ORDER
I.P. Bansal, J.M.
1. These are cross-appeals and they are directed against the order of CIT(A) dt. 3rd Feb., 2006 for asst. yr. 2002-03.
2. Ground of appeal raised by the Revenue reads as under:
That the learned CIT(A) has erred in law and on facts in holding that the revenues on account of reimbursement of expenses received by the non-resident company are not includible in the gross receipts of the nonresident company.
Grounds of appeal raised by the assessee read as under:
1. The learned CIT(A) erred on facts and in law in upholding the order of AO with regard to taxing the interest on tax refunds as business income as per Article 7 instead of specific provisions of Article 12(2) of DTAA with France merely on the existence of PE when the interest is payable statutorily on tax refunds and neither arises through the PE nor effectively connected with the PE.
2. That the learned CIT(A) erred in law in upholding the order of AO by taking the interest on tax refunds as business receipts, when the interest on tax refunds does not depend on the existence or non-existence of PE in India and is statutorily dependent on the outcome of assessment proceedings, appeals conducted by tax consultants and lawyers.
3. The learned CIT(A) erred in law in upholding the levy of tax on interest of Rs. 1,46,996 on tax refunds @ 48 per cent on gross as per IT Act instead of 10 per cent as prescribed in Article 12(2) of DTAA of the IT Act (sic) by virtue of applying beneficial provisions as per Section 90(2) of the IT Act.
3. The assessee is a French company operating in India in oil drilling operations and related services under various contracts with ONGC. For the year under consideration assessee has contract with ONGC for charter hire of Drilling Rig Pride Pennsylvania. The assessee had returned the gross fee for drilling operation for computation and taxation of income as per Section 44BB of IT. Act, 1961 (‘Act’). While working out the receipts assessee did not take into computation a gross sum of Rs. 34,73,174 the details of which are as under:
__________________________________________________________________________ | Clause (No. | Date of Invoice | Nature of reimbursement | Amount (in INR) | |________|__________________|_________________________|____________________| | 1. | 5.9.2001 | Equipment | 17,68,204 | |________|__________________|_________________________|____________________| | 2. | 1.10.2002 | Communication charges | 1,64,162 | |________|__________________|_________________________|____________________| | 3. | 12.2.2002 | -do- | 2,12,997 | |________|__________________|_________________________|____________________| | 4. | 2.8.2001 | Dry fruits | 32,504 | |________|__________________|_________________________|____________________| | 5. | 14.12.2001 | Equipment | 12,39.977 | |________|__________________|_________________________|____________________| | 6. | 19.7.2002 | Dry fruits | 17,748 | |________|__________________|_________________________|____________________| | 7. | | -do- (not yet billed) | 12,252 | |________|__________________|_________________________|____________________| | 8. | 14.12.2001 | Dry fruits | 20,876 | |________|__________________|_________________________|____________________| | 9. | 19.1.2002 | -do- | 4,454 | |________|__________________|_________________________|____________________| | Total | 34,73,174 | |_____________________________________________________|____________________| 4. After consolidating the above figures into three main heads the position as described in the order of CIT(A) will be as under: _____________________________________________________ | Nature of reimbursement/supply | Amounts | |_______________________________________|_____________| | Dry fruits | 87,834 | |_______________________________________|_____________| | Equipments | 30,08,181 | |_______________________________________|_____________| | Communication charges | 3,77,159 | |_______________________________________|_____________| | Total | 34,73,174 | |_______________________________________|_____________|
5. The assessee was asked to show cause as to why the abovementioned amount of Rs. 34,73,174 was not included in the gross receipts and why on these receipts deemed profit at the rate of 10 per cent should not be applied under Section 44BB of the Act. It was submitted that these represent reimbursement which is not chargeable to tax under Section 44BB and reliance was placed on the decision of Tribunal in the case of Sedco Forex International Drilling Inc. v. Dy. CIT (2000) 67 TTJ (Del) 670 : (2000) 72 ITD 415 (Del) wherein it has been held that the expression of reimbursement means to repay or pay an equivalent amount for the loss of expenses incurred. It was submitted that the supply of material in question was an obligation of ONGC and assessee simply provided such services to ONGC in conformity with the terms of agreement. Thus, it was submitted that reimbursement of actual cost of such supply along with expenses for freight, insurance etc., therefore, cannot be included in the amount of contract receipt for the purposes of Section 44BB of the Act.
Considering the submission of the assessee and the nature of reimbursement expenses, the AO observed that the receipts of the assessee were part of contractual receipts and, therefore, these were allowable to be included in the payments received while computing the profit under Section 44BB of the Act. Regarding decision of Delhi Tribunal, the AO observed that Department has not accepted the said decision of Tribunal, therefore, the decision of Tribunal is not applicable. Accordingly, the AO treated reimbursement as part of gross receipts and computed the profits of the assessee.
6. Aggrieved, assessee filed an appeal before CIT(A) wherein the action of AO was objected. Reference was made to various documents giving details of expenses along with debit notes/invoices issued to ONGC and giving the relevant clause of agreement for meeting out of pocket expenses incurred by the assessee at the instance of ONGC. It was submitted that as per Article 5.1(a)(ii) of contract ONGC was obliged to supply certain items and at the request of ONGC assessee incurred specific expenses which were reimbursed on actual basis or at below cost. It was submitted that the ONGC personnel and/or their contractors while doing drilling operations on the well had lost tubulars and other capital items which is a capital equipment for the assessee and as per Clause 16.3 of the contract, ONGC had to reimburse 75 per cent cost of the equipment to assessee which amounted to Rs. 30,08,181 and the same being a capital expenditure for the assessee and also being reimbursement of supply of items was excluded from receipts in terms of Section 44BB(2) r/w Section 5(2) of the Act.
7. It was further submitted that the assessee has inmarsat connection on the rig which is used for communication purposes. The ONGC personnel on the rig had made calls which were to be borne by them and a debit note on the basis of actual inmarsat voice was raised on ONGC which amounted to Rs. 3,77,159 during asst. yr. 2002-03 and the same also is not in the nature of drilling operational services, therefore, could not be added in income as per provisions of Section 44BB of the Act.
8. It was further submitted that ONGC personnel on the rig as per their office order were to receive dry fruit packets on daily basis. Such obligation was of ONGC and on the request of ONGC assessee had purchased the dry fruits from ONGC designated supplier for and on behalf of ONGC and the dry fruit packets were given to the personnel of ONGC on the rig. The assessee had debited a sum of Rs. 87,834 towards the reimbursement cost of dry fruits provided as per order of ONGC and the same does not relate to drilling operational services, therefore, said sum also cannot be considered for the purpose of Section 44BB of the Act.
9. To substantiate the above contentions the assessee had filed copy of invoices for expenses and supplies which forms part of the paper book from pp. 9-46 and a comparison chart was also filed to show that these were incurred at cost or below cost as charged to ONGC. Reliance was also placed on the aforementioned decision of Delhi Tribunal in the case of Sedco Forex International Drilling Inc. (supra). Learned CIT(A) after considering the submissions and after considering the case record found that AO had examined the issue that whether there was any profit element in the reimbursement and evidence was submitted by the assessee to show that there was no element of profit. Learned CIT(A) also found that supply of material was of the obligation of ONGC and assessee company had simply provided such services to ONGC. Relying on the decision of Tribunal in the case of Sedco Forex International Inc. (supra), learned CIT(A) has held that reimbursement of expenses to be incurred by contractee is not taxable under Section 44BB and he directed the AO not to include amount of Rs. 34,73,174 in the gross revenue for working out profit under Section 44BB. The Department is aggrieved with such direction of CIT(A) and hence in appeal.
10. Learned Departmental Representative after narrating the facts pleaded that return has been filed by the assessee by computing its income under Section 44BB of the Act and thus, the return filed by the assessee is under the provisions of domestic laws and no reference to DTAA is made. Thus, he contended that income of non-resident company is subject to the provisions of Sections 4, 5 and 9 of IT Act. He contended that according to Section 5, in a case of non-resident following incomes are taxable:
(a) if it is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) if it accrues or arises or is deemed to accrue or arise to him in India during such year.
11. Referring to Section 9 he pleaded that it deals with the income which is deemed to accrue or arise in India which includes all income accruing or arising through a business connection or for any source of income in India and this also includes income by way of technical services as well as income by way of royalty. He pleaded that Section 44BB needs to be interpreted with regard to the background of each and every word used by the legislature in that section. And while interpreting the provision two principles of interpretation should be necessarily to be kept in mind, firstly, that the legislature is not ignorant of the other provisions of law; secondly, that each and every word has been used with a specific purpose and none of them is redundant. He referred to Sub-sections (2)(a) and (2)(b) of Section 44BB which refer to amount paid or payable whether in or out of India and amount received or deemed to be received in India in respect of provision of services and facilities outside India.
12. He pleaded that Sub-section (1) of Section 44BB is a computation section in respect of profits and gains in connection with the business of exploration etc. of mineral oil and it provides computation of income on the basis of receipts mentioned in the section and legislature has taken into account Sections 4, 5 and 9 while framing Section 44BB and any view that Section 44BB is not in accordance with the provisions of Sections 4, 5 and 9 of the Act will amount to invalidating Section 44BB in the case of non-resident and such view, if taken, will be against the decision of Hon’ble Supreme Court in the case of K.S. Venkatararnan & Co. (P) Ltd. v. State of Madras .
13. Without prejudice, he submitted that Section 44BB is a complete code and is in accordance with Sections 4, 5 and 9 of the Act. Reference was made to following decisions:
(1) Oil India Ltd. v. CIT (1995) 123 CTR (Ori) 46 : (1995) 212 ITR 225 (Ori);
(2) CIT v. Oil & Natural Gas Commission .
14. It was pleaded that any sum received as a result of any supply of goods, commodity or for rendering services of any nature falls within the inclusive definition of income as given in Section 2(24) of the Act and the net income determining as per provisions of the Act is required to be taxed until and unless it falls under any of the exemptions available under the Act. He pleaded that reimbursement is neither excluded from taxation under Sections 4, 5, 9 and 10. Thus, he pleaded that any receipt of business can be exempted from taxation only in a case when the expenses incurred in earning the receipt become equal to the receipt itself and it is a case of pure reimbursement of expenditure. Reference was made to Section 37 of the Act which provides that all expenditure incurred wholly and exclusively (for) earning income shall be allowed as a deduction in order to determine total income subject to taxation. It was submitted that Section 44BB starts with non obstante clause that computation shall be made according to section notwithstanding to the contrary mentioned in Sections 28 to 41 and 43 and 43A of the Act. Thus, he pleaded that Section 44BB is applicable irrespective of Section 37 which cannot be applied as specific provisions for Section 44BB are applicable. For contending that reimbursement is not considered as income only in accordance with Section 37 he placed reliance on the decision of Hon’ble Delhi High Court in the case of CIT v. Industrial Engineering Projects (P) Ltd. .
15. Learned Departmental Representative contended that reliance on the decision of Tribunal in the case of Sedco Forex International Drilling Inc. (supra) is misplaced as the issue was considered by the Lordships of High Court of Uttaranchal in the case of Sedco Forex International Inc. v. CIT and Anr.. in IT Appeal No. 99 of 1999 (New No. 434 of 2001) vide their order dt. 28th Sept., 2007 [reported at (2008) 214 CTR (Uttarakhand) 192–Ed.] copy of which was furnished of learned Departmental Representative. In the said case the provision of Section 44BB was considered and it was found that payment was made to the assessee company outside India and the said payment had no nexus with the actual amount incurred by the assessee company for transportation of drilling units of rigs to the specified drilling locations in India and thus, it was found that such mobilization fee was not the reimbursement of expenses. In that case ONGC was liable to pay a fixed sum as stipulated in the contact regardless of actual expenditure which may be incurred by the assessee company thus, it was held that the AO was right in adding the amount of such mobilization fees.
16. Thus, it was pleaded by learned Departmental Representative that CIT(A) has wrongly excluded the abovementioned amount of Rs. 34,73,174 from the computation of income under Section 44BB of the Act.
17. On the other hand it was pleaded by learned Authorised Representative that all the reimbursements were on actual basis and were without any element of profit. He referred to the p. 37 of the paper book where a chart has been submitted to show that no element of profit was involved. He pleaded that the expenditure was incurred at the instance of ONGC and it did not relate to actual drilling operation covered by the Section 44BB of the Act. It was pleaded that in any case of supply of dry fruits etc. the supply is not covered under Section 44BB(2)(a)/(b) of the Act. Similarly, it was submitted that employees of ONGC used telecommunication facility which also does not relate to drilling operational activity covered under Section 44BB of the Act and it was submitted that reimbursement of 75 per cent cost of the equipment damaged by ONGC employees is capital cost recovery and does not relate to drilling operational income. Thus, it was pleaded that reimbursement of expenses/supply of items is not oil drilling activity and in absence of element of gain or profit these could not be included in the receipts for computing income as per Section 44BB of the Act.
18. We have carefully considered the rival submissions in the light of material placed before us. The assessee has filed its return as per provisions of Section 44BB which is a special provision for computing profits and gains in connection with the business of exploration, etc. of mineral oils. The section reads as under:
44BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils.–(1) Notwithstanding anything to the contrary contained in Sections 28 to 41 and Sections 43 and 43A, in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in Sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head ‘Profits and gains of business or profession’:
Provided that this sub-section shall not apply in a case where the provisions of Section 42 or Section 44D or Section 115A or Section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections.
(2) The amounts referred to in Sub-section (1) shall be the following, namely:
(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India; and
(b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India.
(3) Notwithstanding anything contained in Sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under Sub-section (2) of Section 44AA and gets his accounts audited and furnishes a report of such audit as required under Section 44AB, and thereupon the AO shall proceed to make an assessment of the total income or loss of the assessee under Sub-section (3) of Section 143 and determine the sum payable by, or refundable to, the assessee.
Explanation–For the purposes of this section,–
(i) ‘plant’ includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business;
(ii) ‘mineral oil’ includes petroleum and natural gas.
19. According to Section 44BB in a case of non-resident assessee who is engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to 10 per cent of the aggregate of amount specified in Sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”, subject to exclusion of Section 42, 44D, 115A or 293A. The nature of sums which are to be taxed under Section 44BB(1) is described in Sub-section (2) and the amount is aggregate of sum paid or payable (whether in or out of India) to the non-resident or to any person on his behalf on account of provisions of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in specified activity of extraction of mineral oil in India and also the sum received or deemed to be received in India by or on behalf of the non-resident on account of provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of mineral oils outside India. In other words the income received refers to the activity of providing services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of mineral oils in India or outside India.
20. Thus, it is elementary that any sum which is to be assessed under Section 44BB of the Act must be connected with the activity of providing of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in prospecting for, or extraction or production of mineral oils and if such receipts are not connected with such activity the same cannot be assessed under the provisions of Section 44BB of the Act. Any other receipts, if brought under tax have to come under other provision of the Act and not under Section 44BB of the Act. There is no dispute to the fact that the activities in respect of which assessee has been reimbursed were not the obligation of the assessee in terms of the contract entered into by it with ONGC. As it has been specifically found by learned CIT(A) that supply of material was obligation of ONGC and assessee company simply provided such services to ONGC. The details were submitted before the AO as well as CIT(A) to show that no element of profit was involved in the reimbursement. The reimbursement on account of equipment was in accordance with the contract according to Clause 16.3 of the contract and the said clause reads as under:
Loss or damage to contractor’s down hole equipment
Company shall reimburse contractor for loss or damage to contractor’s down hole equipment, as under, provided that such loss or damage is not occasioned by normal wear and tear or negligence on the part of the contractor.
(a) In the case of contractor’s down hole equipment being damaged, company shall reimburse contractor such repair cost, provided however, that company shall not be required to reimburse contractor any amount greater than that which would have been due had such equipment been lost and, therefore, calculated under Sub-section (b) hereinbelow.
(b) In the case of contractor’s down hole equipment being lost, company will reimburse contractor 75 per cent of the replacement cost, FOB nearest port of the vendor.
According to said clause ONGC was not liable to reimburse the assessee in case where loss or damage is occasioned by normal wear and tear or negligence on the part of the contractor and in all other cases if equipment is lost then ONGC was to reimburse the assessee with 75 per cent replacement cost. Thus, there was no receipt to the assessee related to the activities mentioned in Section 44BB of the Act. Similar is the position with regard to supply of dry fruit and recovery of communication expenses lost which have been claimed as reimbursement on actual basis. These activities also do not relate to the activities specified in Section 44BB(2) of the Act. There is no material on record to suggest that in respect of these three reimbursements, assessee has received amount more than the cost it incurred for the same. In other words, there is no element of profit in the receipts by the assessee. In absence of such profit the reimbursement receipts also cannot be brought to tax under the normal provision of the Act?
21. No doubt that Section 44BB is a code in itself and it starts with non obstante clause which excludes application of Sections 28 to 41 and Sections 43 and 43A of the Act but at the same time, to assess any sum under that section, the activity must fall within the activity described in Sub-section (2) of Section 44BB of the Act. Supply of dry fruits and recovery of communication expenses specifically do not find mention in Sub-section (2) of Section 44BB as these activities have nothing to do with the activity of prospecting for or extraction or production of, mineral oils in India or outside India. So (far) as it relates to reimbursement of cost of equipment, the same also does not fall within the ambit of Sub-section (2) of Section 44BB as the same applies on supply of plant and machinery on hire and the equipment, 75 per cent cost of which is reimbursed, was not machinery on hire being used in such activity. There is no material on record to show that the said equipment was used on hire either by the assessee or the contractee. Therefore, the reimbursement payments received by the assessee being not coming within the scope of Section 44BB of the Act have rightly been held to be excludible by learned CIT{A). The case law relied upon by learned Departmental Representative have no application to the facts of present case as the non obstante clause of Section 44BB is held to be applicable only in respect of activities referred to in Section 44BB(2) of the Act. The reimbursement of expenses is also not taxable under other provisions of the Act as there is no material on record to show that any element of profit was embedded in the reimbursement received by the assessee. In absence of element of profit in the amount received by the assessee as reimbursement, no income can be assessed under other provisions of the Act. Therefore, we find no force in the arguments which have been submitted by learned Departmental Representative. Rather it will be useful to refer to the following observations from the decision of Hon’ble Uttaranchal High Court in the case of Sedco Forex International Inc. v. CIT (supra):
In the present case, a finding has been recorded by the Tribunal that it was not in dispute before the Tribunal that the payment was made to the appellant company outside India and the mobilization fee as claimed by the assessee was paid to the appellant by ONGC has no nexus with the actual amount incurred by the appellant company for transportation of drilling units of rigs to the specified drilling locations in India. Hence, the mobilization fee is not the reimbursement of expenditure. ONGC was liable to pay a fixed sum as stipulated in the contract regardless of actual expenditure which may be incurred by the assessee company for the purpose. In view of the fictional taxing provision contained under Section 44BB, the AO was right in adding the amount of Rs. 99,04.000 for the asst. yr. 1986-87 and amount worth Rs. 64,64,530 for the asst. yr. 1987-88 received by the assessee towards mobilization charges for the purpose of imposing income-tax and CIT(A) and Tribunal were also right in upholding the order of the AO.
(Emphasis, italicised in print, ours)
22. From the above observations it is clear that mobilization fee was not considered reimbursement on the ground that this was not in the nature of reimbursement; therefore, the same could not (sic) be brought to tax under the provisions of Section 44BB of the Act. Their lordships in the said case have considered Section 44BB, Section 4, Section 5(2), Section 9 and Section 98 also and after analyzing these sections it has been concluded that mobilization fee was to be considered under Section 44BI3 on the ground that ONGC was liable to pay a fixed sum as stipulated in the contract regardless of actual expenditure which may be incurred by assessee company for the purpose. It is, therefore, that the mobilization fee was considered liable for taxation under Section 44BB. In the present case, payments received by the assessee were not a fixed sum as stipulated in the contract. It was based on actual expenditure which has been incurred by the assessee for that very purpose. There was no element of profit. Therefore also provisions of Section 44BB could not be applied for present case.
In the result Departmental appeal is dismissed.
Assessee’s appeal:
23. The issue raised in assessee’s appeal is regarding applicability rate of tax on interest received by assessee on income-tax refund. As per claim of the assessee the rate of tax is applicable according to Article 12(2) of DTAA of India with French Republic and according to AO the rate applicable on such income is in the terms of Article 12(5) r/w Article 7 of the said DTAA. For the sake of convenience relevant portions of articles are reproduced below for the sake of convenience:
1. The profits of an enterprise of one of the Contracting States shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a PE situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to that PE.”
Where profits include items of income which are dealt with separately in other articles of this Convention, then the provisions of those articles shall not be affected by the provisions of this article.
1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting 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 recipient is the beneficial owner of the interest, tax so charged shall not exceed 10 per cent of the gross amount of the interest.
5. The provisions of paras 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a PE situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt claim in respect of which the interest is paid is effectively connected with such PE or fixed base. In such case, the provisions of Article 7 or Article 15, as the case may be, shall apply.
24. According to AO the interest received by the assessee falls within the ambit of Article 12.5 as such interest has accrued to the assessee through PE of the assessee in India. As against that claim of AO it is the case of assessee that interest cannot fall within the ambit of Article 12.5 as interest received by the assessee is not in respect of debt which is effectively connected with PE. The interest was received by the assessee from the IT Department on delayed refund of taxes. Department also deducted tax at the rate of 10 per cent as per rate applicable in the terms of Article 12.2 of DTAA (with) France. Therefore, it was the contention of the assessee that the rate of tax chargeable to such interest is 10 per cent. Learned CIT(A) did not accept such submission of the assessee and has upheld the order of AO on this issue on the ground that assessee is operating in India through its PE and the interest has rightly been taxed at the rate of 48 per cent. He dismissed the ground. The assessee is aggrieved, hence in appeal. Learned Authorised Representative refers to pp. 4-9 of the paper book wherein copies of refund vouchers are enclosed. He also referred to p. 13 of the paper book which is an order passed by AO giving the appeal effect to the order of CIT(A).
25. It was pleaded that assessee was entitled to refund on the tax paid and the interest was paid by the Department on delayed refund of income-tax and on such interest Department has deducted tax at the rate of 10 per cent as described in Article 12.2 of DTAA with France. Article 12.2 reads as under:
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 recipient is the beneficial owner of the interest, tax so charged shall not exceed 10 per cent of the gross amount of the interest.
26. Reference was made to the decision of AAR reported in ABC, In re (1999) 151 CTR (AAR) 481 : (1999) 236 ITR 637 (AAR) wherein interest received from income-tax has been held to be not connected with any activity of PE or base in India. It was held that right to get interest arose because of the delay in making refund of the excessive collection of the tax thus, it was a case falling under para 2 of Article 12 of DTAA. It may be mentioned here that Article 12(2) of DTAA which was considered in the aforementioned decision of AAR as per UK treaty is pari materia with Article 12.2 of DTAA of France. It was pointed out that Article 12.5 has wrongly been held applicable by learned CIT(A). It was pointed out that for asst. yr. 1997-98 Tribunal in assessee’s own case while interpreting the nature of interest on tax refund and while holding that whether it should be taxable as business income or income from other sources has held that such income was taxable under the head “Income from other sources”. Reference was made to the order of Tribunal, a copy of which is placed at pp. 17-28 of the paper book which is an order dt. 25th Aug., 2004 in ITA No. 1442/Del/2001. The relevant observations of Tribunal in this regard are contained in para 7 of the order which are reproduced below for the sake of convenience:
Having decided that the assessee was in business during the year under consideration, there is no question of not allowing the expenses of Rs. 5,55,152 as business expenses. When the assessee was contemplating to revive the business and since it was in constant touch with ONGC, it had to keep its establishment running which entailed the incurring of the expenses. These are normal administrative expenses which are wholly incurred for the purposes of the business, they are clearly allowable. However, whether these expenses can be set off against the interest on income-tax refunds, which is the only credit in the P&L a/c, is the question to be answered. In our opinion, it cannot be so set off simply because such interest income cannot be termed as business income. It is true that assessee was not out of business and had to pursue and participate in the income-tax proceedings, it does not follow that interest on income-tax refund becomes the business income of the assessee. The assessee is not in the business of obtaining income-tax refunds and earning interest thereon. It is neither derived from nor attributable to the business activity of the assessee. It is merely a fallout of the profits earned by the assessee and is an appropriation of profits. Thus, when excess amount than what is due under the Act is appropriated, assessee gets refund thereof and when there is a delay in granting such refund, assessee is granted interest thereon which is taxable under the head ‘Income from other sources’. Thus, we hold that though the expenses claimed by the assessee are allowable expenses, they will not be set off against the interest income. Interest income will be taxed as income from other sources and the unabsorbed expenses will constitute business loss and be available for inter-head set off under Section 71 of the Act.
(Emphasis, italicised in print, ours)
27. It was pleaded that no conscious effort was made through PE to earn interest on tax refund from IT Department except for pursuing the matters before AO or appellate authorities in compliance with statutory provisions. It was contended that as the interest was sui generis, it could not be considered within the purview of Article 12.5 of the DTAA. Reference was made to the decision of Hon’ble Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. v. CIT . Thus, it was pleaded that learned CIT(A) has wrongly upheld the action of AO. The interest received by the assessee on income-tax refund was taxable only at the rate of 10 per cent.
28. On the other hand, learned Departmental Representative relied on the orders of AO and CIT(A).
29. We have carefully considered the rival submissions in the light of material placed before us. Similar issue came for consideration on AAR reported as (supra). The question arose for decision by the Authority was that whether interest received on tax refund constituted “income from debt and claims of every kind” and, therefore, qualify as interest as defined in Clause 5 of Article 12 of DTAA. The questions referred to AAR are reproduced below for the sake of convenience:
Whether, on the facts and circumstances of the case described in Annex. 3, the taxes paid in excess of tax due in respect of income returned by ABC, lying with the Revenue authorities would be covered within the terminology ‘debt-claims of every kind,’ as provided in Clause 5 of Article 12 of the DTAA between India and UK?
Whether, on the facts and circumstances of the case described in Annex. 2, interest of Rs. 30,24,576 under Section 244/243 of the IT Act, 1961 (‘Act’) paid by the Revenue authorities along with tax refunds due to ABC during the asst. yr. 1998-99, would constitute ‘income from debt-claims of every kind’ and therefore, qualify as interest as defined in Clause 5 of Article 12 of the DTAA?
And Authority after considering the Articles 12.2 and 12.5 has observed as under:
The only question is whether para 6 of Article 12 stands in the way of the applicant getting the benefit of para 2. However, para 6 will only apply when it can be shown that the applicant carries on business in India and the interest arose through a PE situated in India or performs in India any independent personal service from a fixed base situated in India. The debt claim in respect of which interest was paid must also be shown to be connected with such PE or fixed base. None of the aforesaid provisions of para 6 are attracted in the applicant’s case. Applicant does not have a PE in India. The interest amount in dispute has not arisen out of any business operation in India. It is statutory interest granted on delayed refund under the provisions of Section 244/243 of the IT Act. There cannot be any dispute that the interest has been paid on delayed refund. Refund due and payable to the assessee is debt owing and payable. For delayed payment of this debt, interest will have to be paid by virtue of the provisions of Sections 243 and 244 of the IT Act. The debt claim is not connected in anyway with any activity of a PE or base in India. The right to get interest arose because of the delay in making refund of excessive collection of the tax. This is clearly a case falling under para 2 of Article 12 of the DTAA.
30. Though the order of AAR has no binding force but it has persuasive value. No contrary decision has been brought to our notice to contend that the interest received by the assessee can be taxed under Article 12.5 of the DTAA. It may be mentioned here that Article 12 of DTAA of UK and France are in pari materia. Therefore, the said decision will be applicable to the present case also. There is no dispute to the extent that interest received by the assessee is on account of delayed issue of income-tax refunds.
31. There is one more reason to hold that the interest could not fall within the purview of Article 12.5 as Tribunal in assessee’s own case for asst. yr. 1997-98 (the relevant portion of order has already been reproduced in the above part of this order) has observed that the assessee is not in a business of obtaining income-tax refunds and earning interest thereon. And, therefore, the interest is neither derived from nor attributable to the business activity of the assessee. It is merely fallout of the profits earned by the assessee and is an appropriation of profit and when excess amount than what is due under the Act is appropriated, assessee gets refund thereto, and when there is a delay in granting such refund, assessee is granted interest thereon which is taxable under the head “Income from other sources”. Therefore also, the interest earned by the assessee cannot be held to be related to activity of PE. Thus, cannot be related to Article 12.5 of the DTAA.
32. In view of our discussion we hold that interest received by the assessee on delayed issue of refunds could be taxed only under Article 12.2 of the DTAA.
33. Therefore, the appeal filed by the assessee is allowed. In the result, Departmental appeal is dismissed and assessee’s appeal is allowed.