TaxTMI Updates e-Newsletter
Jan 14,2012

Chargeability of interest under Section 220(2) of the Income Tax Act - revival of original notice of demand - Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 - doctrine of merger - compensatory nature of interest

Chargeability of interest under Section 220(2) of the Income Tax Act - revival of original notice of demand - compensatory nature of interest - Liability to pay interest under Section 220(2) on the tax demand assessed for AY 1995-96, including the period during which an appellate order had reduced the demand but was later reversed. - HELD THAT: - The Court held that where the original assessment demand is ultimately restored by appellate orders, the original notice of demand is revived and interest under Section 220(2) is chargeable from the date of the original demand. The validating Act, 1964 and the doctrine of merger support treating the original demand as kept in abeyance during appeals and revived on final confirmation; interest is compensatory and therefore may be computed with reference to the tax finally determined but reckoned from the original demand date. The Court differentiated authorities where the assessee had fully paid the original demand immediately (in which cases different principles apply) from cases where the demand was not fully satisfied, observing that the present petitioner had not paid the tax in full and therefore could not benefit from those rulings. Applying these principles, the Court held that interest is payable on the amount determined in the assessment order from November 1997 until actual payment, without regard to the interim reduction by the CIT(A) while appeals were pending. [Paras 10, 11, 37, 42]

The petitioner is liable to pay interest under Section 220(2) on the tax as computed in the assessment order from November 1997 until payment; the AO is directed to recalculate and recover interest in accordance with the Court's directions.

Chargeability of interest under Section 220(2) of the Income Tax Act - Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 - Whether interest should be charged on amounts already allowed to the assessee as interest on refunds under Section 244A. - HELD THAT: - While directing interest to be charged on the tax demand from the original demand date, the Court clarified that interest must not be charged on amounts of interest already allowed to the assessee under Section 244A on earlier refunds. The AO was instructed to exclude those interest amounts when recomputing the interest liability. [Paras 42]

No interest shall be charged on the interest amounts of Rs.2,58,993, Rs.58,500 and Rs.26,000 allowed under Section 244A; AO to exclude these amounts when recalculating interest.

Final Conclusion: Writ petition dismissed. The assessee must pay interest under Section 220(2) on the tax as assessed for AY 1995-96 from the original demand date (November 1997) until payment; the AO to recompute interest excluding interest amounts already allowed under Section 244A; no order as to costs.

Permanent Establishment - Dependent Agent Permanent Establishment (DAPE) - Agency PE vs Fixed Place PE - Onus on Revenue to prove PE - Arm's length transactions between agent and principal - Article 5(5) and Article 5(6) of the Indo-French DTAA - Profit attribution to PE / DAPE profit neutrality

Dependent Agent Permanent Establishment (DAPE) - Article 5(5) and Article 5(6) of the Indo-French DTAA - Onus on Revenue to prove PE - Arm's length transactions between agent and principal - Existence of a permanent establishment (DAPE) in India - HELD THAT: - The Tribunal held that the determination of a DAPE is governed by Article 5(5) read with Article 5(6) of the Indo-French DTAA, which treats an agent as of independent status unless it is shown that transactions between the agent and the enterprise were not made on arm's length terms. Since Article 5(5) and (6) override the basic fixed-place PE rule, the test for DAPE required a specific negative finding that transactions between principal and agent were not at arm's length. The onus to establish existence of a PE lies on the revenue, and here the Assessing Officer and the Dispute Resolution Panel did not record any finding (nor was any material placed before the Tribunal) to show that transactions were not at arm's length. Mere authority of an agent to conclude contracts or the agent carrying out business activities for the principal is not decisive without displacing the agent's independent status under Article 5(6). In absence of the requisite finding, the Tribunal set aside the AO/DRP conclusion that the assessee had a PE in India and confined its decision to the facts of the year under consideration. [Paras 8, 9]

Assessee did not have a permanent establishment in India on the facts of the case; AO/DRP finding to the contrary is vacated for lack of any finding that transactions were not at arm's length.

Article 9 of the Indo-French DTAA - Claim for relief under Article 9 of the DTAA in respect of freight earnings - HELD THAT: - The Tribunal observed that the issue on applicability of Article 9 was covered against the assessee by a coordinate bench's earlier decision in the assessee's own case for an earlier year. The assessee retained liberty to pursue the matter before higher courts, but for the present forum the coordinate-bench precedent governed the outcome. [Paras 16]

Claim for relief under Article 9 in respect of the freight earnings is rejected before this forum.

Interest under section 234B - Levy of interest under section 234B - HELD THAT: - The Tribunal followed the jurisdictional High Court decision cited by the assessee, holding that the assessee was entitled to relief on the ground raised against levy of interest under section 234B. The Tribunal directed the Assessing Officer to grant necessary relief in accordance with that precedent. [Paras 19]

Grievance against levy of interest under section 234B is allowed and relief is directed to be granted.

Final Conclusion: Appeal partly allowed: the Tribunal vacated the finding of a permanent establishment (DAPE) for the assessment year 2006-07 for lack of any finding that agent-principal transactions were not at arm's length; the claim under Article 9 was rejected on existing coordinate-bench precedent; relief on interest under section 234B was allowed following the jurisdictional High Court authority.