TMI Blog2024 (2) TMI 529X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 fact, in proposing to initiate penalty proceedings under section 270(A) of the Act. 3. During the course of hearing, the assessee has also filed following Additional Grounds of appeal :- Additional grounds of appeal Validity of proceedings under section 143(3) r.w.s 144C of the Act 6. erred in upholding the order of the learned Assessing Officer without appreciating the fact that in absence of any variation proposed to the income of the Appellant, which is prejudicial to the interest of the Appellant, passed an order under section 143(3) read with section 144C(1) of the Income-tax Act, 1961 instead of directly issuing a final assessment order under section 143(3) of the Act and thus, the final assessment order issued should be quashed and treated as non-est given that time period prescribed under section 153 of the Act read with CBDT Notifications for passing the final assessment order has lapsed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interest income was effectively connected with the PE in India. In other words, the Assessing Officer concluded that the interest income in question was business income which was to be taxed in terms of Article 7 read with Paragraph 5 of Article 12 of the India-France DTAA. The DRP, in its directions dated 6th December, 2021, affirmed the findings of the Assessing Officer and, inter alia, observed that merely because the interest on the income tax refund was received after the closure of the India branch office would not change the character of such receipt and that it was to be treated and taxed as business income. The Assessing Officer has thereafter passed the final assessment order under Section 143(3) read with Section 144C(13) dated 29th January, 2022 on the above lines, against which, the assessee is in further appeal before us. 6. The short point, manifested by way of Ground of appeal No.3 enumerated above is to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness 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 DR, the interest income having arisen from business activities can be understood to be connected to PE also and, therefore, the Assessing Officer made no mistake in treating the said sum to be covered by the exception provided in Paragraph 5 of Article 11, thereby liable to be taxed as business income under Article 7 of the India-France DTAA. 8. We have carefully considered the rival submissions. Insofar as the fact position is concerned, there is no dispute that the assessee is a branch office of a French entity in India and also that during the year under consideration, the India branch office has not carried out any business activity. This aspect has been consistently canvassed by the assessee before the lower authorities, without any repudiation; and, in any case, it is supported by the fact that the solitary income declared by the assessee for the year under consideration is of ₹ 1,79,47,179/- representing interest on the income tax refund. Our attention was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the 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 PE situated therein or performs in that other State independent personal services from a fixed base situated therein and the debt claimed in respect of which the interest is paid is effectively connected with such Permanent Establishment or the fixed base. Paragraph 5 further states that in case of such exceptions, the provisions of Article 7 or Article 15, as the case may be, shall apply. Thus, Paragraph 5 carves out an exception whereby in certain situations interest income can be taxed as business income in terms of Article 7 or as Independent Personal Services in terms of Article 15. 11. The case of the appellant before us is that interest received by the assessee on income tax refund is not business income, inasmuch as, it is not effectively connected with such Permanent Establishment so as to attract Paragraph 5 of Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income has to be necessarily business income in nature for establishing the effective connection with the PE because that would render provision contained in paragraph 4 of Article XI redundant. Thus, there may be cases where interest may be taxable under the Act under the residuary head and yet be effectively connected with the PE. The bank interest in this case is an example of effective connection between the PE and the income as the indebtedness is closely connected with the funds of the PE. However, the same cannot be said in respect of interest on income-tax refund. Such interest is not effectively connected with PE either on the basis of asset-test or activity-test. Accordingly, it is held that this part of interest is taxable under paragraph No. 2 of Article XI. Thus, the ground referred to the Special Bench is partly allowed. The Division Bench shall dispose off the appeal in conformity with this order. (emphasis by underlining provided by us) 12. In our considered opinion, the aforesaid d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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