TMI Blog2022 (2) TMI 1423X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in holding that receipts on account of VAT Service tax are not includible in gross revenue of the assessee for the purpose of computation of profits under the presumptive provisions of section 44BB of the I.T. Act, 1961. Interest Income taxability - AO taxed the interest on Income Tax Return @40% whereas the assessee pleaded that it should be taxed @15% in terms of Article 11 of Indo-USA DTAA - HELD THAT:- Interest income need not be necessarily business income in 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. On going through Article of Indo-US DTAA with regard to interest it can be concluded that interest on income tax refund is not effectively connected with the PE either on the basis of asset-test or activity-test. Hence, it is taxable as per the provisions in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax u/s 44BB of the Income Tax Act, 1961 applying dividend profit rate of 10%. The AO made addition on account of service tax and VAT to be treated as part of the gross receipts. VAT Service Tax u/s 44BB: 4. The AO held that the receipts on account of service tax and VAT are in the nature of royalty/FTS u/s 9(1)(vi)/9(1)(vii). We have examined the issue of inclusion of service tax and VAT with reference to the provisions of Section 44BB in the light of the judgment of Hon ble Delhi High Court in the case of Pr. CIT Vs. Mitchell Drilling International Pvt. Ltd. 380 ITR 130 which held as under: that for the purposes of computing the presumptive income of the assessee for the purposes of Section 44BB the service tax collected by the asses see on the amount paid to it for rendering services was not to be included in the gross receipts in terms of Section 44BB(2) read with Section 44BB(1). The service tax is not an amount paid or payable, or received or deemed to be received by the assessee for the services rendered by it. The assessee only collected the service tax for pas sing it on to the Government. 5. Since, the decision of the ld. CIT(A) is based on the esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was a direct nexus of the indebtedness with the assets of the business. It was submitted that if the assessee opted to be taxed under the DTAA, the classification of income was not required to be done under the five heads. In fact, no head of income had been prescribed under the treaty. Therefore, it cannot be said that the provisions contained in paragraph no. 2 of Article XI were analogous to the provisions contained in the Act regarding computation of income under the residuary head. It was argued that the expression used was to the effect that indebtedness was effectively connected with the PE and not that the interest income was effectively connected with the PE. 10. Heard the arguments of both the parties and perused the material available on record. 11. As per the provisions of Sec 90(2), in a case where the provisions of the DTAA apply to an assessee, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. Although the words more beneficial has not been elaborated upon by any of the contending parties, it is clear that application of the provision can be made after ascertaining- (i) tax payable by the assessee under the DTA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. 14. The relevant Article of Indo-US DTAA with regard to interest are as under: ARTICLE 11 - Interest 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed : (a) 10 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company); and (b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2 of this Article, interest arising in a Contractin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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