TMI Blog2010 (12) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... 4-05. 2. The only effective ground is reproduced as under:- The Commissioner of Income-tax ( Appeals ) -XXXIII [hereinafter referred to as the CIT(A)] erred in upholding that interest of Rs. 12,44,428 granted on Income-tax refund is covered by Article 11 of DTAA and therefore taxable in India. The appellants submit that CIT(A) ought to have held that such interest income is covered by Article 8 of DTAA between India and Germany and therefore not taxable in India. 3. Briefly stated the facts of the case are that the assessee, a non-resident, filed its return declaring total income of Rs. Nil. A note was given below the statement showing computation of total income stating that the entire income arising in India for the year was represented by profits derived from the operation of ships in international traffic and the same was not taxable in India in view of Article 8 of the Double Taxation Avoidance Agreement ( DTAA for short) in force between India and Germany, but was taxable only in Germany where its effective management was situated. During the course of assessment proceedings, the Assessing Officer noted that the assessee received Income-tax refund, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of ships or aircraft in the international traffic. He relied on the judgment of the Hon ble Supreme Court in the case of Donald Miranda And Others ( supra ) to support his view that when it deposited the tax with the Central Government, a portion of the profits of the business of the assessee was sliced away and on its return, the same must be restored to its original character of being a part of the profits of business. He further relied on the judgment of the Hon ble Supreme Court in Govinda Choudhury and Sons ( supra ) for canvassing the view that the interest partakes of the same character as the payment on which it is awarded. Since the payment of taxes and its refund was from the profits derived from the operation of ships, it was urged that the interest on such refund should also assume the same character as profits from the operation of ships in international traffic. It was vehemently argued that clause (3) of Article 8 of DTAA withGermany was clearly applicable and hence interest on Income-tax refund should be h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax at the rate of 10 per cent as per Article 11(2), which has been precisely done by the Assessing Officer 8. In order to appreciate the rival contentions it is necessary to note down the relevant parts of these two Articles as under: - ARTICLE 8 Shipping and Air Transport 1. Profits from the operation of ships or aircraft in international traffic shall be taxable only in theContractingState in which the place of effective management of the enterprise is situated. 2. 3. For the purposes of this Article, Interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 shall not apply in relation to such interest. ARTICLE 11 Interest 1. Interest arising in aContractingStateand paid to a resident of the otherContractingStatemay be taxed in that other State. 2. However, such interest may also be taxed in theContractingStatein which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate, the profits of the enterprise may be taxed in the other State to the extent as are attributable to that permanent establishment. Article 7(7) is relevant, which provides that : Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article . A perusal of clause (7) of Article 7 discloses that if there are items of income, which have been separately set out in other Articles of this DTAA, then the provisions of Article 7 would not apply and such items of income would be dealt with as per the prescription of the relevant Articles. We find that there are different Articles such as Article 8 which deals with income from shipping and air transport business, Article 10 which deals with dividends, Article 11 dealing with royalties and fees for technical services, Article 13 dealing with capital gains etc. etc. It is thus seen that starting from Article 8 onwards, items of specific nature of income, such as income from shipping and air transportation, dividends, royalty and fees for technical services etc. are dealt with in different Articles. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om operation of ships or aircrafts in international traffic which shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. Going by this clause, the present assessee, being a resident of Germany, cannot be subjected to tax in respect of profits arising in India from the operation of ships or aircrafts in international traffic. Clause (3) of this Article further elaborates the scope of clause (1) by providing that interest on funds connected with the operation of ships or aircrafts in international traffic shall be regarded as profits derived from the operation of ships or aircrafts in international traffic . This clause further makes Article 11 subservient to it inasmuch as it provides that the provisions of Article 11 shall not apply in relation to interest on funds connected with the operation of ships or aircrafts in international traffic. It is also noted that Article 11 specifically deals only with interest income. Applying the above maxim of generalia specialibus non derogant the interest income encompassed in this Article shall be dealt with as per the prescription of this Article and not other Articles. When ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome from business assessable under section 10 of the Income-tax Act and not income from other sources under section-12. It is relevant to consider that the amount of excess profit tax payable in respect of business for chargeable accounting period was allowable by way of relief in computing the profits and gains of the business and was deductible as an expense incurred in that period. It was in the light of these facts that the Hon ble Supreme Court held that when it was deposited with the Central Government it was a portion of the profit of the business of the assessee and when it was returned to the assessee it must be restored to the character of being part of the profits of the business. From the facts of this case it can be seen that primarily the ratio decidendi of this judgment is qua the treatment of refund of Income-tax and not interest on such Income-tax refund. Further the tax payable by the assessee in that case was deductible from business profits as per the relevant provisions and it was only when the excess amount was refunded that it was held to be income from business. On the other hand we are dealing with a case in which neither there is any dispute on the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest on funds connected with the operation of ships or aircrafts in international traffic , it is discernable that the reference to the interest income in this clause is qua the funds connected with the operation of ships in international traffic. In other words, there must be direct and immediate relation of interest income with the funds from the operation of ships in international traffic. Once this relationship ceases to exist, the interest income would go out of the ambit of this clause. The case would be covered within the scope of clause (3) when assessee, engaged in the operation of ships in international traffic, raises invoice on his customer towards charges for carrying his cargo to other destination on ship and the amount remains unpaid for a particular period, after which the assessee recovers interest on such invoice amount. The amount of interest so resulting shall be the interest on funds connected with the operation of ships . The argument of the ld. AR that interest income resulting from the deployment of funds from the shipping business in any manner as qualifying for inclusion in clause (3) of Article 8, is far fetched and deserves to be jettisoned. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment. Coming back to the DTAA with Germany, we find that the interest referred to in Article 8(3) is confined only to the funds which are connected with the operation of ships or aircrafts. Accordingly interest on account of delayed payment of the invoice value would partake of the same character as the original amount, being the profit from the operation of ships or aircrafts in international traffic. In that view of the matter it becomes amply clear that only interest on funds which are concerned with the operation of ships or aircrafts in international traffic is covered within the ambit of clause (3) for assuming the character of profits from the operation of ships or aircrafts in international traffic as per Article 8. It does not and cannot refer to any interest other than that. Naturally the interest on Income-tax refund cannot have any relation with operation of ships or aircrafts in international traffic and hence cannot be brought within the purview of Article 8. In view of the exclusion of interest on Income-tax refund from the ambit of Article 8(3), the same would go back for consideration under Article 11, which is otherwise a special provision dealing with the trea ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
