2018 (12) TMI 1511 - AT - Income Tax

Interest earned on income-tax refund - taxed as income from other sources as per Article 12(2) of the DTAA between Indian and UK - income accrued in India - Held that - A careful perusal of the order of the Tribunal and the order giving effect to the directions of the ITAT amply makes it clear that the decision of a coordinate bench of this Tribunal in the case of ACIT Dehradun vs Clough Engineering Ltd. 2011 (5) TMI 562 - ITAT DELHI is applicable to the facts of the case and the interest on income-tax refund cannot be treated as effectively connected with PE of the assessee and has to be taxed as per beneficial provisions of the treaty between the two countries. In view of the decisions in the case of Clough Engineering Ltd. (supra) and the stand taken by the revenue in assessee s own case for earlier years we are of the considered opinion that the interest earned on income-tax refund has to be taxed as income from other sources as per Article 12(2) of the DTAA between Indian and UK at 15% on gross basis. With this view of the matter we uphold the contention of the assessee and direct the learned AO to levy the tax on the interest of income-tax refund at 15% on gross basis. Now coming to the appeal of the revenue challenging the directions of the DRP in respect of interest free foreign bank account and also foreign exchange gains on reinstatement of bank balance of foreign bank account during the year. At the outset it is brought to our notice by the learned AR that for the Asstt. Year 2006-07 a coordinate bench of this Tribunal considered both these issues at length and reached a conclusion that the interest earned outside India has to be excluded and also that the gain on account of fluctuations of foreign exchange on reinstatement of balance lying in the foreign bank outside India should not be subjected to tax in India at all. There is no change of facts for this year from the earlier years. We therefore find it difficult to take a different view from the one taken. While respectfully following the same we hold these two issues in favour of the assessee and find the grounds of appeal of the revenue devoid of merits.

Summary

Issues:
1. Taxability of interest income on UK bank accounts and exchange gain on reinstatement of bank balance outside India.
2. Rate of tax applicable on interest income on income-tax refund.
3. Tax treatment of interest earned outside India and foreign exchange gains on reinstatement of bank balance in a foreign bank account.

Analysis:
1. The first issue pertains to the taxability of interest income from UK bank accounts and exchange gain on reinstatement of bank balance outside India. The Assessing Officer proposed additions to the income based on these amounts. The Dispute Resolution Panel accepted the non-taxability of certain income but disagreed on the tax rate applicable to the interest income on the income-tax refund. The Tribunal upheld the assessee's contention that the interest on income-tax refund should be taxed at 15% under the DTAA between India and UK, rejecting the revenue's argument for a higher tax rate based on the connection with the Permanent Establishment in India.

2. The second issue revolves around the rate of tax applicable to the interest income on the income-tax refund. The revenue challenged the rate of tax at 42.33% set by the DRP, advocating for a higher rate instead of the 15% proposed by the assessee. The Tribunal, considering past decisions and the provisions of the DTAA, concluded that the interest earned on the income-tax refund should be taxed at 15% on a gross basis, in line with the beneficial provisions of the treaty between India and UK.

3. The final issue concerns the tax treatment of interest earned outside India and foreign exchange gains on reinstatement of bank balance in a foreign bank account. The Tribunal referred to a previous decision for the assessment year 2006-07, where it was held that interest earned outside India should be excluded from taxation, along with gains from foreign exchange fluctuations on reinstatement of bank balance outside India. Consistent with this precedent, the Tribunal ruled in favor of the assessee, dismissing the revenue's appeal and upholding that these amounts should not be subjected to tax in India.

In conclusion, the Tribunal allowed the assessee's appeal and dismissed the revenue's appeal, providing detailed reasoning and legal analysis for each issue raised in the case.