Treaty interest income linked to a permanent establishment falls under business profits, not the concessional interest article.

Interest on an income-tax refund received by a UK resident with a permanent establishment in India was treated as business profits because the debt-claim was effectively connected with that permanent establishment. Article 12(6) of the India-UK DTAA excluded the concessional 15% rate under Article 12(2) in such circumstances and directed taxation under Article 7. The advance ruling cited by the assessee was distinguishable because it involved no permanent establishment in India. The treaty benefit under Article 12(2) was therefore unavailable, and the interest was taxed as business profits.

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Issues: Whether interest on income-tax refund received by a non-resident assessee having a permanent establishment in India was taxable at 15% under Article 12(2) of the India-United Kingdom DTAA, or as business profits under Article 7 by virtue of Article 12(6).

Analysis: The assessee was a UK resident carrying on business in India through a permanent establishment, and the interest income was effectively connected with that permanent establishment. Article 12(6) expressly excludes the application of Article 12(2) where the beneficial owner carries on business in the other Contracting State through a permanent establishment there and the debt-claim is effectively connected with that permanent establishment. In such a situation, the treaty directs application of Article 7, not the concessional interest rate under Article 12(2). The advance ruling relied upon by the assessee was distinguishable because it proceeded on the absence of a permanent establishment in India.

Conclusion: The concessional rate under Article 12(2) was not available, and the interest income was taxable as business profits under Article 7.

Final Conclusion: The assessee failed to establish entitlement to the 15% treaty rate, and the interest was correctly brought to tax under the business profits article of the treaty.

Ratio Decidendi: Where a non-resident's interest income is effectively connected with a permanent establishment in India, Article 12(6) of the treaty excludes Article 12(2) and subjects the income to taxation under Article 7 as business profits.

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