Interest on Income tax refund received by foreign company taxable as interest income and not as business income

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Bechtel International Inc Vs. Assistant Director of Income Tax (ITAT Mumbai)

ITA No 5198 and 6998 /Mum/2010 , Date – 08.02.2012

Issue -1. Whether the interest on income-tax refund is to be considered as interest income falling within Article 11(2) of the tax treaty or as interest income attributable to permanent establishment or fixed base in India falling under Article 11(5) read with Article 7 of the tax treaty? 2. whether the expression ‘attributable’ as used in Article 11(5) of the tax treaty has to be construed as equivalent / narrower to the term ‘effectively connected’ as used under Interest Article in other tax treaties with India and thereby squarely covered by the Special Bench decision of Clough Engineering Ltd.

Held- in the light of the commentary of Klaus vogel on the reason for use of the word “attributable” in the US conventions, they are in no way different from the expression “effectively connected”. US Model convention deviates from OECD and UN Model Conventions (MCs) because the term “effectively connected” is a technical term of US domestic tax law and that it is defined in detail in I.R.C. Sec.864 (c) whereas “attributable”, though used in US domestic tax law as well, is not defined. If US MC were to refer to “effectively connected”, the question would arise whether that term would be required by Article 3(2) MC to be interpreted on the US side in accordance with its definition under US tax law, Use of the term “attributable” avoids that problem and that is the reason the expression “Attributable” is used in US Model Conventions. Therefore the term appearing in US Model Conventions have the same meaning as the expression “Effectively Connected”. The expression “Attributable” as used in Article 11(5) of the India-USA DTAA has therefore to be construed as equivalent to “Effectively connected”. The technical explanation referred to by the learned counsel for the Assessee whereby it has been observed that the term “Attributable” is to be given a narrower meaning than the expression “Effectively Connected”, we find that the said technical explanation is in the context of attribution of profits of the PE and is relevant to taxation of an Indan enterprise having PE in USA. Nevertheless, the expression “attributable” even if held to be equivalent to the expression “effectively connected” in the light of the commentary by Klaus Vogel, referred to above, then the case of the Assessee would stand squarely covered in favour of the Assessee by the decision of the Special Bench in the case of Clough Engineering (supra). Following the same, we hold that the interest income on income tax refund is to be charged to tax only under Article 11(2) of the Indo-USA DTAA and not under Article 11(5) thereof.

Comments :-While under general parlance/ Income Tax Act, the term ‘attributable’ is of wider import; the same may not be relevant while interpreting the provisions of the tax treaties. In this case ITAT dealt with the issue of whether the expression ‘attributable’ as used in Article 11(5) of the tax treaty has to be construed as equivalent / narrower to the term ‘effectively connected’ as used under Interest Article in other tax treaties with India. ITAT has subtly held that the word ‘attributable’ is in no way different from the expression ‘effectively connected’ by making reference to Commentary by Klaus Vogel. This decision bringing out the very fact that the term ‘attributable’ is analogous to the term ‘effectively connected’ for the purpose of Article 11 (5) of the tax treaty