ITAT Mumbai: Assessing Officer to Tax Interest Income at 10% per Indo Netherlands Tax Treaty

The Appellate Tribunal ITAT Mumbai ruled in favor of the assessee, directing the Assessing Officer to tax the interest income at 10% as per the provisions of Article 11(2) of the Indo Netherlands Tax Treaty. The appeal of the Revenue was dismissed.

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Issues involved:
The issues involved in this case are:
1. Taxability of interest income in the hands of the assessee.
2. Dispute over the tax rate to be applied as per the Indo Netherlands Tax Treaty.

Issue 1: Taxability of interest income:
The assessee, an Indian Branch of a company incorporated in Netherlands, filed its return of income for A.Y. 2012-13 declaring total income. The Assessing Officer (AO) observed a difference in income in Form 26AS and the Profit & Loss Account. The AO sought to tax the difference as interest income on external commercial borrowings at 40%. The assessee argued that the interest income should be taxed as per the Indo Netherlands Tax Treaty. The Commissioner of Income Tax (Appeals) (CIT(A)) directed the AO to apply the tax rate prescribed in the treaty. The Revenue appealed this decision.

Issue 2: Dispute over tax rate as per Indo Netherlands Tax Treaty:
The Revenue contended that the interest income should be taxed as business profit of the Indian branch at 40%. However, the Tribunal found that Article 7(6) of the treaty states that if profits include items of income dealt with separately in other articles, those provisions shall not be affected. Since there is a separate Article 11 for taxability of interest income, the Tribunal directed the AO to tax the interest income at 10% as per Article 11(2) of the treaty. Consequently, the grounds raised by the Revenue were dismissed.

In conclusion, the Appellate Tribunal ITAT Mumbai ruled in favor of the assessee, directing the Assessing Officer to tax the interest income at 10% as per the provisions of Article 11(2) of the Indo Netherlands Tax Treaty. The appeal of the Revenue was dismissed.

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