2024 (2) TMI 529

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....erest income amounting to INR 1,79,47,179 under Article 12 of India-France DTAA; 2. erred in holding that the branch office in India would constitute a Permanent Establishment (PE') of Corning SAS in India for current year disregarding the fact that no business was being carried out from the aforesaid branch post 1 February 2012 and thereby wrongly held the branch office as PE; 3. erred in concluding that interest income is liable to taxed as business income under Article 7 of India-France DTAA by treating branch office as PE in India, without appreciating that even if it is held that assessee has PE in India (without admitting) the said interest income would still not be chargeable to tax as business income as the same is not effectively connected to alleged PE; 4. without prejudice to our contention that assessee does not have a PE in India in relevant AY and income cannot be considered as effectively connected to PE, in case it is held that income is taxable as business income under Article 7, then the business expenditure incurred during the year should be allowed to be adjusted against the said business income; 5. erred in law and in fac....

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....ssessment year under consideration, i.e. 2018-19, the India branch office had no business activity. It transpires that during the assessment years 2001-02 and 2003-04 when India branch office was doing business, assessee paid excess income-tax on its business profits and, accordingly, a refund was due to it. During the assessment year under consideration before us, the assessee received interest from the Income-tax Department on such income tax refund amounting to Rs. 1,79,47,179/-. In the return of income filed on 30th October, 2018, the assessee offered the aforesaid income to tax in India in terms of Paragraph 2 of Article 12 of the DTAA between India and France at the rate of 10%. At the stage of the draft assessment order under Section 144C of the Act dated 12th April, 2021, the Assessing Officer sought to tax the said interest income at the rate of 40%, thereby treating it as business income, as against the stand of the assessee of treating the said income as interest income in terms of Article 12 of the India-France DTAA. In coming to such conclusion, the Assessing Officer treated the branch office in India as being equivalent to a PE of the assessee and also held that such ....

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....ted 14 January 2019). (v) DHL Operations BV v. DDIT (ITA No. 183/Mum/2010 dated 21 September 2011) (Mumbai Tribunal) - Appeal filed by Revenue dismissed by Hon'ble Bombay HC (ITA No. 431 of 2012 dated 17 July 2014). (vi) DIT(IT) v. Credit Agricole Indosuez [2015] 377 ITR 102 (Bom HC). (vii) International Global Networks BV v. DDIT (2012) (50 SOT 433) (Mumbai Tribunal) - Issue not challenged by the department before the Hon'ble Bombay HC (ITA No. 1579 of 2012 dated 12 December 2014). (viii) Transocean Offshore International Ventures Ltd v. DCIT(IT) (ITA No. 5895/Del/2017 dated 28 January 2022) (Delhi Tribunal). (ix) ACIT(IT) v. Baker Hughes Singapore Pte (ITA No. 5337/Del/2018 dated 8 February 2022) (Dehradun Tribunal). 7. On the other hand, the learned DR appearing for the Revenue has primarily reiterated the stand of the Assessing Officer inasmuch as, according to him, the interest on income tax refund is connected to the business income, having arisen from business activities, and as the assessee has a PE in India, the same is to be taxed as business income under Article 7 of the India-France DTAA. According to the learned D....

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....he beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 15, as the case may be, shall apply." 10. Shorn of other details, for the purposes of appreciating the limited controversy before us, it is relevant to note that in terms of Paragraph 1 of Article 12, interest arising in a contracting State and paid to a resident in other contracting State may be taxed in the other State. Paragraph 2 provides an exception and prescribes that such interest may also be taxed in the contracting State in which it arises but, if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10% of the gross amount of such income. Paragraph 5 of Article 12 enumerates that the provisions of Paragraph 1 and 2 shall not apply if....

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....h the PE. We have already held that the claim is connected with the PE in the sense that it has arisen on account of tax deduction at source from the receipts of the PE. However, it is also a fact that payment of tax is the responsibility of the foreign company. The same is determined after computation of its income and the tax forms not an expenditure for earning the income but an item of appropriation of profit. Therefore, even if the debt is connected with the receipts of the PE, it cannot be said to be effectively connected with such receipts because the responsibility to pay the tax lies on the shoulders of the assessee-company from the final profit ascertained as on the last date of the previous year and on closing the books of account. It is for the company to pay the tax from any source available with it. It so happened in this case that the tax got automatically deducted from the receipts of the PE by operation of law. Such collection of tax by force of law would not establish effective connection of the indebtedness with the PE as ultimately it is only the appropriation of profit of the assessee company. However, we may add that we do not venture to say that the interest ....