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Ansaldo Energia SPA, C/O N. Madhan Versus The Commissioner of Income Tax, (International Taxation) , Chennai

2016 (5) TMI 945 - MADRAS HIGH COURT

Interest payable on the refund of income tax under Section 244-A - whether falls within the definition of the term interest under Article 12.4 of the Double Taxation Avoidance Agreement or not? - Held that:- Subsection (1) of Section 244-A uses two important expressions, namely (i) becomes due, and (ii) be entitled to. The expression "becomes due" is a clear indication that an assessee will be entitled to the benefit of Section 244-A only if the refund of any amount has become due. If a refund h .....

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yable to the assessee is debtowed payable by the revenue" is actually a perfect statement of law. It is certainly a theorem, but not Euclid's theorem. Therefore, the law as we see is well settled to the effect that what was due as a refund and what was payable as interest on such refund are debt claims within the meaning of Article 12.4. As a consequence, they satisfy the parameters of Article 12.3(a).- Decided in favour of the assessee. - Tax Case Appeal Nos. 19 to 21 of 2016 - Dated:- 20-4-201 .....

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he Act on refund of income tax is not covered within the term 'interest' under Article 12(4) and accordingly, the same is not outside the purview of taxation by India as provided in Article 12(3)(a) of the Double Taxation Avoidance Agreement between India and Italy? and (ii) Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in not adjudicating the alternate ground of the appellant that the interest under Section 244A is liable to taxation .....

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xation Avoidance Agreement on 23.11.1995, but with effective date from 01.01.1996. 4. By orders dated 25.7.2012, the Assessing Officer gave effect to the orders of the Income Tax Appellate Tribunal and Commissioner of Income Tax (Appeals) in relation to the assessment years 2000-01, 2001-02, 2002- 03 and determined the income and tax liability. This giving effect order gave rise to refunds to be granted to the appellant. This refund also carried interest under Section 244-A of the Act. While mak .....

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r the purpose of convenience, let us take the first question of law, which we have already extracted above. If that question of law is answered in favour of the assessee, the second question of law will not even arise for consideration. 7. The first question of law is as to whether the interest payable on the refund of income tax under Section 244-A falls within the definition of the term interest under Article 12.4 of the Double Taxation Avoidance Agreement or not. 8. Paragraphs 1 to 4 of Artic .....

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erest arising in a Contracting State shall be exempt from tax in that State, if: (a) 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 mo .....

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12 circumscribes the prescription contained in paragraph 1, by stipulating that the tax chargeable in a contracting State on interest arising in that State and paid to a resident of the other contracting State in respect of loans or debts shall not exceed 15% of the gross amount of such interest. 11. Paragraph 3 of Article 12 carves out an exception to the stipulation contained in paragraphs 1 and 2. As per paragraph 3, the interest arising in a contracting State will be exempt from tax in that .....

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t claims of every kind, and (iii) all other income assimilated to income from money lent by the taxation law of that State in which the income arises. 13. The contention of Mr.N.V.Balaji, learned counsel for the appellant is that the interest paid on the refund in terms of Section 244-A of the Income Tax Act, is a debt claim, within the meaning of the term "interest" under paragraph 4 of Article 12 and that therefore, it is exempt under Clause (a) of paragraph 3 of Article 12. To subst .....

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mount of tax which has been duly paid in prescribed time and provisions in that behalf form part of the recovery machinery provided in a taxing Statute. Refund due and payable to the assessee is debt-owed and payable by the Revenue. The Government, there being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period .....

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, the issue that arose for consideration before the Supreme Court in Tata Chemicals, as seen from paragraph 2 was as to whether the Revenue was legally responsible under Section 244-A for payment of interest on the refund of tax made to the resident/deductor under Section 240 or not. Therefore, the contention of the learned counsel for the appellant is that all the three authorities erred in holding that the interest payable on the refund of tax was not a debt due from the Government. 15. In res .....

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treated as part of the business profits under Article 7 and made taxable even as per the provisions of the Double Taxation Avoidance Agreement. 16. In support of the above contention, the learned Standing Counsel for the Department drew our attention to the order of the Income Tax Appellate Tribunal dated 11.5.2007 in relation to the assessment year 2000- 01, in respect of the very same assessee, wherein the Tribunal recorded a finding that the assessee has a permanent establishment in India. T .....

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bunal and also confirmed by an order of this Court, and (ii) that therefore, by virtue of Article 12.6 read with Articles 5 and 7, the interest paid on the refund of income tax under Section 244-A constitute business profits taxable under Article 7 of Double Taxation Avoidance Agreement. 18. But, we are unable to accept the above contention for the simple reason that Article 12.6 does not deal with a situation where the State is the person paying the interest. Article 12.6 reads as follows: &quo .....

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ishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated." 19. The first portion of Article 12.6 states that the interest will be deemed to arise in a contracting State, when the payer is that State itself. To this rule found in the first line of Article 12.6, an exception is carved out in the remaining part of Article 12.6. What follows the first portion of Article 12.6 is that when the person paying the .....

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to the case. 21. As a matter of fact, the Tribunal seems to have realised this position. That is why the Tribunal, after having extracted the argument of the departmental representative made on the basis of the decision of the Tribunal in BJ Services Company Middle East Ltd. v. Assistant Commissioner of Income Tax [(2009) 29 SOT 312], chose not to deal with either Article 12.6 or with BJ Services Company. 22. To put it differently, the departmental representative appears to have invited the atte .....

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ct that the Tribunal did not rest its conclusion on Article 12.6. This is why a contention is raised by the learned counsel for the appellant that what was not recorded as a finding by the Tribunal, cannot now be raised by the Revenue on an appeal filed by the assessee. Though he is correct in his legal submission, we thought we would still have a look at Article 12.6 and expose the fact that the second part of Article 12.6 does not deal with the issue as to whether the interest payable by the G .....

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of Central Excise v. Srikumar Agencies [AIR 2008 SCW 942], it was contended by the learned Standing Counsel that stray observations found in judgments cannot be taken to be an expression of a proposition of law and that judgments are not to be read as Euclid's theorem. 25. For a moment, we will keep aside the decision of the Supreme Court in Tata Chemicals and have a plain look at Section 244-A of the Income Tax Act. Under Sub-section (1) of Section 244-A, an assessee is made entitled to re .....

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