M/S B. J. SERVICES COMPANY MIDDLE EAST LIMITED vs. ASSISTANT COMMISSIONER OF INCOME TAX OSD RANGE-I

Facts

The assessee, M/s B.J. Services Company Middle East Limited, a non-resident engaged in oil exploration, appealed against the taxability of interest received on a refund of excess tax paid. The original assessment was completed on March 8, 2005. Proceedings were later initiated under Section 147 of the Income Tax Act, 1961. The Assessing Officer treated the interest income as business income taxable at 42% under Article 12(6) of the India-UK Double Taxation Avoidance Treaty (DTAA), instead of 15% under Article 12(2). The Commissioner (Appeals) and the Income Tax Appellate Tribunal upheld the Assessing Officer's order. The assessee's appeals were admitted by the High Court, framing substantial questions of law.

Held

The High Court held that the interest paid on refund to the assessee should be treated as business income and taxed at a higher rate, not 15% as contended by the assessee. The Court reasoned that Article 12(6) of the India-UK DTAA is applicable because the assessee, being a resident of the UK, carried on business in India through a permanent establishment, and the debt claim in respect of which interest was paid was effectively connected with such permanent establishment. As per Article 12(6), the provisions of Article 7 (Business profits) of the DTAA apply in such cases. The Court found no error in the Assessing Officer's assessment, which was upheld by the appellate authorities. Regarding Section 44BB of the Act, the Court held that the interest paid by the Income Tax Department does not fall within the scope of Section 44BB(2)(a) as it is not on account of the provision of services and facilities in connection with the supply of plant and machinery. The questions of law were answered against the appellant.

Key Issues

1. Whether the learned Income Tax Appellate Tribunal was legally justified in upholding the orders of the Commissioner (Appeals) and Assessing Officer that interest paid on refund to the assessee is business income, taxable at 42% instead of 15% as per Article 12(2) of the India-UK DTAA? (Question of law) 2. Whether the learned Income Tax Appellate Tribunal was legally justified in holding that Article 12(2) of the India-UK DTAA is not applicable due to Article 12(6), thus treating interest paid on refund as business income? (Question of law) Assessee's contentions: The assessee argued that the interest on refund should be taxed at 15% under Article 12(2) of the DTAA. It was also contended that it would be incongruous to treat the interest as business income under Article 12(6) of the DTAA and simultaneously argue that it does not fall within the scope of Section 44BB(2) of the Income Tax Act, 1961. Revenue's contentions: The revenue contended that Article 12(6) of the DTAA applies because the assessee, a resident of the UK, carried on business in India through a permanent establishment, and the debt claim (for refund) was effectively connected with it. Consequently, Article 7 (Business profits) of the DTAA would apply, leading to taxation at the business profit rate. The revenue also argued that the interest paid by the Income Tax Department is not on account of the provision of services and facilities in connection with the supply of plant and machinery, as contemplated under Section 44BB(2)(a) of the Act.