Interest on Income Tax Refund not connected with PE, Taxable under India Malaysia DTAA: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench held that Interest on income tax refund not connected with Permanent Establishment (PE), taxable under India Malaysia Double Taxation Avoidance Agreement (DTAA).

The assessee, Aker Solutions India SDN BHD submitted that it had received interest under section 244A of the Income Tax Act, 1961 during the previous year. The assessee claimed that the aforesaid interest is taxable @10% under Article 11(2) of India- Malaysia DTAA.

The Assessing Officer following the decision rendered by the Uttarakhand High Court in the case BJ Services Company Middle East Ltd. applied provisions of Article -7 of DTAA and taxed interest on refund of Income Tax at a higher rate. The assessee remained unsuccessful before the CIT(A), hence, the present appeal.

The Counsel for the assessee submitted that the Authorities below have erred in not appreciating the fact that interest on income tax refund is not effectively connected with assessee’s PE in India and placed reliance on the decision of Special Bench Delhi in the case of ACIT vs. Clough Engineering Ltd, to contend that interest on income tax refund is taxable under Article -11 of the DTAA.

The Authorized Representative of the assessee further placed reliance on the decision of the Bombay High Court in the case of DIT vs. Credit Agricole Indosuez, to contend that interest on income tax refund is not connected with the PE and hence, rate of tax is to determine on the basis of relevant clause of Interest in DTAA.

A Bench comprising Pramod Kumar, Vice President and Vikas Ashwathy, Judicial Member relied on the judgment in Clough Engineering Ltd, wherein it was observed that “Interest on income tax refund would be taxable under Article-11 and not as business profits connected with the PE of assessee.”

“In light of the decision of the Jurisdictional High Court and the decision rendered by the Special Bench we find merit in the appeal by the assessee. Accordingly, the Assessing Officer is directed to tax interest on income tax refund under Article 11(2) of India- Malaysia DTAA” the Tribunal noted.

To Read the full text of the Order CLICK HERE

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