Ansaldo Energia Spa v. The Commissioner Of Income Tax,(International Taxation), Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 20.4.2016 CORAM THE HONOURABLE MR.JUSTICE V.RAMASUBRAMANIANANDTHE HONOURABLE MR.JUSTICE M.V.MURALIDARAN Tax Case Appeal Nos.19 to 21 of 2016 Ansaldo Energia SPA, C/O N.Madhan, Tidel Park,7th Floor, A Block,(Module 601, 701-702),4, Rajiv Gandhi Road, Taramani, Chennai-113...Appellant/Appellant Vs. The Commissioner of Income Tax,(International Taxation), Chennai. ..Respondent/Respondent ----- APPEALS under Section 260A of the Income Tax Act, 1961against the order dated 17.7.2015 in I.T.A.Nos.1496 to1498/Mds/2014 on the file of the Income Tax Appellate Tribunal,Madras 'D' Bench for the assessment years 2000-2001 to 2002-2003against the order the Commissioner of Income Tax(Appeals)-VII,Chennai, dated 25.03.2014 made in I.T.A.Nos.840 to 842/13-14against the Assessment order of the Assistant Director of IncomeTax(International Taxation)-I,Chennai, dated 25.07.2012 for theAssessment years 2000-2001, 2001-2002 and 2002-2003 inPAN.No.AACCA4151H. -----For Appellant : Mr.N.V.BalajiFor Respondent : Mr.T.Ravikumar-----COMMON JUDGMENT(Delivered by V.Ramasubramanian,J) These appeals filed by the assessee under Section 260-A ofthe Income Tax Act, were admitted on 02.02.2016 on the followingsubstantial questions of law: https://hcservices.ecourts.gov.in/hcservices/ "(i) Whether under the facts andcircumstances of the case, the Income TaxAppellate Tribunal was right in holding thatinterest under Section 244A of the Act on refundof income tax is not covered within the term'interest' under Article 12(4) and accordingly,the same is not outside the purview of taxationby India as provided in Article 12(3)(a) of theDouble Taxation Avoidance Agreement between Indiaand Italy? and(ii) Whether under the facts andcircumstances of the case, the Income TaxAppellate Tribunal was right in not adjudicatingthe alternate ground of the appellant that theinterest under Section 244A is liable to taxationat a restricted rate of 15% as provided inArticle 12(2) of the Double Taxation AvoidanceAgreement between India and Italy ?" 2. Heard Mr.N.V.Balaji, learned counsel for the appellantand Mr.T.Ravikumar, learned Standing Counsel for the Department. 3. The assessee/appellant is a company incorporated underthe laws of Italy. The appellant is a non-resident for thepurpose of the Income Tax Act, 1961 and it is a resident ofItaly with whom the Government of India has entered into aDouble Taxation Avoidance Agreement on 23.11.1995, but witheffective date from 01.01.1996. 4. By orders dated 25.7.2012, the Assessing Officer gaveeffect to the orders of the Income Tax Appellate Tribunal andCommissioner of Income Tax (Appeals) in relation to theassessment years 2000-01, 2001-02, 2002-03 and determined theincome and tax liability. This giving effect order gave rise torefunds to be granted to the appellant. This refund also carriedinterest under Section 244-A of the Act. While making payment ofthe interest along with refund, the Assessing Officer deductedtax at source at 42.024%. 5. Challenging the deduction at source made on the interestpayable on the refund, the appellant filed three appeals beforethe Commissioner of Income Tax (Appeals). By a common orderdated 25.3.2014, the Appellate Commissioner dismissed theappeals. The further appeals filed by the appellant before theTribunal having also been dismissed, the assessee has come upwith the above appeals. 6. For the purpose of convenience, let us take the firstquestion of law, which we have already extracted above. If thatquestion of law is answered in favour of the assessee, the https://hcservices.ecourts.gov.in/hcservices/ second question of law will not even arise for consideration. 5. Challenging the deduction at source made on the interestpayable on the refund, the appellant filed three appeals beforethe Commissioner of Income Tax (Appeals). By a common orderdated 25.3.2014, the Appellate Commissioner dismissed theappeals. The further appeals filed by the appellant before theTribunal having also been dismissed, the assessee has come upwith the above appeals. 6. For the purpose of convenience, let us take the firstquestion of law, which we have already extracted above. If thatquestion of law is answered in favour of the assessee, the https://hcservices.ecourts.gov.in/hcservices/ second question of law will not even arise for consideration. 7. The first question of law is as to whether the interestpayable on the refund of income tax under Section 244-A fallswithin the definition of the term interest under Article 12.4 ofthe Double Taxation Avoidance Agreement or not. 8. Paragraphs 1 to 4 of Article 12 read as follows:"1. Interest arising in a Contracting Stateand paid to a resident of the other ContractingState may be taxed in both the ContractingStates. 2. Notwithstanding the provisions ofparagraph 1, the tax chargeable in a ContractingState on interest arising in that State and paidto a resident of the other Contracting State inrespect of loans or debts shall not exceed 15 percent of the gross amount of such interest. 3. Notwithstanding the provisions ofparagraph 2, interest arising in a ContractingState shall be exempt from tax in that State, if: (a) the payer of the interest is theGovernment of that Contracting State or a localauthority thereof, or (b) the interest is paid to any agency orinstrumentality(includingafinancialinstitution) which may be agreed upon in thisbehalf by the two Contracting States. 4. The term "interest" as used in thisArticle means income from Government securities,bonds or debentures, whether or not secured bymortgage and whether or not carrying a right toparticipate in profits, and debt-claims of everykind as well as all other income assimilated toincome from money lent by the taxation law of theState in which the income arises." 9. From a reading of the above paragraphs, it will be clearthat the first rule under Article 12 is that interest arising ina contracting State and paid to a resident of the othercontracting State may be taxed in both contracting States. 10. Paragraph 2 of Article 12 circumscribes the prescriptioncontained in paragraph 1, by stipulating that the tax chargeablein a contracting State on interest arising in that State andpaid to a resident of the other contracting State in respect ofloans or debts shall not exceed 15% of the gross amount of suchinterest. 11. Paragraph 3 of Article 12 carves out an exception to thestipulation contained in paragraphs 1 and 2. As per paragraph 3, https://hcservices.ecourts.gov.in/hcservices/ the interest arising in a contracting State will be exempt fromtax in that State, if any of the conditions stipulated inClauses (a) or (b) of paragraph 3 are satisfied. Under Clause(a), if the payer of the interest is the Government of thatcontracting State or a local authority, then the interestarising in a contracting State shall be exempt from tax. 12. But, paragraph 4 of Article 12 defines the term"interest". The term "interest" in paragraph 3 contains fouritems. They are (i) income from Government securities, bonds ordebentures, (ii) debt claims of every kind, and (iii) all otherincome assimilated to income from money lent by the taxation lawof that State in which the income arises. https://hcservices.ecourts.gov.in/hcservices/ the interest arising in a contracting State will be exempt fromtax in that State, if any of the conditions stipulated inClauses (a) or (b) of paragraph 3 are satisfied. Under Clause(a), if the payer of the interest is the Government of thatcontracting State or a local authority, then the interestarising in a contracting State shall be exempt from tax. 12. But, paragraph 4 of Article 12 defines the term"interest". The term "interest" in paragraph 3 contains fouritems. They are (i) income from Government securities, bonds ordebentures, (ii) debt claims of every kind, and (iii) all otherincome assimilated to income from money lent by the taxation lawof that State in which the income arises. 13. The contention of Mr.N.V.Balaji, learned counsel for theappellant is that the interest paid on the refund in terms ofSection 244-A of the Income Tax Act, is a debt claim, within themeaning of the term "interest" under paragraph 4 of Article 12and that therefore, it is exempt under Clause (a) of paragraph 3of Article 12. To substantiate his contention that the interestpayable by the Government of India on the refund of income taxis a debt claim, the learned counsel relied upon the decision ofthe Supreme Court in Union of India v. Tata Chemicals Ltd.[(2014) 363 ITR 612]. Paragraph 38 of the said decision reads asfollows:"Providing for payment of interest in case ofrefund of amounts paid as tax or deemed tax oradvance tax is a method now statutorily adoptedby fiscal legislation to ensure that theaforesaid amount of tax which has been duly paidin prescribed time and provisions in that behalfform part of the recovery machinery provided in ataxing Statute. Refund due and payable to theassessee is debt-owed and payable by the Revenue.The Government, there being no express statutoryprovision for payment of interest on the refundof excess amount/tax collected by the Revenue,cannot shrug off its apparent obligation toreimburse the deductors lawful monies with theaccrued interest for the period of undueretention of such monies. The State havingreceived the money without right, and havingretained and used it, is bound to make the partygood, just as an individual would be under likecircumstances. The obligation to refund moneyreceived and retained without right implies andcarries with it the right to interest. Whenevermoney has been received by a party which ex aequo et bono ought to be refunded, the right tointerest follows, as a matter of course." 14. As a matter of fact, the issue that arose forconsideration before the Supreme Court in Tata Chemicals, asseen from paragraph 2 was as to whether the Revenue was legallyresponsible under Section 244-A for payment of interest on therefund of tax made to the resident/deductor under Section 240 ornot. Therefore, the contention of the learned counsel for theappellant is that all the three authorities erred in holdingthat the interest payable on the refund of tax was not a debtdue from the Government. 15. In response to the above contentions, Mr.T.Ravi Kumar,learned Standing Counsel for the Department submitted thatparagraph 4 and paragraph 3(a) of Article 12 of Double TaxationAvoidance Agreement will not apply to a case where the assesseehas a permanent establishment in India. According to the learnedStanding Counsel, if an assessee has a permanent establishment,within the meaning of Article 5 of Double Taxation AvoidanceAgreement, the interest that was payable even under Section 244-A would be treated as part of the business profits under Article7 and made taxable even as per the provisions of the DoubleTaxation Avoidance Agreement. 15. In response to the above contentions, Mr.T.Ravi Kumar,learned Standing Counsel for the Department submitted thatparagraph 4 and paragraph 3(a) of Article 12 of Double TaxationAvoidance Agreement will not apply to a case where the assesseehas a permanent establishment in India. According to the learnedStanding Counsel, if an assessee has a permanent establishment,within the meaning of Article 5 of Double Taxation AvoidanceAgreement, the interest that was payable even under Section 244-A would be treated as part of the business profits under Article7 and made taxable even as per the provisions of the DoubleTaxation Avoidance Agreement. 16. In support of the above contention, the learned StandingCounsel for the Department drew our attention to the order ofthe Income Tax Appellate Tribunal dated 11.5.2007 in relation tothe assessment year 2000-01, in respect of the very sameassessee, wherein the Tribunal recorded a finding that theassessee has a permanent establishment in India. This findingrecorded from paragraphs 52 to 58 of the decision of the IncomeTax Appellate Tribunal in ITA No.411/Mds/2006 dated 11.5.2007was also confirmed by this Court in TCA No.1303 of 2007.However, the assessee has taken this matter on appeal to theSupreme Court and the matter is now pending. 17. Therefore, it is contended by Mr.T.Ravikumar, learnedStanding Counsel (i) that the fact that the assessee has apermanent establishment in India already stands adjudicated byan order of the Tribunal and also confirmed by an order of thisCourt, and (ii) that therefore, by virtue of Article 12.6 readwith Articles 5 and 7, the interest paid on the refund of incometax under Section 244-A constitute business profits taxableunder Article 7 of Double Taxation Avoidance Agreement. 18. But, we are unable to accept the above contention forthe simple reason that Article 12.6 does not deal with asituation where the State is the person paying the interest.Article 12.6 reads as follows:"6. Interest shall be deemed to arise in aContracting State when the payer is that Stateitself, a political or administrative sub-division, a local authority or a resident of that https://hcservices.ecourts.gov.in/hcservices/ State. Where, however, the person paying theinterest, whether he is a resident of aContracting State or not, has in a ContractingState a permanent establishment or a fixed basein connection with which the indebtedness onwhich the interest is paid was incurred, and suchinterest is borne by such permanent establishmentor fixed base, then such interest shall be deemedto arise in the State in which the permanentestablishment or fixed base is situated." 19. The first portion of Article 12.6 states that theinterest will be deemed to arise in a contracting State, whenthe payer is that State itself. To this rule found in the firstline of Article 12.6, an exception is carved out in theremaining part of Article 12.6. What follows the first portionof Article 12.6 is that when the person paying the interestwhether the resident of the contracting State or not, has apermanent establishment in a contracting State, such interestborne by the permanent establishment will be deemed to arise inthat State. 19. The first portion of Article 12.6 states that theinterest will be deemed to arise in a contracting State, whenthe payer is that State itself. To this rule found in the firstline of Article 12.6, an exception is carved out in theremaining part of Article 12.6. What follows the first portionof Article 12.6 is that when the person paying the interestwhether the resident of the contracting State or not, has apermanent establishment in a contracting State, such interestborne by the permanent establishment will be deemed to arise inthat State. 20. In other words, if the assessee is the payer of theinterest, it is only then that the second part of Article 12.6will arise. In this case, the payer of interest is theGovernment of the contracting State, namely the Government ofIndia. Therefore, Article 12.6 has no application at all to thecase.21. As a matter of fact, the Tribunal seems to have realisedthis position. That is why the Tribunal, after having extractedthe argument of the departmental representative made on thebasis of the decision of the Tribunal in BJ Services CompanyMiddle East Ltd. v. Assistant Commissioner of Income Tax [(2009)29 SOT 312], chose not to deal with either Article 12.6 or withBJ Services Company. 22. To put it differently, the departmental representativeappears to have invited the attention of the Tribunal to Article12.6 and the decision of the Tribunal at Delhi Bench in BJServices Company, as seen from paragraph 5 of the order of theTribunal, which is under appeal. But, since paragraph 12.6 hasno application at all to the case, the Tribunal rightly chosenot to deal with it, but to focus only upon paragraphs 4 and 3(a) of Article 12. 23. In fact, the contention of the learned Standing Counselfor the Department revolving around paragraph 6 of Article 12,overlooks the fact that the Tribunal did not rest itsconclusion on Article 12.6. This is why a contention is raisedby the learned counsel for the appellant that what was not https://hcservices.ecourts.gov.in/hcservices/ recorded as a finding by the Tribunal, cannot now be raised bythe Revenue on an appeal filed by the assessee. Though he iscorrect in his legal submission, we thought we would still havea look at Article 12.6 and expose the fact that the second partof Article 12.6 does not deal with the issue as to whether theinterest payable by the Government under Section 244-A wouldfall within Article 12.3 or not. 24. As an alternative submission, it was contended byMr.T.Ravikumar, learned Standing Counsel that the questionwhether the interest payable by the Government was a debt claimwithin the meaning of Article 12.4, did not arise forconsideration in Tata Chemicals at all and that what was foundin paragraph 38 of Tata Chemicals was only a passing reference.Therefore, relying upon the decision of the Supreme Court inCommissioner of Central Excise v. Srikumar Agencies , it was contended by the learned Standing Counsel thatstray observations found in judgments cannot be taken to be anexpression of a proposition of law and that judgments are not tobe read as Euclid's theorem. 24. As an alternative submission, it was contended byMr.T.Ravikumar, learned Standing Counsel that the questionwhether the interest payable by the Government was a debt claimwithin the meaning of Article 12.4, did not arise forconsideration in Tata Chemicals at all and that what was foundin paragraph 38 of Tata Chemicals was only a passing reference.Therefore, relying upon the decision of the Supreme Court inCommissioner of Central Excise v. Srikumar Agencies , it was contended by the learned Standing Counsel thatstray observations found in judgments cannot be taken to be anexpression of a proposition of law and that judgments are not tobe read as Euclid's theorem. 25. For a moment, we will keep aside the decision of theSupreme Court in Tata Chemicals and have a plain look at Section244-A of the Income Tax Act. Under Sub-section (1) of Section244-A, an assessee is made entitled to receive in addition toany amount of refund that has become due to him, simple interestcalculated in the manner provided therein. Sub-section (1) ofSection 244-A uses two important expressions, namely (i) becomesdue, and (ii) be entitled to. The expression "becomes due" is aclear indication that an assessee will be entitled to thebenefit of Section 244-A only if the refund of any amount hasbecome due. If a refund has become due, interest on the refundis also automatic subject to the satisfaction of otherconditions. Anything that is due and which a person is entitledto collect, is naturally in the nature of a debt claim.Therefore, we do not think that the Supreme Court made a verystray observation in paragraph 38 of its decision in TataChemicals, without realising what they were actually indicating.The statement found in paragraph 38 of the decision in TataChemicals to the effect "refund due and payable to the assesseeis debt-owed payable by the revenue" is actually a perfectstatement of law. It is certainly a theorem, but not Euclid'stheorem. Therefore, the law as we see is well settled to theeffect that what was due as a refund and what was payable asinterest on such refund are debt claims within the meaning ofArticle 12.4. As a consequence, they satisfy the parameters ofArticle 12.3(a). Hence, the first question of law is answered infavour of the appellant. Consequently, the second question of law does not arise for consideration. The appeal stands allowed.There will be no order as to costs. s/d- Assistant Registrar(CCC) True Copy Sub-Assistant RegistrarRS/kplTo1.The Income Tax Appellate Tribunal, Madras 'D' BenchChennai2.The Commissioner of Income Tax Appeals VII Chennai3.The Assistant Director of Income Tax(International Taxation)Chennai+2 cc to Mr.T.Ravikumar Advocate sr.24350+3 ccs to Mr.N.V.Balaji Advocate sr.24345TCA.Nos.19 to 21 of 2016gjIi(co)aa06/06/2016