Interest on tax refund effectively connected with the permanent establishment in India is not taxable as interest income under the India-France tax treaty
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Interest on tax refund effectively connected with the permanent establishment in India is not taxable as interest income under the India-France tax treaty

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The Uttarakhand High Court (High Court) in the case of Pride Foramer SAS (the taxpayer), held that the income should be taxed under the Article 12 of India-France tax treaty (tax treaty), if the ...

The Uttarakhand High Court (High Court) in the case of Pride Foramer SAS (the taxpayer), held that the income should be taxed under the Article 12 of India-France tax treaty (tax treaty), if the recipient of interest does not have a Permanent Establishment in the country where he receives the interest. The High Court also held that since there was no dispute regarding the taxpayer having a permanent place of business in India, the interest earned in India on the refund of income-tax is not covered under Article 12(1) and 12(2) of the tax treaty.

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Interest on tax refund effectively connected with the permanent establishment in India is not taxable as interest income under the India-France tax treaty Interest on tax refund effectively connected with the permanent establishment in India is not taxable as interest income under the India-France tax treaty Document Transcript

  • KPMG FLASH NEWS KPMG IN INDIA Interest on tax refund effectively connected with the permanent establishment in India is not taxable as interest income under the India-France tax treaty 20 December 2013 Background High Court’s ruling The taxability of interest income received on tax refund has been a subject matter of debate before the Courts. The High Court held that the income should be taxed under the Article 12 of the tax treaty, if the recipient of interest does not have a Permanent Establishment (PE) in the country where he receives the interest. The High Court also held that since there was no dispute regarding the taxpayer having a permanent place of business in India, the interest earned in India on the refund of income-tax is not 2 3 covered under Article 12(1) and 12(2) of the tax treaty. Recently, the Uttarakhand High Court (High Court) in the 1 case of Pride Foramer SAS (the taxpayer), has dealt with taxability of interest on income-tax refund under Article 12 (Interest) of the India-France tax treaty (tax treaty). The taxpayer, a resident of France, offered to tax the profits earned in connection with the business of exploration, etc., of mineral oils. However, the interest earned in India on the refund of income-tax was not offered to tax as business income. __________________ ____________________ 1 DIT v. Pride Foramer SAS (ITA No. 16 of 2009) – Taxsutra.com 2 Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 3 Interest income 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, the tax so charged shall not exceed 10 per cent of the gross amount of the interest. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • Our comments It is pertinent to note that as per Article 12(5) of the tax treaty, interest may get taxed as business profits under Article 7 of the tax treaty, on net income basis if such interest is effectively connected with a PE or a fixed base or as Independent Personal Services under Article 15 of the tax treaty. The Special Bench of the Delhi Income-tax Appellate Tribunal and the Mumbai Bench of the Income-tax 4 Appellate Tribunal in the case of Clough Engineering Ltd. 5 and Bechtel International Inc. respectively held that interest received on income-tax refund would be covered by beneficial provisions of interest article under the IndiaAustralia and India-USA tax treaties. It was not considered as business income since such refund was not effectively connected with the PE of the taxpayer. However, in the present case, the High Court has held that if the taxpayer has a PE in India, the beneficial provisions of the interest article under the tax treaty will not apply to tax such interest income. _______________ 4 5 ACIT v. Clough Engineering Ltd. [2011] 9 ITR 618 (Del) Bechtel International Inc. v. ADIT [2013] 21 ITR 404 (Mum) © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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