The Dehradun Bench of ITAT has held that interest on income tax refund received by a foreign enterprise is not effectively connected to its Permanent Establishment in India and therefore it cannot be taxed as its business income under Income Tax Act, 1961. The ITAT also held that receipts from Service Tax and VAT could not be included in the gross taxable receipts of an assessee under the Act.
The ITAT bench consists of Mr. Amit Shukla (Judicial Member) and Dr. B. R. R. Kumar (Accountant Member) was considering an appeal by the assessee, Baker Hughes Singapore Pte. The assesseehad filed its income tax return in which it had reduced the receipts on account of Service tax and VAT out of its total receipts and had offered the remaining amount to tax under Section 44BB of the Income Tax Act, 1961. The Assessing Officer (AO) had made additions to Baker Hughes’s income on account of Service tax and VAT and had treated them as part of its gross receipts. Also, the AO had taxed the interest on income tax refund received by Baker Hughes as business income at the Maximum Marginal Rate of 40 per cent under the Income Tax Act instead of 15 per cent in terms of Article 11 (2) of the India-USA Double Taxation Avoidance Agreement (DTAA).
On appeal, the Commissioner of Income Tax (Appeal) (CIT (A)) had ruled that the receipts on account of VAT and Service tax were not includible in the gross revenue of Baker Hughes for the purpose of computation of profits under the Income Tax Act.
The ITAT observed that the Delhi High Court in the case of PCIT versus Mitchell Drilling International Pvt Ltd (2015) had held that Service tax was not an amount received by an assessee for the services rendered by it and that it was collected only for passing it on to the Government.
Noting the decision of the Delhi High Court, it was held that the Service tax collected by the assessee could not, therefore, be included in its taxable gross receipts under the Income Tax Act. The ITAT, therefore, upheld the order of CIT (A) excluding the VAT and Service Tax collected by Baker Hughes from its gross taxable receipts.
“Also, the ITAT observed that the interest earned by Hughes Baker on its income tax refund was not effectively connected with the business of its PE in India under Article 7 of the DTAA. Therefore, it could not be taxed as its business income under Income Tax Act and was taxable at 15 per cent as per the provisions of Article 11 (2) of the India-US DTAA. “On going through the above, it can be concluded that interest on income tax refund is not effectively connected with the PE either on the basis of asset-test or activity-test. Hence, it is taxable as per the provisions in the Para No. 2 of Article 11 of Indo-US DTAA,” the Tribunal said.
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