Director of Income Tax vs Pride Foramer SAS

Barin Ghosh, C.J.—In this appeal, appellants have sought interpretation of Article 12 Sub-Articles (1), (2) & (5) of the Double Taxation Avoidance Treaty between India and France. Those are as follows:

ARTICLE 12 - Interest - 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10 per cent of the gross amount of the interest.

The provisions of paragraphs 1 and 2 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 Contracting 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 or article 15, as the case may be, shall apply.

Therefore, a plain reading of these provisions will make it absolutely clear that Sub-articles (1) & (2) will apply inter alia when the recipient of interest does not have a permanent establishment in the country, where he has received interest. There is no dispute that the respondent assessee had a permanent place of business in India and, accordingly, submitted to the taxing jurisdiction of India and paid tax on its income except income from interest u/s 44BB of the income tax Act. The interest earned in India on the refund of income tax is, therefore, not covered by Sub-articles (1) & (2) of Article 12 of the said Treaty. To that extent, the judgment of the Tribunal is set aside and, accordingly, the appeal is allowed.