Pass-through taxes and treaty interest rules excluded service tax, VAT, and refund interest from broader business income treatment.

Service tax and VAT collected as statutory pass-through levies were held outside gross receipts for presumptive taxation under section 44BB, because they are not consideration for services but amounts remitted to the Government. Interest on income-tax refund was held taxable under Article 11 of the Indo-Cyprus DTAA at the treaty rate, since it was not effectively connected with a permanent establishment on either the asset test or activity test. The revenue's challenge failed on both issues, and relief was granted to the assessee on the cross-objection.

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Issues: (i) Whether service tax and VAT collected by the assessee were includible in gross receipts for computing income under section 44BB of the Income-tax Act, 1961; (ii) Whether interest on income-tax refund was taxable in India at the treaty rate under Article 11 of the Indo-Cyprus DTAA or as business income linked to the permanent establishment.

Issue (i): Whether service tax and VAT collected by the assessee were includible in gross receipts for computing income under section 44BB of the Income-tax Act, 1961.

Analysis: The presumptive scheme under section 44BB applies to amounts paid or payable for services rendered. Service tax and VAT are statutory levies collected by the assessee for remittance to the Government and do not form part of consideration for services. The settled position was applied that such indirect taxes are outside the gross receipts for section 44BB computation.

Conclusion: The receipts on account of service tax and VAT were not includible in gross receipts under section 44BB, and the finding was in favour of the assessee.

Issue (ii): Whether interest on income-tax refund was taxable in India at the treaty rate under Article 11 of the Indo-Cyprus DTAA or as business income linked to the permanent establishment.

Analysis: Under section 90(2) of the Income-tax Act, 1961, the assessee is entitled to the more beneficial treaty provision. Article 11 permits taxation of interest in the source State at the capped treaty rate unless the debt claim is effectively connected with a permanent establishment, in which case Article 7 applies. On the facts, the refund interest was held not to be effectively connected with the permanent establishment on either the asset-test or activity-test.

Conclusion: The interest on income-tax refund was taxable under Article 11 of the Indo-Cyprus DTAA and not as business income linked to the permanent establishment, and the finding was in favour of the assessee.

Final Conclusion: The revenue's challenge failed on both issues, and the assessee obtained relief on the cross-objection.

Ratio Decidendi: Statutory taxes collected as pass-through amounts are not part of gross receipts for presumptive taxation, and treaty interest provisions prevail at the capped rate unless the debt claim is effectively connected with a permanent establishment.

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