interest payable on income tax refunds under Section 244A falls within the definition of 'interest' under Article 12(4) of the ... Interest payable on the refund of income tax under Section 244-A - whether falls within the definition of the term interest under Article 12.4 of the Double Taxation Avoidance Agreement or not? - Held that:- Subsection (1) of Section 244-A uses two important expressions, namely (i) becomes due, and (ii) be entitled to. The expression 'becomes due' is a clear indication that an assessee will be entitled to the benefit of Section 244-A only if the refund of any amount has become due. If a refund has become due, interest on the refund is also automatic subject to the satisfaction of other conditions. Anything that is due and which a person is entitled to collect, is naturally in the nature of a debt claim. Therefore, we do not think that the Supreme Court made a very stray observation in paragraph 38 of its decision in Tata Chemicals, without realising what they were actually indicating. The statement found in paragraph 38 of the decision in Tata Chemicals to the effect 'refund due and payable to the assessee is debtowed payable by the revenue' is actually a perfect statement of law. It is certainly a theorem, but not Euclid's theorem. Therefore, the law as we see is well settled to the effect that what was due as a refund and what was payable as interest on such refund are debt claims within the meaning of Article 12.4. As a consequence, they satisfy the parameters of Article 12.3(a).- Decided in favour of the assessee. Issues Involved:1. Whether interest under Section 244A of the Income Tax Act on refund of income tax is covered within the term 'interest' under Article 12(4) of the Double Taxation Avoidance Agreement (DTAA) between India and Italy.2. Whether the interest under Section 244A is liable to taxation at a restricted rate of 15% as provided in Article 12(2) of the DTAA between India and Italy.Issue-wise Analysis:Issue 1: Definition of 'Interest' under Article 12(4) of DTAAThe primary question was whether the interest payable on the refund of income tax under Section 244A of the Income Tax Act falls within the definition of 'interest' under Article 12(4) of the DTAA between India and Italy. Article 12(4) defines 'interest' as income from government securities, bonds, debentures, debt claims of every kind, and all other income assimilated to income from money lent by the taxation law of the State in which the income arises.The appellant argued that the interest paid on the refund under Section 244A is a debt claim within the meaning of 'interest' under Article 12(4). The appellant relied on the Supreme Court's decision in Union of India v. Tata Chemicals Ltd., which stated that refund due and payable to the assessee is a debt-owed and payable by the Revenue, and the right to interest follows as a matter of course.The Department contended that Article 12(4) and 12(3)(a) of the DTAA would not apply if the assessee has a permanent establishment in India, as the interest would be treated as part of business profits under Article 7 and made taxable accordingly. The Department's argument was based on the Tribunal's finding that the assessee has a permanent establishment in India, which was confirmed by the High Court but is pending appeal before the Supreme Court.The Court rejected the Department's contention, stating that Article 12(6) does not apply to a situation where the State is the payer of the interest. The Court clarified that Article 12(6) deals with cases where the payer has a permanent establishment, which is not applicable when the Government of India is the payer. Therefore, the interest payable by the Government under Section 244A falls within the definition of 'interest' under Article 12(4).Issue 2: Taxation Rate of Interest under Article 12(2) of DTAASince the first question of law was answered in favor of the appellant, the second question regarding the restricted taxation rate of 15% under Article 12(2) did not arise for consideration.Conclusion:The Court concluded that the interest payable on the refund of income tax under Section 244A is a debt claim within the meaning of 'interest' under Article 12(4) of the DTAA between India and Italy. Consequently, the first question of law was answered in favor of the appellant, and the second question did not arise. The appeal was allowed with no order as to costs.