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| DATE: | May 6, 2011 (Date of publication) |
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| Click here to download the judgement (clough_IT_refund_PE.pdf) |
Interest on Tax refund not “effectively connected” with PE
The assessee, an Australian company, had a PE in India from which it carried on business in India. The assessee received interest on income-tax refund of TDS. While the assessee claimed that the interest was taxable on gross basis at 15% under Article XI(2) of the DTAA, the AO & CIT(A) claimed that the interest was “directly connected with the PE” and so assessable under Article VII. On appeal, the issue was referred to the Special Bench. HELD by the Special Bench, deciding in favour of the assessee:
Under Article 11(4) of the DTAA, interest from indebtedness “effectively connected” with a PE of the recipient is taxable under Article 7 and not under Article 11. Though the interest was connected with the PE in the sense that it has arisen on account of TDS from the receipts of the PE, it was not “effectively connected” with the PE either on the basis of asset-test or activity-test. The payment of tax was the responsibility of the foreign company and the fact that it was discharged by way of TDS did not establish effective connection of the indebtedness with the PE. In order to be “effectively connected”, it is not necessary that the interest income has to be necessarily business income in nature. Even interest assessable under “other sources” can qualify.
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