TaxTMI 
TaxTMI 
2010 (12) TMI 282
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....tatement showing computation of total income stating that the entire income arising in India for the year was represented by profits derived from the operation of ships in international traffic and the same was not taxable in India in view of Article 8 of the Double Taxation Avoidance Agreement ("DTAA" for short) in force between India and Germany, but was taxable only in Germany where its effective management was situated. During the course of assessment proceedings, the Assessing Officer noted that the assessee received Income-tax refund, which included interest on such Income-tax refund amounting to Rs. 12,44,428. Such refund was pursuant to the order dated 10th April, 2003 for the assessment year 1992-93. This interest was also claimed by the assessee as exempt in terms of clause (3) of Article 8 of Indo-German Tax Treaty. On being called upon to explain as to why such interest on refund of Income-tax was not offered for taxation, the assessee submitted that the same was covered under Article 8(3) of DTAA between India and Germany. Apart from that the assessee also relied on judgments of the Hon'ble Supreme Court in the case of Donald Miranda And Others v. CIT [1961] 42 ITR 166....
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....udhury and Sons (supra) for canvassing the view that the interest partakes of the same character as the payment on which it is awarded. Since the payment of taxes and its refund was from the profits derived from the operation of ships, it was urged that the interest on such refund should also assume the same character as profits from the operation of ships in international traffic. It was vehemently argued that clause (3) of Article 8 of DTAA withGermany was clearly applicable and hence interest on Income-tax refund should be held as profits derived from the operation of ships in the international traffic. 5. Per contra, the learned Departmental Representative argued that interest on Income-tax refund was covered under Article 11 (4) of DTAA with Germany. In support of his case he relied on the afore-stated ruling of the Authority for Advance Rulings (supra) in which it has been held that Income-tax refund is enveloped with in the expression "debt-claims of every kind" covered under Article 12(5) of DTAA with UK, which provision was stated to be analogous to Article 11 (4) of DTAA with Germany. His further submissions were the reiteration of the reasoning recorded by the authori....
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....d as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 shall not apply in relation to such interest. ARTICLE 11 Interest 1. Interest arising in aContractingStateand paid to a resident of the otherContractingStatemay be taxed in that other State. 2. However, such interest may also be taxed in theContractingStatein which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest. 3.(a) ................... (b) ..................... 4. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, binds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. 5. 6. 7. ........................." (Emphasis supplied by us) 9. A cursory glance....
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....th as per the prescription of the relevant Articles. We find that there are different Articles such as Article 8 which deals with income from shipping and air transport business, Article 10 which deals with dividends, Article 11 dealing with royalties and fees for technical services, Article 13 dealing with capital gains etc. etc. It is thus seen that starting from Article 8 onwards, items of specific nature of income, such as income from shipping and air transportation, dividends, royalty and fees for technical services etc. are dealt with in different Articles. If an item of income falls under any of these specific Articles, then the provisions of Article 7 dealing with business profits generally, are ousted as is apparent from a reading of clause (7) of Article 7 itself. 11. We are reminded of the maxim generalia specialibus non derogant, according to which special provisions override general provisions. As per this rule, if there is a special provision and also a general provision dealing with the same subject matter, then the mandate of the special provision would prevail and the general provision shall lean in favour of the special provision. The Hon'ble jurisdictional Hig....
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....afts in international traffic". This clause further makes Article 11 subservient to it inasmuch as it provides that the provisions of Article 11 shall not apply in relation to interest on funds connected with the operation of ships or aircrafts in international traffic. It is also noted that Article 11 specifically deals only with interest income. Applying the above maxim of generalia specialibus non derogant the interest income encompassed in this Article shall be dealt with as per the prescription of this Article and not other Articles. When we examine Article 8(3) in conjunction with Article 11, it emerges that interest income of every kind as referred to in Article 11 arising in India and paid to a resident of Germany shall be subjected to tax in India and the mandate of Article 8 exempting profits from the operation of ships or aircrafts in international traffic in India shall not apply provided it is not of the nature of interest income as specifically referred to in Article 8(3). Though Article 8 is a special provision vis-a-vis Article 7 in terms of profits derived from the operation of ships or aircrafts in international traffic which are otherwise business profits, Articl....
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....ing part of the profits of the business. From the facts of this case it can be seen that primarily the ratio decidendi of this judgment is qua the treatment of refund of Income-tax and not interest on such Income-tax refund. Further the tax payable by the assessee in that case was deductible from business profits as per the relevant provisions and it was only when the excess amount was refunded that it was held to be income from business. On the other hand we are dealing with a case in which neither there is any dispute on the nature of refund of Income-tax nor at the time of payment of tax, there was any provision granting deduction for it. Thus this judgment, being clearly distinguishable, is of no assistance to the assessee. 14. Let us examine as to whether the interest on Income-tax refund can be characterized as "interest on funds connected with the operation of ships or aircrafts in international traffic" as is the directive of clause (3) of Article 8. Only if interest on Income-tax refund falls within the expression "interest on funds connected with the operation of ships or aircrafts in international traffic" it shall be considered as profits derived from the operation o....
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....s for carrying his cargo to other destination on ship and the amount remains unpaid for a particular period, after which the assessee recovers interest on such invoice amount. The amount of interest so resulting shall be the "interest on funds connected with the operation of ships". The argument of the ld. AR that interest income resulting from the deployment of funds from the shipping business in any manner as qualifying for inclusion in clause (3) of Article 8, is far fetched and deserves to be jettisoned. If the intention had been to provide immunity from taxation in respect of each and every kind of interest resulting from the parking of funds of shipping business, then the language of this clause would have been worded something like 'interest on funds from shipping business'. At any rate, the payment of Income-tax, as has been noted supra, is a discharge of statutory liability of the assessee and hence cannot be equated with the investment of funds of business. As exemption extends only to the interest Income on funds which are 'connected with the operation of ships in international traffic'', the same cannot bring in its fold interest income of every nature, resulting from t....
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....nal traffic as per Article 8. It does not and cannot refer to any interest other than that. Naturally the interest on Income-tax refund cannot have any relation with operation of ships or aircrafts in international traffic and hence cannot be brought within the purview of Article 8. In view of the exclusion of interest on Income-tax refund from the ambit of Article 8(3), the same would go back for consideration under Article 11, which is otherwise a special provision dealing with the treatment of interest. 17. We can examine this case from another angle as well. Clause (4) of Article 11 defines "interest" to mean income inter alia from "debt-claims of very kind". In an earlier para we have examined the nature of Income-tax which is payable on assessee's income after the same is determined. In that view of the matter the excess amount of tax paid by the assessee becomes recoverable and assumes the character of 'debt-claim' as has been held by the Authority for Advance Rulings in ABC (supra). In that case the appellant, a company incorporated in U.K., made application for Advance Rulings on the following questions :- "1. Whether, on the facts and in the circumstances of the cas....