Appellants: In Re: Application No. P. 17 of 1998 Vs.
1. The applicant herein, ABC, is a company incorporated in the United Kingdom. The control and management of the company is not situated in India. It is a resident of the United Kingdom.
2. The company has made an application for advance ruling on the following two questions ; "1. Whether, on the facts and circumstances of the case, described in annexure-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 Double Taxation Avoidance Agreement between India and United Kingdom ('DTA') 2. Whether, on the facts and circumstances of the case, described in annexure-2, interest of Rs. 30,24,576 under Section 244/243 of the Income-tax Act, 1961 ('Act'), paid by the revenue authorities along with tax refunds due to ABC during assessment year 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 DTA ?" 3. The facts of the case as stated in the application are that ABC is a large chemical company having a diversified portfolio of manufacturing and trading activities. ABC during the financial year relevant to the assessment year 1970-71, received in India income from royalty, technical services fee, dividends and interest on debentures.
4. ABC filed its corporate tax return for the assessment year 1970-71 under Section 139 of the Income-tax Act, 1961. Its assessment proceedings for this assessment year were in litigation for a long period. The same were concluded by the Assessing Officer by giving effect to an appellate order whereby a refund of Rs. 8,54,483 was determined payable to ABC. The Assessing Officer in the said order adjusted this refund of Rs. 8,54,483 against a tax demand for the assessment year 1985-86.
5. However, in the year 1997, the Assessing Officer while verifying the records for the assessment year 1985-86 discovered that the refund of Rs. 8,54,483 determined in respect of the assessment year 1970-71 had not been adjusted against the tax demand for the assessment year 1985-86, owing to certain technical reasons.
6. The Assessing Officer by an order of rectification dated June 27, 1997, under Section 154 of the Act determined that the assessee was entitled to a refund of tax of Rs. 8,54,483. Interest thereon under Section 244/243 of the Act was determined at Rs. 30,24,576 from which tax was deducted at source at the rate of 15 per cent. as prescribed under Clause 2 of Article 12 of the Double Taxation Avoidance Agreement between India and the United Kingdom ("DTAA").
7. ABC's case is that the interest on tax payable relating to the assessment year 1970-71 given by the Income-tax Department should be taxed in accordance with the provisions of the Double Taxation Avoidance Agreement between India and the United Kingdom. It has been stated that in the past the income of ABC has been consistently taxed according to the provisions of the DTAA.8. Our attention was drawn to Article 12(2) of the DTAA. Article 12 in so far it is relevant for the purpose of this case is set out hereinunder (see [1994] 206 ITR (St.) 235, 247) ; "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 law of that State, provided that where the resident of the other Contracting State is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent. of the gross amount of the interest . . .
6. The provisions of paragraphs 1, 2 and 3(a) of this article 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 permanent establishment situated therein, or performs in that other 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 permanent establishment or fixed base. In such case the provisions of Article 7 (business profits) or Article 15 (independent personal services) of this Convention, as the case may be, shall apply." 9. There is no dispute that the applicant is a resident of the United Kingdom and not of India. There is also no dispute in the instant case that the interest income has arisen in India due to delayed refund of tax by the Income-tax Department in India. Therefore, the interest income of the applicant is liable to be assessed in accordance with the provisions of paragraph 2 of Article 12 of the DTAA.10. The only question is whether paragraph 6 of Article 12 stands in the way of the applicant getting the benefit of paragraph 2. However, paragraph 6 will only apply when it can be shown that the applicant carries on business in India and the interest arose through a permanent establishment situated in India or performs in India any independent personal services 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 permanent establishment or fixed base. None of the aforesaid provisions of para graph are attracted in the applicant's case. The applicant does not have a permanent establishment 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 Income-tax 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 Section 243/244 of the Income-tax Act. The debt claim is not connected in any way with any activity of a permanent establishment 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 paragraph 2 of Article 12 of the DTAA.11. On the facts as stated by the applicant the application must succeed. Both the questions raised are answered in the affirmative and in favour of the applicant.