Uttarakhand H.C : The interest paid to the assessee on its refund is a business income and therefore it is taxable @ 42% instead of 15% as provided in para 2 of Article 12 of DTAA between India and United Kingdom

High Court Of Uttarakhand

B.J. Services Co. Middle East Ltd. vs. Assistant Commissioner Of Income Tax

Section 154, 147, 44BB, 251, 245HA, 254, 260A, 28 to 41, 43, 43A, 44D, 42, 115A, 293A

Asst. Year 2001-02

K.M. Joseph, C.J. & V.K. Bist, J

ITA No. 01 to 4 of 2010

19th May, 2015

Counsel appeared:

S.K. Posti, for the Appellant: H. M. Bhatia for the Respondent.

K.M. JOSEPH, C.J:

The appeals being connected, we are disposing of the same by this common judgment.

The substantial questions of law, which have been framed at the time of admission of the appeals, are as follows:

(a) Whether learned Income Tax Appellate Tribunal was legally justified in upholding the order of learned Commissioner of Income Tax (Appeals) and of Assessing Officer that the interest paid to the assessee on its refund is a business income and therefore it is taxable @ 42% instead of 15% as provided in para 2 of Article 12 of DTAA between India and United Kingdom?

(b) Whether learned Income Tax Appellate Tribunal was legally justified in holding that in view of the para 6 of Article 12 of DTAA between India and United Kingdom, the para 2 of Article 12 of DTAA between India and United Kingdom is not applicable and hence the interest paid on refund by the Income Tax Department it will be treated as the business income?

The appellant/assessee is engaged in a business of Oil Exploration. It is a non-resident Company. Originally the assessment was completed on 08.03.2005. The bone of contention in this case relates to the taxability and the rate at which the amounts received by the appellant by way of interest on the refund ordered in respect of excess tax paid on behalf of the employees of the assessee. As already noted, appellant was engaged in Oil Exploration as nonresident of India. The tax was computed at the rate of 15 per cent on the basis of the provisions of Article 12 of the Double Taxation Avoidance Treaty (hereinafter referred to as the Treaty). Subsequently, the matter was reopened under Section 154 of the Income Tax Act, 1961 (hereinafter referred to as the Act). The same was dropped. Still thereafter the proceedings were initiated under Section 147 of the Act. The Assessing Officer assessed the interest income under Clause 6 of Article 12 of the Treaty, which Clause we shall refer to hereinafter.

An appeal was carried against the same which was unsuccessful. Equally unsuccessful was the further appeal carried before the Appellate Tribunal and the appellant is before us.

We heard the learned counsel for the appellant Shri S.K. Posti and Shri H.M. Bhatia, learned counsel for the revenue.

The agreement is one for avoidance of double taxation and prevention of fiscal evasion between United Kingdom of Great Britain and Northern Ireland. Since we are concerned with only Article 12 of the Treaty which deals with interest, we refer to the relevant portions which are Clause 1, 2 & 6 of Article 12 of the Treaty.

“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 accordingly 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 disinterest.

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.” We will consider whether there is any merit in the contention of the appellant that the appellant should have been taxed at the rate of 15 per cent on the gross amount of the interest under Clause 2 of Article 12. Under Clause 1 of Article 12, interest arising in a Contracting State and paid to the resident of the other Contracting State may be taxed in the other State. In the facts of this case, interest which was received in India can be taxed in England. However, Clause 2 provides that the said interest can also be taxed in the Contracting State in which it arises (which in this case is India) as tax was paid by the Government of India in the Income Tax Department on the excess tax paid on behalf of the assessee/appellant’s employees. It is to be taxed according to the law in India, namely, the Income Tax Act, 1961, as it stands. The limitation which is cast is that when the beneficial owner of the interest so charged is a resident of the other State which means that since the appellant is resident of England, the tax so charged should not exceed 15 per cent of the gross amount of the interest. Therefore, the appellant would contend that the tax should have been charged at 15 per cent of the interest received which the appellant became entitled to on the basis of excess tax paid.

As matters stood there if there was no other provision to consider, the appellant would indeed be justified in offering 15 per cent to taxation. But if we come to Clause 6, we notice that Clause 6 expressly provides that provisions of paragraph 1, inter alia, will not apply, if the beneficial owner of interest (the appellant in this case) is the resident of the Contracting State carries on business in the other Contracting State (in India) in which the interest arises through a permanent establishment situated therein. There is not much dispute raised before us that the appellant was indeed carrying on business through a permanent establishment in India. Since the word ‘or’ figures immediately thereafter, we need not be concerned with the further provisions as the requirement of the Clause that interest arises through a permanent establishment situated therein as fulfilled in this case. To continue with the requirement of Clause 6 of Article 12, it contemplates that the debt claim in respect of which interest paid is effectively connected with such permanent establishment on fixed rates. In this case, appellant paid excess tax on behalf of its employees. The Income Tax Officer, after assessment, apparently has ordered refund. There was the delay and interest was paid under the Act at the statutory rate fixed. So there arises a debt claim and the interest is effectively connected with the permanent establishment on fixed rates. In such an eventuality, Clause 6 of Article 12 provides that the provisions of Article 7, which relate to Business profits, or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply. This will be assessed as business profits and in regard to business profits, the rate of tax is 48 per cent. It is on the said basis that, in fact, the Assessing Officer in the first assessment and also in the further assessment after proceedings under Sec. 147 of the Act had assessed the appellant. This assessment has been upheld by the First Appellate Authority as also by the Tribunal.

We would think that in this analysis of the provisions of the Clauses of the Treaty, there is no error as such committed by the Assessing Officer as confirmed by the First Appellate Authority and the Tribunal and, therefore, the questions of law as framed must necessary be answered against the appellant in all the cases and we do so.

In normal circumstances that should have been the end of our enquiry, but Shri S.K. Posti, learned counsel for the appellant pressed before us that we also consider the fact that another substantial question of law would arise in the proceedings. He would submit that it is a case where being N.R.I. and otherwise liable to be assessed as such, the appellant was taxed under Section 44 BB of the Act. He would submit that at any rate, the interest income which is derived under the refund order from the Income Tax Department should also be assessed under Section 44 BB and taxed under sub-section (2) at the rate of 10 per cent. His argument is immediately met by Shri H.M. Bhatia, who points out that substantial question of law is not raised in this matter. To the same, Shri Posti would respond and submit that the Court is not confined to the substantial question of law which has been framed and any substantial question of law which may arise can also be considered and framed and answered. In fact, Shri H.M. Bhatia would submit that such a question was not even raised before the Appellate Authority and it was also not raised before the Tribunal and it does not lie into the mouth of the appellant to raise the same in this proceeding under 260 A of the Act. To the same, Shri Posti would submit that even if the matter is not raised before the First Appellate Authority, it has always been the law that the Appellate Authority must consider the matter as it arises from the order of assessment and the question as to whether the assessee must be taxed as was done by the Assessing Officer should have been gone into by the Appellate Authority. In fact, Shri H.M. Bhatia, did made an attempt to make available the memorandum of appeal to convince us that the question was not raised before the Appellate Authority. Shri Posti would oppose the handing over of the memorandum of appeal. The appellant has also not made available the memorandum of appeal before the Appellate Authority. Therefore, from this we can conclude safely that the appellant has not raised such a contention before the Appellate Authority, but he would refer to the explanation to Section 251 of the Act, which provides power of appeal to the Commissioner. It reads as follows:

“251. Powers of the Commissioner (Appeals).

(1) In disposing of an appeal, the Commissioner (Appeals) shall have the following powers—

(a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment; (aa) in an appeal against the order of assessment in respect of which the proceeding before the Settlement Commission abates under section 245HA, he may, after taking into consideration all the material and other information produced by the assessee before, or the results of the inquiry held or evidence recorded by, the Settlement Commission, in the course of the proceeding before it and such other material as may be brought on his record, confirm, reduce, enhance or annul the assessment;

(b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty;

(c) in any other case, he may pass such orders in the appeal as he thinks fit.

(2) The Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction.” Explanation.-In disposing of an appeal, the Commissioner (Appeals) may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the Commissioner (Appeals) by the appellant.”

11. Learned counsel for the appellant also drew our attention to a judgment, reported in (1993) 199 ITR 351 (Ahmedabad Electricity Co. Ltd. Vs. Commisisoner of Income-Tax) of the Full Bench of the Bombay High Court, wherein the Full Bench, inter alia, took the following view:

“The basic purpose of an appeal in an income-tax matter is to ascertain the correct tax liability of the assessee in accordance with law. Therefore, at both the stages, either before the Appellate Assistant Commissioner or before the Appellate Tribunal, the appellate authority can consider the proceedings before it and the material on record before it for the purpose of determining the correct tax liability of the assess. The appellate authorities, of course, can not travel beyond the proceedings and examine new sources of income. For this purpose, other separate remedies are provided to the Department under the Income-tax Act. But, apart from

this, there is nothing in section 254 or section 251 of the Income-tax Act, 1961, which would indicate that the appellate authorities are confined to considering only the objections raised before them or allowed to be raised before them either by the assessee or by the Department, as the case may be. They can consider the entire proceedings to determine the tax liability of the assessee. Under section 254 (1), the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, “pass such orders thereon as it thinks fit”. This gives very wide power to the Appellate Tribunal to pass, on the appeal, such orders as it may thinks fit.”

12. This is an appeal under Section 260A of the Act and Section 260A of the Act reads as follows:

“260A. Appeal to High Court.-(1) An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal before the date of establishment of the National Tax Tribunal, if the High Court is satisfied that the case involves a substantial question of law.

(2) The Chief Commissioner or the Commissioner or an assessee aggrieved by any order passed by the Appellate Tribunal may file an appeal to the High Court and such appeal under this subsection shall be—

(a) filed within one hundred and twenty days from the date on which the order appealed against is received by the assessee or the Chief Commissioner or Commissioner;

(b) {***}

(c) in the form of a memorandum of appeal precisely stating therein the substantial question of law involved. (2A) The High Court may admit an appeal after the expiry of the period of one hundred and twenty days referred to in clause (a) of sub-section (2), if it is satisfied that there was sufficient cause for not filing the same within that period.

(3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question.

(4) The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question:

Provided that nothing in this sub-section shall be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.

(5) The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit.

(6) The High Court may determine any issue which—

(a) has not been determined by the Appellate Tribunal; or

(b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on such question of law as is referred to in sub-section (1).

(7) Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure, 1908

(5 of 1908), relating to appeals to the High Court shall, as far as may be, apply in the case of appeals under this section.”

On a conspectus of these provisions, the legal effect of the Section would appear to be that the appeal is normally to be heard on the substantial questions of law formulated and the appellant can be allowed to argue only in regard to the same. It is also open to the respondent to point out that though a substantial question of law has been formulated but in fact and in law, the said question of law is really not a substantial question of law. The High Court is to deliver judgment on the basis of the decision on the question of law framed and it also provides that the High Court may also decide the appeal on any other substantial question of law which may not have been formulated. The only condition is that it should be satisfied that the case involved such a question. Even if the Appellate Tribunal has not decided an issue or an issue has been wrongly decided, it is open to the High Court in a proceeding under Section 260A of the Act to either decide the question which has not been decided or to decide the question which is wrongly decided subject to the only limitation that this is occasioned by the decision which it renders on the substantial question of law. Therefore, in the ultimate analysis, the High Court’s interference with the impugned decision must be premised on the existence of the substantial question of law and a decision on the same. If there is a substantial question of law made out; it provides power to interfere with the Appellate Tribunal’s order; be it on an issue which has been decided by it erroneously or on an issue not decided by it. In this case, it may be true that the appellant has not raised this question before the Appellate Authority and also before the Appellate Tribunal. The appellant has not produced the memorandum of the appeal before the Tribunal and the order of the Appellate Tribunal also does not bear it out that the appellant has raised this question, but we would think that the question which is raised essentially, appears to be a pure question of law and it is substantial in the sense that it has got a direct and substantial impact on the destiny of the appellant’s case and we hence proceed to formulate the following substantial question of law:-Whether in the circumstances of the case, the Appellate Authority and the Tribunal should have found that the amount of interest received on the refund by the Income Tax Department should be included in the amount on which the appellant was taxed under Section 44BB of the Act?

Having formulated the said question and having heard the learned counsel for the parties also, we proceed to answer the same.

Section 44BB of the Act is a special provision. It reads as follows:

“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 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 44DA 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, 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 Assessing Officer 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.]”

The argument of the learned counsel for the appellant would appear to be that the amount received by way of interest from the Income Tax Department is an amount, which has been received by the appellant in connection with its business of exploration carried out in India and, therefore, it should be included in sub-section (2) of Section 44BB of the Act.

Per contra, learned counsel for the Revenue would point out that a reading of sub-section (2), which provides for ascertaining the amounts which are to be included in computing the profits and gains under the deeming provision in sub-section (1) as chargeable under profits and gains of business or profession, the amount is limited to the amount which has been paid to the person (in this case to the appellant) 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 for the purpose of prospecting for, or extracting or production of mineral oil in India. He would point out that the payment by the Income Tax Department must be treated as a payment by a third party and he would submit that it is not in connection with the provision of services and facilities in connection with, or supply of plant and machinery. Appellant made payment on behalf of the employees. The amount is found to be in excess of the legal liability. Under the Income Tax Act, amounts became due by way of refund. The amount was refunded late along with interest payable under the Act. He would, therefore, submit that it cannot be included under sub-section (2).

Learned counsel for the appellant would point out that, on the one hand, under the Treaty, the Department lays store by Clause 6 of Article 12, which provides for the amount being treated as business profits if it is in connection with the permanent office carrying on business in India through a permanent establishment. He contends that it is incongruous to still contend that it will not fall within the four corners of sub-section (2) of Section 44BB of the Act.

We are of the view that there may not be merit in the contention of the learned counsel for the appellant. What Section 44 BB of the Act provides for is a special provision in respect of income in the form of profits derived by non-residents engaged in business, providing services and facilities, supplying plant and machinery used for extraction or production of mineral oils. Profits is deemed at 10% of the amounts mentioned in sub-section (2). The said amount is to be treated as the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession” and then we pass on to the method of computing the amounts for the purpose of sub-section (1) which is provided in sub-section (2). It provides for including all amounts paid or which are payable (whether in India or out of India) to the assessee or to any person on its behalf. To this extent, the appellant is covered by the same and it has been assessed also in regard to other income also. This section further provides that the payment must be on account of the provision of services and facilities in connection with supply of plant and machinery on hire used, or to be used, in the prospecting for or extraction of mineral oil in India. Here we cannot possibly hold that the amount of interest paid by the Income Tax Department is paid to it 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. The amount, which is contemplated under sub-section (2), has already been included. No doubt, we notice that there is no provision which provides as to who is to make the payment to the non-resident and which is to be included. In other words, it could be argued that any payment by the Income Tax Department as such is not expressly excluded. Shri Posti would confine himself to clause (a) of sub-section (2) of Section 44BB of the Act and we are not called upon to decide the impact of clause (b) of sub-section (2) of Section 44BB of the Act. But nonetheless on a reading of clause (a), we are left with the impression that what is contemplated is only the payments received actually or payable on account of the provision of services and facilities in connection with, or supplying plant and machinery on hire used, or to be used. No doubt, learned counsel for the Revenue drew our attention to a judgment of the Hon’ble Apex Court, reported in AIR 1969 SC 288 (Vidya Sagar Joshi Vs. Surinder Nath Gautam). That is the case of the Representation of the People Act. Therein, the Court, inter alia, has held as follows:-“The critical words of Section 77 are ‘expenditure’, ‘in connection with election’ and ‘incurred or authorised’. ‘Expenditure’ means the amount expended and ‘expended’ means to pay away, lay out or spend. It really represents money out of pocket, a going out. It is money ‘in connection with’ his election. These words mean not so much as ‘consequent upon’ as ‘having to do with’.”

But here, the words “in connection with” are relatable to the provision of services and facilities of supply of plant and machinery. We would think that it will be impermissible being too farfetched to include the amount received from the Income Tax Department in the circumstances which we have already set out as falling within the same. No doubt, a question may arise as to whether after providing for a deeming provision in sub-section (1) providing that notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, 10% of the amounts in sub-section (2) shall be deemed to be the profits and gains chargeable to tax and yet the amount under Clause 6 of Article 12 of the Treaty is to be taxed as business profits. But, we also asked the learned counsel for the Revenue whether the tax is premised under Section 28, or is taxable under Section 56 (the income from other sources), the answer was, it is under Section 56 of the Act. Learned counsel for the Revenue would submit that the appellant had been taxed under Clause 6 of Article 12 of the Treaty.

We need not probe the matter further as we confined ourselves to questions of law which we have formulated already and also which we have formulated today.

In the upshot of the above discussion, we answer the questions of law, which were already formulated, against the appellant. We also answer the question of law, which we have formulated today, against the appellant. Consequently, the appeals are without merit and they are dismissed. No order as to costs.

[Citation : 380 ITR 138]

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