Indian Income Tax Appellate Tribunal holds Baker Hughes’ interest on IT refund taxable at 15%

March 15, 2022 2 minute read

Indian income-tax refund to be taxable at 15% under article 11 of the India-US bilateral tax treaty and not at 40% applicable to foreign companies




The Indian State Income Tax Appellate Tribunal (ITAT) dismisses the Indian Income Tax Department’s appeal and holds interest on the Indian income-tax refund to be taxable at 15% under article 11 of the India-US bilateral tax treaty and not at 40% applicable to foreign companies.

The Indian Income Tax Department held that since interest income is not covered under the provisions of the Indian Income Tax Act, interest on the income tax refund received by the assessee-company for assessment year 2015/16 (equivalent to financial year 2014/15), was taxable at 40% under the head business income on the basis that the income was effectively connected to its PE in India.

The ITAT refers to provisions of section 90(2) and opines that the assessment of interest for tax under the treaty would be more beneficial as compared to the assessment under the Act, since tax payable under the Act (40%) is more than the tax payable under the treaty (15%). It thus opines that “the aforesaid provision will come to the aid of the assessee to come to an automatic conclusion, without exercise of any option, that it should get the benefit under the DTAA.”. It rejected Revenue’s contention that interest income was effectively connected to the assessee’s PE in India and thus, was taxable as business income. It points out that “Interest income need not be necessarily business income in nature for establishing the effective connection with the PE because that would render provision contained in paragraph 4 of Article XI redundant” and it refers to the provisions of articles 7 and 11 of the India-US bilateral tax treaty and opines, “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”, thus holding that the interest is to be taxed at 15%.

Taxsutra Note: As per section 90(2) of the Indian Income Tax Act, where the Indian Government has entered into an agreement with the government of any country outside India or specified territory outside India, for granting relief of tax, or avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.