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2015 (12) TMI 686 - ITAT CHENNAI

2015 (12) TMI 686 - ITAT CHENNAI - [2016] 48 ITR (Trib) 572 - Deduction of tax at source u/s.195(1) in respect of refund including the interest u/s.244A - DTAA - contention of the assessee is that interest on refund of tax is exempt from tax in India - Held that:- When we go through the definition of interest under Article 12(4) of of DTAA between India and Italy, this kind of interest is not envisaged in the definition of interest, therein. Being so, the lower authorities are justified in impos .....

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I CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER For The Appellant : Shri N.V.Balaji, Advocate For The Respondent : Dr. U. Anjaneyalu, CIT ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER These appeals by the assessee are directed against the common order of the Commissioner of Income-tax(Appeals) dated 25.3.2014 for the assessment years 2000-01, 2001-02 and 2002-03, respectively. 2. The facts of the case are that the assessee is a company registered under the laws of Italy. The assessee is a non-resident .....

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.2 The CIT(A) passed an order on 29/09/2011 u/s. 251 of the I.T. Act upholding the additions made by the AO to the income of the assessee from NLC contracts. The CIT(A) also held that profit and tax should be determined by following the judgement dated 11.05.2001 of the ITAT, Chennai in ITA No.411/Mds/2006. Accordingly, the assessment orders dated 27.02.2004, 31.03.2005 and 24.03.2006 were modified and corresponding fresh orders were passed by the AO on 25.07.2012, determining therein ₹ 24 .....

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tter before the CIT(A) challenging the deduction of tax at source u/s.195(1) of the Act in respect of refund including the interest u/s.244A while giving effect to the Tribunal s order. 3. The CIT(Appeals) observed that Article 12 of the DTAA, elaborated this type of interest. In the instant case, interest involved emanates from the income-tax refund payable to the assessee. This kind of interest is not covered by the definition of interest provided in Article 12(4) of the DTAA. Once the interes .....

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of M/s. Clough Engineering Ltd. in ITA Nos.4771 & 4986/Del/2007, wherein it was held as under: 11.4 Thus, we are again left with the fundamental question as to whether the debt-claim in this case can be said to be effectively connected with the PE. We have already held that the claim is connected with the PE in the sense that it has arisen on account of tax deduction at source from the receipts of the PE. However, it is also a fact that payment of tax is the responsibility of the foreign co .....

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is for the company to pay the tax from any source available with it. It so happened in this case that the tax got automatically deducted from the receipts of the PE by operation of law. Such collection of tax by force of law would not establish effective connection 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 f .....

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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. 4.1 He also relied on the decision of the Tribunal, Mumbai Bench in the case of M/s. DHL Operations B.V. in ITA No.183/Mum/2010 da .....

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R 658). Further he submitted that interest on income-tax refund is not effectively connected with PE either on the basis of asset-test or activitytest. This part of interest is not taxable in view of Article 12 of DTAA between India and Italy. He also relied on the judgment of Mumbai Bench in the case of Bechtel International Inc. in ITA Nos.5198 & 6998/Mum/2010, wherein it was held as under: 10. We have given a careful consideration to the rival submissions. We are of the view that in the l .....

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is not defined. If US MC were to refer to "effectively connected", the question would arise whether that term would be required by Article 3(2) MC to be interpreted on the US side in accordance with its definition under US tax law, Use of the term "attributable" avoids that problem and that is the reason the expression "Attributable" is used in US Model Conventions. Therefore the term appearing in US Model Conventions have the same meaning as the expression "E .....

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ribution of profits of the PE and is relevant to taxation of an Indian enterprise having PE in USA. Nevertheless, the expression "attributable" even if held to be equivalent to the expression "effectively connected" in the light of the commentary by Klaus Vogel, referred to above, then the case of the Assessee would stand squarely covered in favour of the Assessee by the decision of the Special Bench in the case of Clough Engineering (supra). Following the same, we hold that .....

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in India through a PE situated in India; (3) The interest was effectively connected with such PE in India; ordinarily para 2 of article 12 would have been made applicable. However, in terms of para 6 of article 12, provision of para 2 of this article would not apply if the beneficial owner of the interest carries on business in India in which the interest arises through a PE situated in India and the debt-claim in respect of which the interest is paid is effectively connected with such PE in In .....

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nefit of para 2 of article 12 so as to pay tax on such interest at the rate of 15 per cent. Rather in terms of para 6 of article 12, the same was chargeable under article 7 as business profit. Accordingly, the assessee was not entitled to be taxed under para 2 of article 12 but was rightly taxed under 6. We have heard the parties and perused the material on record. Article 12 of DTAA between India and Italy reads as under: Article 12 Interest 1. Interest arising in a Contracting State and paid t .....

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) The payer of the interest is the Government of that Contracting State or a local authority thereof; or (b) The interest is paid to any agency or instrumentality (including a financial institution) which may be agreed upon in this behalf by the two Contracting States. 4. The term interest as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits and debt-claims of every k .....

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-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the interest shall be taxable in that other Contracting State according to its own law. 6. Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a political or administrative subdivision, a local authority or a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracti .....

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