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2017 (4) TMI 1635 - AT - Income TaxTaxability of interest on income tax refund received - PE in India or not? - AO held that the assessee had derived interest income on refund of TDS made out of business receipts as also the interest from bank was on business funds, thus directly connected with the business receipts and was therefore assessable under Article VII of Indo Australia DTAA as business income to be subjected to normal rate of tax - HELD THAT:- Special Bench in own case [2011 (5) TMI 562 - ITAT, DELHI] decided the question as we do not venture to say that the interest income has to be necessarily business income in the 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 - Decided in favour of assessee. Addition in respect of the Hazira project - HELD THAT:- It is a settled position that PE has to be reckoned project wise. As decided in Ishikama Heavy Industries Ltd [2007 (1) TMI 91 - SUPREME COURT] to attract the taxing provisions of I.T. Act, there has to be some activities conducted to permanent establishment (PE). There would be no tax liability with regard to overseas services even under the DTAA. From the invoices, it is clear that engineering services were sub contracted to a Singapore-based company and services were performed in Singapore only. As the work in respect of Hazira project was performed outside India, the AO was not right in treating 2% of the receipts as income. Reliance is also placed on the decision of Supreme Court in the case of CIT versus Hyundai Industries Co Ltd [2007 (5) TMI 196 - SUPREME COURT] The AO is directed to delete the addition. Cancellation of interest u/s 234B - HELD THAT:- As seen that the CIT (A) has observed correctly that since the entire income of the assessee was subject to deduction of tax at source, the assessee had no liability to pay advance tax. CIT (A) has placed reliance of the judgment of the Hon’ble Uttarakhand High Court in the case of CIT vs. Sedco Forex International Drilling Co. [2003 (10) TMI 40 - UTTARANCHAL HIGH COURT] and also on another judgment of the Uttarakhand High Court in the case of CIT vs. Haliburton Offshore Services [2004 (7) TMI 74 - UTTARANCHAL HIGH COURT] while directing the AO to delete the interest. We do not find any reason to interfere on this issue as the Department could not counter the stand of the Ld. CIT (A) with any judgment to the contrary or bring on record any fact which could prove that the finding of the Ld. CIT (A) was erroneous. Therefore, this ground also stands dismissed.
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