2008 (2) TMI 465 - AT - Income Tax

Tribunal rules on gross receipts and tax treatment of interest under DTAA with France

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal. It was held that reimbursements for equipment, communication charges, and ... Business Of Exploration etc. Of Mineral Oils Issues Involved:1. Inclusion of reimbursement of expenses in gross receipts under Section 44BB of the Income Tax Act, 1961.2. Taxation of interest on tax refunds under the Double Taxation Avoidance Agreement (DTAA) with France.Detailed Analysis:1. Inclusion of Reimbursement of Expenses in Gross Receipts under Section 44BB:The Revenue's appeal contested the CIT(A)'s decision that reimbursements received by the non-resident company were not includible in gross receipts for taxation under Section 44BB of the Income Tax Act, 1961. The assessee, a French company engaged in oil drilling operations in India, argued that reimbursements for equipment, communication charges, and dry fruits were not taxable under Section 44BB as they were actual costs incurred on behalf of ONGC, without any profit element.The AO included these reimbursements in gross receipts, citing that they were part of contractual receipts. However, the CIT(A) found that these reimbursements were not part of the drilling operations covered under Section 44BB and were obligations of ONGC. The CIT(A) directed the AO to exclude these amounts from gross receipts.The Tribunal upheld the CIT(A)'s decision, stating that Section 44BB applies only to receipts connected with providing services or facilities related to oil extraction or production. Since the reimbursements were not related to these activities and lacked any profit element, they could not be taxed under Section 44BB or other provisions of the Act.2. Taxation of Interest on Tax Refunds under DTAA with France:The assessee's appeal challenged the AO's decision to tax interest on tax refunds as business income under Article 7 of the DTAA with France, instead of applying the specific provisions of Article 12(2) which prescribes a 10% tax rate.The AO and CIT(A) treated the interest as business income connected to the assessee's Permanent Establishment (PE) in India, thus applying a higher tax rate. The assessee argued that the interest on tax refunds did not arise through the PE and should be taxed at 10% as per Article 12(2).The Tribunal referred to the AAR decision in ABC, In re, which held that interest on tax refunds is not connected with any PE activity and falls under Article 12(2). The Tribunal also noted that in the assessee's own case for a previous assessment year, interest on tax refunds was classified as 'Income from other sources,' not business income.The Tribunal concluded that the interest on tax refunds should be taxed at 10% under Article 12(2) of the DTAA, as it is not effectively connected with the PE in India.Conclusion:The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, affirming that:1. Reimbursements for equipment, communication charges, and dry fruits are not includible in gross receipts under Section 44BB due to their lack of connection with oil extraction activities and absence of profit element.2. Interest on tax refunds should be taxed at 10% under Article 12(2) of the DTAA with France, as it is not connected with the PE in India.