2011 (9) TMI 1006

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.... the order passed by the Learned Deputy Director of Income Tax ("the learned Assessing Officer") under Section 154 of the Act is bad in law in so far as the change in taxability of interest of income tax refund is not a mistake apparent from the records. 2. Without prejudice, interest on income tax refund is not effectively connected to the alleged PE. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned Assessing Officer erred in holding that the interest on income tax refund is effectively connected to the PE; thereby erred in holding that the same is taxable at the rates applicable to business income by virtue of Article 7 of the India-Netherlands tax treaty ("the treaty") instea....

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....the A.O. held that since the assessee was having PE in India and the interest income which arose was on account of excess payment of taxes relating to business income, therefore, the same was effectively connected with such PE, for which provisions of para 7 of Article 11 relating to income from business was applicable. The A.O. accordingly taxed the interest income at 41% as applicable to business income along with surcharge @ 5%. 2.1 In appeal, the ld. CIT(A) upheld the validity of the order passed by the A.O. u/s 154 of the I.T. Act. He further held that the interest received by the assessee on income tax refund amounting to ` 1,13,13,177/- is attributable to the business activity of the assessee as per Article 11(7) of the treaty. ....

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....1 or paragraph (2) of article 11 of the Indo-Australia Double Taxation Avoidance Agreement." 5.1 We find the Tribunal while deciding the issue in favour of the assessee has held as under:- (short notes) "Held, (i) that the gist of the provision in section 90(2) of the Incometax Act, 1961, is that in a case where the provisions of the Double Taxation Avoidance Agreement apply to an assessee, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. Application of the provision can be made after ascertaining: (i) tax payable by the assessee under the Double Taxation Avoidance Agreement and (ii) tax payable by the assessee under the Income-tax Act. If tax payable under the Act is less than the tax pa....

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....her form of indebtedness as well as all other income assimilated to income from money lent by the law, relating to tax in India. Paragraph (4) provides exceptions to the contents of paragraphs (1) and (2). It is provided that these paragraphs shall not apply if the assessee carries on business in India, in which the interest arises, through a permanent establishment situated in India, and the indebtedness in respect of which the interest is paid is effectively connected with such permanent establishment. In such a case, the provisions of article 7 shall apply. The debt claim was connected with the permanent establishment in the sense that it had arisen on account of tax deduction at source from the receipts of the permanent establishment. H....