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2024 (2) TMI 529 - AT - Income TaxTaxability of interest on income tax refund received - PE in India or not? - whether shall be taxable as business income under Article 7 of India-France DTAA as against offered to tax as interest income under Article 12 of India-France DTAA ? - as manifested even if it is assumed that assessee has a PE in India in the form of India branch office, but since the said PE has not been carrying out any business activity in India since February, 2012, the income in question, i.e., ‘interest on income-tax refund’ cannot be said to be “effectively connected with such permanent establishment”, and, therefore, it does not fall in the ambit of Paragraph 5 of Article 12 so as to be taxed as business profits in terms of Article 7 of India France DTAA HELD THAT:- Tribunal in the case of Clough Engineering Ltd. [2011 (5) TMI 562 - ITAT, DELHI] noted in similar circumstances that the real test to be applied is not whether the interest is business income or not, but as to whether the debt-claim in respect of which the interest is paid is effectively connected with the PE or not. Thus the aforesaid decision of the learned Special Bench answers the extant controversy quite squarely inasmuch as it cannot be said that interest on income tax refund is effectively connected with the PE either on the basis of the asset-test or the activity-test, especially when there is no dispute to the position before us that India branch office of the assessee has not carried out any business activity during the previous year relevant to the assessment year under consideration. As the provisions of Paragraph 2 of Article 12 of the India-France DTAA are clearly attracted and, there is no scope for considering the instant case in terms of Paragraph 5 of Article 12 so as to invite taxability in terms of Article 7 of the DTAA. In fact, we find that in the context of India-France DTAA, the Mumbai Bench of the Tribunal in the case of Aker Solutions India SDN BHD [2022 (11) TMI 1445 - ITAT MUMBAI] relying upon the decision of .Clough Engineering Ltd. [2011 (5) TMI 562 - ITAT, DELHI] had taken a similar view with respect to the interest on income tax refund received under Section 244A of the Act. On an appeal filed by the Revenue, the Hon’ble Bombay High Court in the case of DIT Vs. Credit Agricole Indosuez [2015 (6) TMI 974 - BOMBAY HIGH COURT] did not find it expedient to interfere with the aforesaid decision of the Tribunal, and, thus, the same stands affirmed. Thus we find that the case of the assessee for taxing the income by way of interest on tax refund at the rate of 10% in terms of Paragraph 2 of Article 10 of the India France DTAA is liable to be upheld. Assessee appeal allowed.
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